SAURABH SRIVASTAVA v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2007-LL-1207-2]

Citation 2007-LL-1207-2
Appellant Name SAURABH SRIVASTAVA
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 07/12/2007
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags value of any benefit or perquisite • business of publishing newspaper • termination of his employment • city compensatory allowance • memorandum of understanding • indian made foreign liquor • interest on borrowed funds • opportunity of being heard • distributorship agreement • transfer of capital asset • memorandum of association • share purchase agreement • profit in lieu of salary • income chargeable to tax • commencement of business • contractual relationship • wholly owned subsidiary • distribution agreement
Bot Summary: The Ld. Counsel for the assessee, Sh. Ajay Vohra submitted that the assessee is a computer engineer and has been actively associated with computer software and information technology through his association with a variety of companies and industry associations. 5.3 Arguing further, the Ld. DR submitted that the assessee, by agreeing to continue to work only with IISC after the acquisition of 76 per cent of its shareholding by the FI Group, UK, the assessee has received an additional advantage/gain in the form of the non-compete fees in lieu of salary which falls in the category of salary, within the meaning of section 17(3) and is taxable as such. In the rejoinder to the submissions of the Ld. DR, the Ld. AR has submitted that the non-compete fees received by the assessee from the FI Group, UK cannot be treated as a profit in lieu of salary, because there did not exist any relationship of employer and employee between the FI Group and the assessee. The Ld. AR, on the other hand, has relied on two judgments of the Hon'ble Calcutta High Court in the cases of Saroj Kumar Poddar and A.S. Wardekar, where the payments received by the assessee for entering into restrictive covenants of not entering into competitive business was held to be a capital receipt despite the fact that assessees had continued in his capacity as non-executive Chairman with the said company. The facts of the case before the Hon'ble Supreme Court were that the assessee was formed for carrying on the business of managing agencies, was the managing agent of six companies including the Fort William Jute Co. Pursuant to an arrangement with M/s. Mugneeram Bangur and Co.; whereby the latter agreed to purchase the entire holding of shares of the assessee in the Fort William Jute Co. the managed company; to procure repayment of all loans made by the assessee to managed company; and to procure that the managed company will compensate the assessee for loss of office by the payment of the sum of Rs. 3.50 lakhs after the assessee resigned its managing agency and reimburse that amount to the managed company. Cost of trained manpower, compensation for cost of dealers and compensation for loss of profits, it could not be said that the assessee had recouped or been reimbursed the expenses in the past or that it had been reimbursed the profit that was not available as a result of the termination of the distribution agreement: that the Tribunal was right in treating the amount received by the assessee as a capital receipt. As already held, the non-compete fees received by the assessee did not arise to the assessee from carrying on any business.


This appeal of assessee has been filed against order of Commissioner of Income-tax (Appeals) [In short 'the CIT(A)'], New Delhi, for assessment year 1998-99 and following question has been referred to this Special Bench for its decision: ' Whether, non-compete fee received by assessee from FI Plc., U.K. is not liable to tax being in nature of capital receipt?' 2. material facts relevant to question referred to this Bench are that assessee was Computer Engineer associated with Software and Information Technology. He was promoter and founder of as well as Managing Director in one Software Company, viz., M/s. IIS Infotech Ltd. He held 8,66,450 shares of said company. said company was agreed to be taken over by FI Group Plc., UK and as per shares purchase agreement dated 4-12-1997 entered into by U.K. company with shareholders of M/s. IIS Infotech Ltd., including assessee, 76 per cent of subscribed equity capital was agreed to be transferred in favour of U.K. company by shareholders in order to effect said takeover. In terms of said agreement, assessee sold 8,66,450 shares of M/s. IIS Infotech Ltd.; to U.K. Company. assessee filed return of income for assessment year under consideration on 31-10-1999 declaring therein total income of Rs. 38,29,590. In return, assessee had shown long-term capital gain of Rs. 8,71,21,723 on said sale of 8,66,450 shares of M/s. IIS Infotech Ltd. to U.K. company, in respect of which exemption was claimed under section 54EA of Income-tax Act, 1961 (for brevity 'the Act'). In addition to share transfer agreement, FI Group also entered into non-compete agreement with assessee on same date, i.e., 4-12-1997, whereby assessee received sum of Rs. 1,07,36,570 during financial year 1997-98 relevant to assessment year under consideration. similar instalment of 1,69,000 (Pound sterling) was to be received by assessee in subsequent financial year 1998-99 relating to assessment year 1999-2000. Although assessee had paid advance tax and self-assessment tax in respect of non-compete fees of Rs. 1,07,36,570 yet in return of income filed, assessee claimed exemption in respect of non-compete fees as being capital receipt. assessee also entered into yet another new service agreement with M/s. IIS Infotech Ltd., on 24-2-1998, i.e., after said company was taken over by U.K. Company, whereby, assessee was employed as Managing Director of U.K. Company. salary income received from said Company in terms of said agreement was also shown in return of income filed for assessment year under consideration. return filed was processed under section 143(1). However, subsequently, Assessing Officer initiated proceedings under section 147 by issue of notice under section 148 on 31-1-2003, for reason that non- compete fees received by assessee was revenue receipt liable to tax. In response to such notice, assessee filed return on 3-3-2003 declaring same income as shown in original return. During course of assessment proceedings, it was submitted before Assessing Officer that as per Non- Compete Agreement (In short, 'the NCA') entered into with U.K. Company on 4-12-1997, assessee was restrained from carrying out any software development activity for any other person who directly competed with FI and its associate and subsidiary companies in U.K., USA, Singapore, Japan and India, for period of 18 months and amount of Rs. 1,07,36,570 paid to him as compensation was in nature of non-compete fees. Thus, it was contended that non-compete agreement put restriction on carrying on any software development activity for any other person and, therefore, said amount was capital receipt. However, Assessing Officer took notice of subsequent services agreement entered into with M/s. IIS Infotech Ltd. after takeover, on 24-2-1998, whereby, assessee continued to be Managing Director of Company. He also took notice of fact that restrictions imposed were only for limited period of 18 months and these were not absolute restrictions on running any business or such activity by assessee. He observed that only limitation undertaken by assessee was not to harm business interest of M/s. FI Group Plc., UK. Assessing Officer also observed that very fact that assessee received lump sum payment did not make receipt as that of capital nature. He also observed that assessee was not running or carrying on any business. He was working in capacity of Managing Director of M/s. IIS Infotech Ltd. before entering into non-compete agreement with U.K .Group and continued to work in that capacity after its take over by U.K .Group. His capacity to work or earn income was not affected adversely because of non-compete agreement and there was no loss of source of income to assessee. Assessing Officer also referred to various judgments of courts relied on by assessee and observed that facts of those cases w e r e distinguishable from facts of present case. Therefore, Assessing Officer held that ratio of those judgments was not applicable to facts of present case. Thus, he rejected claim of assessee that non-compete fees of Rs. 1,07,36,570 was capital receipt. Accordingly, Assessing Officer held that amount in question was revenue receipt liable to tax under section 28(ii) of Act. In this manner, Assessing Officer made addition of Rs. 1,07,36,570. 3. Being aggrieved, assessee filed appeal before CIT(A), where action of Assessing Officer for initiating proceedings under section 1 4 7 was inter alia challenged. submissions made before Assessing Officer were reiterated. However, Ld. CIT(A) upheld action of Assessing Officer for initiating proceedings under section 147, by observing that information with Assessing Officer was sufficient to entertain as ex facie belief that income chargeable to tax had escaped assessment. As regards merits of case, Ld. CIT(A) took notice of fact that as per share purchase agreement dated 4-12-1997 with U.K. Group, shareholders transferred 76 per cent of subscribed equity capital to Indian Company at agreed price of Rs. 100.90 per share. assessee was also promoter, founder and Managing Director of Indian Company. He also observed that as per non-compete agreement of same date made by U.K. group, assessee was restrained from engaging in or carrying on any activity or business, which directly competed with M/s. FI. U.K. Group, its associate and subsidiary companies in U.K., U.S.A., Singapore, Japan and India. However, Ld. CIT(A) observed that assessee continued to work with group as Managing Director after take over and therefore, was not, in effect, restrained or inhibited from exploiting his talent to full, much less from sterlising his income earning apparatus and that in fact, assessee received much higher salary and other benefits from U.K. Group after its take over. He also noticed that very fact that nomenclature given in agreement was 'non-compete agreement', would not change character of receipt and, that therefore, same was revenue receipt. While taking such view, Ld. CIT(A) referred to decision of his predecessor in case of Shri S. Dhanbal, another shareholder and Director of M/s. IIS Infotech Ltd., who too had received similar amount by way of non-compete fees. said Director also continued to work for U.K. based company after its take over and amount paid was held to be revenue receipt. It was also held that so-called non-compete agreement was collusive and self-serving document executed with sole purpose to evade income-tax. Thus, action of Assessing Officer was upheld. Hence, this appeal before Tribunal. 