TaxTMI 
TaxTMI 
2015 (3) TMI 407
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....from Annamalai University. He qualified in M.E. in Control Systems Engineering from PSG College of Technology, Coimbatore, in the year 1973. In 1974, it is stated that, he joined as Assistant Development Engineer with the R&D Division of M/s.Jyoti Ltd., Baroda. Between 1975 to 1982 he discharged duties as Manager (Designs) with M/s.Usha Rectifier Corporation, Faridabad. Between 1982 and 1985, the appellant functioned as Senior Manager with DEBIKAY Electronics, Calcutta. Between 1986 and 1989, the appellant was working as Senior Manager with A.B. Controls Ltd., Sahibabad (U.P.). The appellant had also underwent the following specialised trainings:- 1984 Training on Drives for Rolling Mills at the Works of CGEE ALSTOM, France. 1985 Training on DC/AC Drives in Allen Bradley, USA 1986 Training on Total Quality System in Allen Bradley, UK 1987 Training on High Power UPS (Uninterruptible Power Supply) Systems in Exide Electronics, USA 1988 Training on AC Drives in Stromberg, Finland 3. It is the further case of the appellant that he has rich experience in design, development and commissioning of Industrial Drives, power electronic equipments, su....
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....ents. Additionally, RSM also bought the Drives from CT-PLC for providing complete solution to their customers. 5. In the meanwhile, in September, 1993, CT-PLC and RSM realized their joint potential in the field of industrial drives and as a result, a Joint Venture company was formed in September, 1993, by name Control Techniques India Pvt. Ltd. (for short 'CTIL') with 51% share held by CT-PLC and 49% share held by RSM. Since the expertise of the technical personnel of RSM would be the key to success of this joint venture, the Directors of RSM were asked to assume executive responsibility in the joint venture company and, accordingly, an employment contract was signed by the appellant and he became the employee of CTIL on 30.9.93. The salary of the appellant was paid by CTIL, which is a duly constituted and registered company under the laws of this country. The said company was filing returns of income for all the assessment years, including the assessment year in question, viz., 1996-1997. 6. The percentage of shareholding continued in the manner stated above upto 26.9.95. On 26.9.95, the Government of India, Ministry of Industries, Department of Industrial Policy & P....
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....dustrial use for efficient production and energy saving in Industry. B. RAVEENDRAN, by virtue of the said experience gained over the last 20 years, set up a company RSM Electronics Pvt Limited ('RSM') in 1990 for design, manufacture and testing of Industrial Drive systems and market the products in India. RSM has considerable orders from reputed companies and were in direct competition with CT's competitors worldwide. C. RSM Electronics entered into a Joint Venture Agreement dated 1st day of October, 1993, with 'CT' to form Control Techniques India Pvt. Ltd., (the CIT ) to take over the Business of 'RSM' and run as a going concern in India (the territory ) and subject to the conditions therein specified, to take over from RSM the business of Industrial Drive systems on the terms and conditions therein. D. By the Deed of Assignment, RAVEENDRAN has irrevocably agreed to cease and desist to engage, directly or indirectly, in the Industrial Drives business save and except RAVEENDRAN's participation as a shareholder and operating executive of the 'CTI' under mutually agreed terms. E. RAVEENDRAN is desirous of giving an undertaking not ....
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.... nominated, one by each party and the Indian Arbitration Act shall apply. IN WITNESS WHEREOF THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE EXECUTED THE DAY AND YEAR FIRST HEREIN ABOVE WRITTEN." 9. The non-competition agreement speaks for itself. It provides for a consideration of 18,000 Pound Sterling in recognition of the appellant's expertise in industrial drives system and taking note of the business of RSM and the good reputation and market that it enjoys, which was the main source of income for the appellant. In turn, the appellant agreed to give up, part with, cease and desist from carrying on the business of industrial drives anywhere in the territory, subject to certain conditions, on receipt of consideration of 18,000 Pound Sterling. Accordingly, an agreement dated 14.12.95 was entered into between the appellant/assessee and CT-PLC and, accordingly, payment was made. 10. The appellant/assessee, in his return of income, showed this amount as capital receipt. Note-2 of the return filed for the assessment year 1996-1997, financial year ending 1996, is relevant for the present case and the same is extracted hereinbelow, for better clarity :- "2. I have re....
