TaxTMI 
TaxTMI 
2007 (12) TMI 240
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....ken over by the FI Group Plc., UK and as per the shares purchase agreement dated 4-12-1997 entered into by the U.K. company with the shareholders of M/s. IIS Infotech Ltd., including the assessee, 76 per cent of the subscribed equity capital was agreed to be transferred in favour of the U.K. company by the shareholders in order to effect the said takeover. In terms of the said agreement, the assessee sold 8,66,450 shares of M/s. IIS Infotech Ltd.; to the U.K. Company. The assessee filed return of income for the assessment year under consideration on 31-10-1999 declaring therein total income of Rs. 38,29,590. In the return, the assessee had shown long-term capital gain of Rs. 8,71,21,723 on the said sale of 8,66,450 shares of M/s. IIS Infotech Ltd. to the U.K. company, in respect of which exemption was claimed under section 54EA of the Income-tax Act, 1961 (for brevity 'the Act'). In addition to the share transfer agreement, the FI Group also entered into a non-compete agreement with the assessee on the same date, i.e., 4-12-1997, whereby the assessee received a sum of Rs. 1,07,36,570 during the financial year 1997-98 relevant to the assessment year under consideration. A similar in....
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....s or such activity by the assessee. He observed that the only limitation undertaken by the assessee was not to harm the business interest of M/s. FI Group Plc., UK The Assessing Officer also observed that the very fact that the assessee received a lump sum payment did not make the receipt as that of a capital nature. He also observed that the assessee was not running or carrying on any business. He was working in the capacity of Managing Director of M/s. IIS Infotech Ltd. before entering into non-compete agreement with U.K. Group and continued to work in that capacity after its take over by the U.K. Group. His capacity to work or earn income was not affected adversely because of the non-compete agreement and there was no loss of source of income to the assessee. The Assessing Officer also referred to the various judgments of the courts relied on by the assessee and observed that the facts of those cases were distinguishable from the facts of the present case. Therefore, the Assessing Officer held that the ratio of those judgments was not applicable to the facts of the present case. Thus, he rejected the claim of the assessee that the non-compete fees of Rs. 1,07,36,570 was a capita....
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....over and the amount paid was held to be a revenue receipt. It was also held that the so-called non-compete agreement was a collusive and self-serving document executed with the sole purpose to evade income-tax. Thus, the action of the Assessing Officer was upheld. Hence, this appeal before the Tribunal. 4. The Ld. Counsel for the assessee, Sh. Ajay Vohra submitted that the assessee is a computer engineer and has been actively associated with computer software and information technology through his association with a variety of companies and industry associations. The assessee was having a considerable expertise, skills and experience in the knowledge of the business and supply of information technology and computer software products, application and services, etc. The assessee was a promoter and founder of M/s. IIS Infotech Ltd., i.e., 'the Indian Company' engaged in the business of computer software development. He was also appointed as Managing Director of the Company since its inception. He submitted that the FI Group Plc. (In short 'FI'), a U.K. based public limited company, was engaged in the supply of computer software to major organisations whose business depended mainly ....
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....1999, along with interest accrued thereon. An amount of Rs. 1,07,36,570 was received in the accounting year relevant to the assessment year under consideration. He submitted that subsequently the assessee entered into a fresh service agreement dated 24-2-1998 with M/s. IIS Infotech Ltd. whereby, the assessee was appointed as Managing Director of the Company after its takeover. Sh. Vohra submitted that the execution of the services agreement was not dependent on payment of the non-compete fees. The other two directors, namely, Sh. S. Dhanabal and Mr. Mohit Goyal also entered into a fresh service agreement on 24-21998. However, Shri Rohitsava Chand did not accept the new service agreement and opted out of employment of the company once there was a change of its ownership. Nevertheless, Sh. Rohitsava also received non-compete fees as per agreement dated 4-12-1997. He submitted that like the assessee, Sh. Rohitsava also claimed the first instalment of the non-compete fees as capital receipt. This claim of the assessee was accepted for the assessment year 1998-99. However, for the subsequent assessment year 2000-01, the Assessing Officer rejected the claim of the assessee for capital re....