4. Ld. Counsel for assessee, Sh. Ajay Vohra submitted that assessee is computer engineer and has been actively associated with computer software and information technology through his association with variety of companies and industry associations. assessee was having considerable expertise, skills and experience in knowledge of business and supply of information technology and computer software products, application and services, etc. assessee was promoter and founder of M/s. IIS Infotech Ltd., i.e., 'the Indian Company' engaged in business of computer software development. He was also appointed as Managing Director of Company since its inception. He submitted that FI Group Plc. (In short 'FI'), U.K. based public limited company, was engaged in supply of computer software to major organisations whose business depended mainly on information technology. In order to increase its capacity, facilitate further growth and establish overseas service provider within group, said company evinced interest to take over Indian Company and entered into share purchase agreement dated 4-12-1997 with major shareholders of Indian Company to purchase 76 per cent of subscribed equity capital of M/s. IIS Infotech Ltd. at agreed price of Rs. 100.90 per share. This agreement was subject to approval from Government of India, Reserve Bank of India, etc. Share Purchase Agreement (SPA) was at arm's length and it is not allegation of revenue that same was collusive arrangement. He submitted that shares were purchased at same rate at which other shareholders also sold shares to F.I. Group. 4.1 Shri Vohra further submitted that simultaneously, FI group U.K. 4.1 Shri Vohra further submitted that simultaneously, FI group U.K. also entered into non-compete agreement on 4-12-1997 with assessee and three other Directors of Company, viz., S/Sh. Rohitsava Chand, S. Dhanabal and Mohit Goyal. copy of said agreement is placed at pages 40 to 49 of paper book. He submitted that as per non-compete agreement, assessee and three other directors were restrained from engaging in or carrying on any activity or business, which directly competed with FI Group, its associates and subsidiary companies in U.K., U.S.A., Singapore, Japan and India. Besides, Directors agreed to various restrictive covenants under said agreement. This agreement was separately signed by each of four Directors/Managing Director, i.e., assessee. He submitted that non- compete agreement was made effective for period of 18 months. He submitted that clause (d) of article 8.1 of share purchase agreement contained obligation of sellers, as per which, each of four Directors, viz., S/Sh. Rohitsava Chand, assessee, S. Dhanabal and Mohit Goyal shall enter into contracts of employment with company in agreed form and remain in employment of company as per terms and conditions, except if prevented by disability or death. In consideration of non-compete agreement, each of four Directors was to receive from FI Group, U.K., sum of 1,69,000 (pounds sterling) each on completion date (i.e., on completion of share purchase agreement) and on 31-5-1999, along with interest accrued thereon. amount of Rs. 1,07,36,570 was received in accounting year relevant to assessment year under consideration. He submitted that subsequently assessee entered into fresh service agreement dated 24-2-1998 with M/s. IIS Infotech Ltd. (a copy placed at pages 50 to 67 of paper book) whereby, assessee was appointed as Managing Director of Company after its takeover. Sh. Vohra submitted that execution of services agreement was not dependent on payment of non-compete fees. other two directors, namely, Sh. S. Dhanabal and Mr. Mohit Goyal also entered into fresh service agreement on 24-2-1998. However, Shri Rohitsava Chand did not accept new service agreement and opted out of employment of company once there was change of its ownership. Nevertheless, Sh. Rohitsava also received non- compete fees as per agreement dated 4-12-1997. He submitted that like assessee, Sh. Rohitsava also claimed first instalment of non-compete fees as capital receipt. This claim of assessee was accepted for assessment year 1998-99. However, for subsequent assessment year 2000- 01, Assessing Officer rejected claim of assessee for capital receipt and held that since assessee was not carrying on any business of computer software, there was no question of foreign company putting any restrictions on him through non-compete agreement. Ld. AR submitted that Assessing Officer further referred to definition of term 'income' in clause 24 of section 2 and observed that same was inclusive in nature and same took into account not only income in its normal connotation, but also other receipts, to save artificial categories of income. Thus, Assessing Officer held that such income was liable to tax as income from other sources. He submitted that in appeal, Ld. CIT(A) upheld action of Assessing Officer. When matter was carried in appeal before Tribunal, ITAT, Delhi 'B' Bench in ITA No. 4713(Delhi)/2003, for assessment year 2000-01, held that no dent was made in income earning apparatus of assessee through non- compete agreement and, therefore, non-compete fees was revenue receipt. copy of order of Tribunal is placed at pages 173 to 227 of paper book. However, Tribunal has not clarified that if it is revenue receipt, under what head of income same is liable to tax. 4.2 He further submitted that even in case of Shri S. Dhanabal, Director of Indian Company, who also received non-compete fees of same amount, Assessing Officer did not accept claim of assessee that same was capital receipt for assessment year 1998-99. Assessing Officer brought to tax such receipt as income from salary. On appeal, Ld. CIT(A) upheld action of Assessing Officer by observing that so-called non-compete agreement was collusive and self-serving document prepared for sole purpose to evade Income-tax. He submitted that assessee filed appeal before Tribunal and ITAT, Delhi Bench 'A': New Delhi, in ITA No. 3748 (Delhi) of 2002, for assessment year 1998-99 (a copy of order placed at pages 86 to 98 of paper book), held that receipt in question could not be treated as part of salary and there was no material placed on record to show that non-compete agreement was colourable devise to evade tax. Thus, Tribunal held that non-compete fees was in nature of capital receipt. Sh. Vohra submitted that in present case, Assessing Officer has held that non-compete fees is taxable under section 28(ii) of Act. Thus, Ld. Counsel submitted that dispute relates to as to whether non- compete fees is capital receipt or revenue receipt and as to if it is revenue receipt, under what section same is taxable. 4.3 Arguing further, Ld. Counsel for assessee submitted that Share Transfer Agreement (In short 'the STA') was subject to approval of Reserve Bank of India and Stock Exchange Board of India (In short 'SEBI') Guidelines. He referred to page 80 of paper book, where rates of equity shares of IIS Infotech Ltd. during period from 1-6-1997 to 28-11-1997 have been given. He submitted that as against average quoted price of 26 weeks at Rs. 45.80 per share, assessee along with other Directors had sold shares at rate of Rs. 100.90 per share. It is not case of revenue that shares were sold at less than prevailing market rate. Thus, Ld. Counsel submitted that non-compete fees could not be considered as part of sale consideration of shares and, therefore, cannot be brought to tax as capital gain. He further submitted that non-compete fees cannot be treated as profit in lieu of salary under section 17 of Act because date when agreement was made on 4-12-1997, U.K. Company had not taken over business of Indian Company. Therefore, it cannot be held that FI Group was employer of assessee. Shri Vohra further argued that amount received was in no way related to services rendered/to be rendered by assessee. He further submitted that signing of fresh services agreement was not condition precedent for receipt of non-compete fees. He submitted that Shri Rohitsava Chand did not sign fresh services agreement. Still he received non- compete fees. He relied on two judgments of Hon'ble Calcutta High Court in cases of CIT v. Saroj Kumar Poddar [2005] 279 ITR 573 and CIT v. A.S. Wardekar [2007] 283 ITR 432. He, therefore, contended that amount in question could not be treated as profit in lieu of salary. 4.4 Ld. A.R. further submitted that in case of 'Rohitsava Chand v. DCIT' (supra), Tribunal has held that Non-Compete Agreement did not make any dent in profit-earning apparatus of assessee and, therefore, it w s revenue receipt. Shri Vohra submitted that even if it was revenue receipt, question still remains as to head of income under which said receipt, question still remains as to head of income under which said receipt could be brought to tax. He submitted that all receipts are not income and cannot be brought to tax until same fall under any of heads of income mentioned in section 14 of Act. Therefore, it is very necessary to first determine character of receipt and head under which it falls before same could be brought to tax. He relied on judgment of Hon'ble Bombay High Court in case of Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758. He submitted that burden is entirely on revenue to prove that same was receipt liable to tax under heads mentioned in section 14 of Act. He further argued that receipt in question cannot be brought to tax under head 'Capital gain' because there was no transfer of capital asset within meaning of section 45 of Act. He further submitted that non- compete fees cannot be brought to tax under head 'Income from other sources'. He relied on judgment of Hon'ble Supreme Court in case of Union of India v. Cadell Wvg. Mill Co. (P.) Ltd. [2005] 273 ITR 1. 