TaxTMI 
TaxTMI 
2012 (2) TMI 750
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....bifurcated the amount and took Rs. 205/- per share out of 570/- received by the assessee per share as towards non-compete fee and brought to tax as business income under section 28(va). Aggrieved the assessee carried the matter in appeal before the CIT(A). The learned CIT (A) upheld the action of the Assessing Officer in principle but reworked the amount to Rs. 41/- per share which can be attributable to non-compete fees. He differed from the decision of Coordinate Bench in the case of Homi Apsi Balsara's vs. ACIT 30 DTR 576 to hold that there is specific mention of non-compete obligation and accordingly decided the appeal. Hence both the Revenue and the assessee are in appeal before us. 3. The Revenue is contesting in its two grounds about CIT (A) differing from the earning capitalization method for valuation of shares and restricting the amount of non-compete amount from Rs. 205/- per share taken by the Assessing Officer to Rs.41/- per share. The assessee, however, questions the entire action of the Assessing Officer, as confirmed by the CIT (A), in bifurcating the sale price towards non-compete value and further, without prejudice, in treating the non-compete portion of sale ....
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....facts of the case and so there is no merit in the action of the Assessing Officer and the CIT (A). He also distinguished the cases relied on by the learned Departmental Representative. 6. We have considered the issue. Before adverting to the arguments of the learned Departmental Representative, the following facts are to be placed on record. The assessees before us were shareholders in Mandhana Exports Pvt Ltd - a closely held company owned and managed by Mandhana family for a number of years. In the year 1996, the assessee company entered into a joint venture arrangement with Bornemann and Bick GmbH, Germany, under which 50% of Equity shares were allotted to this German company and the name of the company was changed to Mandhana Boremann Industries Pvt Ltd ('Mandhana Boremann', in short) . As this German company was acquired by a Dutch company by the name of Paxar BV, the shareholdings in Mandhana Boremann were transferred to Paxar BV. In the relevant previous year, Paxar BV acquired all the shares held by Mandhana family for a consideration of Rs. 570 per share which worked out to Rs. 45.60 crores. All the shareholders in Mandhana family entered into an agreement with Paxar BV....
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....siness activity in similar line. It can only be considered as capital gain amount received as part of sale consideration upon sale of shares by individual members. These aspects were considered in the Coordinate Bench decision of Homi Apsi Balsara's vs. ACIT 30 DTR 576 wherein that assessee also sold shares through share purchase agreement which had also a clause for non compete. Considering the fact that the assessee on her own was not carrying on the business and it is the company which was carrying in the business and as per Section 55(2)A where the capital asset is in nature of right to carry on business, it was held that it will fall within the ambit of capital gains. The facts in the above said case equally applies to the facts in the present case. 8. Considering these aspects the Coordinate Bench decided in favour of the assessee in the case of Shashikant G. Mandhana, HUF in ITA No. 3908/Mum/2010 and in the case of Savita N. Mandhana in ITA Nos. 3900 and 3878/Mum/2008. The Coordinate Bench decision is as under: "4. We find that, even in the case of Homi Aspi Balsara (supra) there was a specific non-compete obligation and yet the coordinate bench was of ....
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....from subsequent discussions. Admittedly, assessee on her own was not carrying on business and it was the company in which she was share holder was carrying on the business. Section 55 2(a) reads as under:- "Section 55(2)(a) " (a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business] [or a right to manufacture, produce or process any article or thing] [or right to carry on any business], tenancy rights, stage carriage permits or look hours, -" Thus, it is evident that where capital asset is in the nature of right to carry on business, then the same will come within the ambit of capital gain tax. Section 28 (va) reads as under:- Section 28 (va) "any sum, whether received or receivable, in cash or kind, under an agreement for - (a) Not carrying out any activity in relation to any business; or (b) Not sharing any knowhow, patent, copy right, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. Provided that sub-clause (a) shall....
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.... actively engaged in business, it is not really necessary to examine that aspect of the matter any further. The stand of the assessee, in treating entire consideration received on sale of shares as taxable under the head 'capital gains' must therefore be upheld. 6. For the detailed reasons set out above, and respectfully following the coordinate bench in Homi Apsi Balsara's case (supra), we hold that the entire consideration has been rightly offered to tax under the head capital gains. The partial relief granted by the CIT(A), by reducing the quantum of amount attributable to non-compete obligations, is thus rendered academic and infructuous. The grievance and the stand of the assessee, on the other hand, is upheld". 9. The learned Departmental Representative in the course of the argument relied on the decision of Coordinate Bench in the case of Nayan C. Shah vs. DCIT 14 Taxmann.com 155 (Mum). In that the facts are: "The assessee had promoted a company called Paramount Health Care Management Company Pvt. Ltd. (PHMC) for the purpose of providing Third party administration and managed care service. A German Company namely 'MR' was interested in becoming a shareho....
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....ompete fee paid, the issue has to be considered in the context of section 28(v)(a) introduced w.e.f. 1.4.2003. The compensation accrues and is receivable only under the year in appeal. Therefore, the taxability of the amount is considered as per the provisions of law prevailing for this year. Hence the receipt should be analyzed in the context of section 28(va). Section 28(va) deems that payment for certain restrictive covenants would be in the nature of business income/revenue receipt. The exception to this would be any amount received on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business which is chargeable under the head capital gains. In the present case, the assessee has agreed not to do any business in competition with 'MR'. At the same time he has continued to do business which he was carrying on earlier, for the foreign company. The assessee argued that professional activities of radiology and imaging has been given up in view of non-compete agreement and that should be considered as giving up his right to carry on any business. But it is a fact that even after the noncompete agreement the asse....
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....y business and cannot fall within the exclusion contemplated in the proviso viz., not transfer of right to carrying on any business. Thus, it is held that the payment restriction for not to compete German company can be classified only as agreement not transfer of a right to carry on any activities in relation to any business and will not fall under transfer of right to carry on business. Although the impugned payment made to the assessee is to be considered as a part of the non-compete agreement, it cannot be considered as payment made to the assessee for transfer of the right to carry on any business during the year. It cannot be agreed that this payment made after five years, on the basis of the performance and profitability of the company for the past five years is also part of the compensation for the assessee for refraining from carrying on any business. It is in the nature of share of profits earned by the joint venture in excess of the estimated profits. That is why the payment is made after 5 years taking into account performance of the company for all the 5 years. Therefore, the amount of Rs. 43,14,775/- received by the assessee during the year, can be c....