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....ii) of the Act. Thus, the Ld. Counsel submitted that the dispute relates to as to whether the non-compete fees is capital receipt or a revenue receipt and as to if it is a revenue receipt, under what section the same is taxable. 4.3 Arguing further, the Ld. Counsel for the assessee submitted that the Share Transfer Agreement (In short 'the STA') was subject to approval of the Reserve Bank of India and the Stock Exchange Board of India (In short 'SEBI') Guidelines. He referred to page 80 of the paper book, where the rates of equity shares of IIS Infotech Ltd. during the period from 1-6-1997 to 28-11-1997 have been given. He submitted that as against the average quoted price of 26 weeks at Rs. 45.80 per share, the assessee along with other Directors had sold shares at the rate of Rs. 100.90 per share. It is not the case of the revenue that shares were sold at less than the prevailing market rate. Thus, the Ld. Counsel submitted that the non-compete fees could not be considered as part of the sale consideration of shares and, therefore, cannot be brought to tax as capital gain. He further submitted that the non-compete fees cannot be treated as profit in lieu of salary under sectio....
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....ed that since the assessee was not carrying on any business, the amount received by way of non-compete fees cannot be considered as profit arising in the course of any business. Therefore, the amount in question cannot be brought to tax under section 28(ii) of the Act. He submitted that sub-clause (a) of clause (ii) of section 28 of the Act regards compensation which is received by any person, managing the whole or substantially the whole of the affairs of an Indian company, at the time of termination of his management or on modification of the terms and conditions relating thereto, as liable to tax under the head "Profits and gains from business or profession". In the present case, the assessee has not received any compensation for termination of his management of IISC. He was the Managing Director of the Company before take over and continued to be the Managing Director after the take over. Therefore, the non-compete fees cannot be charged to tax under section 28(ii) of the Act. He relied on the following decisions of the various Benches of the ITAT: (i) ITAT, Amritsar Bench, in the case of T.S. Manocha v. Dy. CIT [2006] 5 SOT 277. (ii) Third Member decision of ITAT, Delhi ....
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....ffect of the acquisition of the shares of IISC by the FI Group, UK was that the said group became the owner of the IISC on 26-2-1998. He submitted that though the date of the non-compete agreement between the assessee and the FI Group, UK is dated 4-12-1997, yet as per para 6 of this agreement, the same was to become effective simultaneously with the completion of the transaction of sale and purchase of shares under the share purchase agreement. He further stated that as per the non-compete agreement, the consideration of 3,38,000 GBP (pounds sterling) was to be paid in two instalments of 1,69,000 GBP each on the completion date and on 31-5-1999. In terms of the non-compete agreement, an amount of Rs. 1,07,36,750, being the first instalment of the consideration of 1,69,000 GBP, along with the sale consideration of shares of IISC, were credited to the bank account of the assessee on 26-2-1998. The Ld. Sr. DR has submitted that on completion of the share purchase agreement, 76 per cent of the subscribed share capital come to be owned and vested with the F.I. Group. 5.1 The Ld. DR has drawn our attention to clause (d) of article 8.1 of the share purchase agreement, which stipulates....
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....tegral to the continuation of the employment of the assessee and that, therefore, the same arises as a result of employment. The Ld. DR submitted that it is difficult to understand as to with whom or against whom the Managing Director was to compete/non-compete with, since he was the Managing Director of the Company before its take over and continued to be the Managing Director after the take over. Thus, the Ld. DR submitted that the revenue earning apparatus of Sh. Saurabh Srivastava was never dented and his source of income remained intact. On the contrary, the Ld. DR submitted that there has been enhancement in the earning capacity of the assessee after the take over of IISC by the F.I. Group, as income returned in the year 1999-2000 was Rs. 38lakhs whereas it increased to Rs. 280 lakhs in assessment year 2000-01. He further argued that two conditions for the payment of the non-compete fees were to be satisfied cumulatively, i.e., continuation of employment of Sh. Saurabh Srivastava as Managing Director of IISC after take over and completion of the share purchase agreement. The Ld. DR submitted that the logical inference that can be drawn is that the non-compete agreement would ....