4.5 Arguing further, Ld. A.R. submitted that since assessee was not carrying on any business, amount received by way of non-compete fees cannot be considered as profit arising in course of any business. Therefore, amount in question cannot be brought to tax under section 28(ii) of Act. H e submitted that sub-clause (a) of clause (ii) of section 28 of Act regards compensation which is received by any person, managing whole or substantially whole of affairs of Indian company, at time of termination of his management or on modification of terms and conditions relating thereto, as liable to tax under head 'Profits and gains from business or profession'. In present case, assessee has not received any compensation for termination of his management of IISC. He was Managing Director of Company before take over and continued to be Managing Director after take over. Therefore, non-compete fees cannot be charged to tax under section 28(ii) of Act. He relied on following decisions of various Benches of ITAT: (i) ITAT, Amritsar Bench, in case of T.S. Manocha v. Dy. CIT [2006] 5 SOT 277. (ii)Third Member decision of ITAT, Delhi Bench in case of Shiv Raj Gupta v. Asstt. CIT [IT Appeal No. 4886 (Delhi) of 1998] (copy placed at pages 101 to 134 of paper book). (iii)ITAT, Chennai Bench in case of R.K. Swamy v. Asstt. CIT [2004] 88 ITD 185. 4.6 Ld. AR submitted that subsequently, Finance Act, 2002 inserted clause (va) in section 28 of Act with effect from 1-4-2003, as per which receipts of nature as of one in this case have been specifically m d e liable to tax. Relying on decisions of various Benches of ITAT including ITAT, Amritsar Bench in case of T.S. Manocha (supra), Ld. AR submitted that this amendment has been held to be prospective. Therefore, same is not applicable to assessment year under consideration. 4.7 Arguing further, Ld. A.R. submitted that non-compete fees is not taxable under any of heads of income mentioned in section 14 of Act. He submitted that assessee has received amount for undertaking restrictive/negative covenant and, therefore, same is capital receipt. He relied on following judgments: (i) Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 (SC) (ii)CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 (SC) (iii)Murray (Inspector of Taxes) v. Imperial Chemical Industries Ltd. [1969] 71 ITR 661 (CA) (iv)CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.) (v)CIT v. Saraswati Publicities [1981] 132 ITR 207 (Mad.) SLP dismissed vide 142 ITR (St. 6). (vi)Ashok Bihari Lal (HUF) v. Asstt. CIT [2006] 99 TTJ (Delhi) 513 (vii)Asiatic Industrial Gases Ltd. v. Dy. CIT [2006] 6 SOT 743 (Bang.) (viii)Dy. CIT v. Indian Syntans Investments (P.) Ltd. [2007] 107 ITD 457 (Chennai) (ix)Gomti Credits (P.) Ltd. v. Dy. CIT [2007] 164 TAXMAN 69 (Delhi) (ix)Gomti Credits (P.) Ltd. v. Dy. CIT [2007] 164 TAXMAN 69 (Delhi) (Mag.). 5. Ld. Sr. DR, in addition to submissions made at time of hearing of appeal, also furnished detailed written submissions, stating therein that Share Purchase Agreement between FI Group, U.K. and IISC is dated 4-12-1997. Sh. Saurabh Srivastava was shareholder and Managing Director of IISC. He submitted that as per share purchase agreement, specified date was 9-12-1997, opening date of issue through letter of offer for purchase of 24 per cent shares held by others was 19-1-1998, closing date was 17-2-1998, on which date, FI Group, UK made bid to purchase shares of IISC. completion date was 26-2-1998. effect of acquisition of shares of IISC by FI Group, UK was that said group became owner of IISC on 26-2-1998. He submitted that though date of non-compete agreement between assessee and FI Group, UK is dated 4-12-1997, yet as per para 6 of this agreement, same was to become effective simultaneously with completion of transaction of sale and purchase of shares under share purchase agreement. He further stated that as per non-compete agreement, consideration of 3,38,000 (pounds sterling) was to be paid in two instalments of 1,69,000 each on completion date and on 31-5-1999. In terms of non-compete agreement, amount of Rs. 1,07,36,750, being first instalment of consideration of 1,69,000 , along with sale consideration of shares of IISC, were credited to bank account of assessee on 26-2-1998. Ld. Sr. DR has submitted that on completion of share purchase agreement, 76 per cent of subscribed share capital come to be owned and vested with F.I. Group. 5.1 Ld. DR has drawn our attention to clause (d) of article 8.1 of share purchase agreement, which stipulates that sellers (i.e., shareholders of IISC who agreed to sell their 76 per cent holdings to FI Group, UK) shall ensure that Directors, namely, S/Sh. Saurabh Srivastava i.e., assessee, Rohitsava Chand, S. Dhanabal and Mohit Goyal shall have entered into contract of employment with company in agreed form and remained in employment of company on terms and conditions. deed for employment had to be entered into on or prior to completion date, i.e., 26-2-1998. fresh Service Agreement was entered into on 24-2-1998 between assessee and IISC (i.e., Company being owned by FI Group, U.K. after take over). Ld. DR, therefore, submitted that on basis of these facts, it has been established that as on date of payment of non-compete fees of Rs. 1,07,36,750 in financial year 1997-98 on 26-2-1998 to assessee, shares of IISC were beneficial and substantially owned by FI Group, UK and, therefore, relationship of employer and employee existed between them. 5.2 Ld. DR further submitted that Sh. Saurabh Srivastava was Managing Director of IISC and owner of shares which he agreed to sell to FI Group, UK. Referring to para IV(3) of offer letter, Ld. DR submitted that t h e share purchase agreement provided that Executive Directors of that Company including assessee were to enter into new service agreements with company on revised terms and conditions, subject to approval of Board of Directors and shareholders. Such new service agreements were to come into force on completion of share purchase agreement, i.e., 26-2-1998. As per new service agreement modifying terms of employment, assessee was to be appointed as Managing Director from commencement date, said date being completion date under share purchase agreement. modified service agreement indicates revised salary and allowances (details placed at pages 62 to 65 of paper book). This was done only to ensure continuity of management. Ld. DR submitted that despite acquisition of IISC shares by FI Group, UK of IISC, four Executive Directors of IISC who also included assessee, continued to be retained on Board of IISC, i.e., FI Group, UK after take over, on enhanced and better employment terms. Thus, Ld. DR has submitted that non-compete fees paid to assessee and other Directors was integral to continuation of employment of assessee and that, therefore, same arises as result of employment. Ld. DR submitted that it is difficult to understand as to with whom or against whom Managing Director was to compete/non-compete with, since he was Managing Director of Company before its take over and continued to be Managing Director after take over. Thus, Ld. DR submitted that revenue earning apparatus of Sh. Saurabh Srivastava was never dented and his source of income remained intact. On contrary, Ld. DR submitted that there has been enhancement in earning capacity of assessee after take over of IISC by F.I. Group, as income returned in year 1999-2000 was Rs. 38 lakhs whereas it increased to Rs. 280 lakhs in assessment year 2000-01. He further argued that two conditions for payment of non-compete fees were to be satisfied cumulatively, i.e., continuation of employment of Sh. Saurabh Srivastava as Managing Director of IISC after take over and completion of share purchase agreement. Ld. DR submitted that logical inference that can be drawn is that non-compete agreement would have become inapplicable in case share purchase agreement was not completed and Sh. Saurabh Srivastava was not employed with IISC after its take over. Ld. DR submitted that it is continuation of employment of Sh. Saurabh Srivastava, which resulted in yield of additional revenue in form of non-compete fees which assumes character of revenue receipt. 5.3 Arguing further, Ld. DR submitted that assessee, by agreeing to continue to work only with IISC after acquisition of 76 per cent of its shareholding by FI Group, UK, assessee has received additional advantage/gain in form of non-compete fees in lieu of salary which falls in category of salary, within meaning of section 17(3) and, therefore, is taxable as such. Ld. DR further submitted that any receipt integrally linked with continuation of employment of Sh. Saurabh Srivastava, Managing Director with IISC after take over, would fall in definition of salary. same can be earned by expressly agreeing to apply skill/experience in particular form with existing employer, or to receive money by expressly agreeing not to apply skill/experience so gained with any other person except present employer. He submitted that in both cases, immediate source continues to be employment under employer and same is taxable under head 'Income from salary'. He submitted that in no way profit-earning apparatus of assessee has been impaired or affected by entering into non-compete agreement. It was submitted that definition of salary given in section 17(3) of Act is inclusive definition and has wide meaning. same would also include amounts or any compensation due to or received by assessee from his employer or former employer at or in connection with termination of his employment. He submitted that terms of appointment of assessee as Managing Director, nature of duties, responsibilities, obligations and limits to his power, manner of his removal and resignation are clearly spelt out in services agreements before and after take over. Every power in effect emanates from articles of association. Thus, Ld. DR submitted that assessee was servant of company and income received from company was taxable under head 'Income from salary'. revenue has also relied on following judgments: 1. Ram Prasad v. CIT [1972] 86 ITR 122 (SC). 2. Karamchari Union v. Union of India [2000] 243 ITR 143 (SC). 3. CIT v. MSP Rajes [1993] 202 ITR 646 (Kar.). 4. Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC). 