TMI Blog2006 (5) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt of Rs. 57.84 crores being a question of law should have been considered also under the provisions of s. 17(3)(i) or alternatively under the provisions of s. 10(3) as a casual and non-recurring receipt. (v) The learned CIT(A) ought to have held that even otherwise under the scheme of the IT Act, the receipt of Rs. 57.84 crores by the assessee was neither a non-taxable capital receipt nor a receipt exempt under the provisions of s. 10 of the Act and was hence taxable. (vi) The learned CIT(A) ought to have held that the interest of Rs. 1,15,06,849 on the amount of Rs. 30 crores held escrow had accrued upto 31st March, 2000 in favour of the assessee and was taxable in his hands for the asst. yr. 2000-01. 3. The facts of the case are recapitulated as under: The assessee, assessed in the status of individual is the managing director of Chennai Bottling Company Ltd. The company was engaged in the business of production and marketing of various beverages, the raw materials, for which (mainly concentrates and syrups) were to be purchased by it from the Coca Cola Company of USA. The two concerns entered into an agreement on 15th Aug., 1994 by which Chennai Bottling Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O, inter alia held, that the entire series of transactions was a colourable device and with the similar objective to minimize tax liability. He, further, held that as to the provisions of s. 28(va), the amendment merely articulates a legal position already extant earlier. It is not that such a situation as envisaged by the amendment was unheard of prior to 1st April, 2003. The amended provision thus makes explicit what could have been an occasion for diverse opinion earlier. It does not follow that income of the kind visualized by the amendment is beyond the ambit of taxation prior to 1st April, 2003. In any case, the agreement dt. 27th April, 1999 relating to protection of 'know-how', etc. has been shown to be a devise to mislead the Revenue. Hence, the AO held that the consideration received by the assessee is taxable as a revenue receipt, that too in asst. yr. 2000-01 itself. 7. Upon assessee's appeal, the learned CIT(A) reversed the finding of the AO and held that the receipt of Rs. 57.84 crores was in the nature of capital receipt and hence not taxable. He also held that interest accrued upto the end of previous year relevant to the asst. yr. 2000-01 was taxable in subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eto; (d) any person, for or in connection with the vesting in the Government or in any corporation owned or controlled by the Government under any law for time being in force, of the management of any property or business; All the above clauses are outside the purview of the non-compete agreement entered by the assessee. 11. The amendment in the Finance Act, 2002 proves that the above clauses are not applicable to the assessee's case and s. 28(va) is applicable with effect from the asst. yr. 2003-04 only. Since it has no retrospective application, the law is now well settled by the legislature that the respondent is not liable to pay tax on the non-compete fees received for the asst. yr. 2000-01. 12. The Revenue was not able to prove that the agreement was sham or colourable one. The assessee submits that the business or commercial transactions are to be considered in the competitive world with reference to the capacity of the persons, the competitors' capacity to poach the person connected with the other party; marketing and distribution capacity, knowledge of business, and its techniques as the key factors. The assessee is very much in the business of bottling Coca Cola a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned Departmental Representative, in his rebuttal, submitted that the said receipt was in the nature of revenue. The assessee's income earning apparatus had not been cut off by this agreement. Restriction was only for 5 years and for the State of Tamil Nadu. The assessee did not have any particular know-how for which he could have been given compensation. The only knowledge the assessee had was some marketing. He further placed reliance upon Hon'ble apex Court's decision in CIT vs. Best Co. (P) Ltd., CIT vs. Prabhu Dayal 1972 CTR (SC) 112 : (1971) 82 ITR 804 (SC) and CIT vs. Ashok Leyland 1973 CTR (SC) 9 : (1972) 86 ITR 549 (SC). 18. We have heard the rival contentions in the light of the material produced before us and perused the relevant records. The salient features of agreement under which this payment has been made to the assessee are as under: (a) In consideration of the amount set forth below, the convenantor convenants and agrees that, for five (5) years from the closing, the convenantor shall not at any time after the closing disclose to any person for any purpose or use any know-how in any business or venture, either directly or indirectly through any person, fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same by HCC, it was agreed by the assessees not to use the said technology/information for production of the similar products nor to disclose the said information to any other party for a period of five years and since the said agreement for a consideration of Rs. 1.5 crores paid to each of the assessees was for the purpose of avoiding immediate competition, the same was in the nature of non-compete fees. It clearly shows that the assessee had not given away any right to manufacture as contemplated even in the amended provisions of s. 55(2)(a) and, in any case, the said amendment having been specifically made for the purpose of ss. 48 and 49 dealing with the cost in relation to a capital asset for the purpose of computation of capital gain, we are of the view that the same were not attracted to treat the information possessed by the assessee as right to manufacture in order to treat it as a capital asset. Moreover, by the agreement in question entered into with HCC, the assessee had merely agreed not to disclose the said information/technology to third party nor to use the same for manufacturing for a limited period of five years. In those circumstances, it cannot be said that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w coming to the case laws cited by the learned Departmental Representative, we find that the following has been relied upon by the learned Departmental Representative: 1. CIT vs. Prabhu Dayal (Deed By LR) The assessee entered into an agreement for exploitation of kankar deposits. The company agreed to pay commission to the assessee, but it failed to do so. Compromise was arrived at for termination of the agreement. Whether compensation for termination is income or capital? The assessee's activities neither in respect of the services rendered by him in the past nor towards the accumulated commission due to him. It was paid because he gave up his right to get commission in future to which he was entitled under the agreement. It was price paid for surrendering a valuable right which was a capital asset. 2. CIT vs. Best Co. (P) Ltd. While the IT authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge and keeping the loss of the agency by the assessee was onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 28(v)(a) and hence not taxable under that section, in the present financial year, the AO has proceeded to tax the sum by giving the provision retrospective effect in the garb of labelling the agreement as a colourable device. By no yardstick of interpretation, the transaction which the legislature intends to bring to tax from a particular date can be brought to tax prior to that date by calling it a sham device. Moreover, an identical agreement has been held by the Delhi Tribunal in the case cited supra to be falling under s. 28(v)(a) and there was no murmur by the Revenue in that case that the same is a sham transaction. (iii) The other grouse is that it should have been considered under the provisions of s. 17(3)(i) or s. 10(3) or has to be taxed anyhow as it was neither a non-taxable capital receipt nor a receipt exempt under the provisions of s. 10. 25. On perusal of s. 17(3)(i), we find that the same is applicable to receipts from employer or former employer which is clearly not the case here. Similarly, extant provision under s. 10(3) deals with receipts which were of a casual and non-recurring nature which is also not the case here. 26. As held by the Delhi Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under appeal. The AO, however, relied on the relevant bank statement and brought the amount of Rs. 1,15,06,849 as income taxable in the assessment year under appeal. 31. Before the learned CIT(A), it was submitted that in terms of the escrow agreement accrual of interest income to the assessee was subject to the occurrence of the closing as agreed under the business purchase agreement and receipt by the escrow agent and written confirmation thereof from M/s Chennai Bottling Co. and M/s Hindustan Coca Cola Bottling South West (P) Ltd. It was further submitted that the closing date was extended to 30th April, 2000 through an instrument dt. 25th April, 2000, in writing signed by the parties to the business purchase agreement dt. 27th April, 1999. Thus, prior to 1st May, 2000, there was no accrual of interest in favour of the assessee to that interest income. Credit of interest of Rs. 1,15,06,849 for the financial year 1999-2000 in the escrow account did not give rise to an enforceable right in favour of the assessee. Therefore, it cannot be construed that the said interest accrued to him and was income taxable in the assessment year under appeal. That the assessee had access to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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