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....., CTIL. For better clarity, the finding of the Assessing Officer is set out as hereunder :- As mentioned above, the assessee became an employee of the company CTI, as early as on 1.10.93. As per the Employment Contract (copy filed), the assessee was prevented from doing anything in the line of business against the interests of CTI, including accepting any job in that line. So as on 1.10.93, the assessee had become a full time Director of CTI, dedicating all his expertise for the future of CTI. Secondly, the company RSM was taken over by CTI as per agreement dt. 17.9.93 and all the Directors of RSM were taken as Directors of CTI. The IT record shows that as on 14.12.95, the assessee was continuing as Director of CTI on salary. In view of the above, as on 14.12.95 neither the assessee nor his old company RSM was in a position to compete with CTI and there is, therefore, no sanctity for a non-competition agreement in this case. In addition to this, it has to be seen that when the assessee was taken over as Director he had agreed not to work against the business interests of CTI, and the very appointment was the reward for his non-competition. 12. The Assessing Officer, fu....
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....further observed by the Assessing Officer that in a sense, the entire payment is attributable to the goodwill of the assessee and that goodwill is self-generated and as the cost is 'Nil' the provisions of Section 55 (2) (a) (ii) of the Act will get attracted and as a result, the entire receipt is taxable as capital gains. 14. The Assessing Officer, further held that the payment in this case was received from the employer on the premise that the company, CT-PLC and CTIL are one and the same stating that the UK company, viz., CT-PLC owns 51% in the Indian company. The Assessing Officer proceeds to hold that the payment is directly related to the service the assessee was rendering as any payment, whether it be salary, remuneration, commission, etc., forming part of the salary as per Section 17 (1) of the Income Tax Act, even if it is casual or non-recurring payment, Section 10 (3) does not exclude the amount from the purview of taxation, if the said payment is in addition to remuneration. The Assessing Officer, therefore, held that the above stated receipt is assessable under the head 'salary'. 15. In the alternative, the Assessing Officer concluded as under :- ....
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....petition allowance is only salary/addition to salary/payment in lieu of salary from CT PLC (UK) which is actually a foreign version of Indian employer CTI. Holding so, I affirm the assessment of Rs. 9,83,385/- as salary. 18. The appellant/assessee, aggrieved over the finding rendered by the CIT (Appeals), pursued the matter before the Tribunal. The Tribunal, considering the factual matrix and the documents placed before it, held as under :- "4. Having heard the learned representatives on both sides, we also perused the material available on record. Admittedly, the assessee has received a sum of Rs. 18,000 Pound Sterling which is equivalent to Indian currency Rs. 9,83,385/- from the foreign company Control Techniques PLC. The only objection of the assessee is that there is no employee and employer relationship to treat the payment as salary. According to the assessee, it is a fee received for non-competition in the business. As rightly submitted by the learned D.R., if it is a non-competition fee, it has to be paid to RSM Electronics Pvt. Ltd., and not to the assessee. The assessee converted his business into Pvt. Limited company and the same Pvt. Limited company has entered i....
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....al drive system anywhere in India for a period of five years. That being the case, the said amount received, partook the character of capital receipt. It is the further submission of the learned counsel for the appellant/assessee that the amount towards non-competition agreement was paid by the foreign company, viz., CT-PLC, while the salary towards the employment of the appellant/assessee was paid by the joint venture Indian company, viz., CTIL. Both the transactions being with two different entities, the receipt of the amount under the non-competition agreement from the foreign company cannot be construed as salary, when the appellant/assessee is not in employment under the foreign company, viz., CT-PLC. It is submitted by the learned counsel for the appellant/assessee that Section 15 of the Act deals with incomes falling under the head 'Salaries and 'Section 16 deals with deduction thereof from salaries. Section 15 clearly stipulates what salary means and what incomes should be construed as salary, which have not been construed in proper perspective by the authorities below and, therefore, the impugned order deserves to be set aside. 22. Per contra, learned standing c....
