9911796707
TMI Blog2018 (3) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... of a pharmaceutical company, by name, Natco Pharma Ltd. He is an assessee to income tax on the file of the Assistant Commissioner of Income Tax, Circle-II, Hyderabad, with Permanent Account/G.I.R. No.N-707/ABEPN 6301 L. The appellant filed his returns of income for the assessment year 1998-99 on 31.10.1998 and for the assessment year 1999- 2000 on 29.9.1999. For the assessment year 1998-99 he declared loss of Rs. 1,91,209/- and for the next assessment year he declared loss of Rs. 5,21,560/-. The returns of income were processed separately under Section 143(1) of the Income Tax Act, 1961 (for short, "the Act") and they were accepted by the Assistant Commissioner of Income Tax. However, the Deputy Commissioner of Income Tax, Circle-I, Hyderabad, passed an order for the assessment year 1998-99 on 30.3.2001 under Section 143(3) of the Act determining the total income of the appellant at Rs. 1,74,68,625/- and in the process of determination, the said officer has included a sum of Rs. 1,50,00,000/- received by the appellant from Ranbaxy Laboratories Limited (hereinafter referred to as "RLL") towards "non-competition fee" included under the head "income from other sources" and treated it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue receipt. (ii) Whether on the facts and in the circumstances of the case, the Tribunal failed to appreciate that the restraint on the appellant as per clause-2 of the non-competition agreement between RLL and the appellant is not merely that Appellant "shall not sell, supply, market or distribute the specified produces in the specified countries viz., Russia and CIS countries but he shall not advise, assist, and in establishing etc., competing business, directly or indirectly, in all manner of forms and there can be no doubt that if the appellant could help Time Cap Pharma Labs Pvt., Ltd., to establish a business in time release pharmaceutical products, the Appellant has capacity to help and aid other manufactures to manufacture and sell products competing with RLL in the specified territories". (iii) Whether on the facts and in the circumstances of the case, the ITAT was right in holding that non competition fee received by the Appellant from RLL is not capital receipt in the hands of the Appellant. (iv) Whether the non-competition fee received by the Appellant is taxable under Income Tax Act, 1961 as it stood in the relevant year. (v) Whether the ITAT having r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l receipt" as was done in respect of the amount received by the Natco. (ii) The Tribunal failed to appreciate that the RLL and the SPIL paid money to the Natco company and the appellant in restraint of their advising, assisting, aid in establishing, managing, providing or developing or act as consultant or technical advisor in respect of the specified products or any other products similar to the products either on their own account or on behalf of any other person whether as an agent or as a licensee or as an advisor, consultant etc., and that the restraint regarding the advise, assistance, advising, to act as a consultant or technical advisor is more particularly referable to an individual, like the appellant, and that the Tribunal failed to understand this aspect from proper perspective. (iii) On the Tribunal's own observation, the appellant has pioneered in the time release technology and promoted the Natco Pharma Ltd., and that in the absence of any material before it showing that the appellant was barred once and for all from using his knowledge, expertise and technical know-how, either in establishing his own industry or aiding, advising or acting as a technical consultant f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore no question of law, much less substantial question of law, arises for consideration in these appeals. (ii) The Tribunal rightly rendered a finding that the appellant having transferred all the technical know-how to the company, has not suffered any capital loss as he had no capital available when the RLL and the SPIL entered into agreements with the NATCO GROUP for transfer of rights over the drugs in specified areas and therefore the amount received by him was rightly treated under the head "income from other sources". (iii) In order to treat the income as capital receipt, the appellant has to prove that there is a capital loss and the said loss is of enduring value, that even if the appellant has suffered capital loss, it was only with respect to certain specified drugs over certain area and that therefore the income cannot be treated as against the capital loss. In support of her submissions, she relied upon the judgments in Gillanders Arbuthnot & Co. Ltd. (supra), Kettlewell Bullen and Co. Ltd. (supra), Best & Co. (P) Ltd. (supra), Commissioner of Income Tax v. G.R. Karthikeyan (1993) 201 ITR 866 (SC), and Commissioner of Income Tax v. Biju Patnaik (1986) 160 ITR 674 (SC). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st year Rs.296 lacs. b) Non competition for 2nd year Rs.104 lacs. c) Non competition for 3rd year Rs.75 lacs. d) Non competition for 4th year Rs.15 lacs. e) Non competition for 5th year and thereafter Rs.10 lacs. However, each of such instalment shall become payable on the 7th day after the commencement of this agreement and on the expiry of seven days of each subsequent anniversary thereafter. Out of the first instalment of Rs. 296 lacs. NATCO GROUP has agreed to share the receipt of the payment in the following manner. a) Rs. 146 lacs in the name & favour of NATCO b) Rs. 150 lacs in the name of Mr. V.C. Nannapaneni Ranbaxy agrees to make the payment accordingly." 