TMI Blog2020 (7) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of INR 6.6 crores received by the assessee was received as part of the full value of sale consideration paid for transfer of shares and not for handing over management and control of CDBL and is consequently not taxable under Section 28(ii)(a) - Nor is it exempt as a capital receipt being non-compete fee, as it is taxable as a capital gain in the hands of the respondent-assessee as part of the full value of sale consideration paid for transfer of shares. This finding would clearly be in the teeth of Section 260-A (4), requiring the judgment to be set aside on this score. The reasons given by the learned Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines drawn by the judgments cited, which state that the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other. As decided in Guffic Chem (P) Ltd. [2011 (3) TMI 6 - SUPREME COURT] the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of ₹ 50 lakhs by the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Order dated 11.03.1994, which made it clear that the company s manufacturing activity at the plant at Meerut was suspended until a secondary effluent treatment plant is installed and made operative by the company. This led to the sale of this controlling block of shares, which was sold at the price of INR 30 per share (when the listed market price of the share was only INR 3 per share). It is stated in the said MoU that the entire sale consideration of ₹ 55,83,270/- has since been paid by the SWC group to Shri Gupta, as a result of which Shri Gupta has irrevocably handed over physical possession, management and control of the said brewery and distillery of CDBL to a representative of the SWC group on 10.02.1994. Among the things to be done under the MoU, it was made clear that the nominees of the SWC group would be put in the saddle i.e. be made directors on or before 13.04.1994, so that they will constitute an absolute majority on the board of the company. Importantly, both Shri Shiv Raj Gupta and his son Shri Jayant Gupta (who, together with his wife, is the major shareholder of the family) will resign as Chairman and Managing Director and as Joint Managing Director respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Covenant, is really in the nature of payment received by the appellant as compensation for terminating his management of CDBL, in which case it would be taxable under Section 28(ii)(a) of the Income Tax Act, 1961. Section 28(ii)(a) reads as follows: 28. Profits and gains of business or profession. The following income shall be chargeable to income-tax under the head Profits and gains of business or profession , - xxx xxx xxx (ii) any compensation or other payment due to or received by,- (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; 6. By an order dated 31.03.1998, the Assessing Officer held that despite the fact that the appellant owned a concern, namely, one M/s Maltings Ltd., which also manufactured IMFL, being a loss making concern, no real competition could be envisaged between a giant, namely, the SWC group and this loss making dwarf, as a result of which the huge amount paid under the Deed of Covenant cannot be said to be an amount paid in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the MoU resulting in loss, the amount of such loss will be deducted from this deposit. The result, therefore, was that the appeal stood allowed by a majority of 2:1 in the Appellate Tribunal. 8. The revenue preferred an appeal under Section 260-A of the Income Tax Act, 1961 to the High Court. In its grounds of appeal, the revenue framed the substantial questions of law that arose in the matter as follows: A) Whether the ITAT has correctly interpreted the provisions of Section 28(ii) of the Income Tax Act, 1961? B) Whether the Ld. ITAT was correct in holding that receipt of ₹ 6.6 crores by the respondent/assessee as non-competitive fee was a capital receipt u/s 28(iv) income tax act and not a revenue receipt as envisaged in Section 28(ii) of I.T. Act? C) Whether the Ld. ITAT failed to distinguish between nature of capital and nature of benefit in commercial sense in respect of amount of ₹ 6.6 crores received in view of restrictive covenant of deed dated 13.04.1994? D) Whether Ld. Judicial Member of ITAT was correct in recording his difference of opinion that receipt of ₹ 6.6 crores by respondent/assessee was actually a colourable exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is, therefore, vitiated and must be set aside on this ground alone. They relied on several judgments to buttress this contention. They then relied upon the judgment of the learned Accountant Member and of the third Member in favour of the assessee and the reasoning therein, which according to them is unexceptionable and should have been followed by the High Court. They also cited judgments to show that prior to 01.04.2003, i.e. before the introduction of Section 28(va) by Finance Act 20 of 2002 with effect from the aforesaid date, any sum received under an agreement for not carrying out any activity in relation to any business was taxed, for the first time, under this provision and the provision not being retrospective would not apply to the facts of the present case. 11. Shri Arijit Prasad, learned senior advocate appearing on behalf of the revenue, read the order of the Assessing Officer and the order of the first learned Judicial Member and adopted the reasoning contained therein. According to him, the High Court judgment correctly applied both McDowell (supra) and Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613 to arrive at the result which it arrived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. (6) The High Court may determine any issue which- (a) has not been determined by the Appellate Tribunal; or (b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1). (7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section. This provision, being modelled on a similar provision that is contained in Section 100 of the Code of Civil Procedure, makes it clear that the High Court s jurisdiction depends upon a substantial question of law being involved in the appeal before it. First and foremost, it shall formulate that question and on the question so formulated, the High Court may