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.... from salary'. The revenue has also relied on the following judgments: 1. Ram Prasad v. CIT [1972] 86 ITR 122 (SC). 2. Karamchari Union v. Union of India [2000] 243 ITR 143 (SC). 3. CIT v. MSP Rajes [1993] 202 ITR 646 (Kar.). 4. Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT [1997] 227 ITR 172 (SC). 5.4 The Ld. DR then referred to the respective clauses of the share purchase agreement whereby certain restrictions were placed on the sellers. These restrictions inter alia included the four Directors (including the assessee) being under obligation to enter into a contract of employment with the company in the agreed form, and to continue to perform and conduct the cause of the company and its subsidiaries in accordance with and consistent with past practices, etc., from the date of the share purchase agreement till the completion date. Further restrictions were also placed on the sellers from selling, transfer, gift, exchange, disposal, etc., of shares of the company from the date of the share purchase agreement till the completion date except with the prior consent of the buyer, i.e., the FI Group, U.K. The sellers, viz., the assessee and other three Directors wer....
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....ence. (v) The continuation of employment till 31-5-1999 mentioned in the non-compete agreement and effective entering into service agreement for continued availability was an integral part of the completion of the Share Purchase Agreement and thus payment of non-compete fees was not an independent obligation, but inextricably and integrally linked with the overall terms of employment, which cannot be missed. In fact, the continuation of service was the integral cause of payment of the non-compete fees, read with the share purchase agreement. Thus, the Ld. DR has submitted that non-compete fees was paid to four Directors for expressly being in employment with IISC and the receipt emanated directly from the employment with the IISC after take over. This was, therefore, a profit in lieu of salary. The Ld. DR has submitted that the assessee never lost his income-earning apparatus and there was also no dent made in the income-earning apparatus. On the contrary, the assessee received higher remuneration and other benefits from the said company after its take over and the non-compete fees received on account of non-application of knowledge, skill and experience by way of working for ot....
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....1980] 122 ITR 880, the Ld. DR pleaded that raising of alternative contentions to determine the head of taxability is permissible. The revenue has also relied on two judgments of the Hon'ble Supreme Court in the cases of Kapur Chand Shrimal v. CIT [1981] 131 ITR 451 and 40 ITR 398 (there is no such judgment reported in this ITR at page 398), and the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Om Prakash Bidhi Chand [1983] 141 ITR 750, in support of the contention that powers of the Tribunal to pronounce upon the matter in issue are very wide. If on the material on record more than one argument is available for recording the same or similar finding and if any of the arguments was not found mentioned in the order of the ITO or AAC, the Tribunal is always entitled to record such a finding, subject to the assessee having been given an opportunity of being heard in that regard. Thus, the Ld. DR has contended that the very fact that these arguments were not mentioned in the assessment order does not preclude the Tribunal from taking a correct view in the matter. 5.7 The Ld. DR has further submitted that the judgments relied upon by the assessee are disting....
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....mpete fees. He submitted that both the sale consideration of shares and the non-compete fees were credited to the account of the assessee on completion of the transaction for sale of shares on 26-2-1998. 6.1 The Ld. AR has further submitted that that there is also no merit in the submissions of the Ld. DR that the non-compete fees was a profit in lieu of salary, inasmuch as it was not a compensation from an employer or former employer in connection with the termination of his employment or modification of the terms and conditions under section 17(1)(iv) read with section 17(3)(ii) of the Act, because the agreement entered into by the FI Group with the assessee on 24-2-1998 was an independent, distinct and separate agreement to retain the services of the assessee as an employee. He further stated that entering into the said agreement was not a condition precedent to the receipt of the non-compete fee. It was not a mandatory condition for the payment of the non-compete fees. This is obvious from the fact that although Sh. Rohitsava Chand opted out of the employment of the Indian company, yet he received the non-compete fees. He further submitted that two agreements, i.e., the serv....
