TaxTMI 
TaxTMI 
2008 (3) TMI 16
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.... all his shares in IIS Infotech Ltd. and by the other agreement, the Assessee agreed that till 31st May, 1999 he would not take up any business activity relating to software development in all the seven companies/organizations in which he was a director, major shareholder or a member since his expertise in the matter may adversely affect the business of the foreign company. For convenience, the second agreement is referred to as the non-compete agreement . 4. The relevant terms of the non-compete agreement are as follows: 2.1 Save in relation to a potential breach of Article (b) as otherwise disclosed to the Covenantee and accepted by the Covenantee in writing from time to time provided however such acceptance shall not be unreasonably withheld by the Covenantee, the Covenantor shall not for the period up to May 31, 1999 directly or indirectly, either alone or jointly with or on behalf of any person, firm, company or entity and whether on his own account or as principal, partner, shareholder (unless such shareholding is less than 10% of the issued share capital of the company concerned and is held by way of bona fide investment only), director, employee, consultant or in any othe....
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....y the Assessee in his return. 6. When the Assessee received the second installment of Rs.1,26,25,940/-in the previous year relevant to the assessment year 2000-2001 he relinquished the office of Director of IIS Infotech Ltd. and also transferred all his shares in IIS Infotech Ltd. to the foreign company. 7. In respect of the assessment year 2000-2001, the Assessee again claimed the receipt as a capital receipt and this was accepted by the Assessing Officer. Later on, however, the Assessing Officer initiated re-assessment proceedings by issuing a notice to the Assessee under Section 148 of the Income Tax Act, 1961 (for short the Act). 8. In the reassessment order, the Assessing Officer did not accept the contention of the Assessee that the second installment received by him was a capital receipt. The following facts (as mentioned in the order of the Tribunal) were taken into consideration by the Assessing Officer in coming to this conclusion: (i) The Assessee was not carrying on the business of software and, thus, there was no question of putting any embargo on him from carrying on software business by paying him non-compete fees; (ii) There was no loss to the Assessee fo....
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....ease in the profit making apparatus of the Assessee. Indeed, the Assessee did not own any profit making apparatus. He was not carrying on any business on his own but was merely an employee of IIS Infotech Ltd. In regard to this company, the Assessee had resigned as its Director and transferred his shares to the foreign company and, therefore, had nothing further to do with IIS Infotech Ltd. In so far as the other six organizations are concerned, it appears that the Assessee had agreed not to carry on his activity of software development in these companies also in which he was a director, shareholder or member. In essence, therefore, the non-compete agreement was consideration paid to the Assessee for loss of his office as a Director and shareholder of IIS Infotech Ltd. leaving him free to carry out his other employment but without being involved in software development. Payment for loss of office was held by the Tribunal to be a revenue receipt and not a capital receipt. 14. In our opinion, the Tribunal has approached the issue from an incorrect legal standpoint and a narrow interpretation of the non-compete agreement. As such, a substantial question of law arises for consideratio....
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.... of Income Tax v. Saraswathi Publicities, [1981] 132 ITR 207 the question was the nature of compensation received under an agreement to refrain from carrying on competitive business. One of the findings in Saraswathi was that no business was taken over or acquired of the assessee. On this basis, the Madras High Court considered the law applicable to restrictive covenants and receipts in connection therewith. After discussing the law laid down in Best and Co. and Gillanders Arbuthnot it was held by the Madras High Court that the compensation paid was a capital receipt and not liable to income tax. This is how the Madras High Court dealt with the two decisions: After considering the agreement in the case in CIT v. Best and Co. (P.) Ltd., the Supreme Court held that the compensation agreed to be paid was not only in lieu of the giving up of the agency but also for the assessee accepting a restrictive covenant for a specified period. As far as the loss of agency was concerned, it was only a normal trading loss and the income received on that account was only a revenue receipt. But, with reference to the loss on account of the restrictive covenant, after referring to the decision in Gi....
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....e to the conclusion that the non-compete agreement entered into between the assessee and Gillette resulted in a payment to the assessee which was in the nature of the capital receipt. 21. In Commissioner of Income Tax v. A.S. Wardekar, [2006] 283 ITR 432, the assessee received a sum of Rs.1.75 crores for entering into a restrictive covenant of not entering into a competing business with the United Breweries Group for a period of five years. Referring to and relying upon Saroj Kumar Poddar, the question was answered in favour of the assessee by holding that the amount received by the assessee for entering into a restrictive covenant of not entering into a competitive business was a receipt by the assessee of a capital nature and thus not liable to tax. 22. On the other hand, in Tam Tam Pedda Guruva Reddy v. Joint Commissioner of Income Tax, [2007] 291 ITR 44, the question before the Karnataka High Court related to an agreement whereby the assessee agreed not to compete with Tam Tam Pedda Guruva Reddy Constructions (P) Ltd. within the local limits of Turuvekere, Tumkur and Kunigal for a period of five years. In consideration of this covenant, the assessee was paid a sum of Rs.8 lak....