TMI Blog2006 (1) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... not closed; 4.Taking the wrong plea that section 40A(7) is applicable to the assessee and the condition were not fulfilled; 5.Disallowing the amount of compensation of Rs. 16,29,343 by treating the compensation was paid after the closer of the business; and 6.Confirming the levy of interest under sections 234B and 234C which was not proper and for which no specific speaking order was passed by the Assessing Officer, as has been held by various High Courts as well as Supreme Court in the case of CIT v. Ranchi Club Ltd. [2001] 247 ITR 209. 2. Ground Nos. 1 to 3 2.1.1 The appellant is an Individual having Salary income from Eastern Air Products Pvt. Ltd. in which he is the Chairman and Managing Director. The Company was incorporated in 1964 and put up a Factory at Bhopal and started production in 1965. 2.1.2 Over the years, besides Bhopal he was instrumental in setting up several Gas factories at Jabalpur (1974), Indore (1979) and Dhar (1988). These factories were put up for Jabalpur Oxygen Company (JOC), Northern Air Products Pvt. Ltd. (NAP), Dhar Oxygen Pvt. Ltd. (DOPL). In J.O.C. he was Proprietor, in N.A.P. Managing Director, in D.O.P.L. - Chairman Mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the written down value of various assets in a summarized manner so that it can be seen at a glance. Rs. in lakhs Sales Value Market Value W.D. Value (as per I. Tax) Eastern Air Products Pvt. Ltd. Building (with Furniture Fitting and Office Equipment) 30.00 22.02 15.82 Machinery 110.00 61.00 48.50 Goodwill 154.00 294.00 83.02 64.32 Oxygen Cylinders etc. 250.00 166.00 Total 544.00 249.02 64.32 Northern Air Products Pvt. Ltd. Building 13.00 11.13 2.59 Machinery 17.00 11.00 5.02 Goodwill 45.00 75.00 22.13 7.61 Oxygen Cylinders etc. 52.00 33.80 Total 127.00 55.93 7.61 Jabalpur Oxygen Company Building 20.00 12.80 8.85 Machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was also taken into consideration. It may be appreciated that the value estimated by the assessee was much less than the purchasers having agreed to pay for the same, the reason being that they were keen to enter into this business in M.P. put, Shri Taneja out of it. In respect of plant machinery also the age of plant and machinery, its fair market value and other facts have been taken into consideration for valuing the same by the assessee. 2.2.4 The assessee has 45 years experience in the Gas business and over the years had made name for himself and developed good rapport both with the customers as well as Government Departments, all over Central India. 2.2.5 The Appellant supported the Company at all times by providing : ( a )Efficient Technical services. ( b )Establishment of good dealer network in the State of Madhya Pradesh, in the neighbouring States and the Central Government Departments. ( c )Maintenance of personal rapport with dealers and big customers. ( d )Maintenance of good relationship with employees and labourers in the Factory. ( e )Establishment of efficient transportation network. ( f )Establishment of good marketing system and advertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of said business. This amount includes Rs. 319 lakhs for the appellant and balance for the remaining family members. 2.2.9 The appellant accepted their offer and no compete agreement dated 17-8-2000 was entered into with Inox Air Products Ltd. for the purpose. (Copy of agreement on Page Nos. 84 to 99 of the Paper Book) As per the said Agreement the assessee was restricted from doing any gas business in Madhya Pradesh for a period of 5 years whether alone or in association with others, either directly or indirectly and/or in association with others and in any capacity whatsoever from carrying on any business in competition with the business being taken over by Inox Air Products Ltd. and carried on by them. 2.2.10 In lieu of the above restriction and other conditions mentioned in the Agreement, Non-compete fee was paid to him. This non-compete fee having been received by him on account of restriction imposed on him i.e., for agreeing not to compete with Inox Air Products Ltd. has been claimed as "Capital Receipts" not liable to tax on the basis of various decisions of Income-tax Tribunals, High Court and Supreme Court. 2.2.11 Non-compete fee was a capital receipt a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inox Air Products Ltd. He refers the important terms of agreement, pleaded as page Nos. 84 to 333 of paper book. 2.2.17 The learned AR also comments upon the observations of the lower authorities on the issue and the judgments relied upon by them and as to how these are mispleaded and misdirected. The ld. AR cites the following decisions wherein amount received for agreeing not to engage incompeting business has been treated as capital receipt : ( i ) CIT v. A.S. Wardekar [2005] 151 Taxman 303 (Cal.) ( ii ) CIT v. Saroj Kumar Poddar [2005] 279 ITR 573 (Cal.) ( iii ) CIT v. Best Co. (P.) Ltd. [1964] 60 ITR 11 (SC) ( iv ) Kettlewell Bullen Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) ( v ) Gillanders Arbuthnot Co. Ltd. v. CIT [1964] 53 ITR 283 (SC) ( vi ) CIT v. Saraswathi Publicities [1981] 132 ITR 207 (Mad.) ( vii ) CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad.) ( viii ) CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.) ( ix ) P.L. Chemical Ltd. v. Asstt. CIT [1972] 86 ITR 46 (Mad.) ( x ) R.K. Swamy v. Asstt. CIT [1984] 88 ITD 185 (Chennai) ( xi ) ITO v. Smt. Sarojben v. Gandhi [2004] 83 TTJ (Ahd.) 716 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ete agreement dated 17th August, 2000 executed between Shri H.L. Taneja, who was in the industrial and medical gas manufacturing and selling business for about 45 years, his daughters and son in law, who was looking after different companies of the group through various companies as one part and Inox Air Products Ltd. as other part . The basic covenants of the non-compete agreement placed on record at page Nos. 84 to 99 and others of the paper book, are as under : ( i )In consideration of INOXAP agreeing to acquire Assets and Complete Gax Business from each of the Taneja Group Entities in terms of the said agreements and in further consideration of the sum of Rs. 3,67,00,000 (Rupees Three Crore Sixty Seven Lakhs only) agreed to be paid as compensation for non-compete by INOXAP to the Covenantors in the manner as specified in Schedule 4 hereunder written each of the Covenantors hereby irrecoverably agree and undertake in favour of INOXAP, that from the 1st September, 2000, when INOXAP is scheduled to commence its Industrial and Medical gases manufacturing activities in the State of Madhya Pradesh or such other date on which INOXAP commences its Industrial and Medical gas manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under section 269UC of the Income-tax Act, 1961. ( b )INOXAP commencing its Industrial and Medical gases manufacturing activities in Madhya Pradesh. ( c )Taneja Group and Taneja Group entities discontinuing its Industrial and Medical gases manufacturing and selling activities. ( vii )Agreed and declared that all the three conditions listed in 1.3.1 are conditions precedent for the purpose of payment of consideration by INOXAP. 2.4.2 The Assessing Officer has treated this amount of Rs. 319 lakhs as deemed dividend under section 2( 22 )( a )/2( 24 )( iv ) in paragraph 4.17 page No. 26 of the assessment order. As per this paragraph this amount was received by the company by way of distribution of the profit/benefit from the company by adopting the device to receive it directly from M/s. Inox Air Products Ltd. In this connection, it would be pertinent to consider the definition given under section 2(22)( a ) - "Dividend includes - ( a ) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the Company." It appears that the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies stopped, and hence, the amount received cannot be non-compete fee, is totally misconceived and wrong. The machinery and other assets that were sold were merely tools for running the factory and can easily be acquired. The appellant was the driving force behind these operations. It was for this reason, the non-compete fee was paid to the assessee. It was not given for the assets, plant machinery etc. and other manufacturing activities, but for the experience, technical competence and in depth knowledge of the business gained during the last 45 years by the appellant to prevent the assessee from starting or giving assistance/ consultancy for similar type of manufacturing business, existing or new. The observation of the Assessing Officer that the assets were not got valued before sale is irrelevant in the context of deciding the matter regarding the taxability of the sum of Rs. 319 lakhs. The contention of the assessee in this regard remained that no valuation of assets was done before sale either by the seller by the purchaser. A query in this regard was also raised by the Assessing Officer by issuing summons under section 131 of the Act to Inox Air Products Ltd., who has conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has already been given by the appellant and it is purely on the agreed price which has been worked out and considered by the buyer, who are world renowned Multinational Co., looking to the market conditions. The reasons given by the learned CIT (Appeals) is based only on presumptions and assumptions. ( ii )The amount had not been paid to concerned companies/units who had earned a goodwill, were running business concern and having liabilities (creditors, bank overdrafts, gratuity, compensation to workers etc.). It was not a sale of business as a going concern. The restrictive covenant not to carry on business for 5 years may be relevant for the concerns whose assets were transferred and payment of goodwill was also made. Comments : The Company M/s. Inox Air Products Ltd., have purchased assets of various companies i.e., Building, Plant Machinery and Cylinders etc. the liabilities relating to all these concerns are of the companies themselves. The details are as under : 1999-00 (Rs.) 2000-01 (Rs.) Eastern Air Products Pvt. Ltd. 5,15,67,598 4,21,44,730 Northern Air Products Pvt. Ltd. 41,91,358 39,72,389 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed only on presumptions, assumptions and surmises. ( vii )The payment of non-compete fee to the appellant and other members was not for loss of capital asset. Comments : The payment of non-compete fees of the appellant and other members was on the basis of restrictive covenant and loss of profit making apparatus. Compensation received for immobilization, sterlisation, destruction or loss, total or partial, of a capital asset would be capital receipt and it is also held that if payment received is towards compensation for extinction of sterilisation partly or fully of a profit earning source (Capital Asset), such receipt will not be in the ordinary course