5.4 Ld. DR then referred to respective clauses of share purchase agreement whereby certain restrictions were placed on sellers. These restrictions inter alia included four Directors (including assessee) being under obligation to enter into contract of employment with company in agreed form, and to continue to perform and conduct cause of company and its subsidiaries in accordance with and consistent with past practices, etc., from date of share purchase agreement till completion date. Further restrictions were also placed on sellers from selling, transfer, gift, exchange, disposal, etc., of shares of company from date of share purchase agreement till completion date except with prior consent of buyer, i.e., FI Group, U.K. sellers, viz., assessee and other three Directors were to deliver effective written resignations of Directors other than four Directors, namely, S/Sh. Saurabh Srivastava, assessee, Rohitsava Chand, Mohit Goyal and S. Dhanabal. Thus, said agreement ensured exit of all Directors from Board of IISC and its all other associate companies, except four Directors. Ld. DR has argued that on completion date of SPA, shares of IISC and all its associate companies stood acquired by FI Group, UK. Simultaneously, Board of Management/Directors of IISC and its associate companies were also effectively represented by set of Directors comprising only of four persons. Ld. DR has submitted that these features of share purchase agreement should be read and understood conjointly with terms of non-compete agreement dated 4-12-1997 entered into between Sh. Saurabh Srivastava and FI Group, UK. non-compete agreement was conditional upon completion of share purchase agreement dated 4-12-1997, as said agreement was to become effective simultaneously with completion of transaction of sale and purchase under SPA. Thus, Ld. DR has submitted that payment of non-compete fees was subject to following conditions: (i) Exit of all remaining directors of all associate companies and IISC except four [as per Article 13.1.1(h) of SPA]. (ii)The remaining Directors were now being paid remuneration for enhanced/responsibilities/additional burden cast in light of all other directors moving out from IISC and its subsidiaries. (iii)The four directors were to be continuously available for employment with IISC and its associates (after take over by F.I. Group) on such package terms of payment to ensure continuity of management for at least minimal tenure up to 31-5-1999. total package comprised of non-compete fees, modified remuneration package, both integrally linked to continue employment of assessee and other three Directors with IISC. (iv)The non-compete fees agreement was not independent obligation, inasmuch as it was inextricably and integrally liked to New Service Agreement (Article 13, page 59 of assessee's paper book) and, hence, by corollary, linked to completion of share purchase agreement. scope of this document cannot be appreciated ignoring circumstances under which it came into existence. (v)The continuation of employment till 31-5-1999 mentioned in non- compete agreement and effective entering into service agreement for continued availability was integral part of completion of Share Purchase Agreement and thus payment of non-compete fees was not independent obligation, but inextricably and integrally linked with overall terms of employment, which cannot be missed. In fact, continuation of service was integral cause of payment of non-compete fees, read with share purchase agreement. Thus, Ld. DR has submitted that non-compete fees was paid to four Directors for expressly being in employment with IISC and receipt emanated directly from employment with IISC after take over. This was, therefore, profit in lieu of salary. Ld. DR has submitted that assessee never lost his income-earning apparatus and there was also no dent made in income- earning apparatus. On contrary, assessee received higher remuneration and other benefits from said company after its take over and non- compete fees received on account of non-application of knowledge, skill and experience by way of working for others during course of employment with IISC amounts to benefit in lieu of salary. Therefore, same was taxable as such under section 17 of Act and is revenue receipt. 5.5 Ld. DR has also taken alternate plea that payment of non- compete fees is taxable under section 28(ii) of Act. Ld. DR has submitted that section 28(ii) of Act covers any compensation or other payment due to or received by person, managing whole or substantially whole of affairs of Indian company, at or in connection with termination of its management or modification of terms and conditions relating thereto. Ld. DR has submitted that this definition is also wide enough to cover payments like non-compete fees. He has further submitted that assessee has received payment of non-compete fees from IISC Delhi, Indian company having its registered office in Delhi during course of his professional engagement of applying his skills/experience with IISC and its associates. assessee was managing substantially whole of affairs of company as its Managing Director subject to terms and conditions of Memorandum of Association and Articles of association of company. terms of management were modified as per share purchase agreement read conjointly with non-compete fees agreement. Therefore, same is taxable under section 28(ii) of Act. 5.6 Ld. DR advanced further alternative argument that non- compete fees is liable to tax under section 28(iv) of Act, because expression 'Profession' is word of wide import and includes 'vocation', which is only way of living and person can have more than one vocation. Clause (iv) o f section 28 provides that value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession, is chargeable as part of profit under this Act. It is deemed to be income under clause (va) of sub-section (24) of section 2, which defines 'Income'. Ld. DR has submitted that definition of 'income' under sub- section (24) of section 2 is inclusive definition. Reliance has been placed on decision of Hon'ble Delhi High Court in case of CIT v. Nar Hari Dalmia [1971] 80 ITR 454. Relying on judgment of Bombay High Court in case of D.M. Naterwalla v. CIT [1980] 122 ITR 880, Ld. DR pleaded that raising of alternative contentions to determine head of taxability is permissible. revenue has also relied on two judgments of Hon'ble Supreme Court in cases of Kapur Chand Shrimal v. CIT [1981] 131 ITR 451 and 40 ITR 398 (there is no such judgment reported in this ITR at page 398), and judgment of Hon'ble Punjab & Haryana High Court in case of CIT v. Om Prakash Bidhi Chand [1983] 141 ITR 750, in support of contention that powers of Tribunal to pronounce upon matter in issue are very wide. If on material on record more than one argument is available for recording same or similar finding and if any of arguments was not found mentioned in order of ITO or AAC, Tribunal is always entitled to record such finding, subject to assessee having been given opportunity of being heard in that regard. Thus, Ld. DR has contended that very fact that these arguments were not mentioned in assessment order does not preclude Tribunal from taking correct view in matter. 5.7 Ld. DR has further submitted that judgments relied upon by assessee are distinguishable on facts. He submitted that in case of Best & Co (P.) Ltd. (supra), compensation was paid to assessee after termination of agency. receipt of compensation was held to be capital in nature because same dried up source of income. same is position in case of Gilanders Arbuthnot & Co. Ltd. (supra). judgment of Hon'ble Madras High Court in case of Saraswathi Publicities (supra) is not applicable because in that case, sum received on restrictive covenant was held as capital receipt. In present case, assessee continued to work s Managing Director and received non-compete fees in connection with his employment. Similarly, other judgments relied upon by assessee are held to be distinguishable on facts. Thus, Ld. DR has concluded that non- compete fees was not capital receipt but was revenue receipt. same was taxable under head 'Salary' because it was profit in lieu of salary. He further submitted that alternatively same was taxable under section 28(ii) and 28(iv) of Act. 6. In rejoinder to submissions of Ld. DR, Ld. AR has submitted that non-compete fees received by assessee from FI Group, UK cannot be treated as profit in lieu of salary, because there did not exist any relationship of employer and employee between FI Group and assessee. He submitted that there is no merit in contention of Ld. DR that since majority of shares of IIS Infotech Ltd., at time of payment of non- compete fees to assessee, were held by FI Group, UK, employer- employee relationship existed between FI Group and assessee. He submitted that as per its dictionary meaning 'Employer' is person who controls and directs worker under express or implied contract of hire and who pays workers salaries or charges. Ld. AR has illustrated this point by giving example of wholly owned subsidiary company in India of foreign company. H e submitted that employees of subsidiary company in India would be employees of subsidiary company and not of foreign company. Ld. AR has further submitted that mere fact that amount of non-compete fees w s credited to bank account of assessee on 26-2-1998, i.e., after signing fresh service agreement on 24-2-1998 would not change nature of non-compete fees. He submitted that both sale consideration of shares n d non-compete fees were credited to account of assessee on completion of transaction for sale of shares on 26-2-1998. 6.1 Ld. AR has further submitted that that there is also no merit in submissions of Ld. DR that non-compete fees was profit in lieu of salary, inasmuch as it was not compensation from employer or former salary, inasmuch as it was not compensation from employer or former employer in connection with termination of his employment or modification of terms and conditions under section 17(1)(iv) read with section 17(3)(ii) of Act, because agreement entered into by FI Group with assessee on 24-2-1998 was independent, distinct and separate agreement to retain services of assessee as employee. He further stated that entering into said agreement was not condition precedent to receipt of non-compete fee. It was not mandatory condition for payment of non-compete fees. This is obvious from fact that although Sh. Rohitsava Chand opted out of employment of Indian company, yet he received non-compete fees. He further submitted that two agreements, i.e., service agreement and non- compete agreement operate in totally different fields and for different considerations. non-compete agreement was for restraining assessee from exploiting his entrepreneurial skills in competition with Indian company and its other associate companies, and not for rendering services as Director- employee. Ld. AR has also submitted that restraints placed upon assessee under service agreement are of general nature, which are normally imposed by all employers. He submitted that restrictive covenants undertaken by assessee under non-compete agreement were independent of obligations undertaken by assessee as employee and were wider in scope, resulting in sterilization of potential source of income. Ld. AR submitted that by employing services of assessee, Indian company has also gained, because it could carry on business without disruption, interruption, break in continuity, etc., which could have arisen, had new set of people joined. He further stated that payment of non-compete fees was made by FI Group, UK whereas employer of assessee was IIS Infotech Ltd. Ld. AR has also submitted that judgment of Hon'ble Supreme Court in case of Ram Prashad (supra) relied upon by Ld. DR is distinguishable on facts because in that case, Managing Director had received certain percentage of gross profit in addition to monthly remuneration. issue before Hon'ble Supreme Court was whether additional amount received was in nature of salary or not. He submitted that these are not facts of present case. He has also submitted that judgments of Hon'ble Madras High Court in case of K.R. Kothandaraman v. CIT [1966] 62 ITR 348 and Hon'ble, Karnataka High Court in case of M.S.P. Rajes (supra) being on different issue, are not applicable to facts of present case. Ld. AR, on other hand, has relied on two judgments of Hon'ble Calcutta High Court in cases of Saroj Kumar Poddar (supra) and A.S. Wardekar (supra), where payments received by assessee for entering into restrictive covenants of not entering into competitive business was held to be capital receipt despite fact that assessees had continued in his capacity as non-executive Chairman with said company. Thus, Ld. A.R. has submitted that non-compete fees cannot be treated as profit in lieu of salary. 