TaxTMI 
TaxTMI 
2020 (7) TMI 544
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....e the registered holders of 1,86,109 equity shares of INR 10 each constituting 57.29% of the paid-up equity share capital of CDBL listed in the Bombay and Delhi Stock Exchanges. The break-up of the shares held by the family members of the appellant and the appellant himself are as follows: Name of the Shareholder Number of Shares held in CDBL Shiv Raj Gupta (Appellant) 38,999 Jayant Gupta (Appellant's Son) 44,658 Roopa Gupta (Appellant's Daughter-in-law) 53,911 Pushpa Gupta (Appellant's Wife) 3,303 Avanti Pandit (Appellant's Daughter) 5,541 Arti Kirloskar (Appellant's Daughter) 2,760 Total 1,86,109 3. The said MoU recites that the company employed in its factory 350 employees and around 25 staff and other officers in its other offices. The MoU then refers to a direction of the Supreme Court, which was made by an Order dated 11.03.1994, which made it clear that the company's manufacturing activity at the plant at Meerut was suspended until a secondary effluent treatment plant is installed and made operative by the company. This led to the sale of this controlling block of shares, which was sold at the price of INR 30 per share (when....
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....these presents, Mr. Gupta will not start or engage himself directly or indirectly or provide any service, assistance or support of any nature, whatsoever, to or in relation to the manufacturing, dealing and supplying or marketing of Indian Made Foreign Liquor (IMFL) and/or Beer. The balance amount of Rs. 60,00,000 (Rupees sixty lacs only) will be paid by SWC to Mr. Gupta on 31st October, 1994. 2. This covenant shall remain in full force and effect for a period of 10 years from the date of these presents and this covenant will be absolutely and irrevocably binding on Mr. Gupta." 5. The bone of contention in this appeal is whether the said Deed of Covenant can be said to contain a restrictive covenant as a result of which payment is made to the appellant, or whether it is in fact part of a sham transaction which, in the guise of being a separate Deed of Covenant, is really in the nature of payment received by the appellant as compensation for terminating his management of CDBL, in which case it would be taxable under Section 28(ii)(a) of the Income Tax Act, 1961. Section 28(ii)(a) reads as follows: "28. Profits and gains of business or profession. The fo....
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.... Judicial Member on the other hand substantially agreed with the Assessing Officer, as a result of which he decided in favour of the revenue. A reference was then made to a third Member, who was also a Judicial Member. The learned third Member emphasised the fact that a share worth INR 3 was sold for INR 30 under the MoU as a result of transfer of control of the CDBL. It cannot be said that these shares have been undervalued, neither can it be said that there was any collusion or other sham transaction, as a result of which the amount of INR 6.6 crores has escaped income tax. He pointed out that by a letter dated 02.04.1994, a "penalty clause" was provided for in that, out of the amount received by the assessee an amount of INR 3 crore was to be deposited with the SWC group for two years under a public deposit scheme, it being made clear that in case there is any breach of the terms of the MoU resulting in loss, the amount of such loss will be deducted from this deposit. The result, therefore, was that the appeal stood allowed by a majority of 2:1 in the Appellate Tribunal. 8. The revenue preferred an appeal under Section 260-A of the Income Tax Act, 1961 to the High Court. In i....
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....es. 10. Shri Arvind Datar and Shri Ajay Vohra, learned senior advocates appearing on behalf of the appellant, have taken us through the orders of the Income Tax Authorities, the Appellate Tribunal and the impugned judgment of the High Court. They raised as a preliminary submission the fact that under Section 260-A, it is only the substantial question of law that is framed that can be answered and no other. If some other question is to be answered, the Court must first give notice of the same to both sides, hear them, pronounce a reasoned order and thereafter frame another substantial question of law, which it may then answer. This procedure has not been followed in the present case as it is clear that the substantial question of law framed did not contain within it the question as to whether the assessee can be taxed outside the provisions of Section 28(ii)(a). The entire judgment is, therefore, vitiated and must be set aside on this ground alone. They relied on several judgments to buttress this contention. They then relied upon the judgment of the learned Accountant Member and of the third Member in favour of the assessee and the reasoning therein, which according to them is u....
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....l question of law involved. (2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing the same within that period. (3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. (4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question : Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. (5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. (6) The High Court may determine any issue which- (a) has not been determ....
