TMI Blog2023 (10) TMI 1282X X X X Extracts X X X X X X X X Extracts X X X X ..... authorized representative of the assessee. Tribunal, in our view, has applied the correct test, which is that there was no material on record for the CIT(A) to conclude that non- compete fee was a camouflage for payment of money or transfer of business. Tribunal, in brief, is seeking to convey is that because the assessee had executed a non-compete agreement with WSIL, the conversation the CIT(A) had with the assessee could not be used to vary, add or subtract from the obligations contained in the said agreement. Assessee had been restrained both directly and indirectly from undertaking any business which would compete with the business of WSIL. Clearly, for the period in which the non-compete agreement was to operate, which in this case was 10 years, the assessee s source of income had been clamped and, therefore, compensation received by him could only be treated as capital receipt. - Decided in favour of assessee. - HON'BLE MR. JUSTICE RAJIV SHAKDHER AND HON'BLE MR. JUSTICE GIRISH KATHPALIA For the Appellant Through: Mr Prashant Meharchandani, Sr Standing Counsel with Mr Akshat Singh, Standing Counsel. For the Respondent Through: Mr Ajay Vohr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47 of the Act. 7.3 Via the aforementioned order, the Assessing Officer (AO) concluded that Rs. 8 crore received by the assessee from an entity going by the name, Wilkinson Swords India Ltd. [hereafter referred to as WSIL ] under a noncompete agreement was taxable as revenue receipt. 7.4 Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short, CIT(A) ]. The CIT(A), via order dated 19.08.2003, sustained the assessment order. It is in this background that the respondent/assessee approached the Tribunal. 7.5 Before the Tribunal, the issues with regard to the jurisdiction to trigger reassessment proceedings under Section 147 of the Act as well as on merits were raised. 7.6 The Tribunal, insofar as the issue regarding jurisdiction was concerned, ruled in favour of the revenue. However, on merits, the Tribunal concluded that Rs. 8 crores received by the assessee was a capital receipt and hence not eligible for tax. 7.7 Given this background, the aforementioned cross-appeals have been filed. 8. Before we proceed further, it may be relevant to note that several agreements were executed both with GISL and its Managing Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s captured in Clauses 2 and 4 of the said agreement. For the sake of convenience, the two clauses are set forth hereafter: 2. Non-Compete Covenant : In consideration of the premises and the mutual covenants and consideration contained herein, the Covenantor does hereby agree and covenant with and undertake to, the Covenantee that the Covenanter shall not , save as provided for in Clause 4 below, for a period of ten years from the date hereof, engage or participate directly or indirectly whether as shareholder, director, partner, proprietor, member or otherwise, in any business in India or any other country in the world which involves manufacture, trading, marketing and distribution of the Products or providing any services in connection therewith. xxx xxx xxx 4. Exceptions : 4.1 Notwithstanding anything to the contrary set forth herein, the Covenantee expressly agrees that the Covenantor may through GISL engage in or carry on the business of manufacture of the Products at its facilities located at Allahabad and Mysore for supply to the Covenantee or its affiliate, in accordance with the provisions of the Sourcing Agreements dated 25th November, 1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier of the sourcing agreement. 17. Therefore, the argument which was put forth before the Tribunal that the assessee had lost its source of income, according to us, has both merit and weight, the reason being that one of the tests for determining whether or not a receipt is of the nature of capital or revenue relates to the source of receipt. 17.1 If the source of income is, in a figure of speech, closed, the recipient is entitled to take the stand that the receipt is capital in nature. This test has been recognized in several judgments including the judgment rendered by the Supreme Court in Shiv Raj Gupta v CIT, (2020) 425 ITR 420 SC. For the sake of convenience, the relevant part of the said judgment is extracted hereafter: 19. It only remains for us to point out the judgment in Guffic Chem (P) Ltd. v. CIT (2011) 4 SCC 254. In this case, the question set out by the Court is as follows: Whether a payment under an agreement not to compete (negative covenant agreement) is a capital receipt or a revenue receipt is the question which arises for determination in this case? Here, the Court was dealing with an amount of INR 50 lakhs received by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders case [(1964) 53 ITR 283 (SC)]. In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by CIT (A) and the Tribunal. 8. One more aspect needs to be highlighted. The payment received as non-competition fee under a negative covenant was always treated as a capital receipt till Assessment Year 2003-2004. It is only vide the Finance Act, 2002 with effect from 1-4-2003 that the said capital receipt is now made taxable [see Section 28(v-a)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1-4-2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained the assessee, albeit for a specified period, from carrying on any business activity directly or indirectly which would compete with the business activity of WSIL. 22. The other submission made by Mr Meharchandani is founded on the proceeding note dated 23.07.2003 which records what transpired between CIT(A) and the authorised representative of the assessee. In this context, it would be relevant to refer to what is noted by the CIT(A) in its order: 5.9 During the course of hearing I asked the appellant to explain to me the method of valuation of business done by them which resulted in receipt of Rs. 75 crores from WSIL and besides this receipt of Rs. 8 crores each by 2 senior family members. It was explained to me that the final negotiation concluded with the settlement of the consideration at Rs. 75 crores and this amount was split as under: 1. Mysore Factory - The factory land had been valued a few years ago at Rs. 5.5 crores. The replacement value of the major plant and machinery was known as the same had been manufactured in house. On this basis the total value was determined at Rs. 9.5 crores. 2. Against the non compete agreement between WSIL and GISL a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore was to the assessee as non compete fee which in fact was a payment for transfer of the business of the business and the non compete fee was merely camouflage. There is no material on record to arrive at this conclusion. There is no material on record to arrive at this conclusion. The CIT(A) seems to rely on conversation that took place between him and the Assessee in the course of the appellate proceedings for arriving a conclusion that the sale consideration for the transfer of the entire business was arrived at first at Rs. 75 crores and thereafter the consideration was split under heads and the sum of Rs. 8 crores was in reality sale consideration for transfer of the business which has been camouflaged as a non compete fee and paid to the Assessee. The revenue authorities cannot go beyond the terms of agreement. The parties are at liberty to agree upon various terms and conditions under an agreement. These terms would depend upon the exigencies of business. The Revenue Authorities seek to overlook the right s and obligation of the parties arising out of agreement. 27. We may note that what the Tribunal, in brief, is seeking to convey is that because the assessee had e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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