TMI Blog2007 (12) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... to become effective only on the date of takeover by the FI Group. Therefore, the revenue is correct in saying that on the date of payment of non-compete fees to the assessee, the shares of IISC were substantially owned by the FI Group, UK and, therefore, an employer-employee relationship existed between them. whether the non-compete fees received for undertaking restrictive covenants was a capital or a revenue receipt even though the employer and employee relation stood established on the completion date - A bare reading of the restrictive covenant shows that the assessee along with other three directors had undertaken for the period of 18 months up to 31-5-1999, directly or indirectly, either alone or jointly with or on behalf of any person, firm, company or entity, to solicit or interfere with or endeavour in the relevant territory to entice away from the Company any person, firm, company or entity who was a client or customer of the assessee in respect of business in the 12 months prior to the completion date, or who becomes a client after the said period prior to 31-5-1999. The assessee was also estopped from employing or engaging or soliciting the employment of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aracter of the non-compete fee received by the assessee was for undertaking restrictive covenant to compete with the business of the assessee directly or indirectly. These are not at all linked with the services rendered in the past or to be rendered in future. Such payments did not spring from relationship of an employer and employee. The nature and scope of activities spelt out in the new services agreement was different and independent from the non-compete agreement. Therefore, the payment cannot be linked directly or indirectly with the employment of the assessee as Managing Director of the Company. Therefore , the non-compete fees is not taxable under the head 'Income from salary' . The non-compete fee is also not taxable under section 28(ii) and 28(iv) of the Act because the assessee was not carrying on any business or profession. Such receipt is also not liable to tax under the head 'Capital gains' or 'Income from other sources' . The non-compete fees for undertaking restrictive covenants was capital in nature and hence, not liable to tax under any head of income mentioned under section 14 of the Act. The receipt of a non-compete fees under an agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of which exemption was claimed under section 54EA of the Income-tax Act, 1961 (for brevity 'the Act'). In addition to the share transfer agreement, the FI Group also entered into a non-compete agreement with the assessee on the same date, i.e., 4-12-1997, whereby the assessee received a sum of Rs. 1,07,36,570 during the financial year 1997-98 relevant to the assessment year under consideration. A similar instalment of 1,69,000 (Pound sterling) was to be received by the assessee in the subsequent financial year 1998-99 relating to the assessment year 1999-2000. Although the assessee had paid advance tax and self-assessment tax in respect of the non-compete fees of Rs. 1,07,36,570 yet in the return of income filed, the assessee claimed exemption in respect of the non-compete fees as being a capital receipt. The assessee also entered into yet another new service agreement with M/s. IIS Infotech Ltd., on 24-2-1998, i.e., after the said company was taken over by the U.K. Company, whereby, the assessee was employed as the Managing Director of the U.K. Company. The salary income received from the said Company in terms of the said agreement was also shown in the return of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer also referred to the various judgments of the courts relied on by the assessee and observed that the facts of those cases were distinguishable from the facts of the present case. Therefore, the Assessing Officer held that the ratio of those judgments was not applicable to the facts of the present case. Thus, he rejected the claim of the assessee that the non-compete fees of Rs. 1,07,36,570 was a capital receipt. Accordingly, the Assessing Officer held that the amount in question was a revenue receipt liable to tax under section 28(ii) of the Act. In this manner, the Assessing Officer made an addition of Rs. 1,07,36,570. 3. Being aggrieved, the assessee filed an appeal before the CIT(A), where the action of the Assessing Officer for initiating the proceedings under section 147 was inter alia challenged. The submissions made before the Assessing Officer were reiterated. However, the Ld. CIT(A) upheld the action of the Assessing Officer for initiating the proceedings under section 147, by observing that the information with the Assessing Officer was sufficient to entertain as ex facie belief that income chargeable to tax had escaped assessment. As regards the merits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was a promoter and founder of M/s. IIS Infotech Ltd., i.e., 'the Indian Company' engaged in the business of computer software development. He was also appointed as Managing Director of the Company since its inception. He submitted that the FI Group Plc. (In short 'FI'), a U.K. based public limited company, was engaged in the supply of computer software to major organisations whose business depended mainly on information technology. In order to increase its capacity, facilitate further growth and establish an overseas service provider within the group, the said company evinced interest to take