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2016 (7) TMI 971 - ITAT BANGALORE

2016 (7) TMI 971 - ITAT BANGALORE - TMI - Non-compete fees receipt - taxability under Section 17(3)(iii) or 28(va) as salary income or business income or not - profit in lieu of salary - assessee is an individual and was Financial Director - Held that:- section 17(3)(iii)(b) of the Act pre- suppose the existence of relationship of employer and employee between the assessee and the person who makes the payment of “any amount” in terms of sectin 17(3)(iii) of the Act. The amount received by the as .....

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the business of airlines. From the so called non-competent agreement dt.1.2.2007 it cannot be inferred that the said agreement in any way intended to compensate the assessee for loss of employment or in lieu of salary. Therefore in the absence of any contrary facts or material either brought on record by the Assessing Officer or by the CIT (Appeals) it cannot be held that the payment received by the assessee under the agreement dt.1.2.2007 is a profit in lieu of salary in terms of section 17(3) .....

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ommissioner of Income Tax (Appeals) for the Assessment Year 2007-08. 2. The assessee has raised the following grounds : 1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2.1 The learned CIT[A] is not justified in upholding the assessment of a sum of ₹ 2,50,00,000 /- made by the learned A.O. invoking the provisions of u/s. 28(va) of the Act, considering the am .....

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Act is un-enforceable as being invalid and void in restraint of trade and therefore, invocation of Section 28[va] of the Act and sec. 17[3][iii] of the Act both are misconceived and he ought to have deleted the addition even on the alternate view taken by him by considering the same under provisions of Sec. 17[3][iii] not invoked by the learned A at all. 2.3 Without prejudice to the above, the provisions of Sec. 17[3][iii] is not applicable at all as the entitlement and the payment was made afte .....

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ble CCIT/D.G, the appellant denies himself liable to be charged to interest u/s. 234-D of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled. 4. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of .....

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Assessing Officer observed that the assessee left the company during the year and he has received an amount of ₹ 2.5 Crores as non-compete fees from the employer Deccan Aviation Ltd. (DAL). While filing the return of income the assessee claimed the same as non-taxable being capital receipt. The Assessing Officer held that the receipt of non-compete fees is taxable as per the provisions of section 28(va) of the Income Tax Act, 1961 (in short 'the Act'). Accordingly, the said amount .....

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t and therefore it cannot be assessed as business income under Section 28(va) of the Act. It was also contended that the so called non-compete fees is invalid in terms of Article 19(1)(g) of Constitution of India and Section 27 of the Contract Act and therefore the said agreement is unenforceable as being invalid and void in restrain of trade. The CIT (Appeals) held that this payment is covered under the provisions of section 17(3)(iii) of the Act as profit in lieu of salary. Thus the CIT (Appea .....

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in the past to derive any business income. In March, 2005, the assessee was employed as an Executive by DAL vide Agreement dt.1.3.2005. During the year under consideration the assessee was working as Director (Finance) when the assessee resigned on 24.1.2007 which was accepted by DAL vide Board Resolution dt.25.1.2007. The learned Authorised Representative has referred to the terms and conditions of the employment agreement as well as the terms of the termination of the employment. The assessee .....

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treated as compensation lieu of the salary or employment. He has further contended that Section 28(va) of the Act is not applicable as this provision is otherwise applicable only in the case of restrictive agreement for business and not for employment. The assessee never did any business and would not have business in future being a CA therefore the payment in question has no connection of doing or not doing any business neither it is received in lieu of loss caused due to cessation of employme .....

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iii) of the Act. He has referred to the letter dt.24.1.2007 and Form 32 filed by the DAL with the Registrar of Companies intimating the change in the appointment of Director. The learned Authorised Representative has submitted that the company had already filed the requisite information of cessation of the employment of the assessee vide Resolution dt.25.1.2007 and therefore the amount received by the assessee has no connection with the employment but it is a capital receipt for not sharing the .....

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l submissions as well as the relevant material on record. Before proceeding to examine and analyse the facts as well as the rival contentions of the parties we make it clear that the Assessing Officer assessed the amount of ₹ 2.5 Crores received by the assessee under non-compete fees agreement as business income under Section 28(va) of the Act however, the CIT (Appeals) held that the said amount is taxable under Section 17(3)(iii) and not 28(va) of the Act in para 3.11 and 3.12 as under : .....