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....non-compete fees cannot be treated as a profit in lieu of salary. 6.2 The Ld. AR has also submitted that there is no merit in the alternative submission of the Ld. D.R. that the amount in question is taxable under section 28(ii) of the Act. He submitted that the assessee was not carrying on any business and, therefore, the non-compete fees cannot be treated as profit and gain from business and profession. He submitted that such receipt cannot also be brought within the purview of section 28(iv) of the Act, because the same does not arise from business or exercise of a profession. He has submitted that the judgment of the Hon'ble Delhi High Court in the case of Nar Hari Dalmia is not applicable to the facts of the present case, because the non-compete fees has not been received in exercise of any profession. He summed up his submissions by stating that the non-compete fees received by the assessee is a capital receipt. The same does not fall under any of the heads of income mentioned in section 14 of the Act. The receipt falls under section 28(va), specifically inserted by the Finance Act, 2002, with effect from 1-4-2003. The same is not applicable to the assessment year under re....
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....n-trade." Now in the present case, we find that certain judgments were cited before the authorities below in support of the claim that the non-compete fees received by the assessee was capital in nature. First of all, we consider it appropriate to refer to the ratio of those judgments: (i) Best & Co. (P.) Ltd.'s case. The facts of the case were that a company was carrying on business in innumerable lines, acquired, in the course of its business, selling agencies from manufacturers both in and outside India. One of them was from Imperial Chemical Industries (Exports) Ltd.; Glasgow, for distribution of their explosives in certain centres. This agency came into existence in 1900 and was terminable at will. The same continued up to 1947, when Imperial Chemical Industries (Exports) Ltd.; decided that all its agencies in India and Ceylon should be taken over by the principal company and gave notice to the assessee for terminating the agency from 1-4-1948. The assessee was paid compensation for the transfer of the agency, during the three successive years after the termination, calculated on the basis of commission on sales made by the Imperial Chemical Industries (India) Ltd. As a ....
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....case is that assessee itself was carrying on business. Still the payment attributable to restrictive covenant for a specified period was held to be a capital receipt. Therefore, we do not accept the plea of the revenue that this judgment is not applicable to this case. Similar is the position in respect of the judgments cited at Sl. Nos. (iii) to (vii) below. However, the receipt in the case at Sl. No. (ii) below was held to be revenue receipt because it was incidental to the carrying on of business. (ii) Gillanders Arbuthnot & Co. Ltd.'s case. The facts of this case were that the assessee was carrying on business in diverse lines; besides acting as managing agents, shipping agents, purchasing agents and secretaries, besides the assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account under an unwritten agreement which was terminable at will, the assessee acted as sale agents and distributors of explosives manufactured by the Imperial Chemical Industries (Export) Ltd. The agency was terminated and by way of compensation, the assessee was paid for the first three years after termination of the agency two-fifths of th....
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....assessee to relinquish the managing agency was a revenue receipt or a capital receipt. On these facts, the Hon'ble Supreme Court held: "Held, on facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co." (iv) A.S. Bhargava v. CIT [1973] 88 ITR 14 (Delhi). In this case, assessee was allotted a petrol pump and service station. The assessee transferred the dealership rights to a company for a consideration of fully paid up shares of the face value of Rs. 30,000. The question was whether the consideration was a revenue receipt in the hands of the assessee. On these facts, the Hon'ble Delhi High Court held as under: "...that the consideration received by the assessee was for the transfer of a capital asset and constituted a capital receipt. Held also, that the ....
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.... the compensation received by the assessee and his son was revenue in nature. However, the Tribunal bifurcated the compensation into three categories viz., (a) share in the assets, (b) share in the goodwill, and (c) share in the restrictive covenants in terms of section 36(2) of the Partnership Act. On these facts, the Tribunal held that the compensation relatable to the restrictive covenant was a capital receipt not liable to tax. On further appeal, the Hon'ble Madras High Court held as under: "...that so far as the cash compensation paid by the new partners referable to the assets and goodwill of the firm was concerned. the cash took the place of the assets of the partnership and the compensation paid for restrictive covenant not to carryon similar business for a period of five years was in the nature of a separate transaction unconnected with the business of the asset of the partnership. The Tribunal was right in its view that the total compensation paid by the firms to the old partners was for (a) the share in the assets (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets ....