over the Indian Company and entered in to a share purchase agreement dated 4-12-1997 with the major shareholders of the Indian Company to purchase 76 per cent of the subscribed equity capital of M/s. IIS Infotech Ltd. at an agreed price of Rs. 100.90 per share. This agreement was subject to approval from the Government of India, the Reserve Bank of India, etc. The Share Purchase Agreement (SPA) was at an arm's length and it is not the allegation of the revenue that the same was a collusive arrangement. He submitted that shares were purchased at the same rate at which other shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... theless, Sh. Rohitsava also received non-compete fees as per agreement dated 4-12-1997. He submitted that like the assessee, Sh. Rohitsava also claimed the first instalment of the non-compete fees as capital receipt. This claim of the assessee was accepted for the assessment year 1998-99. However, for the subsequent assessment year 2000-01, the Assessing Officer rejected the claim of the assessee for capital receipt and held that since the assessee was not carrying on any business of computer software, there was no question of the foreign company putting any restrictions on him through a non-compete agreement. The Ld. AR submitted that the Assessing Officer further referred to the definition of the term 'income' in clause 24 of section 2 and observed that the same was inclusive in nature and the same took into account not only income in its normal connotation, but also other receipts, to save artificial categories of income. Thus, the Assessing Officer held that such income was liable to tax as income from other sources. He submitted that in appeal, the Ld. CIT(A) upheld the action of the Assessing Officer. When the matter was carried in appeal before the Tribunal, the ITAT, Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 100.90 per share. It is not the case of the revenue that shares were sold at less than the prevailing market rate. Thus, the Ld. Counsel submitted that the non-compete fees could not be considered as part of the sale consideration of shares and, therefore, cannot be brought to tax as capital gain. He further submitted that the non-compete fees cannot be treated as profit in lieu of salary under section 17 of the Act because the date when the agreement was made on 4-12-1997, the U.K. Company had not taken over the business of the Indian Company. Therefore, it cannot be held that the FI Group was an employer of the assessee. Shri Vohra further argued that amount received was in no way related to the services rendered/ to be rendered by the assessee. He further submitted that signing of the fresh services agreement was not a condition precedent for receipt of the non-compete fees. He submitted that Shri Rohitsava Chand did not sign the fresh services agreement. Still he received the non-compete fees. He relied on the two judgments of the Hon'ble Calcutta High Court in the cases of CIT v. Saroj Kumar Poddar [2005] 279 ITR 573 and CIT v. A.S. Wardekar [2007] 283 ITR 432. He, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Managing Director of the Company before take over and continued to be the Managing Director after the take over. Therefore, the non-compete fees cannot be charged to tax under section 28(ii) of the Act. He relied on the following decisions of the various Benches of the ITAT: (i) ITAT, Amritsar Bench, in the case of T.S. Manocha v. Dy. CIT [2006] 5 SOT 277. (ii) Third Member decision of ITAT, Delhi Bench in the case of Shiv Raj Gupta v. Asstt. CIT [IT Appeal No. 4886 (Delhi) of 1998]. (iii) ITAT, Chennai Bench in the case of R.K. Swamy v. Asstt. CIT [2004] 88 ITD 185. 4.6 The Ld. AR submitted that subsequently, the Finance Act, 2002 inserted clause (va) in section 28 of the Act with effect from 1-4-2003, as per which the receipts of the nature as of the one in this case have been specifically made liable to tax. Relying on the decisions of various Benches of ITAT including ITAT, Amritsar Bench in the case of T.S. Manocha, the Ld. AR submitted that this amendment has been held to be prospective. Therefore, the same is not applicable to the assessment year under consideration. 4.7 Arguing further, the Ld. A.R. submitted that non-compete fees is not taxable under any of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration of shares of IISC, were credited to the bank account of the assessee on 26-2-1998. The Ld. Sr. DR has submitted that on completion of the share purchase agreement, 76 per cent of the subscribed share capital come to be owned and vested with the F.I. Group. 5.1 The Ld. DR has drawn our attention to clause (d) of article 8.1 of the share purchase agreement, which stipulates that the sellers (i.e., shareholders of IISC who agreed to sell their 76 per cent holdings to the FI Group, UK) shall ensure that the Directors, namely, S/Sh. Saurabh Srivastava i.e., the assessee, Rohitsava Chand, S. Dhanabal and Mohit Goyal shall have entered into a contract of employment with the company in the agreed form and remained in employment of the company on terms and conditions. The deed for employment had to be entered into on or prior to the completion date, i.e., 26-2-1998. The fresh Service Agreement was entered into on 24-2-1998 between the assessee and IISC (i.e., Company being owned by the FI Group, U.K. after take over). The Ld. DR, therefore, submitted that on the basis of these facts, it has been established that as on the date of payment of the non-compete fees of Rs. 1,07,36, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2000-01. He further argued that two conditions for the payment of the non-compete fees were to be satisfied cumulatively, i.e., continuation of employment of Sh. Saurabh Srivastava as Managing Director of IISC after take over and completion of the share purchase agreement. The Ld. DR submitted that the logical inference that can be drawn is that the non-compete agreement would have become inapplicable in case the share purchase agreement was not completed and Sh. Saurabh Srivastava was not employed with IISC after its take over. The Ld. DR submitted that it is a continuation of the employment of Sh. Saurabh Srivastava, which resulted in the yield of additional revenue in the form of the non-compete fees which assumes the character of a revenue receipt. 