9. From the contentions advanced by his counsel, the sheet anchor of the appellant's case is that the RLL and the SPIL have treated the appellant and the Natco Pharma Ltd., as two different entities from the point of view of threat perception and accordingly they not only entered into a joint agreement with the individual, his family members and the company, but also made separate payments towards non-competition fees. It is his further case that being deprived of the right to set up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the question of law as to "whether the sum of O.S. Rs. 2,19,343 received by the assessee firm from Vazir Sultan Tobacco Co., Ltd., is a revenue receipt or a capital receipt?". The High Court reframed the question as to "whether the sum of Rs. 2,19,343 received by the assessee firm from Vazir Sultan Tobacco Co., Ltd., is liable to be taxed under the Indian Income Tax Act?." This question was answered in favour of the assessee. The Revenue has filed an appeal before the Supreme Court. The Supreme Court referred to its judgment in Commissioner of Income Tax v. South India Pictures Ltd. [1956] 29 ITR 910 (SC), which in turn referred to the statement of Lord Macmillan in Van Den Berghs Ltd. v. Clark [1935] 3 ITR (Eng. Cas.) 17 (HL) and reproduced the following passage in South India Pictures Ltd. (supra): "That though in general the distinction between an income and a capital receipt was well recognized and easily applied, cases did arise where the item lay on the border line and the problem had to be solved on the particular facts of each case. No infallible criterion or test can be or has been laid down and the decided cases are only helpful in that they indicate the kind of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble : [1903] A.C. 299}." The Supreme Court also referred to its earlier case in Raghuvanshi Mills Ltd. v. Commissioner of Income Tax [1952] 22 ITR 484 wherein it was observed that the definition of "income" in Shaw Wallace's case (supra), as a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources must be read with reference to the particular facts of that case. The Supreme Court also quoted the judgment in Van Den Berghs Ltd. (supra), and framed the following questions for determining whether a 12 [1952] 22 ITR 484 particular payment received by the assessee was income or has to be regarded as a capital receipt: (i) "whether the agreements in question were entered into by the assessee in the course of carrying on its business of distribution of firms, and (ii) whether the termination of the agreements in question could be said to have been brought about in the ordinary course of business." The Supreme Court held that when a question arises whether a payment of compensation for termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough expansion of the territory of the agency in 1939 and the restriction thereof in 1950 could very well be treated as grant of additional territory in 1939 and the withdrawal thereof in 1950, both these agency agreements constituted but one employment of the assesses as the sole selling agents of the company. There is nothing on the record to show that the acquisition of such agencies constituted the assessee's business or that these agency agreements were entered into by the assesses in the carrying on of any such business. The agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assesses by entering into contracts for the sale of the Charminar cigarettes manufactured by the company to the various customers and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee's business. It did not constitute the business of the assesses but was the means by which the assesses entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessee's business of distribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital receipt: what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Cases on the borderline give rise to vexing problems. The Act contains no real definition of income; indeed it is a term not capable of a definition in terms of a general formula. Section 2(6C) catalogues broadly certain categories of receipts which are included in income. It need hardly be said that the form in which the transaction which gives rise to income is clothed and the name which is given to it are irrelevant in assessing the exigibility of receipt arising from a transaction to tax. It is again not predicated that the income must necessarily have a recurrent quality. We are not called to enter upon an extensive area of enquiry as to what receipts may be regarded as income generally, but merely to consider in this case whether receipt of compensation for surrendering the managing agency may be regarded as capital or as revenue. In the absence of a statutory rule, payment made by an employer in consideration of the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of taking agencies, how many agencies it had, what was their nature and variety? How were they acquired, how one or some of them were lost and what was the total income they were yielding? If one of them was given up, what was the average income of the agency lost? What was its proportion in relation to the total income of the company? What was the impact of giving it up on the structure of the entire business? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure? Or was it a loss due to an ordinary incident in the course of the business? The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to a loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latter, it would be a capital receipt. But these questions can only be answered satisfactorily if the relevant material is available to the income-tax authorities. The evidence of witnesses in charge of the business, the relevant accounts and balance-sheets of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deprived the assessee of a trading avenue, leaving it free to devote its energies after the cancellation to carry on the rest of the business, the amount received must be regarded as revenue receipt, and not capital receipt. 