6.2 Ld. AR has also submitted that there is no merit in alternative submission of Ld. D.R. that amount in question is taxable under section 28(ii) of Act. He submitted that assessee was not carrying on any business and, therefore, non-compete fees cannot be treated as profit and gain from business and profession. He submitted that such receipt cannot also b e brought within purview of section 28(iv) of Act, because same does not arise from business or exercise of profession. He has submitted that judgment of Hon'ble Delhi High Court in case of Nar Hari Dalmia (supra) is not applicable to facts of present case, because non- compete fees has not been received in exercise of any profession. He summed up his submissions by stating that non-compete fees received by assessee is capital receipt. same does not fall under any of heads of income mentioned in section 14 of Act. receipt falls under section 28(va), specifically inserted by Finance Act, 2002, with effect from 1-4-2003. same is not applicable to assessment year under reference. Therefore, impugned receipt is not taxable. 7. We have heard both parties at some length and have given our thoughtful consideration to rival contentions, examined facts, evidence and material placed on record. We have also gone through orders of authorities below, referred to relevant pages of paper book, to which, our attention has been drawn and also to relevant judgments cited by both parties. From facts discussed above, it is obvious that assessee has claimed receipt of non-compete fees as capital receipt. However, revenue has considered said receipt as revenue in nature and has accordingly brought it to tax. Now, whether particular receipt is capital in nature o r revenue in nature depends on facts of each case. various judicial pronouncements on subject only help in indicating broad parameters which have to be taken into account for deciding whether particular receipt is capital or revenue in nature. Reliance in this regard is placed on judgment of Hon'ble Supreme Court in case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148, where Their Lordships held (headnote): ' In determination of question whether receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. question must ultimately depend on facts of particular case and authorities bearing on question are valuable only as indicating matters that have to be taken into account in reaching decision. That, however, is not to say that question is one of fact, for these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend to very great extent on particular facts of each case, do involve conclusion of law to be drawn from those facts.' In this case, it was further held (headnote): ' Generally, payments made in settlement of rights under trading contract are trading receipts and are assessable to revenue. But where person who is carrying on business is prevented from doing so by external authority in exercise of paramount power and is awarded compensation therefor, whether receipt is capital receipt or revenue receipt will depend upon whether it is compensation for injury inflicted on capital asset or on stock-in-trade.' Now in present case, we find that certain judgments were cited before authorities below in support of claim that non-compete fees received by assessee was capital in nature. First of all, we consider it appropriate to refer to ratio of those judgments: (i) Best & Co. (P.) Ltd.'s case (supra). facts of case were that company was carrying on business in innumerable lines, acquired, in course of its business, selling agencies from manufacturers both in and outside India. One of them was from Imperial Chemical Industries (Exports) Ltd.; Glasgow, for distribution of their explosives in certain centres. This agency came into existence in 1900 and was terminable at will. same continued up to 1947, when Imperial Chemical Industries (Exports) Ltd.; decided that all its agencies in India and Ceylon should be taken over by principal company and gave notice to assessee for terminating agency from 1-4-1948. assessee was paid compensation for transfer of agency, during three successive years after termination, calculated on basis of commission on sales made by Imperial Chemical Industries (India) Ltd. As condition of paying compensation assessee undertook for period of five years to refrain from selling or accepting any agency for explosives competitive with those covered by agency agreement terminated. assessee claimed compensation received as capital receipts as they represented compensation for termination of agency and consideration for restrictive covenant. On these facts, Hon'ble Supreme Court held (headnote): ' (i) that compensation agreed to be paid was not only in lieu of loss of agency but also for respondent accepting restrictive covenant for specified period; (ii) that restrictive covenant was independent obligation which came into operation only when agency was terminated and that part of compensation which was attributable to restrictive covenant was capital receipt and hence not taxable.' In this case, it was further held (headnote): 'Whether compensation received by assessee for loss of agency is capital or revenue receipt depends upon circumstances of each case. But before coming to conclusion one way or other, many questions have to be asked and answered: What was scope of earning apparatus or structure, from physical, financial, commercial and administrative standpoints? If it was business of taking agencies, how many agencies had it, what was their nature and variety, how were they acquired, how were one or some of them lost and what was total income they were yielding? What was its proportion in relation to total income of company? What was impact of giving it up on structure of entire business? Did it amount to loss of enduring asset causing unabsorbed shock dislocating entire or part of earning apparatus or structure? Or, was loss ordinary incident in course of business? But these questions can only be answered satisfactorily if relevant material is available to income-tax authorities. evidence of witnesses in charge of business, relevant accounts and balance-sheets of assessee before and after loss, other evidence disclosing previous history of total business and relative importance of agency lost and present position of business after loss of said agency have to be scrutinised by department.' significant feature of this case is that assessee itself was carrying on business. Still payment attributable to restrictive covenant for specified period was held to be capital receipt. Therefore, we do not accept plea of revenue that this judgment is not applicable to this case. Similar is position in respect of judgments cited at Sl. Nos. (iii) to (vii) below. However, receipt in case at Sl. No. (ii) below was held to be revenue receipt because it was incidental to carrying on of business. (ii)Gillanders Arbuthnot & Co. Ltd.'s case (supra). facts of this case were that assessee was carrying on business in diverse lines; besides acting as managing agents, shipping agents, purchasing agents and secretaries, besides assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account under unwritten agreement which was terminable at will, assessee acted as sale agents and distributors of explosives manufactured by Imperial Chemical Industries (Export) Ltd. agency was terminated and by way of compensation, assessee was paid for first three years after termination of agency two-fifths of commission accrued on its sales in territory of agency computed at rates at which assessee had earlier been paid and in addition full commission for sales effected in third year at same rates. principal company also intended to take formal undertaking from assessee to refrain from selling or accepting any agency for explosives or other competitive commodities, but there was no written agreement made in this regard. issue before Apex Court was whether amounts received by assessee for those three years were capital or revenue in nature. On these facts, Hon'ble Supreme Court held as under (headnote): ' . . . That, having regard to vast array of business done by appellant as agents, acquisition of agencies was in normal course of business and determination of individual agencies normal incident not affecting or impairing its trading structure. amounts received by appellant for cancellation of explosives agency therefore did not represent price paid for loss of capital asset, they were of nature of income. There is no immutable principle that compensation received on cancellation of agency must always be regarded as capital.' (iii)Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC). facts of case before Hon'ble Supreme Court were that assessee was formed for carrying on business of managing agencies, was managing agent of six companies including Fort William Jute Co. Pursuant to arrangement with M/s. Mugneeram Bangur and Co.; whereby latter agreed (i) to purchase entire holding of shares of assessee in Fort William Jute Co. managed company; (ii) to procure repayment of all loans made by assessee to managed company; and (iii) to procure that managed company will compensate assessee for loss of office by payment of sum of Rs. 3.50 lakhs after assessee resigned its managing agency and reimburse that amount to managed company. assessee submitted resignation