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.... the amount received by the partners would be assessable as revenue receipt as the same partners entered into transactions by introducing a corporate personality. These are not the facts of this case. Therefore, this judgment is not applicable to the facts of the present case. (ix) Boeing v. CIT [2001] 250 ITR 667 (Mad.). In this case, the assessee was carrying on cloth business and during the course of such business, the assessee received a gift of Rs. 50,000 from a company in a gift scheme for having purchased cloth exceeding certain value. The assessee claimed the receipt as non-recurring and hence not taxable. However, on these facts, it was held that the value of gift of Rs. 50,000 was a benefit convertible into money arising from business and, therefore, was taxable as business. As already held, the non-compete fees received by the assessee did not arise to the assessee from carrying on any business. The same was for accepting the restrictive covenant and, therefore, this judgment is also not applicable to the facts of the present case. (x) D.M. Naterwalla's case. In this case, the assessee was a Director of a Company. In terms of an agreement with the promoters, shares....
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....ment of income-earning apparatus, sterilisation of source of income or transfer of a capital asset would generally fall in the category of capital receipts. Further, the compensation received for undertaking restrictive covenants of not competing with the business of the assessee also generally fall in the nature of capital receipt until the same is incidental to the carrying on of business. Thus, the receipts which are incidental to carrying on the business and which do not affect the source of income would generally fall in the category of revenue receipts. In all those cases, where the compensations received for composite partly for transfer of capital assets, incidental to the carrying on the business and partly for undertaking restrictive covenant of not competing with the business of assessees, the compensation relatable to such activity would be a capital receipt. The ratio of these judgments to the extent the same is relatable to restrictive covenants is applicable to the present case. The present case also requires to be decided in the light of the legal position discussed above. 9. Before we deal with the merits of the case, certain important facts need to be noticed. ....
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....ip, control and management of the company vested with the persons holding 76 per cent share and after take over, the ownership, control and management vested with the F.I. Group, UK. The non-compete fees agreement was also dependent upon the completion of the share purchase agreement. However, the payment of non-compete fees to the assessee and three other Directors was not dependent on their continuing in employment with the IISC after take over. If it were so, Shri Rohitsava Chand who quit the employment after takeover would have not received the non-compete fees. It is also a fact that there were other Directors of the company who had not been paid non-compete fees and the sellers were under an obligation to procure their resignations. Therefore, even though the date of the agreements, i.e., for sale of shares and non-compete fees was 4-12-1997, yet the date when these became effective was the completion date of the share purchase agreement, i.e., 26-2-1998. No doubt, there were certain obligations cast on the sellers between the dates of the agreement, i.e., 4-12-1997 to the completion date, i.e., 26-2-1998, yet these were to become effective only on the date of takeover by the....
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....s or products supplied by the Covenantee Group. (c) Solicit or interfere with or endeavour in the relevant territory to entice away from the Covenantee group any person, firm, company, or entity who is or was a supplier of the services or goods to the Covenantee Group in relation to the relevant business in the months (12) prior to the completion date or becomes a supplier of the service or goods Covenantee Group in relation to the relevant business prior to 31-5-1999. (d) Offer to employ or engage or solicit the employment or engagement of any person who, at the time of or immediately prior to the date of making an offer to employ or engage or solicitation was an employee of the Covenantee Group, provided that nothing contained herein shall prevent the Covenator from making an offer to employ or engage his personal staff such as secretary, personal assistant or driver. (e) Save as consistent with the provisions of any agreement entered into with the company, represent himself as being in any way connected with or interested in the business of the Covenantee Group. In consideration of the aforesaid restrictive covenants and undertakings applicable up to 31-5-1999, the asse....