5.3 Arguing further, the Ld. DR submitted that the assessee, by agreeing to continue to work only with IISC after the acquisition of 76 per cent of its shareholding by the FI Group, UK, the assessee has received an additional advantage/gain in the form of the non-compete fees in lieu of salary which falls in the category of salary, within the meaning of section 17(3) and, therefore, is taxable as such. The Ld. DR further sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase agreement till the completion date. Further restrictions were also placed on the sellers from selling, transfer, gift, exchange, disposal, etc., of shares of the company from the date of the share purchase agreement till the completion date except with the prior consent of the buyer, i.e., the FI Group, U.K. The sellers, viz., the assessee and other three Directors were to deliver effective written resignations of Directors other than four Directors, namely, S/Sh. Saurabh Srivastava, the assessee, Rohitsava Chand, Mohit Goyal and S. Dhanabal. Thus, the said agreement ensured the exit of all the Directors from the Board of IISC and its all other associate companies, except four Directors. The Ld. DR has argued that on the completion date of the SPA, the shares of the IISC and all its associate companies stood acquired by the FI Group, UK Simultaneously, the Board of Management/Directors of IISC and its associate companies were also effectively represented by a set of Directors comprising only of four persons. The Ld. DR has submitted that these features of the share purchase agreement should be read and understood conjointly with the terms of the non-compete agreement date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the assessee never lost his income-earning apparatus and there was also no dent made in the income-earning apparatus. On the contrary, the assessee received higher remuneration and other benefits from the said company after its take over and the non-compete fees received on account of non-application of knowledge, skill and experience by way of working for others during the course of employment with IISC amounts to a benefit in lieu of salary. Therefore, the same was taxable as such under section 17 of the Act and is a revenue receipt. 5.5 The Ld. DR has also taken an alternate plea that the payment of non-compete fees is taxable under section 28(ii) of the Act. The Ld. DR has submitted that section 28(ii) of the Act covers any compensation or other payment due to or received by the person, managing the whole or substantially the whole of the affairs of the Indian company, at or in connection with the termination of its management or modification of the terms and conditions relating thereto. The Ld. DR has submitted that this definition is also wide enough to cover the payments like non-compete fees. He has further submitted that the assessee has received a payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the assessee having been given an opportunity of being heard in that regard. Thus, the Ld. DR has contended that the very fact that these arguments were not mentioned in the assessment order does not preclude the Tribunal from taking a correct view in the matter. 5.7 The Ld. DR has further submitted that the judgments relied upon by the assessee are distinguishable on facts. He submitted that in the case of Best Co. (P.) Ltd., the compensation was paid to the assessee after the termination of the agency. The receipt of compensation was held to be capital in nature because the same dried up the source of income. The same is the position in the case of Gilanders Arbuthnot Co. Ltd. The judgment of the Hon'ble Madras High Court in the case of Saraswathi Publicities is not applicable because in that case, the sum received on restrictive covenant was held as capital receipt. In the present case, the assessee continued to work as Managing Director and received non-compete fees in connection with his employment. Similarly, the other judgments relied upon by the assessee are held to be distinguishable on facts. Thus, the Ld. DR has concluded that the non-compete fees was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said agreement was not a condition precedent to the receipt of the non-compete fee. It was not a mandatory condition for the payment of the non-compete fees. This is obvious from the fact that although Sh. Rohitsava Chand opted out of the employment of the Indian company, yet he received the non-compete fees. He further submitted that two agreements, i.e., the service agreement and the non-compete agreement operate in totally different fields and for different considerations. The non-compete agreement was for restraining the assessee from exploiting his entrepreneurial skills in competition with the Indian company and its other associate