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perusal of section 17(3)(iii), it is evident that this clause (iii) to section 17(3) was applicable for such payment for the assessment year 2002-03. Thus, I find that the amount of ₹ 2,50,00,000 received by the appellant from DAL as non-compete fee is taxable under clause (iii) of section 17(3) and not under Section 28(va) of the I.T.Act. The revenue has not challenged the order of the CIT (Appeals) and therefore the order of the Assessing Officer has merged with the impugned order of the .....

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dt.24.1.2007 which was accepted by DAL vide Board Resolution dt.25.1.2007. Thereafter the assessee and DAL entered into an agreement dt.1.2.2007 whereby the parties agreed upon that the assessee would not share the secrets of the trade/business etc with any third party and particularly with the competitors. It is pertinent to note that there is a confidential clause 6(b) in the employment agreement dt.1.3.2005 which reads as under : 6 Noncompetition : Confidentiality : Non-Solicitation and Owne .....

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t), operating policies or manuals, business plans, financial records, packaging design or other financial, commercial, business or technical information relating to the company or any of its subsidiaries or information designated as confidential or proprietary that the company or any of its subsidiaries may received belonging to suppliers, customers or others who do business with the company or any of its subsidiaries (collectively, Confidential Information ) to any third person unless such Conf .....

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eement dt.1.2.2007 called Non-compete Agreement. Clauses 2 & 3 of the said agreement dt.1.2.2007 reads as under : 2. That for consideration stated herein, the Retiring Officer hereby agree and consent that for a period of next three years from the date hereof : (a) Shall not accept any employment on fulltime or part time basis relating to Airline Business. (b) Shall not accept holding of any office in the Board of Directors of any body corporate engaged in or propose to engage in the Airline .....

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clear from the plain reading of the above clauses that the assessee aggreed to the restrictive covenant of not accepting any employment including holding of office in the Board of Directors of anybody/company engaged in the airline business as well as providing any consultancy, advisory services to anybody or person engaged in the airline business or to aid or associate with anybody to promote, set up, get interest in airline business. The substance of the restrictive covenents of the agreement .....

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he assessee to provide its services of knowledge in the airlines business to third party and particularly to the competitor or prospective competitor. The Hon ble Delhi High Court in the case of Pritam Das Narang (supra) while analyzing the provisions of section 17(3)(iii) of the Act has observed in paras 13 to 15 as under : 13. This Court is unable to agree with the above submissions on behalf of the Revenue. The Employment Agreement itself mentions that the employment shall commence latest by .....

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e employment did not commence from the date of the Employment Agreement is further evident from the fact that ACEE stated in its letter dated 25th August 2007 that it was making the payment of ₹ 1.95 crores as "a one-time payment to you for non-commencement of employment as proposed." 14. The Court is unable to accept the interpretation sought to be placed on the plain language of Section 17 (3) (iii) of the Act by the Revenue. The words "from any person" occurring ther .....

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employee between the person who makes the payment of the amount and the Assessee. It envisages the amount being received by the Assessee "after cessation of his employment". Therefore, the words in Section 17 (3) (iii) cannot be read disjunctively to overlook the essential facet of the provision, viz., the existence of employment i.e. a relationship of employer and employee between the person who makes the payment of the amount and the Assessee. 15. The Court accordingly concurs with .....

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e between the assessee and the person who makes the payment of any amount in terms of sectin 17(3)(iii) of the Act. The amount received by the assessee after cessation of the employment therefore was held as capital receipt and could not be taxed under the head Profits in lieu of salary . As it is clear from the surrounding fact as well as the terms and conditions of the agreement that the payment in question was made by DAL to the assessee for not sharing the assessee's knowledge of the bus .....

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it cannot be held that the payment received by the assessee under the agreement dt.1.2.2007 is a profit in lieu of salary in terms of section 17(3)(iii) of the Act. A similar view has been taken by the co-ordinate bench of this Tribunal in the case of Satya Sheel Khosla (supra) in paras 15 & 16 as under : 15. We have considered the arguments given by the I.T.O. in his assessment order and by the learned CIT (A) in his appellate order; the Opinion of Shri Bhardwaj; and the submissions made, .....

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under section 28(va) of the Act. The question whether the sum of ₹ 1,32,00,000 is taxable as profits in lieu of salary hinges on the status of the appellant. Was the appellant an employee of Suzuki India or not? We hold that the appellant was a joint venture partner in that company, and not an employee of the company. 16. In Ram Prashad v. Commissioner of Income-tax, New Delhi (1972) 86 ITR 122, the Supreme Court has observed at page 126 that: A servant acts under the direct control and su .....

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