TaxTMI 
TaxTMI 
2017 (8) TMI 731
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.... in TSME to M/s. Gyan Marketing Associates Pvt. Ltd. vide agreement dated 10th March, 1995. (iii) Rs. 3,15,31,750/- towards entering into a Non-Compete Agreement with MEW on 10th March, 1995. 3. The Assessing Officer ('AO') issued a show cause notice to the Assessee as to why the amounts received by her from MEW should not be treated as a revenue receipt and as to why her claim, that the said money is a capital receipt, should be rejected. As part of the proceedings, the AO recorded the Assessee on 9th December, 1997 and the AO vide assessment order dated 26th March, 1998 made an addition of Rs. 3,15,31,750/- to the returned income of the Assessee. 4. The Assessee, preferred an appeal before the Commissioner of Income-Tax (Appeals) ['CIT (A)'], who by order dated 24th December, 1998 deleted the addition made by the AO and held that the payment of compensation in lieu of the non-compete agreement by the Respondent was a capital receipt and not chargeable to income tax. 5. The Revenue approached the Income Tax Appellate Tribunal ('ITAT') vide ITA No.1258/Del/99. The ITAT on 12th December, 2003, dismissed the appeal and held that the amount received was a capital receipt n....
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....the entire consideration of Rs. 3,15,31,750/- was taxable under Section 28 (ii) of the Act. Mr. Hossain thereafter submits that a perusal of the list of clients of the Assessee, which included some of the most well-known companies, both Indian and multinational, clearly shows that the amounts paid to the Assessee were actually part of the terminal benefits but were merely described as a non-compete fee. 10. Mr. Hossain contended that the CIT (A) had erred in holding that thedecision to pay the non-compete fee was merely a "business prudence" decision. The growth of TSME after the retirement of the Assessee shows that there has not been any lag or reduction in its revenues and thus the socalled competition from the Assessee could not have dented TSME in any manner. 11. Mr. Hossain urges that the ITAT wrongly upheld the decision of the CIT (A) by relying on the decision of the ITAT in Shiv Raj Gupta in ITA No.489/Del/98, which now stands reversed by this Court. 12. The foundation of Mr. Hossain's arguments rests on the decision of this Court in CIT v. Shiv Raj Gupta 372 ITR 337 (2015) (hereafter 'Shiv Raj Gupta') dated 22nd December, 2014. He specifically relies upon the jud....
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....ding to Mr. Navet, the Non-Competition Agreement was entered into with MEW itself and was a valid and enforceable agreement in law. He sought to distinguish the Shiv Raj Gupta (supra) case based on the fact that in the said case, the Assessee did not possess a license to manufacture or sell IMFL. The Assessee therein did not have a net worth, which would enable him to set up a new venture or pose a threat to M/s/ Shaw Wallace Company Group (`SWC') and that the SWC Group was a much larger group to whom the Assessee would not be pose any threat. Mr. Navet states that, unlike in Shiv Raj Gupta (supra), which was concerned with the manufacturing business, for which a proper manufacturing license would be required, Mrs. Tara Sinha - the Assessee was fully equipped to start a competing business from the date she retired from TSME. She, having been single-handedly responsible for setting up TSME in India, commanded a position from which she had the potential to take away not just the clients but even key employees of TSME. Thus, MEW had rightly paid a non-compete fee to the Assessee. The nature of the services being rendered by the Assessee were so personal to her that in the service indu....
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....auses 3 & 4 of the agreement, which read asunder: "3. The restrictions set out in Clause 1 are considered reasonable by the parties, having regard to the mutual promises set out in this agreement, and the consideration payable to Mrs. Sinha under this Agreement, but in the event that any such restriction shall be found to be void but would be valid if some part were deleted, or the period or area of application reduced, such restriction shall apply with such modification as may be necessary to make it valid and effective. 4. The restrictions set out in each paragraph of Clause 1 constitute separate and independent restrictions. In the event that any restriction set out in any paragraph shall held to be unenforceable the restrictions set out in the other paragraphs shall be unaffected." 19. By relying on clauses 3 & 4, the AO came to the conclusion that the true intention of MEW is not to enforce any of the restrictions contained in Clause 1. The AO, in the opinion of the Court, did not construe the agreement as a whole. The AO, incorrectly, interprets Clauses 2, 3 & 4 in holding that they actually contradict each other. The AO was clearly wrong in holding that the agreemen....
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....essee, at the time when she retired from TSME, did include some of the most well known Indian and Multinational companies. The Non-Competition Agreement dated 10th March, 1995 is, therefore, clearly a genuine agreement and the Clauses in the agreement that the same would be governed by the laws of England and any disputes would be referred to ICC Paris, cannot be termed as a devious method not to seek enforcement, inasmuch as, such clauses appear regularly in several contracts involving international companies. The AO reads too much into these two clauses. 24. Insofar as, Clauses 3 & 4 are concerned, these are standard severability clauses which appear in most contracts that have multiple obligations cast on the parties. Even if one obligation is held to be illegal or void, other clauses and obligations would be enforceable. These clauses cannot by any stretch of imagination, be held to be a ruse to not enforce the agreement. 25. The CIT (A) and ITAT have rightly held that the non-compete fee is not a taxable income. 26. A similar issue had arisen as far back as in 1942 before the House of Lords in Beak v. Robson (supra). The relevant portion reads as under: "The sum of....
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....t the prevalent exchange rates. The Assessee, as clearly ascertainable from the record, was a lady who enjoyed a stature in the advertising industry and the Non-Competition Agreement, by which she agreed not to compete in India with MEW, was clearly not a sham. She is now 82 years of age and considering that the Revenue's appeal challenges concurrent findings of the CIT (A) and ITAT, we do not find any cause to interfere. 29. In Khanna and Annadhanam (supra), this Court followed the judgment of the Supreme Court in Kettlewell Bullen and Company Ltd. v. CIT, [1964] 53 ITR 261 SC, and held that any payment made which represents compensation for the loss of the source of income would be capital in nature and that it would not be taxable. This Court, while commenting upon the amounts paid to a Chartered Accountant's firm, for terminating an arrangement with Delloitte Haskins and Sells (DHS) held as under: "...It is somewhat difficult to conceive of a professional firm of chartered accountants entering into such arrangements with international firms of chartered accountants, as the assessee, in the present case, had done, with the same frequency and regularity with which companies....
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....l Industries (Export) Ltd. That agency was terminated and by way of compensation the Imperial Chemical Industries (Export) Ltd. paid for first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the agency of the Appellant and in addition in the third year full commission was paid for the sales in that year. The Imperial Chemical Industries (Export) Ltd. took a formal undertaking from the Assessee to refrain from selling or accepting any agency for explosives. 7. Two questions arose for determination, namely, whether the amounts received by the Appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the Assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the Assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the....