2022 (2) TMI 878

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....by citing cases never cited by either party nor raised nor argued during the course of hearing, and contrary to the principle of natural justice and without the issue being put to the Appellant renders the decision bad in law and liable to be set aside ? d) Whether the Tribunal sitting as Division Bench ought to have either followed the larger Special Bench decision or in accordance with judicial propriety and practice referred the matter to the President to constitute a larger Bench ? The facts in brief are as under : 2. Osian's - Connoisseurs of Art Private Limited (hereinafter referred to as the Company) which was incorporated on 22nd June, 2000 appointed appellant as its whole time Director on 10th July, 2000 for a salary of Rs. 1,00,000/- per month with effect from 1st July, 2000. In view of his capabilities and knowledge and in order to ensure that appellant did not act/harm the interest of the company upon termination of his employment, the company entered into non-compete agreement dated 7th August, 2000 termed as "Deed for Negative Covenants" (hereinafter referred to as agreement) imposing certain restriction on appellant from carrying out certain profession....

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....tended that the threat from appellant to the company if and when he left the employment, was theoretical and not real, as appellant never had a substantial source of income in the previous assessment years. Hence, respondent took up the contention that appellant would never leave the company or there was any constructive interest on the part of appellant to leave the employment. It was only when appellant had left the employment and at the time of leaving any amount is paid under a negative covenant would there could be a justification or else it has to be treated as salary income. 4. Impugning the Assessment Order, appellant filed an appeal before the Commissioner of Income Tax (Appeals) [CIT (A)] on 25th July, 2005. Before the CIT (A), appellant contended that the amount received under a negative covenant was not taxable as it was capital receipt. Copious material and evidence was shown to CIT (A) evidencing the capability of appellant and his knowledge in the field. The CIT (A) took the view that amount paid by the company to appellant cannot be termed as a payment towards the negative covenant. The CIT (A) rejected the submissions of appellant and upheld the stand of the Ass....

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..... Mr. Walve justified the stand taken by the Assessing Officer, CIT (A) as well as the ITAT. Mr. Walve submitted that by virtue of the definition of the term salary as per Section 17(1)(iv) read with Section 17(3)(i) of the Act receipt of 20,00,000 Equity Shares received by appellant from his employer valued at Rs. 2 Crores would be a profit, gain or advantage in addition to salary though not termed as salary but part and parcel of income by way of salary, which would be taxable. 9. We have considered the orders annexed to the Appeal Memo and also heard counsel and also considered the compilation of judgments tendered by Mr.Kaka. Relying on these judgments/orders, Mr.Kaka submitted that compensation paid by way of 20,00,000 Equity Shares of the company was in lieu of appellant accepting: (a) restrictive covenant and (b) the restrictive covenant was an independent application and the compensation which was attributable to the restrictive covenant, i.e., 20,00,000 Equity Shares of the company, was a capital receipt and hence not taxable. Mr. Kaka also relied on the following judgments/orders : 1. Beak (Inspector of Taxes) v. Robson, (1943) 11 ITR 23 (House Lords) ....

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.... or operate or participate in any similar business in the metro cities. In fact, the agreement goes to the extent of even stating that appellant shall not associate himself or be an advisor, employee or be a partner in any similar business as that of the company and he shall cease and desist from participating in similar business activities as that of the company and not to use his goodwill or expertise in respect of similar business as that of the company. To that extent, in our view it was loss of source of income for him in the future. The agreement, i.e., the deed for negative covenants was an independent obligation undertaken by appellant with the company in same field for a period of ten years. Therefore, the compensation attributable to restrictive covenant, i.e., 20,00,000 Equity Shares of Rs. 10/- each in the hands of appellant was a capital receipt in as much as it was appellants' profit making capabilities for a period of ten years from the date of appellant leaving the employment of the company either on his own or in association with professional competitors. 13. The ITAT, CIT and the Assessing Officer have proceeded on an erroneous footing that the company came int....

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.... of competition exists and because his return of income for A.Y. 2000-01 does not show any income or business of maintenance and business of collection of art and sale of art, the value of shares received by appellant should be treated as revenue receipt and not capital receipt. In our view, these things really does not matter. All this cannot be the basis for determining whether the amount received by appellant should be revenue receipt or capital receipt. The department has to only consider the agreement entered into and if the agreement indicates that the amount paid by way of compensation was against restrictive covenant or for non-compete that would amount to capital receipt. Of course, unless respondent proves that restrictive covenant or negative covenant agreement was a sham agreement. No material has been brought on record to show that the negative covenant agreement is a sham agreement. All judgments/orders relied upon by Mr. Kaka certainly hold that whether compensation is received for negative restrictive covenant or non-compete with business of the company, compensation relatable to such activity would be a capital receipt. 15. The Hon'ble Apex Court in Guffic Chem ....

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....lighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 with effect from April 1, 2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from April 1, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from April 1, 2003. Hence, the said Section 28(va) is amendatory and not clarificatory. Lastly, in CIT v. Rai Bahadur Jairam Valji reported in [1959] 35 ITR 148 it was held by this Court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In....