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.... the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide, Van Den Berghs Ltd. v. Clark [(1935) 3 I.T.R. (Engl. Cas.) 17]. 26. In the case of Oberoi Hotel Pvt. Ltd. v. CIT (236 ITR 903), the Supreme Court, laid down the parameters as to the heads under which the amounts received in a particular transaction should fall into. The relevant portion of the judgment of the Supreme Court is extracted hereunder for better clarity :- It may be broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in a trading transaction is a taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of ....
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....hether the amount received by the assessee/appellant from CT-PLC would fall under the head 'capital receipt', as claimed by the assessee/appellant. 30. The non-competition agreement and the payment made consequent to the non-competition agreement dated 14.12.95, according to the appellant/assessee is a capital receipt and it is not paid by the employer and that no capital gains would arise as there was no cost incurred. This argument is repelled by the Department stating that the person, who made the payment, viz., CT-PLC, holds 51% share in CTIL and the assessee/appellant also, through the joint venture Indian company, viz., CTIL, holds 49% as Director of the company and, therefore, the amount paid pursuant to the non-competition agreement should be considered as salary. 31. To come to a conclusion as to the nature of receipt of the amount, at the first instance, it is necessary to look into the order of the Assessing Officer as to whether the reasonings given by the Assessing Officer to support his findings, that what was paid and received by the appellant/assessee is salary, is correct. The findings in para-11 of the original authority's order this business of ....
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....not have any relevance to the non-competition agreement. On the contrary, the non-competition agreement, it appears, has been entered into subsequently on 14.12.95, i.e., after nearly two years and two months to safeguard the interests of the foreign collaborator, who increased his stakes from 51% to 85% on and from 27.9.95 in the joint venture Indian company. 33. The Assessing Officer is not right in saying that there is no sanctity for this non-competition agreement in this case, because his reasoning that the old company was not in a position to compete with the joint venture company, viz., CTIL, is not the issue, as CTIL is only in the business of industrial drives as a joint venture company. The point in issue is whether the appellant, as an individual, can compete with the business of CTIL, if there is no restriction. To avoid any loophole in that, the non-compete agreement was signed by CT-PLC to restrain the assessee individual from embarking on any such business, which is akin to industrial drives. The finding of the Assessing Officer is merely based on surmises and conjectures and not borne by any documents. 34. The non-competition agreement should be read in relati....
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....oyee of the company and the payment is received from his employer. In this context, the companies CT and CTI are one and the same as the former is owning 51% share in the latter. Secondly, the payment is directly related to the services which the assessee was rendering. Why it is given is not a major issue, since any payment, whether it be salary, remuneration, commission, etc., forms part of salary as per Sec. 17 (1). Even if it is a casual and non-recurring payment, Sec. 10 (3) does not exclude it from taxation if it is an addition to the remuneration. In view of the above, the receipt is also assessable under the head Salary . 36. It is to be kept in mind that RSM never was merged with CT-PLC to form CTIL. CTIL is a joint venture company with 51% shares being held by CT-PLC and 49% shares being held by RSM as on 1.10.93 and there appears to be no dispute on that. 37. The Assessing Officer has further held that the nature of payment, at best, could be attributed as goodwill, paid by the foreign company to the assessee and to substantiate the same, falls back on Section 55 (2) (a) (ii) and comes to the conclusion that it has to be taxed as capital gains. However, the Assessi....
