TaxTMI 
TaxTMI 
2005 (9) TMI 242
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....However, to verify the contention of the assessee, the Assessing Officer called for information under section 133(6) of Income-tax Act regarding details of this receipt from B&L Ltd. In response to that the President of that company vide letter dated 18-2-1997 stated as under: "1. Mr. Ghai is technical person and was mainly responsible for manufacturing operations of our company's products. Mr. Ghai's responsibilities included the following: A. Manufacturing activities Establishing and implementation of quality parameters to make sure that they conform to the Bausch and Lomb's International Standards and industry specifications. Evaluation of different processes of manufacturing and selection of the most appropriate process for manufacturing glasses and lenses to enable optimum use of equipments. Selection of the appropriate temperature and load requirements at the commencement of the process of a specific produce. Selection of the appropriate raw material to be used in the manufacturing process of a specific product. Establishing tolerances for different types of material at various levels of temperature and load to ensure optimum utilization of the material in the manufa....
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....ive activity to protect the business interest. However, provisions of section 192 requires every employer to deduct the tax on payment to the employees. As explained in the circular by Central Board of Direct Taxes the disbursing officer (hereto mean employer) has to follow the instructions given in circular for calculating the withholding tax. We have, therefore, complied with the withholding tax requirements to avoid the possible disputes about the withholding tax. As an employer, we are not obliged to see the ultimate taxability or non-taxability of these types of payments. In view of the above, you would appreciate that we have in fact complied with the law correctly. We have pleasure in advising you that on completion of your contract of services with the company On 31st December, 1995 the company has as a special case, decided to pay you an ex gratia amount of Rs. 32,00,000 subject to deduction of income-tax at source on the understanding that you will not divulge the technology secrets of the company to any one nor will use them for setting up a competitive business anywhere in India. You shall also not join for next 2 years any business activity which is competitive in natu....
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....ons and the areas in which the assessee was dealing, included technology of contract lenses for therapeutic purposes, number of Pharmaceuticals solutions used) for eye surgeries and administration of contact lenses. It was further stated that the amount paid to the assessee was compensation by the employer to an ex-employee for non-competition in a business because there was chances of assessee to become a likely competitor of the company. Therefore, in order to ward off competition from such employees/directors after their retirement, the employers entered into non-competition agreement with such employees. Such compensation paid to an ex-employee in view of the restrictive covenant was a capital receipt and was not liable to tax under the provisions of Income-tax Act. Reliance was placed on the following case laws: Gillanders Arbuthonot & Co. Ltd. v. CIT [1964] 53 ITR 283 (SC) CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 (SC) CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.) CIT v. Saraswati Publicities [1981] 132 ITR 207 (Mad.) CIT v. Ajit Kumar Bose [l987] 165 ITR 902 (Cal.) CIT v. Jamini Mohan Kkar [1989] 176 ITR 127 (Cal.) R.N. Agrawala v. CIT [1960] 38 ITR 67 (....
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....e which could be treated as revenue receipt under section 17(3) and the balance of Rs. 31 lakhs was capital receipt. Now the department is in appeal. 6. Ld. DR for the revenue strongly supported the order of Assessing Officer and vehemently argued that the amount received by the assessee was taxable under section 17(3)(i) of Income-tax Act and since the compensation was in connection with the services and salary received by the assessee, so it was profit in lieu of salary and was taxable as revenue receipt. Reliance was placed on the following case laws: Karamchari Union v. Union of India [2000] 243 ITR 143 (SC). CIT v. D.R. Sondhi [200l] 248 ITR 695 (Delhi). CIT v. Dr. P.L. Meyyappan [2000] 244 ITR 543 (Mad.). 7. In his rival submissions, ld. counsel for the assessee reiterated the submissions made before the authorities below and further stated that the assessee was restrained to join any concern having similar type of job or business and was also restricted not to do any business which could harm the profitability of the business of the company, B&L Ltd. He further stated that there was a fear in the mind of the company that the assessee by joining another concern....
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....fact available on record, it is abundantly clear that the assessee received compensation in consideration of his agreement and undertaking not to engage himself directly or indirectly in the business activity which are competitive to the company and also not to join any service in the similar type of trade. Thus, the amount received was not a profit in lieu of salary but capital receipt in lieu of profit-earning source. Therefore, the amount received against the restrictive covenant was not exigible to tax. The amount received was neither a remuneration nor reward or return for the services rendered by the assessee but it was to restrain him from joining any employment in the similar business or to establish similar type of business to avoid competition or conflict with the existing business of the assessee-company M/s. B&L Ltd. in which the assessee was working as the Head and Vice President of the manufacturing unit and was having access to confidential technology. 8.1 Hon'ble Supreme Court in the case of Gillanders Arbuthonot & Co. held that- "compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency termina....
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....the case of M.N. Karani. Therefore, it can safely be held that the view taken by us is also in consonance with the view taken by the other Benches of ITAT as had been discussed in the aforesaid paras of this order. 8.5 As regards to the case law relied on by the ld. DR. for the revenue is concerned, in the case of D.R. Sondhi, the issue related to compensation received by the M.D. on retiring prematurely whereby his group sold its shares to rival group and the compensation received was held to be business income under section 28(ii)(a) of Income-tax Act. The another issue was related to gratuity and the issue was restored back to be decided as to whether the allowance under section 10(10) was permissible to the assessee or not. So the facts involved in this case are different from the facts of the assessee's case. 8.6 Similarly, in the case of Dr. P.L. Meyyappan, the issue related to family allowance received by the assessee during his employment. Therefore, the facts in this case are clearly distinguishable from the facts of assessee's case, 8.7 As regards to the case of Karamchari Union relied on by the ld. DR for the revenue is concerned, Hon'ble Supreme Court held as u....