companies, and not for rendering services as Director-employee. The Ld. AR has also submitted that the restraints placed upon the assessee under the service agreement are of a general nature, which are normally imposed by all the employers. He submitted that restrictive covenants undertaken by the assessee under the non-compete agreement were independent of the obligations undertaken by the assessee as an employee and were wider in scope, resulting in sterilization of a potential source of income. The Ld. AR submitted that by employing the serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d up his submissions by stating that the non-compete fees received by the assessee is a capital receipt. The same does not fall under any of the heads of income mentioned in section 14 of the Act. The receipt falls under section 28(va), specifically inserted by the Finance Act, 2002, with effect from 1-4-2003. The same is not applicable to the assessment year under reference. Therefore, the impugned receipt is not taxable. 7. We have heard both the parties at some length and have given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below, referred to the relevant pages of the paper book, to which, our attention has been drawn and also to the relevant judgments cited by both the parties. From the facts discussed above, it is obvious that the assessee has claimed the receipt of the non-compete fees as a capital receipt. However, the revenue has considered the said receipt as revenue in nature and has accordingly brought it to tax. Now, whether a particular receipt is capital in nature or revenue in nature depends on the facts of each case. The various judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia and Ceylon should be taken over by the principal company and gave notice to the assessee for terminating the agency from 1-4-1948. The assessee was paid compensation for the transfer of the agency, during the three successive years after the termination, calculated on the basis of commission on sales made by the Imperial Chemical Industries (India) Ltd. As a condition of paying the compensation the assessee undertook for a period of five years to refrain from selling or accepting any agency for explosives competitive with those covered by the agency agreement terminated. The assessee claimed compensation received as capital receipts as they represented compensation for termination of the agency and consideration for the restrictive covenant. On these facts, the Hon'ble Supreme Court held: "(i) that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period; (ii) that the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of the compensation which was attributable to the restrictive covenant wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sold on its own account under an unwritten agreement which was terminable at will, the assessee acted as sale agents and distributors of explosives manufactured by the Imperial Chemical Industries (Export) Ltd. The agency was terminated and by way of compensation, the assessee was paid for the first three years after termination of the agency two-fifths of the commission accrued on its sales in the territory of the agency computed at the rates at which the assessee had earlier been paid and in addition full commission for the sales effected in the third year at the same rates. The principal company also intended to take a formal undertaking from the assessee to refrain from selling or accepting any agency for explosives or other competitive commodities, but there was no written agreement made in this regard. The issue before the Apex Court was whether the amounts received by the assessee for those three years were capital or revenue in nature. On these facts, the Hon'ble Supreme Court held as under: "...That, having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of fully paid up shares of the face value of Rs. 30,000. The question was whether the consideration was a revenue receipt in the hands of the assessee. On these facts, the Hon'ble Delhi High Court held as under: "...that the consideration received by the assessee was for the transfer of a capital asset and constituted a capital receipt. Held also, that the value of the consideration was not the face value of the shares but their market value at the relevant time." (v) CIT v. T.I. M. Sales Ltd. [2003] 259 ITR 116 (Mad.). The facts of the case before the Hon'ble Madras High Court were that the assessee had been distributing, on principal basis, products of three companies for the last 20 years. Under the distribution agreement the assessee was to maintain adequate sales organisation at various places and offices to carryon its business at such places. The distributor-ship, agreement was terminated in 1984 for a lump sum payment of Rs. 42 lakhs to be paid in quarterly instalments. Under the said agreement, the assessee was to transfer the staff, dealership network, brand images and other marketing infrastructures. The assessee was also prohibited for a period of three ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction unconnected with the business of the asset of the partnership. The Tribunal was right in its view that the total compensation paid by the firms to the old partners was for (a) the share in the assets (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets and the share of the goodwill would be on capital account as it was in the nature of an initial outgoing and the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature. The Tribunal was also right in its view that the amount