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.... one between the employer and the employee and also since it is essentially connected with his past, present and future services. But is is made known that this does not discount the scope of assessing it as Capital Gains on Goodwill, which will remain as an equal alternative. It is made clear that the receipt is assessable whether it is treated as Capital or Revenue. 40. The income chargeable under the head 'Salaries' and Deductions from Salaries fall under Sections 15 and 16 of the Income Tax Act and they fall under Chapter IV, which deals with 'Computation of Total Income'. For better appreciation, the said Sections 15 & 16 of the Act are extracted hereinbelow :- "Salaries. 15. The following income shall be chargeable to income-tax under the head "Salaries" (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid42 or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former empl....
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.... participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; and [(viii) the contribution made by the Central Government [or any other employer] in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD;] ********* (3) profits in lieu of salary includes (i) the amount of any compensation86 due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto; (ii) any payment (other than any payment referred to in clause (10) [clause (10A)] [clause (10B)], clause (11), [clause (12) [clause (13)] or clause (13A)] of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund 91[* * *], to the extent to which it does not consist of contributions by the assessee or [interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation. For the purposes of this sub-clause, the expression Keyman insu....
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....erefore, to look after the business and overall interests of the joint venture Indian company, the foreign company has to nominate somebody and probably they have nominated the assessee and as a consideration to take care of the entire joint venture company, the assessee received the amount. This finding of the Tribunal is purely based on surmises and conjectures. It is purely due to misreading of the nature of business of the joint venture company and the nature of payment made under the non-competition agreement. As already stated, the joint venture company was formed for the purpose of manufacture, sales and service of Power Electronic Converters, viz., Industrial Drives as a joint venture between CT-PLC and RSM and the Directors of RSM, viz., the appellant/assessee and others, were also inducted in executive capacity as salaried persons. Therefore, there is no question of RSM being a threat to the very same joint venture company, viz., CTIL, in which RSM had 49% shareholding. On the contrary, the individual assessee is only a paid employee of the joint venture company. 44. Further, it is evident from the record that when the shareholding pattern of the Indian company, viz., ....
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....see cannot be regarded as profits in lieu of salary and brought to tax under the head salaries. By accepting the terms and conditions of the non-competition agreement, the assessee has restrained himself from setting up any business, joining any employment or becoming a director of some concern so as to open competition. Such restrictions have adversely affected his income earning potential by exploiting his skills, knowledge, experience, etc. The clear intention behind CT-PLC entering into the non-competition agreement with the appellant/assessee is only to ward off any competition from the appellant/assessee, as he could exploit his knowledge, skill and experience to the disadvantage of the shareholding of CT-PLC in the joint venture Indian company, which is evident from the non-competition agreement. 47. For the purpose of tax, the nature of payment in the manner as has been paid by the foreign company and received by the assessee will be the primary issue that has to be considered. This payment, under the non-competition agreement, by no stretch of imagination could be stated as salary for taking care of the interests of the foreign company in the newly formed joint ve....
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....the course of employment to the appellant/assessee, as the non-competition agreement was entered into between the foreign company, CT-PLC with the appellant/assessee. The facts in the present case, therefore, stands distinguished. 50. As regards the decision of the Supreme Court in Commissioner of Income Tax Vs P.Mohanakala (2007 (291) ITR) 278 (SC)), relied on by the learned standing counsel for the respondent/Revenue, that concurrent findings of fact should not be normally disturbed, there is no dispute on this proposition. In this case, what is sought to be interpreted is not only facts in the case, but the provisions of Sections 15 and 17 of the Income Tax Act, which have been misread and misinterpreted by the Assessing Officer, the CIT (Appeals) and the Tribunal. The interpretation given by the Assessing Officer, CIT (Appeals) and the Tribunal as to the nature of transaction, by putting the non-competition fee received by the assessee/appellant under the head 'salary', which is erroneous and the conclusion arrived at by the authorities below, which is based purely on conjectures and surmises, have been interpreted in its proper perspective. The interpret....