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....ty is not afforded to the opposite side, it will amount to denial of natural justice. The above parameters within which the High Court has to exercise its jurisdiction under Section 100 CPC should always be borne in mind. We are sorry to state that the above aspects are seldom borne in mind in many cases and second appeals are entertained and/or disposed of, without conforming to the above discipline." This statement of the law was followed in Dnyanoba Bhaurao Shemade v. Maroti Bhaurao Marnor (1999) 2 SCC 471 (See paragraph 10). A recent decision of this Court in Biswanath Ghosh v. Gobinda Ghosh (2014) 11 SCC 605 has reiterated these principles in paragraph 16 as follows: "16. Section 100 of the Code lays down the provision with regard to the second appeal which reads as under: "100.Second appeal.-(1) Save as otherwise expressly provided in the body of this Code or by any other law for the time being in force, an appeal shall lie to the High Court from every decree passed in appeal by any court subordinate to the High Court, if the High Court is satisfied that the case involves a substantial question of law. (2) An appeal may lie under this section fro....
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.... 65. The substantial question of law is accordingly answered in favour of the appellant-Revenue and against the respondent-assessee but holding that Rs. 6.60 crores was taxable as capital gains in the hands of the respondent-assessee being a part of the full value sale consideration paid for transfer of shares. The appellant-Revenue will be entitled to costs as per the Delhi High Court Rules." Clearly, without any recorded reasons and without framing any substantial question of law on whether the said amount could be taxed under any other provision of the Income Tax Act, the High Court went ahead and held that the amount of INR 6.6 crores received by the assessee was received as part of the full value of sale consideration paid for transfer of shares - and not for handing over management and control of CDBL and is consequently not taxable under Section 28(ii)(a) of the Income Tax Act. Nor is it exempt as a capital receipt being non-compete fee, as it is taxable as a capital gain in the hands of the respondent-assessee as part of the full value of sale consideration paid for transfer of shares. This finding would clearly be in the teeth of Section 260-A (4), requiring th....
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.... Court in J.K. Woollen Manufacturers v. CIT (1969) 1 SCR 525 where the Court held: "As pointed out by this Court in CIT v. Walchand & Co. Private Ltd. [(1967) 65 ITR 381 : (AIR 1967 SC 1435)] in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. It is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee." [at page 529-530] This Court in CIT v. Panipat Woollen & General Mills Co. Ltd. (1976) 2 SCC 5 stated as follows: "6. Before coming to the facts it may be necessary to mention that there can be no dispute with respect to the two important propositions: ....
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..... The Income Tax Authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits." The same principle has also been cited with approval by a recent judgment of this Court in Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC 359 where the Court held as follows: "11. Insofar as loans to the sister concern/subsidiary company are concerned, the law in this behalf is recapitulated by this Court in S.A. Builders Ltd. v. CIT [S.A. Builders Ltd. v. CIT, (2007) 1 SCC 781]. After taking note of and discussing on the scope of commercial expediency, the Court summed up the legal position in the following manner: (SCC pp. 787-88, paras 27-31) xxx xxx xxx 31. It has been repeatedly held by this Court that the expression 'for the purpose of business' is wider in scope than the expression 'for the purpose of ea....
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....f CDBL for a period of about 35 years; that he also owned a concern, namely M/s Maltings Ltd., which manufactured and sold IMFL and beer and that he was the President of All India Distilleries Association and H.P. Distilleries Association. (iv) It is further recorded in the judgment of the Accounting Member that the amount of INR 6.6 crores was arrived at as a result of negotiations between the SWC group and the appellant. (v) That the restrictive covenant for a period of 10 years resulted in the payment of INR 66 lakhs per year so that the appellant "...will not start or engage himself, directly or indirectly, or provide any service, assistance or support of any nature, whatsoever, to or in relation to the manufacturing, dealing and supplying or marketing of IMFL and/or Beer." Given the personal expertise of the assessee, the perception of the SWC group was that Shri Gupta could either start a rival business or engage himself in a rival business, which would include manufacturing and marketing of IMFL and Beer at which he was an old hand, having experience of 35 years. (vi) As was correctly held by the second Judicial Member, it was also clear that the w....
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....9. It only remains for us to point out the judgment in Guffic Chem (P) Ltd. v. CIT (2011) 4 SCC 254. In this case, the question set out by the Court is as follows: "Whether a payment under an agreement not to compete (negative covenant agreement) is a capital receipt or a revenue receipt is the question which arises for determination in this case?" Here, the Court was dealing with an amount of INR 50 lakhs received by the appellant-assessee from Ranbaxy as a non-compete fee under an agreement dated 31.03.1997. This Court in negating the application of Section 28(ii)(a) to such receipt, held as follows: "Decision 4. The position in law is clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital receipt. 5. The above dichotomy is clearly spelt out in the judgment of this Court in Gillanders case [(1964) 53 ITR 283 (SC)] , in which the facts were as follows: ....