of managing agency and received compensation of Rs. 3.50 lakhs from managed company. Under terms of managing agency agreement, managing company was not obliged to pay any compensation to assessee for voluntary resignation of managing agency. question was whether amount received by assessee to relinquish managing agency was revenue receipt or capital receipt. On these facts, Hon'ble Supreme Court held (headnote): ' Held, on facts, that arrangement with Mugneeram Bangur and Co. was not in nature of trading transaction, but was one in which appellant parted with asset of enduring value. What assessee was paid was to compensate it for loss of capital asset and was not, therefore, in nature of revenue receipt. It mattered little that appellant did continue to conduct remaining managing agencies after determination of its agency with Fort William Jute Co.' (iv)A.S. Bhargava v. CIT [1973] 88 ITR 14 (Delhi). In this case, assessee was allotted petrol pump and service station. assessee transferred dealership rights to company for consideration of fully paid up shares of face value of Rs. 30,000. question was whether consideration was revenue receipt in hands of assessee. On these facts, Hon'ble Delhi High Court held as under (headnote): '. . . that consideration received by assessee was for transfer of capital asset and constituted capital receipt. Held also, that value of consideration was not face value of shares but their market value at relevant time.' (v)CIT v. T.I. & M. Sales Ltd. [2003] 259 ITR 116 (Mad.). facts of case before Hon'ble Madras High Court were that assessee had been distributing, on principal basis, products of three companies for last 20 years. Under distribution agreement assessee was to maintain adequate sales organisation at various places and offices to carry on its business at such places. distributorship, agreement was terminated in 1984 for lump sum payment of Rs. 42 lakhs to be paid in quarterly instalments. Under said agreement, assessee was to transfer staff, dealership network, brand images and other marketing infrastructures. assessee was also prohibited for period of three years from acting as distributor, stockist, dealer or agent of any other company. As result of transfer of entire establishment including dealership network established by it, turnover of assessee had declined from Rs. 71.14 crores to Rs. 7.17 crores. On these facts, Hon'ble Madras High Court held as under (headnote): ' . . . affirming decision of Appellate Tribunal, (i) that amount paid to assessee was compensation for impairment of profit-making apparatus of assessee and for sterilisation of very source of its income; (ii) that distributorship agreement in principal to principal basis was not agency agreement and did not fall within section 28(ii)(c) of Income-tax Act, 1961; (iii) that merely because compensation had been quantified on three counts, viz., cost of trained manpower, compensation for cost of dealers and compensation for loss of profits, it could not be said that assessee had recouped or been reimbursed expenses in past or that it had been reimbursed profit that was not available as result of termination of distribution agreement: (iv) that, therefore, Tribunal was right in treating amount received by assessee as capital receipt.' (vi)G.D. Naidu's case (supra). In this case, assessee and his son were partners in five different firms carrying on transport business. Subsequently, other partners took over entire business of firms in stages. New firms were composed of entirely new partners. Assessing Officer held that compensation received by assessee and his son was revenue in nature. However, Tribunal bifurcated compensation into three categories viz., (a) share in assets, (b) share in goodwill, and (c) share in restrictive covenants in terms of section 36(2) of Partnership Act. On these facts, Tribunal held that compensation relatable to restrictive covenant was capital receipt not liable to tax. On further appeal, Hon'ble Madras High Court held as under (headnote): ' . . . that so far as cash compensation paid by new partners referable to assets and goodwill of firm was concerned, cash took place of assets of partnership and compensation paid for restrictive place of assets of partnership and compensation paid for restrictive covenant not to carry on similar business for period of five years was in nature of separate transaction unconnected with business of asset of partnership. Tribunal was right in its view that total compensation paid by firms to old partners was for (a) share in assets (b) share of goodwill, and (c) for restrictive covenant and that part of amount referable to acquisition of share in assets and share of goodwill would be on capital account as it was in nature of initial outgoing and payment towards restrictive covenant was on revenue account and it would not amount to acquisition of advantage of enduring nature. Tribunal was also right in its view that amount received by recipients was not liable to tax either as income or capital gains. No question of any liability to penalty would also arise in instant case, because assessees were merely contending for particular position contrary to view taken by Income-tax Officer which would not call for any penalty.' Although amount paid by payee for restrictive covenant was held to be revenue expenditure and, hence allowable, yet compensation received by assessee and his son for not carrying on bus business for five years was held to be for restrictive covenants on capital account and, hence, not taxable either as income or capital gains. (vii)Saraswathi Publicities' case (supra). In this case, assessee had secured rights for distribution and exhibition of advertisement films with right to enter into agreement with other persons for distribution and exhibition. assessee entered into agreement with 'B' which had similar agreements with various firms for purpose of seeing that business of each other did not suffer by competition in certain States. agreements were extended and modified. Subsequently, assessee agreed not to represent or otherwise do business in film shots and any sort of advertisement on cinema screens for Hindustan Lever Ltd.; or handle any film advertising business till end of 1975 and further agreed to refrain from carrying on business with Hindustan Lever Ltd. In consideration of these terms, assessee received compensation of Rs. 1,50,000. On these facts, Hon'ble Madras High Court held as under (headnote): ' . . . that as receipt was referable to restrictive covenant, it was capital receipt not liable to income-tax.' (viii)K. Ramasamy v. CIT [2003] 261 ITR 358 (Mad.). In this case partners of firm dissolved firm and formed company. All partners became shareholders of company and compensation was paid by assessee to partners of erstwhile firm for not to engage in similar business. It was held by Madras High Court that amount received by partners would be assessable as revenue receipt as same partners entered into transactions by introducing corporate personality. These are not facts of this case. Therefore, this judgment is not applicable to facts of present case. (ix)Boeing v. CIT [2001] 250 ITR 667 (Mad.). In this case, assessee was carrying on cloth business and during course of such business, assessee received gift of Rs. 50,000 from company in gift scheme for having purchased cloth exceeding certain value. T h e assessee claimed receipt as non-recurring and hence not taxable. However, on these facts, it was held that value of gift of Rs. 50,000 was benefit convertible into money arising from business and, therefore, was taxable s business. As already held, non-compete fees received by assessee did not arise to assessee from carrying on any business. same was for accepting restrictive covenant and, therefore, this judgment is also not applicable to facts of present case. (x)D.M. Naterwalla's case (supra). In this case, assessee was Director of Company. In terms of agreement with promoters, shares were allotted to Director. On these facts, it was held that share received by Director was benefit or perquisite received from company by Director was benefit assessable to tax. This judgment is not applicable to facts of present case because non-compete fees was not paid to assessee in his capacity as Managing Director. same was paid for undertaking restrictive covenants and, therefore, this decision is also not applicable to facts of present case. (xi)Karamchari Union's case (supra). In this case, issue raised before Hon'ble Supreme Court was whether Dearness Allowance, City Compensatory Allowance, and House Rent Allowance received from employer were taxable as profit in lieu of salary under section 17 of Act. Their Lordships of Supreme Court considered meaning of 'Profit' in context of section 17 and observed that advantage or gain by receipt of payment by employee was benefit liable to tax under section 17 of Act. As mentioned earlier, assessee had not received non-compete fees by virtue of his being employee of company. This payment is independent of his joining as Managing Director of Company after its take over. Therefore, there is no relationship of employer and employee so far payment of non- compete fee is concerned. Therefore, this judgment is not applicable to facts of present case. (xii)Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra). In case before Hon'ble Supreme Court, issue was whether interest on borrowed funds prior to commencement of business was assessable as income from other sources. Hon'ble Supreme Court has held that interest income was taxable under head 'Income from other sources'. In present case, receipt of non-compete fees is not in nature of interest, which could be brought to tax under head 'Income from other sources'. 8. significant feature of all above-mentioned cases is that assessees were themselves carrying on business. These are not cases of salaried employees or Managing Director or Directors employed with business concerns. Still, principles emerging from ratio of various judgments cited above is that whether particular receipt is capital or revenue in nature would depend on facts of each case. However, payments received for impairment of income-earning apparatus, sterilisation of source of income or transfer of capital asset would generally fall in category of capital receipts. Further, compensation received for undertaking restrictive covenants of not competing with business of assessee also generally fall in nature of capital receipt until same is incidental to carrying on of business. Thus, receipts which are incidental to carrying on business and which do not affect source of income would generally fall in category of revenue receipts. In all those cases, where compensations received for composite partly for transfer of capital assets, incidental to carrying on business and partly for undertaking restrictive covenant of not competing with business of assessees, compensation relatable to such activity would be capital receipt. ratio of these judgments to extent same is relatable to restrictive covenants is applicable to present case. present case also requires to be decided in light of legal position discussed above. 