then pronounce judgement, either by answering the question in the affirmative or negative or by stating that the case at hand does not involve any such question. If the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court from every decree passed in appeal by any court subordinate to the High Court, if the High Court is satisfied that the case involves a substantial question of law. (2) An appeal may lie under this section from an appellate decree passed ex parte. (3) In an appeal under this section, the memorandum of appeal shall precisely state the substantial question of law involved in the appeal. (4) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. (5) The appeal shall be heard on the question so formulated and the respondent shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law, not formulated by it, if it is satisfied that the case involves such question. From a bare reading of the aforesaid provision it is manifestly clear that an appeal shall lie to the High Court from an appellate decree only if the High Court is satisfied that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gain in the hands of the respondent-assessee as part of the full value of sale consideration paid for transfer of shares. This finding would clearly be in the teeth of Section 260-A (4), requiring the judgment to be set aside on this score. 15. Coming to the merits, the High Court found: 22. No doubt, market price of each share was only ₹ 3/- per share and the purchase price under the MOU was ₹ 30/-, but the total consideration received was merely about ₹ 56 lacs. What was allegedly paid as non-compete fee was ten times more, i.e. ₹ 6.60 crores. The figure per se does not appear to be a realistic payment made on account of non-compete fee, dehors and without reference to sale of shares, loss of management and control of CDBL. The assessee had attributed an astronomical sum as payment toward non-compete fee, unconnected with the sale of shares and hence not taxable. Noticeably, the price received for sale of shares, it is accepted was taxable as capital gain. The contention that quoted price of each share was mere ₹ 3 only, viz. price as declared of ₹ 30/- is fallacious and off beam. The argument of the assessee suffers from a basic and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General Mills Co. Ltd. (1976) 2 SCC 5 stated as follows: 6. Before coming to the facts it may be necessary to mention that there can be no dispute with respect to the two important propositions: (1) that in order to fall within Section 10(2)(xv) of the Act the deduction claimed must amount to an expenditure which was laid out or expended wholly and exclusively for the purpose of the business, profession or vocation. This will naturally depend upon the facts of each case, (2) that in order to determine the question of reasonableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of the Income tax Department. Further, this Court in Shahzada Nand Sons v. CIT (1977) 3 SCC 432 reiterated this principle as follows: 4. But it is well settled that these factors are to be considered from the point of view of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency What is the requirement of commercial expediency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xx xxx xxx 31. It has been repeatedly held by this Court that the expression for the purpose of business is wider in scope than the expression for the purpose of earning profits vide CIT v. Malayalam Plantation Ltd. [CIT v. Malayalam Plantation Ltd., (1964) 53 ITR 140 (SC)] , CIT v. Birla Cotton Spg. Wvg. Mills Ltd. [CIT v. Birla Cotton Spg. Wvg. Mills Ltd., (1971) 3 SCC 344] , etc. 12. In the process, the Court also agreed that the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [CIT v. Dalmia Cement (B.) Ltd., 2001 SCC OnLine Del 1447 : (2002) 254 ITR 377] wherein the High Court had held that (SCC OnLine Del para 8) once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximise his profit and that the Income Tax Authorities must put them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hand, having experience of 35 years. (vi) As was correctly held by the second Judicial Member, it was also clear that the withholding of INR 3 crores out of INR 6.6 crores for a period of two years by way of a public deposit with the SWC group for the purpose of deduction of any loss on account of any breach of the MoU, was akin to a penalty clause, making it clear thereby that there was no colourable device involved in having two separate agreements for two entirely separate and distinct purposes. 18. The reasons given by the learned Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines drawn by the judgments cited, which state that the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other. For example, stating that there was no rationale behind the payment of INR 6.6 crores and that the assessee was not a probable or perceptible threat or competitor to the SWC group is the perception of the Assessing Officer, which cannot take the place of business reality from the point of view of the assessee, as has been pointed out by us hereinabove. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the judgment of this Court in Gillanders case [(1964) 53 ITR 283 (SC)] , in which the facts were as follows: the assessee in that case carried on business in diverse fields besides acting as managing agents, shipping agents, purchasing agents and secretaries. The assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an agreement which was terminable at will the assessee acted as a sole agent of explosives manufactured by Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation Imperial Chemical Industries (Export) Ltd. paid for first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the agency of the appellant and in addition in the third year full commission was paid for the sales in that year. Imperial Chemical Industries (Export) Ltd. took a formal undertaking from the assessee to refrain from selling or accepting any agency for explosives. 6. Two questions arose for determination in Gillanders case [(1964) 53 ITR 283 (SC)] , namely, whether the amounts received by the appellant for loss of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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