received by the recipients was not liable to tax either as income or capital gains. No question of any liability to penalty would also arise in the instant case, because the asses sees were merely contending for a particular position contrary to the view taken by the Income-tax Officer which would not call for any penalty." Although the amount paid by the payee for restrictive covenant was held to be revenue expenditure and, hence allowable, yet the compensation received by the assessee and his son for not carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es received by the assessee did not arise to the assessee from carrying on any business. The same was for accepting the restrictive covenant and, therefore, this judgment is also not applicable to the facts of the present case. (x) D.M. Naterwalla's case. In this case, the assessee was a Director of a Company. In terms of an agreement with the promoters, shares were allotted to Director. On these facts, it was held that the share received by the Director was a benefit or perquisite received from a company by a Director was a benefit assessable to tax. This judgment is not applicable to the facts of the present case because non-compete fees was not paid to the assessee in his capacity as the Managing Director. The same was paid for undertaking restrictive covenants and, therefore, this decision is also not applicable to the facts of the present case. (xi) Karamchari Union's case. In this case, the issue raised before the Hon'ble Supreme Court was whether Dearness Allowance, City Compensatory Allowance, and House Rent Allowance received from the employer were taxable as profit in lieu of salary under section 17 of the Act. Their Lordships of Supreme Court considered the meani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atable to such activity would be a capital receipt. The ratio of these judgments to the extent the same is relatable to restrictive covenants is applicable to the present case. The present case also requires to be decided in the light of the legal position discussed above. 9. Before we deal with the merits of the case, certain important facts need to be noticed. Before takeover by the FI Group, UK, the principal shareholders including the assessee held 76 per cent of the issued and subscribed share capital of IISC. As per share purchase agreement dated 4-12-1997, the specified date was 9-12-1997, the offer letter to other shareholders, i.e., the opening date was 19-1-1998 and the closing date was 17-2-1998. On the completion date, i.e., 26-2-1998, 76 per cent of the shares of IISC stood owned and vested in the FI Group, UK on completion of the share purchase agreement. This fact is also confirmed by the credit of sale proceeds of shares in the Canara Bank. The non-compete agreement became effective simultaneously with the completion of the transaction of sale and purchase of the shares under the share purchase agreement. The first instalment of the non-compete fees was also credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compete fees was 4-12-1997, yet the date when these became effective was the completion date of the share purchase agreement, i.e., 26-2-1998. No doubt, there were certain obligations cast on the sellers between the dates of the agreement, i.e., 4-12-1997 to the completion date, i.e., 26-2-1998, yet these were to become effective only on the date of takeover by the FI Group. Therefore, the revenue is correct in saying that on the date of payment of non-compete fees to the assessee, the shares of IISC were substantially owned by the FI Group, UK and, therefore, an employer-employee relationship existed between them. Now, the question to be decided by the Special Bench is whether the non-compete fees received for undertaking restrictive covenants was a capital or a revenue receipt even though the employer and employee relation stood established on the completion date. Before, we answer this question, we consider it appropriate to reproduce hereunder the restrictive covenants stipulated in the non-compete agreement. These are as under: Subject to the provisions of this agreement and conditional upon completion and in consideration of the premises and the covenantee agreeing to pay t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such as secretary, personal assistant or driver. (e) Save as consistent with the provisions of any agreement entered into with the company, represent himself as being in any way connected with or interested in the business of the Covenantee Group. In consideration of the aforesaid restrictive covenants and undertakings applicable up to 31-5-1999, the assessee was to receive from the FI Group Plc. the following amounts: (a) a sum of GBP 1,69,000 on the completion date as specified in the agreement. (b) a sum of GBP 1,69,000 on 31-5-1999 and interest accrued thereon. A bare reading of the restrictive covenant shows that the assessee along with other three directors had undertaken for the period of 18 months up to 31-5-1999, directly or indirectly, either alone or jointly with or on behalf of any person, firm, company or entity, to solicit or interfere with or endeavour in the relevant territory to entice away from the Company any person, firm, company or entity who was a client or customer of the assessee in respect of business in the 12 months prior to the completion date, or who becomes a client after the said period prior to 31-5-1999. The assessee was also not to supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) and the Tribunal held the compensation of Rs. 175 