of assessee s business, and it must be construed as a "Capital Receipt". ( viii )There were other competitors in Madhya Pradesh for supply of Industrial gases/Medical gases. Comments : The Appellant is not concerned with other competitors in M.P. and the reasons taken by learned CIT (Appeals) is irrelevant. ( ix )The age, deteriorating health of the appellant, poor management behind loss making units apparently compelled the appellant and the members to carve out a profit/commission for themselves by entrusting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 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 was a capital receipt and hence not taxable. In the case of Kettlewell Bullen Co. Ltd. ( supra ), the Hon ble Supreme Court held that having regard to the vast area of business done by the assessee as an agent, it was held that the acquisition of an agency was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing the trading structure and, therefore the amount received for the cancellation of such agency did not represent price paid for loss of a capital asset. However, if the compensation was for agreeing to refrain from carrying on a competitive business in the commodities in respect of the agency terminated, or for loss of goodwill, such receipt was held to be in the nature of a capital receipt. In the case of Gillanders Arbuthnot Co. Ltd. ( supra ), the Hon ble Supreme Court was pleased to hold that there is no immutable principle that compensation received on cancellation of an agency must always ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether directly or indirectly in any business which undertook or was engaged in the manufacture or marketing or distribution of razor blades, shaving systems, or shaving preparations. That amount could not be taxed as a revenue receipt. The Chennai Bench of the Tribunal in the case of R.K. Swamy ( supra ) has held that clause ( va ) of section 28 along with proviso and Explanation was introduced only prospectively and not retrospectively. Hence, up to 1-4-2003 the amounts referred to in clause ( va ) received by any assessee were not taxable under section 28( va ). Thus non-compete fee received by him was capital in nature not subject to income tax. Therefore, the amount received by the assessee was the outcome of the non-competition agreement in view of the restrictive covenant put on him for a period of five years and such amount received by the assessee for restrictive covenant was not to be subjected to income-tax. 2.4.7 The Ld. DR has referred the decisions relied on by the Ld. Lower authorities. We have gone through these and find that the facts therein are distinguishable from the facts of the present case under consideration, hence these are not helpful to the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its books. It was held that it is not as to how an assessee treats any money but it is the true nature of the receipt which is decisive of its being taxable. The facts of this case are totally different and are not applicable in the present case. In the case of S. Raghbir Singh Sandhawalia v. CIT [1958] 34 ITR 719 (Punjab), the judgment was related to gift by karta to his wife of family property. Likewise, in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC), it was held that once it is shown that the case of assessee comes within the letter of law he must be taxed, however great the hardship may appear to judicial mind to be. This case has different facts from the present case. In the case of Upper India Sugar Exchange Ltd. v. CIT [1969] 72 ITR 331 (All.), it was held that the taxability of an amount depends upon the nature and the matter of receipts at the initial stage. In this judgment the amounts initially received by the assessees were its trading liabilities and, therefore, the amount in question is not liable to be assessed as the income of the assessee. This judgment is also not applicable in the present case having different facts. The deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them in the similar type of business during the next five years. This judgment rather supports the case of the assessee. 2.4.8 The definition of income as amended in section 2(24), clause ( va ) was inserted in section 28 by which the non-compete amount has been made chargeable to the income tax under the head "Profits and gains of business or profession" and also section 55 was simultaneously amended by adding the words or right to carry on any business . All these amendments undisputedly will take effect from 1st April, 2003 that is assessment year 2003-04, whereas in the present case before us the assessment year involved is 2001-02 which is out of the purview of all these amendments. 2.4.9 We thus find that the decisions relied on by the lower authorities do not support the case of the department that the amount in question claimed to have been received by the assessee as no compete fees is revenue in nature. The facts as narrated above and discussed in view of the arguments advanced by the parties as well as the terms of the agreement entered into between the assessee and the other side suggest that the entire purpose behind the payment of amount termed as no compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement entered into between the parties relating to payment of non-compete fees was a colourable device. We thus while setting aside the orders of the lower authorities hold that the amount of Rs. 319 lakhs received by way of non-compete fees was not taxable being a receipt of capital nature and direct the Assessing Officer accordingly. The ground Nos. 1 and 2 are thus allowed in favour of the assessee. 