14. In Oberoi Hotel (P) Ltd. (supra), the assessee company was operating many hotels belonging to others for a fee. It had a contractual right to exercise the option of purchasing the hotel in question in case its owner desires to transfer the same during the currency of the agreement. The receiver of the hotel executed a supplementary agreement with the assessee whereunder the latter has given up its right to exercise its option to purchase and/or operate his hotel. On these facts of the case, the question was whether the amount received by the assessee under the supplementary agreement was a capital receipt or not? The Supreme Court relied upon the Judgment in Kettlewell Bullen & Co Ltd. (supra), and also referred to Karam Chand Thapar & Bros. (P) Ltd. v. C.I.T. (1971) 80 ITR 167 (SC) which in turn referred to the judgment in C.I.T. v. Chari & Chari Ltd. (1965) 57 ITR 400 (SC), wherein it was held that ordinarily compensation for loss of an office or agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for loss of capital is a capital receipt; what is received as profit in a trading transaction is taxable income. (iii) It is not predicated that the income must necessarily have a recurrent quality and that it would be regarded as capital if it is for loss of an asset of enduring value to the assessee. (iv) The form in which the transaction which gives rise to income is clothed and the name which is given to it are irrelevant in assessing the exigibility of receipt arising from a transaction to tax. (v) There is a clear distinction between a case where compensation is received towards loss of capital and compensation received towards loss of agency; in the latter category of cases where cancellation of an agency did not affect the profit-making structure of the assessee, or it did not involve a loss of an enduring trading asset, and if it merely deprived the assessee of a trading avenue, leaving it free to devote its energies after the cancellation to carry on the rest of the business, the amount received must be regarded as revenue receipt and not capital receipt. 16. Now the stage is set to apply the settled legal position as referred to above to the facts of the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profit in a trading transaction, but it clearly falls under the category of income derived from loss of capital. Indeed, the Tribunal treated the income in the hands of the company as capital receipt, but as income from other sources in the hands of the appellant. As regards the income in the hands of the company, the tribunal held as under: "Insofar as Natco is concerned, though the company could not develop and capture substantial market in the specified territory, it nevertheless penetrated into those markets with respect to the specified products and it can be said that by virtue of the restrictive covenant, there was impairment of the capital structure vis-à-vis the products specified in the agreement. Thus, by applying the principles laid down by the Apex Court as discussed above, it can be said that the amount received by the assessee-company is a capital receipt. In fact, the AO has admitted in his order that it was a capital receipt, but sought to tax by treating it as goodwill, overlooking the fact that goodwill separately transferred by another agreement. Thus, the amount received by the assessee-company cannot be treated as a consideration for transfer of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on him on the use of technical know-how or the knowledge Shri VCN possessed with regard to certain pharmaceutical formulations. As rightly observed by the learned CIT (A), Shri VCN and his family members had control over Natco in view of the larger share-holding. The amount which was otherwise receivable by the company was diverted to the assessee, and thus it cannot be treated as a capital receipt in the hands of Shri VCN. The case of the assessee that merely because it is not a capital receipt, it cannot be taxed under sec. 10(3) of the Act, is not acceptable in view of the decision of the apex court in the case of G.R. Karthikeyan (supra) and also in the light of the decision of the Hon'ble Allahabad High Court in the case of Wg. Cdr. K.P.K. Ghose, 268 ITR 260." (emphasis added) 18. In the above reproduced paragraph, the Tribunal accepts that knowledge with regard to manufacture of certain medicines can be considered in certain circumstances as a capital asset. It, however, proceeded on certain assumptions which, as rightly argued by the learned counsel for the appellant, are not based on material on record. As regards the technical know-how possessed by the appellant the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntiated by the Tribunal. This finding, in our opinion, is based on a mere surmise or conjecture in the absence of a finding that the two agreements entered with RLL and SPIL are sham and nominal. 20. In G.R. Karthikeyan (supra), on which the reliance was placed by the learned Standing Counsel, the question was whether the remuneration received by a person who participated in a car rally falls within the definition of 'income' under Section 2(24) of the Income Tax Act? While holding that the word 'income' is of the widest amplitude and it must be given its natural and grammatical meaning, the Supreme Court held that the car rally in question was a contest, if not a race, and the assessee entered the contest to win it, that what he got was the "return" for his skill and endurance and it was income, construed in its widest sense and that though it was casual in nature, it is nevertheless income. The facts in that case and in the present case do not bear any similarity as in the said case the income was not earned by the assessee under a non-competition agreement or for capital loss. 21. Though, as held by the Courts, the form in which the transaction which gives rise to income is cl ..... 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