lakhs as not assessable. On appeal to the High Court, it was held that the compensation of Rs. 175 lakhs received by the assessee for entering into a restrictive covenant of not entering into competitive business was a capital receipt and, therefore, not liable to tax. It is significant to note that the compensation received was held to be a capital receipt though the assessee continued to be the chairman of the company after take over by UBL. (ii) Saroj Kumar Poddar's case. The facts of this case were that the assessee had collaborated with Gillette to set up Industrial Unit in India for manufacturing and marketing shaving blades and other shaving products manufactured by the Gillette in USA. The Indian Company known as Indian Shaving Products Limited (In short 'ISP') was formed in which the assessee remained as a non-executive chairman. Gillette continued to remain the major and dominant shareholder of ISP and had full powers to appoint managerial personnel including the M.D. or Chief Executive Officer of ISP. During the period from 1982 to 1996, the assessee acquired considerable knowledge and expertise in the field of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company, the remuneration will be assessable under the head "Salary". If the company itself is carrying on the business and the Managing Director is employed to manage its affairs in terms of its articles and the agreement, and he could be dismissed or his employment can be terminated by the company if his working is not found satisfactory, the Hon'ble Supreme Court observed that it can hardly be said that he is not a servant of the company. The issue before the Hon'ble Supreme Court was whether certain percentage of gross profits received in addition to salary was taxable under the head 'Salary'. But the percentage of profit received was not for undertaking restrictive covenants. Therefore, this decision is not applicable to the present case. (iv) M.S.P. Rajes' case In this case also, the issue before the Hon'ble Karnataka High Court was whether Managing Director was an employee of the Company and the remuneration received was taxable under the head "Salary" i.e., same issue as considered by the Hon'ble Supreme Court in the case of Ram Prashad. This decision is again not applicable to the facts of the present case. (v) K.R. Kothandaraman's case In this case also, the Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement dated 28-11-1983 was appointed as a whole-time director for five years from 28-12-1983. The assessee resigned from director in 1986. An agreement was entered into by the assessee with the employer by which he was to be paid Rs. 2 lakhs in two instalments for not undertaking for 3 years any activity or employment which could be prejudicial to the interests of the company. The Assessing Officer treated the amount as profit in lieu of salary under section 17(3) of the Act. On appeal, the Ld. CIT(A) confirmed the order of the Assessing Officer. On further appeal, the Tribunal held that compensation received by the assessee was nothing but capital receipt for loss of profit-earning source and, therefore, was not assessable under section 17(3) of the Act. (viii) The decision of ITAT, Bombay Bench in the case of Asstt. CIT v. Parkash G. Heblkar [2002] 83 ITD 495 In this case, the assessee was employed since 2-4-1979 with M/s. Tata Unisys Ltd.; in a senior position, in the company's computer consultancy division. His last assignment was a Senior Vice President of the new business unit. Since the assessee wanted to start his own consultancy business, he resigned from employment wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d A.S. Wardekar, both the assessees continued to work with the employer and in addition received compensation for undertaking restrictive covenants. Such compensations were held to be capital in nature because the receipts were for accepting restrictive covenants for not undertaking business activity or engaging themselves in the business to the detriment of the employer. We also find substantial merit in the submissions of the ld. counsel that the non-compete agreement with the four Directors including the assessee was an independent, distinct and separate agreement from the service agreement. It was not dependent on their continuing in employment with the assessee. In fact, Sh. Rohitsava Chand quit the employment as Director of the Company after takeover. Still, he was paid non-compete fees of the same amount as paid to other three directors. Likewise, there were other Directors of the IISC before takeover. They were also not paid non-compete fees. Therefore, the payment of non-compete fees was neither dependent upon these Directors continuing in the employment of the company after takeover, nor it arose/sprung from their Employer-Employee relationship. We are, therefore, of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-compete agreement with the Director or the Managing Director. The persons buying the company are fully aware of the potential of the Managing Director and other Directors who can exploit their knowledge, skill and experience to the disadvantage of the business of the assessee. The intention behind entering into non-compete agreement is to ward off such competition and prevent harm to the business of the company after takeover. It is not a colourable device to evade tax. 11.1 This issue can be seen from another angle. Earlier, the assessee was not only the Managing Director, but was also the founder, promoter and major shareholder of the company. The same gave a feeling