3.1.1 Ground Nos. 3 4 - The brief facts are that the Assessing Officer noticed in the P L account of the proprietary concern of the assessee that is M/s. Jabalpur Oxygen Co. that the assessee had debited a sum of Rs. 8,94,678 under the head Gratuity . He was of the view that the assessee had sold his entire business to the buyer and so the business was closed and consequently deduction on account of gratuity is inadmissible. The amount of Rs. 8,94,678 was accordingly added to the income of the assessee. The Assessing Officer also found that gratuity amount of Rs. 1,43,731 was outstanding but not paid till the filing of the return of income. He, therefore, disallowed the same and added to the assessee s income. The ld. CIT(A) has upheld the assessment order. 3.2.1 In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case of the assessee the facts were altogether different. The assessee had transferred the assets of the business to another company and got the sale price of the building, machinery and the cylinders etc. as well as amount of goodwill. 3.2.2 The ld. AR has also tried to distinguish the decisions relied on by the Ld. CIT(A). He submits that in the case of Ghasi Ram Padhi Co. v. CIT [1991] 192 ITR 334 (Ori.), the payment of gratuity and compensation to the workers was not an allowable deduction. However, the Hon ble High Court has decided that if the Tribunal came to the conclusion that the business had not been closed down, the payment made on account of compensation and gratuity would be deductible provided the payment had been made for purposes of business expediency. In the case of assessee, the assessee has transferred the assets of the business to another company and got the sale price of building, machinery and cylinders etc. as well as the amount of goodwill. In the case of assessee the payment were made by the Appellant for purposes of business expediency. In the cases of Crompton Engg. Co. Ltd. v. CIT [1992] 193 ITR 483 (Mad.) and CIT v. Gaekwar Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 40A(7)( b ). It does not deal with any actual payment of gratuity amount during the accounting year itself. Actual payment of gratuity on the retirement of an employee during the relevant previous year does not fall under section 40A(7)( a ) because it is a payment which is actually made and is not a provision for payment for a later date. In this regard we find support from the decision of Hon ble Bombay High Court in the case of CIT v. Colgate Palmolive (India) (P.) Ltd. [1994] 210 ITR 770 , 774. The only condition or precaution in such situation to be taken as per Explanation to section 40A(7)( b ) is that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid. We thus while setting aside the orders of the lower autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed due to financial problem as well as labour problem. The same is not the position in the case of the assessee because the assessee had transferred the assets of the business to another business and got the sale price of building and machinery as well as the amount of goodwill. The Ld. AR submits that in the cases of P.N. Ganesan (P.) Ltd. ( supra ) and Art Press ( supra ) relied on by the Assessing Officer, the company was wound up voluntarily and in view of the decision of winding up, the assessee-company decided to retrench its employees and pay them compensation, whereas in the case of Ghasi Ram Padhi Co. v. CIT [1991] 192 ITR 334 (Ori.), it was held that if the Tribunal came to the conclusion that the business had not been closed down, the payment made on account of compensation and gratuity would be deductible provided the payment had been made for the purposes of business expediency. Likewise, in the case of M. Seshadri Iyengar Sons v. CIT [1985] 152 ITR 734 (Mad.), it was held on the basis of debit entries in profit and loss account in respect of retrenchment compensation and other documents that the amount was not actually paid. In the case of T. Satyana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees interested in resignation in lieu of compensation. There may be several reasons behind the scheme. May be the new management/employer did not want to bear the liability of those employees who did not with to work with the new management. May be that the new employer wished to continue with only those employees who were willing to work with them so as to accelerate their promotion only with a view to promote the business smoothly. In the case of CIT v. J.C. Budharaj Co. [1993] 204 ITR 656 (Ori.) retrenchment compensation was held allowable as a deduction where the finding was that the business as a whole continued. Likewise, in the case of CIT v. Turner Morrison Co. (P.) Ltd. [1968] 68 ITR 147 (Cal.), payment of compensation to Directors for premature termination of the contract with a view to reduce administration costs and also to accelerate the promotion of the junior employees, was held to be an allowable expenditure. On the other hand, in the case of Travancore Tea Estates Co. Ltd. v. CIT [1985] 154 ITR 745 (Ker.) compensation paid to former Directors who have already resigned voluntarily, held not allowable because the payment was neither in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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