9. Before we deal with merits of case, certain important facts need to be noticed. Before takeover by FI Group, UK, principal shareholders including assessee held 76 per cent of issued and subscribed share capital of IISC. As per share purchase agreement dated 4-12-1997, specified date was 9-12-1997, offer letter to other shareholders, i.e., opening date was 19-1-1998 and closing date was 17-2-1998. On completion date, i.e., 26-2-1998, 76 per cent of shares of IISC stood owned and vested in FI Group, UK on completion of share purchase agreement. This fact is also confirmed by credit of sale proceeds of shares in Canara Bank. non- compete agreement became effective simultaneously with completion of transaction of sale and purchase of shares under share purchase agreement. first instalment of non-compete fees was also credited to bank account of assessee along with sale proceeds of shares on 26-2- 1998. Clause (d) of Article 8.1 of share purchase agreement stipulated that sellers (i.e., shareholders who had agreed to sell 76 per cent of their holding to F.I. Group, UK) to ensure that directors namely S/Sh. Rohitsava Chand, Saurabh Srivastava, S. Dhanabal and Mohit Goyal shall have entered into contract of employment with company in agreed form and remained in employment of Company on terms and conditions stipulated therein. Thus, continuation of employment of company by these four persons was obligation stipulated in share purchase agreement. We are n o t inclined to accept submission of assessee that continuing in employment with IISC after takeover was not condition laid down in share purchase agreement. If it were so, this clause should have not been included in agreement for sale and purchase of shares. contract for employment was also to be in agreed form and was to be entered into on or prior to completion date i.e., 26-2-1998. In fact, Sh. Saurabh Srivastava entered into service agreement on 24-2-1998 and received non-compete fees of Rs. 1,07,36,750 on 26-2-1998 along with consideration for sale of shares. It is also fact that Sh. Saurabh Srivastava was Managing Director of Company IISC right from its inception and continued in same position after takeover by FI Group, UK, without any break. only difference was that earlier ownership, control and management of company vested with persons holding 76 per cent share and after take over, ownership, control and management vested with F.I. Group, UK. non-compete fees agreement was also dependent upon completion of share purchase agreement. However, payment of non-compete fees to assessee and three other Directors was not dependent on their continuing in employment with IISC after take over. If it were so, Shri Rohitsava Chand who quit employment after takeover would have not received non-compete fees. It is also fact that there were other Directors of company who had not been paid non-compete fees and sellers were under obligation to procure their resignations. Therefore, even though date of agreements, i.e., for sale of shares and non-compete fees was 4-12-1997, yet date when these became effective was completion date of share purchase agreement, i.e., 26-2- 1998. No doubt, there were certain obligations cast on sellers between dates of agreement, i.e., 4-12-1997 to completion date, i.e., 26-2-1998, yet these were to become effective only on date of takeover by FI Group. Therefore, revenue is correct in saying that on date of payment of non- compete fees to assessee, shares of IISC were substantially owned by FI Group, UK and, therefore, employer-employee relationship existed between them. Now, question to be decided by Special Bench is whether non-compete fees received for undertaking restrictive covenants was capital or revenue receipt even though employer and employee relation stood established on completion date. Before, we answer this question, we consider it appropriate to reproduce hereunder restrictive covenants stipulated in non-compete agreement. These are as under: Subject to provisions of this agreement and conditional upon completion and in consideration of premises and covenantee agreeing to pay consideration stated in Article 3 below: Save as otherwise disclosed to Covenantee and accepted by Covenantee in writing from time to time provided however, such acceptance shall not be unreasonably withheld by covenantee, covenantor shall not for period up to 31-5-1999 directly or indirectly, either alone or jointly with or on behalf of any person, firm, company or entity and whether on his own account as principal, partner, shareholder (unless such shareholding is less than 10 per cent of issued share capital of company concerned and is held by way of bona fide investment only) director, employee, consultant or in any other capacity whatsoever: (a) Solicit or interfere with or endeavour in relevant territory to entice away from Covenantee group any person, firm, company or entity who was client or customer of Covenantee Group in relation to relevant business in months (12) prior to completion date or becomes client or customer of Covenantee Group in relation to relevant business prior to 31-5-1999. (b) Be concerned with supply of services of products in relevant territory to any person, firm, company or entity which is or was client or customer of Covenantee Group in relation to relevant business in months (12) prior to completion date or becomes client or customer of Covenantee Group in relation to relevant business prior to 31-5-1999 where such services or products are identical or similar to or in competition with those services or products supplied by Covenantee Group. (c) Solicit or interfere with or endeavour in relevant territory to entice away from Covenantee group any person, firm, company, or entity who is or was supplier of services or goods to Covenantee Group in relation to relevant business in months (12) prior to completion date or becomes supplier of service or goods Covenantee Group in relation to relevant business prior to 31-5-1999. (d) Offer to employ or engage or solicit employment or engagement of any person who, at time of or immediately prior to date of making offer to employ or engage or solicitation was employee of Covenantee Group, provided that nothing contained herein shall prevent Covenator from making offer to employ or engage his personal staff such as secretary, personal assistant or driver. (e) Save as consistent with provisions of any agreement entered into with company, represent himself as being in any way connected with or interested in business of Covenantee Group. In consideration of aforesaid restrictive covenants and undertakings applicable up to 31-5-1999, assessee was to receive from FI Group Plc. following amounts: (a)a sum of GBP 1,69,000 on completion date as specified in agreement. (b)a sum of GBP 1,69,000 on 31-5-1999 and interest accrued thereon. bare reading of restrictive covenant shows that assessee along with other three directors had undertaken for period of 18 months up to 31-5- 1999, directly or indirectly, either alone or jointly with or on behalf of any person, firm, company or entity, to solicit or interfere with or endeavour in relevant territory to entice away from Company any person, firm, company or entity who was client or customer of assessee in respect of business in 12 months prior to completion date, or who becomes client after said period prior to 31-5-1999. assessee was also not to supply of services of products in specified territory to any person which is or was client or customer of company during period of 12 months prior to completion date or becomes client prior to 31-5-1999. assessee had accepted similar restrictions in respect of persons who were supplier of services or goods to IISC for above-mentioned period. assessee was also estopped from employing or engaging or soliciting employment of any person who was employee of IISC except of category of persons mentioned therein. assessee was also restrained from representing himself as being in any way connected with or entrusted with business of covenantee group. Thus, all these stipulations were in nature of restrictive covenants for not doing something to compete with business of assessee and associate companies up to period of 18 months from date of agreement dated 4-12- 1997 to 31-5-1999. 10. Now question is that since assessee had continued with company as Managing Director, whether non-compete fee received by assessee for accepting restrictive covenant would be liable to tax under head 'Salary' as profit in lieu of salary. similar issue came up before various Benches of Tribunal and High Courts. It would be appropriate to refer to some of judgments and decisions of ITAT, Benches cited by parties before Special Bench:- (i) A.S. Wardekar's case (supra) facts of this case were that assessee promoted firm which was subsequently converted into Limited Company. Most of shares were held by assessee and his close relatives. company made public issues. assessee negotiated sale of all shares to UBL. agreement also provided that assessee would continue on Board of Directors as Chairman. UBL i.e., buyer however, thought it expedient to bind assessee by written agreement restraining him from undertaking any business similar to business of company as assessee was carrying on before and could have carried on in future. In consideration of such undertaking, buyer Company agreed to pay assessee consideration of Rs. 175 lakhs. Assessing Officer brought said amount to tax on ground that receipt was of casual and non-recurring nature. On further appeals, Ld. CIT(A) and Tribunal held compensation of Rs. 175 lakhs as not assessable. On appeal to High Court, it was held that compensation of Rs. 175 lakhs received by assessee for entering into restrictive covenant of not entering into competitive business was capital receipt and, therefore, not liable to tax. It is significant to note that compensation received was held to be capital receipt though assessee continued to be chairman of company after take over by UBL. (ii)Saroj Kumar Poddar's case (supra) facts of this