of belongingness, partnership in addition to his being the Managing Director. But after its takeover by the F.I. Group, he ceased to be the shareholder of the company. His relationship with the company, after takeover, is only of Managing Director i.e., the Employee. The ownership and management vests with the F.I. Group. Thus, the feeling of belongingness to the company would not exist and the loyality to the organisation would be no more than an employee. If the assessee gets better terms and conditions from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made applicable with effect from 1-4-2001 and, therefore, the non-compete fee cannot be brought to tax under the amended section also. 12. Now the next issue that requires to be decided by this Bench is whether the non-compete fees can be brought to tax under section 28(ii) of the Act. In the present case, the assessee was himself not carrying on any business. The amount received by way of non-compete fees did not arise to the assessee in the course of business carried on by the assessee. The case of the revenue is that the non-compete fees is covered under sub-clause (a) of clause (ii) of section 28. However, the said clause deems compensation which is received by any person managing wholly or substantially the affairs of the Indian Company at the time of termination of his management or on modification of the terms and conditions relating thereto as income liable to tax under the head 'Profits and gains from business or profession'. It is a fact that apart from four directors, namely, the assessee, Sh. Rohitsava Chand, Sh. S. Dhanbal and Sh. Mohit Goyal had to resign. The assessee continued to be the managing director even after takeover. This means that there is no terminatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the assessee and SWC which provided that the assessee will execute restrictive covenant in favour of SWC for not carrying on directly or indirectly any manufacturing or marketing activity relating to IMFL for a period of 10 years from the date of agreement. The assessee received a non-compete fee of Rs. 6.6 crores from SWC which was claimed to a capital receipt. The Assessing Officer brought to the same to tax under section 28(ii) of the Act. On appeal, the Ld. CIT(A) upheld the order. However, on further appeal, the Tribunal by majority decision held that the amount of Rs. 6.6 crores receives under restrictive covenant was a capital receipt not liable to tax. (c) The decision of ITAT, Chennai Bench, in the case of R.K. Swamy. In this case, the assessee had claimed the non-compete fees received in pursuance of the agreement entered into by him with R.K.S./BBDO as capital receipt and, hence not taxable. The Assessing Officer treated the amount as casual and non-recurring income. On appeal, the Ld. CIT(A) held that non-compete fee was taxable under section 28(ii)(a) of the Act. On further appeal, the Tribunal held that section 28(ii)(a) covers payments for termination of manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns amounting to Rs. 2,90,220 and Rs. 3,63,750 respectively through the Indian Christian Crusade from his friends in USA. On these facts, the Tribunal held that the receipts were casual and non-recurring receipts and did not arise in the course of the exercise of any vocation. On a reference, the High Court held that the receipt arise from the exercise of an occupation by the assessee and were, therefore not casual and non-recurring receipts. On further appeal, the Hon'ble Supreme Court affirmed the view of the High Court and held as under: "Held, affirming the decision of the High Court, that the appellant carried on a vocation of practising against atheism and in the course of such vocation and for the purpose of the same. he received the amounts in question as donations for the furtherance of the objects of his vocation. There was a link between the activities of the appellant and the payments received by him and the link was close enough. The receipts arose to the appellant from the carrying on of his vocation and they were not casual and nonrecurring receipts and were taxable." (ii) CIT v. G.R. Karthikeyan [1993] 201 ITR 866 (SC). In this case, the assessee was an indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on either business or profession. Thus, we hold accordingly. 13. Now the next aspect that requires to be considered is that once it is held that the non-compete fees received by the assessee is a capital receipt, whether the same is liable to tax as capital gains. Section 45 of the Act deals with the income falling in the nature of capital gains. The same can be brought to tax only if there is transfer of a capital asset. In the present case, the assessee has not transferred any capital asset. On the contrary, the assessee has undertaken restrictive covenants for not doing something. Therefore, the same does not amount to transfer of a capital asset. Thus, the non-compete fees is not liable to capital gains. 14. The last aspect of the case is whether the impugned receipt can be brought to tax under the residuary head i.e., 'Income from other sources'. The authorities below have not brought the receipt to tax under the head 'Income from other sources'. Even in the written submissions filed before the Bench, no such plea has been taken. Even otherwise, we have already explained the nature and character of the non-compete fee. The same is for undertaking restrictive covenants ..... X X X X Extracts X X X X X X X X Extracts X X X X
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