2020 (7) TMI 544
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....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 the listed market price of the share was only INR 3 per share). It is stated in the said MoU that the entire sal....
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....ure, 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 following income shall be chargeable to income-tax under the head "Profits and gains of business or profession", - xxx xxx xxx (ii) any compensation or other p....
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.... 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 its grounds of appeal, the revenue framed the substantial questions of law that arose in the matter as follows: "A) Whether the ITAT has correctly interpreted the provisions of Section 28....
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....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 unexceptionable and should have been followed by the High Court. They also cited judgments to show that prior to 01.04.2003, i.e. before the introduction of Section 28(va) by Finance Act 20 of 2002 with effect from the aforesaid d....
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....(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 determined by the Appellate Tribunal; or (b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1). (7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High....
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....isposed 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 from an appellate decree passed ex parte. (3) In an appeal under this section, the memorandum of appeal shall precisely state the substantial question of law involved in the appeal. (4) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. (5) The appeal shall be heard on the question so formul....
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....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 the judgment to be set aside on this score. 15. Coming to the merits, the High Court found: "22. ...No doubt, market price of each share was only Rs. 3/- per share and the purchase price under the MOU was Rs. 30/-, but the total consideration received was merely about Rs. 56 lacs. What was allegedly paid as non-compete fee was ten times more, i.e. Rs. 6.60 crores. The figure per se does not appear to be a realistic payment made on acc....
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....ome 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: "(1) that in order to fall within Section 10(2)(xv) of the Act the deduction claimed must amount to an expenditure which was laid out or expended wholly and exclusively for the purpose of the business, profession or vocation. This will naturally depend upon the facts of each case, (2) that in order to determine the question of reasonableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of ....
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....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 earning profits' vide CIT v. Malayalam Plantation Ltd. [CIT v. Malayalam Plantation Ltd., (1964) 53 ITR 140 (SC)] , CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., (1971) 3 SCC 344] , etc." 12. In the process, the Court also agreed that the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [CIT v. Dalmia Cement (B.) Ltd., 2001 SCC OnLine Del 1447 : (2002) 254 ITR 377] wherein the High Court had held that (SCC OnLine Del para 8) once it is established that there is nexu....
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....ot 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 withholding of INR 3 crores out of INR 6.6 crores for a period of two years by way of a public deposit with the SWC group for the purpose of deduction of any loss on account of any breach of the MoU, was akin to a penalty clause, making it clear thereby that there was no colourable device involved in having two separate agreements for two entirely separate and distinct purposes. 18. The reasons given by the learned Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines drawn by the judgments cited, which state that the revenue h....
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....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: the assessee in that case carried on business in diverse fields besides acting as managing agents, shipping agents, purchasing agents and secretaries. The assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an agreement which was terminable at will the assessee acted as a sole agent of explosives manufactured by Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation Imperial Chemical Industries (Export) Ltd. paid for first three years after the termination of the agency two-fifths of the commission accr....