TMI Blog1996 (12) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1987-88 onwards, the assessee started getting the annual amount of Rs. 90,000 from the company in addition to his normal salary as the Managing Director of the company. The assessee claimed the entire amount under consideration to be capital receipt in his hands on the ground that the amount was received by him for the consideration for not competing with the business of the company M/s. Chandavarkar Thacker (India) Pvt. Ltd. It was the contention of the assessee that inasmuch as the payment was in substitution for the source of an income, it did not itself arise out of any particular source of income and hence, the payment was to be considered as a capital receipt not chargeable to tax. 3. The Assessing Officer did not agree with the contention of the assessee. He noted that the assessee was the only architect in the company whereas the other directors had different other qualifications. The Assessing Officer was of the view that the more the assessee would work for the company, the greater would be the benefits reaped by the company and therefore, in order to make the payment commensurate with the benefits reaped by the company from the business brought to it by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was going to embark upon by starting practice independently and therefore, the compensation for the same should constitute capital receipt in the hands of the assessee. In support of this contention, Shri Venkatesan has relied on a number of judgments of different authorities. First, reliance has been placed on the judgment of the House of Lords in the case of Beak (Inspector of Taxes) v. Robson [1943] 11 ITR 23 (Supplement). In that particular case, that assessee entered, into an agreement with a company whereby he was to be employed for a term of 5 years as director and manager at a certain salary. It was furthermore provided that in the event of the assessee determining the agreement by notice or committing a breach of it which led to a determination, he covenanted for a stated period not to be engaged or interested in a competing business within a certain area, in consideration of which covenant the assessee was paid a sum of pound 7,000. It was held by the House of Lords that the abovementioned amount did not arise from a profit of office of the director and manager of the company but inasmuch as the amount was receivable by the assessee under a separate covenant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s he merely using an asset as a means of obtaining an income or even if he was realising an asset, was he doing it in such a form that the payments arranged by him lost their character of capital receipts and became income ? " Ultimately however, the High Court held in this particular case that the monthly payments received by the assessee even on account of loss of the agency business belonging to the company whose nominee the assessee was, represented only revenue receipts. The facts of this case are, therefore, distinguishable. The decision of Madras High Court in the case of CIT v. Saraswathi Publicities [1981] 132 ITR 207 also relied upon by Shri Venkatesan may be considered to be important for the present purpose. In that particular case, the assessee had secured the rights for distribution and exhibition of advertisement films with a right to enter into agreement with other persons for distribution and exhibition. The assessee entered into an agreement with a company ' B ' which had-similar agreements with various firms for the purpose of seeing that the business of each other did not suffer by competition in certain States. The assessee received compensation of Rs. 1,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. 8. Lastly, reliance has also been placed by Shri Venkatesan on the judgment of the Bombay High Court in the case of R.N. Agrawala v. CIT [1960] 38 ITR 67. In this particular case also, the assessee who had been appointed as general manager of a textile mill company had been dismissed from the services of the company and a settlement was arrived at between the two parties under which the assessee was to receive a sum of Rs. 1 lakh in full settlement of all his claims for compensation for termination of the earlier agreement relating to an appointment as general manager. The assessee also undertook for a period of one year not to engage himself on his own account or on behalf of others within a specified area, in any profession or business which might be detrimental to the interests of the company. It was held that since the employment of the assessee had been terminated, the payment made to him was not under the terms of the agreement of the employment but had been made as compensation for termination of employment and notwithstanding the fact that the assessee was being compensated for loss of employment and was also giving up all his claims against the company and binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee would not start independent practice which would be competitive with the company's business and might be detrimental to its interests. Whether, it would have been possible for the assessee to start an independent practice like that and at the same time remaining in the services of the company is a moot question. No director of a company, not to speak of the Managing Director, is supposed to engage in a business competitive with that of the company, nor is such a person supposed to embark upon an activity which would be detrimental to the interests of the company. If a director behaves in such a manner, most probably he can be charged of misfeasance with regard to his duties towards the company. Therefore, it appears that the payment was dressed up as one supposed to be made for refraining from an activity which the assessee was not at all carrying on in past and which perhaps he could not have been able to take up in future as long as he remained in the services of the company. In all the cases, as relied upon by the learned counsel for the assessee, competition with the paying concerns had come to stark reality inasmuch as either the employment or the agency with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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