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....rm which was subsequently converted into a Limited Company. Most of the shares were held by the assessee and his close relatives. The company made public issues. The assessee negotiated the sale of all the shares to UBL. The agreement also provided that the assessee would continue on the Board of Directors as Chairman. The UBL i.e., the buyer however, thought it expedient to bind the assessee by written agreement restraining him from undertaking any business similar to the business of company as the assessee was carrying on before and could have carried on in future. In consideration of such undertaking, the buyer Company agreed to pay the assessee a consideration of Rs. 175 lakhs. The Assessing Officer brought the said amount to tax on the ground that the receipt was of casual and non-recurring nature. On further appeals, the Ld. CIT(A) and the Tribunal held the compensation of Rs. 175 lakhs as not assessable. On appeal to the High Court, it was held that the compensation of Rs. 175 lakhs received by the assessee for entering into a restrictive covenant of not entering into competitive business was a capital receipt and, therefore, not liable to tax. It is significant to note that....
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.... chairman of ISP, the non-compete fees received for undertaking restrictive covenant was held to be a capital receipt. (iii) Ram Prashad's case In this case, the issue before the Hon'ble Supreme Court was whether certain percentage of gross profit in addition Lo monthly remuneration received by the Managing Director would be treated as salary or business income. While deciding this case, the Hon'ble Apex Court also considered the issue whether the Managing Director is to be treated as servant or agent of Indian Company. The Hon'ble Supreme Court held that nature of employment of the Managing Director may be determined by articles of association of a company and/or agreement, if any, under which a contractual relationship between Director and the Company has been brought about. In case the Director is constituted an employee of the company, the remuneration will be assessable under the head "Salary". If the company itself is carrying on the business and the Managing Director is employed to manage its affairs in terms of its articles and the agreement, and he could be dismissed or his employment can be terminated by the company if his working is not found satisfactory, the Hon'ble....
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.... receive an amount of Rs. 11akh in return for a covenant not to accept employment with any other employer. The Assessing Officer held that the amount of Rs. 1 lakh received by the assessee was in the nature of profits in lieu of salary and, therefore, was assessable to tax under section 17(3)(i) of the Act. On appeal, the Ld. CIT(A) deleted the addition on the ground that that there was no employer-employee relationship. On further appeal, the Tribunal held that the amount received by the assessee by virtue of a restrictive covenant not to accept employment with any other employer had to be regarded only as a capital receipt and, thus, not liable to tax. (vii) The decision of ITAT, Madras Bench in the case of K.S.S. Mani v. ITO [1995] 54 ITD 76 In this case, the assessee was an employee of M/s. Larsen & Toubro Ltd.; and vide agreement dated 28-11-1983 was appointed as a whole-time director for five years from 28-12-1983. The assessee resigned from director in 1986. An agreement was entered into by the assessee with the employer by which he was to be paid Rs. 2 lakhs in two instalments for not undertaking for 3 years any activity or employment which could be prejudicial to the in....
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....d for the sole purpose to evade income-tax. On further appeal, the Tribunal held that the compensation received for undertaking restrictive covenant was a capital receipt not liable to tax. When we apply the ratio of the above-mentioned judgments of various High Courts and decisions of various Benches of the Tribunal, we find that the consistent view is that compensation received for undertaking restrictive covenant falls in the category of a capital receipt. The case of the revenue is that since the assessee was the Managing Director of the Company prior to takeover and continued to be employed in the same position after takeover, the compensation received by the assessee in the form of non-compete fees amounts to profit in lieu of salary. This claim of the revenue does not appear to be correct. In the cases of Saroj Kumar Poddar and A.S. Wardekar, both the assessees continued to work with the employer and in addition received compensation for undertaking restrictive covenants. Such compensations were held to be capital in nature because the receipts were for accepting restrictive covenants for not undertaking business activity or engaging themselves in the business to the detrime....
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....ny. Such persons who manage and run the company acquire sufficient skill, experience and knowledge, while carrying on the business of the company. Such knowledge and skill can be of considerable value in setting up their own business or joining the employment of some other concern which could directly compete with the business of the assessee. Besides, these persons also command considerable confidence of the public shareholders, the employees. For example, if Mukesh Ambani quits the Reliance Industries and decides to set up another company, he can easily do so. There would be plenty of other companies willing to employ him on far more attractive terms than what he might be getting from the present organisation. Thus, it is not correct to say that since the business belongs to the company, why the existing employer should enter into a non-compete agreement with the Director or the Managing Director. The persons buying the company are fully aware of the potential of the Managing Director and other Directors who can exploit their knowledge, skill and experience to the disadvantage of the business of the assessee. The intention behind entering into non-compete agreement is to ward off....
