TMI Blog2017 (8) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... dent : Mr. S.Sridhar JUDGMENT ( Judgment of the Court was delivered by Anita Sumanth, J. ) These Tax Case (Appeals) have been filed by the Commissioner of Income Tax challenging orders of the Income Tax Appellate Tribunal in respect of assessment year 2001-02. Since the facts relating to both appeals are common, we deal with the same by way of a single order. 2. The Substantial questions of law that arise for consideration are as follows: T.C.A.No.1365 of 2007: (appeal by individual) 1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that a restrictive covenant of non competition, between the assessee and the company which is almost wholly owned by her is a capital receipt? 2. Whether the Tribunal was right in holding that the entire amount of payment is a capital receipt, when the restrictive covenant is only a small portion of the same? 3. Whether the Tribunal was treating the payment as one made for non competition, when the agreement clearly allows the assessee to work for others, provided she pays 5% of her earnings to the company T.C(A)No.1175 of 2008 ) (Appeal by Company) 1. Whether on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 lakhs was in the nature of a remuneration paid to the individual for loss of business occasioned to her by virtue of the terms of non-compete. The officer analysed her business receipts from assessment years 1997-98 onwards, noticing that there was a steady increase in receipts from 1997-98 to 2000-01 - ₹ 9.6 lakhs (1997-1998), 14.49 lakhs (1998-1999), 12.12 lakhs (1999-2000) and 15.51 lakhs (2000-2001) respectively. In the financial year relevant to the present assessment year, she had received remuneration of ₹ 5 lakhs of which, 5 % was handed over to the company in terms of agreement dated 3.4.2000. Thereafter the individual received income from the company in place of the income earned by her from third parties prior to 03.04.2000. Accordingly he arrived at the conclusion that there had been a drop in business revenue from the sole proprietary that stood compensated by the arrangement for non-compete with the company. The payment of the non-compete fee was thus, according to him, on revenue account. 6. In any event, and more importantly, he noticed that the individual retained control over the business even after execution of the succession agreement dated 31.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the parties and carefully perused the material on record. On a consideration of the facts and circumstances of the present assessee's case we are of the view that the decision of the ld.CIT(A) is perfectly justified. The Hon'ble Madras High Court in the case of G.D.Naidu held that the compensation relatable to the restrictive covenant was a capital receipt not liable to tax. Respectfully following the said decision of the jurisdictional High Court we see no justification to interfere with the finding of the ld. CIT(A) in this regard. The ld. Counsel also rightly distinguished the decision of the jurisdictional High Court in the case of K.Ramasamy v.CIT (182 ITR 640) relied upon by the ld. DR by stating that in that case the affairs of the company are controlled by the directors who were previously partners of the firm. We therefore, reject the first ground raised by the Revenue. The claim of depreciation on non-compete fee as well as brand equity was upheld by the Tribunal by order dated 14.12.2007. 12. As against the above orders of the Tribunal, the revenue is in appeal before us. We are called upon to decide (i) the taxability of the sum of ₹ 75 lakhs rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that was widely held and this, according to him, would establish the genuineness of the transaction. He would state that the company, wanting to capitalize on the popularity enjoyed by Ms.Radhikaa, particularly to further the prospects of the public offer, retained for itself the exclusive benefit and use of her talents and expertise. This was the reason and rationale behind the payment of non-compete fee rendering it genuine and bonafide, he explained. 18. Let us examine the above statement against the facts as they present themselves to us. The sole proprietary was succeeded to by the company on 31.3.2000. The proprietrix was duly compensated for the assets transferred. Parallelly an agreement was entered into between the parties on 3.4.2000 to provide for a more systematic utilization and exploitation of the creative talents and skills of the Artist. The Artist, who was managing the business as a proprietary concern continued to be part of the corporate structure, employing the same skill sets as always employed by her. It was only the business setting that was enlarged over the relevant period. Though exclusivity of engagement with the company is sought to be portrayed post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strength. 22. The assessing officer has rightly invoked the decision of the Madras High Court in the case of K. Ramasamy vs. Commissioner of Income Tax. The Division Bench, in that case, was concerned with a business that was carried on by a firm with four partners. Constituents of the partnership firm formed a company and the business of the partnership was leased to the new company for yearly rent. On the day the agreement was entered into between the parties, consideration was paid to the individual partners for their assurance not to carry on competing business of running hotels either individually or in association with others. The Division Bench noted that the identity of the company comprising the four brothers as its share holders and directors on the one hand, and the recipients of the consideration, being the four brothers in their individual capacity on the other, was the same. Piercing the veil, High Court observed that the position of the brothers did not change in substance after the company was formed and given a right to run the business. This observation would equally apply in the present case as well. 23. Learned counsel for the assessee relied upon the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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