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....d bring such compensation in the nature and ambit of profits in lieu of salary. This has been the consistent view of the various Benches of the Tribunal duly supported by the various judgments of Supreme Court and of the High Courts referred to above. Thus, we are of the considered opinion that the non-compete fees is not taxable under the head 'Salary' either under section 17(3)(i)/17(2)(v). It is pertinent to mention that clause (iii) of sub-section (3) of section 17 has been inserted by the Finance Act, 2001 with effect from 1-4-2002, under which, any amount due to or received, whether in lump sum or otherwise by an assessee from any person before his joining any employment with that person, or after cessation of his employment with that person, has been included in the nature of profits in lieu of salary. But this amendment has been made applicable with effect from 1-4-2001 and, therefore, the non-compete fee cannot be brought to tax under the amended section also. 12. Now the next issue that requires to be decided by this Bench is whether the non-compete fees can be brought to tax under section 28(ii) of the Act. In the present case, the assessee was himself not carrying on....
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....sessing Officer. On further appeal, the Tribunal held that non-compete fee was not covered under section 28(ii)(a) and the amount was not paid for terminating the terms and conditions of service. It was held that the compensation of Rs. 1 crore paid to assessee in lieu of restrictive covenant was a capital receipt, not liable to tax. (b) The decision of ITAT Delhi Bench (TM) in the case of Shiv Raj Gupta v. Asstt. CIT [IT Appeal No. 4898 (Delhi) of 1998, dated 30-5-2001]. In this case, the assessee was Chairman-cum-MD of a Public Limited Company engaged in the business of manufacture of Indian made Foreign Liquor, where the assessee and his family members were holding 57.29 per cent of the share capital. The assessee entered into an agreement with SWC for selling his entire holding. Another memorandum of understanding was executed between the assessee and SWC which provided that the assessee will execute restrictive covenant in favour of SWC for not carrying on directly or indirectly any manufacturing or marketing activity relating to IMFL for a period of 10 years from the date of agreement. The assessee received a non-compete fee of Rs. 6.6 crores from SWC which was claimed to ....
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.... ITR 412 (SC). In this case, the issue before the Hon'ble Supreme Court was whether donations received by the assessee for propagating religious faith and in the business of publishing newspaper, would be taxable as receipts arising from the carrying on of a vocation. The assessee was a lecturer in a College in Kerala till 1953, had obtained Ph. D degree in USA during 1953 to 1957. He associated himself with Indian Gospel Mission in the USA, which collected money through the Indian Christian Crusade. On returning to India, the appellant was propagating the ideals of Indian Christian Crusade and was engaged in a movement for the spread of religion and for fighting the forces of atheism. Later, in 1959, he started publishing a daily newspaper. During the period relating to assessment years 1960-61 and 1961-62, the assessee received donations amounting to Rs. 2,90,220 and Rs. 3,63,750 respectively through the Indian Christian Crusade from his friends in USA. On these facts, the Tribunal held that the receipts were casual and non-recurring receipts and did not arise in the course of the exercise of any vocation. On a reference, the High Court held that the receipt arise from the exe....
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....m time to time on account of the same. The Hon'ble Supreme Court observed that the assessee was carrying on a vocation and the payments received were in the course of carrying on of such vocation. Therefore, it was held to be in the nature of income. As mentioned above, the assessee was not carrying on any vocation or profession, therefore, the impugned receipts cannot be considered as revenue in nature.As already mentioned above, the non-compete fees did not arise to the assessee from carrying on of business or profession. We have already held that the assessee was not carrying on any business or profession, therefore, the impugned receipt would neither be taxable under section 28(ii) or 28(iv) of the Act. None of the judgments cited by the Ld. DR is applicable to the facts of the present case because in those cases, the assessees were carrying on either business or profession. Thus, we hold accordingly. 13. Now the next aspect that requires to be considered is that once it is held that the non-compete fees received by the assessee is a capital receipt, whether the same is liable to tax as capital gains. Section 45 of the Act deals with the income falling in the nature of capit....