case were that assessee had collaborated with Gillette to set up Industrial Unit in India for manufacturing and marketing shaving blades and other shaving products manufactured by Gillette in USA. Indian Company known as Indian Shaving Products Limited (In short 'ISP') was formed in which assessee remained as non-executive chairman. Gillette continued to remain major and dominant shareholder of ISP and had full powers to appoint managerial personnel including M.D. or Chief Executive Officer of ISP. During period from 1982 to 1996, assessee acquired considerable knowledge and expertise in field of manufacture of shaving blades and other products. assessee was approached by some other concerns to assist or associate with them in setting up rival unit in India for manufacturing similar products. assessee brought this fact to knowledge of ISP. Thereupon Gillette prevailed upon assessee not to assist or associate with any new company or person or entrepreneur to produce in India similar product to those made by Gillette. Gillette entered into non-compete agreement with assessee on 18-1-1996, whereby assessee undertook restrictive covenant of not assisting or associating with any other concerns to manufacture similar items. As per agreement, Gillette agreed to pay to assessee sum of Rs. 8 crores as consideration. Assessing Officer brought said receipt to tax as professional receipt. On appeal, Tribunal held that it was capital receipt. On further appeal to High Court, it was held as under (headnote): ' Held, dismissing appeal, that amount under agreement had been paid to assessee to restrain assessee from engaging, whether directly or indirectly in any business which undertook or was engaged in manufacture or marketing or distribution of razor blades, shaving systems or shaving preparations. That amount could not be taxed as revenue receipt, especially when no material had been brought on record by Assessing Officer to justify that agreement dated 15-12-1996, was colourable device.' In this case even though assessee continued to be chairman of ISP, non-compete fees received for undertaking restrictive covenant was held to be capital receipt. (iii)Ram Prashad's case (supra) In this case, issue before Hon'ble Supreme Court was whether certain percentage of gross profit in addition to monthly remuneration received by Managing Director would be treated as salary or business income. While deciding this case, Hon'ble Apex Court also considered issue whether Managing Director is to be treated as servant or agent of Indian Company. Hon'ble Supreme Court held that nature of employment of Managing Director may be determined by articles of association of company and/or agreement, if any, under which contractual relationship between Director and Company has been brought about. In case Director is constituted employee of company, remuneration will be assessable under head 'Salary'. If company itself is carrying on business and Managing Director is employed to manage its affairs in terms of its articles and agreement, and he could be dismissed or his employment can be terminated by company if his working is not found satisfactory, Hon'ble Supreme Court observed that it can hardly be said that he is not servant of company. issue before Hon'ble Supreme Court was whether certain percentage of gross profits received in addition to salary was taxable under head 'Salary'. But percentage of profit received was not for undertaking restrictive covenants. Therefore, this decision is not applicable to present case. (iv)M.S.P. Rajes' case (supra) In this case also, issue before Hon'ble Karnataka High Court was whether Managing Director was employee of Company and remuneration received was taxable under head 'Salary' i.e., same issue as considered by Hon'ble Supreme Court in case of Ram Prashad (supra). This decision is again not applicable to facts of present case. (v)K.R. Kothandaraman's case (supra) In this case also, Managing Director of Company was paid monthly remuneration and certain percentage of profit. Monthly remuneration due to Managing Director was credited to assessee's account. assessee relinquished remuneration credited to his account after end of assessment year. revenue brought remuneration to tax as salary. action of Assessing Officer was upheld up to level of Tribunal on ground that relationship of Managing Director with Company was employee. On further appeal, Hon'ble Madras High Court held that as per terms of agreement and functions assigned to assessee, Managing Director was employee of company and, therefore, remuneration was taxable under head 'Income from salary'. This decision is also not applicable to facts of present case. What is important for deciding issue in this case is whether non-compete fees arose to assessee as result of employer and employee relationship or it was independent of same. (vi)The decision of ITAT, Bombay Bench in case of ITO v. Anil Kumar Rudra [1999] 71 ITD 96. In this case, assessee was employed as Engineer and Geologist w i t h M/s. Vulcan-Laval Ltd.; which manufactured Industrial machinery. He worked with company for 27 years from 1954 to 1981 and when he retired on 22-9-1981, he was head of mining and drilling division. employer- company entered into agreement dated 29-7-1982 i.e., about 10 months after date of retirement, whereby assessee was to receive amount of Rs. 1 lakh in return for covenant not to accept employment with any other employer. Assessing Officer held that amount of Rs. 1 lakh received by assessee was in nature of profits in lieu of salary and, therefore, was assessable to tax under section 17(3)(i) of Act. On appeal, Ld. CIT(A) deleted addition on ground that that there was no employer-employee relationship. On further appeal, Tribunal held that amount received by assessee by virtue of restrictive covenant not to accept employment with any other employer had to be regarded only as capital receipt and, thus, not liable to tax. (vii)The decision of ITAT, Madras Bench in case of K.S.S. Mani v. ITO [1995] 54 ITD 76 In this case, assessee was employee of M/s. Larsen & Toubro Ltd.; and vide agreement dated 28-11-1983 was appointed as whole-time director for five years from 28-12-1983. assessee resigned from director in 1986. agreement was entered into by assessee with employer by which he was t o be paid Rs. 2 lakhs in two instalments for not undertaking for 3 years any activity or employment which could be prejudicial to interests of company. Assessing Officer treated amount as profit in lieu of salary under section 17(3) of Act. On appeal, Ld. CIT(A) confirmed order of Assessing Officer. On further appeal, Tribunal held that compensation received by assessee was nothing but capital receipt for loss of profit-earning source and, therefore, was not assessable under section 17(3) of Act. (viii)The decision of ITAT, Bombay Bench in case of Asstt. CIT v. Parkash G. Heblkar [2002] 83 ITD 495 In this case, assessee was employed since 2-4-1979 with M/s. Tata Unisys Ltd.; in senior position, in company's computer consultancy division. His last assignment was Senior Vice President of new business unit. Since assessee wanted to start his own consultancy business, he resigned from employment with effect from 31-3-1990. assessee and employer- company entered into agreement dated 26-2-1990 under which assessee was restrained from soliciting and/or engaging, in any manner whatsoever, to employer's affiliates or customers and also from soliciting and/or engaging in any manner whatsoever for rendering services to employers, customers for which assessee was to be paid sum of Rs. 5.50 lakhs on or before 30-4-1990. Assessing Officer held amounts as profits in lieu of salary under section 17(3)(i) of Act. However, Tribunal held that compensation received was not profit in lieu of salary and, therefore, same was not taxable under head 'Salary'. compensation being attributable to restrictive covenant was held to be capital receipt, not liable to tax. (ix)The decision of ITAT, Delhi Bench in case of S. Dhanbal v. Asstt. CIT [IT Appeal No. 3748 (Delhi) of 2002] for assessment year 1998-99. Shri S. Dhanbal was also one of four Directors in IISC who transferred shares as per share purchase agreement and continued to work as Director in said Company after its takeover and also received non-compete fees of same amount as received by assessee in present case. assessee claimed same as capital receipt not liable to tax. Assessing Officer brought non-compete fees to tax as income from salary. On appeal, Ld. CIT(A) upheld addition by observing that so-called non-compete agreement was collusive and self-serving document prepared for sole purpose to evade income-tax. On further appeal, Tribunal held that compensation received for undertaking restrictive covenant was capital receipt not liable to tax. When we apply ratio of above-mentioned judgments of various High Courts and decisions of various Benches of Tribunal, we find that consistent view is that compensation received for undertaking restrictive covenant falls in category of capital receipt. case of revenue is that since assessee was Managing Director of Company prior to takeover and continued to be employed in same position after takeover, compensation received by assessee in form of non-compete fees amounts to profit in lieu of salary. This claim of revenue does not appear to b e correct. In cases of Saroj Kumar Poddar (supra) and A.S. Wardekar (supra), both assessees continued to work with employer and in addition r e c e i v e d compensation for undertaking restrictive covenants. Such compensations were held to be capital in nature because receipts were for accepting restrictive covenants for not undertaking business activity or engaging themselves in business to detriment of employer. We also find substantial merit in submissions of ld. counsel that non-compete agreement with four Directors including assessee was independent, distinct and separate agreement from service agreement. It was not dependent on their continuing in employment with assessee. In fact, Sh. Rohitsava Chand quit employment as Director of Company after takeover. Still, he was paid non-compete fees of same amount as paid to other three directors. Likewise, there were other Directors of IISC before takeover. They were also not paid non-compete fees. Therefore, payment of non-compete fees was neither dependent upon these Directors continuing in employment of company after takeover, nor it arose/sprung from their Employer-Employee relationship. We are, therefore, of opinion that payment of compensation cannot be regarded as profits in lieu of salary. same cannot be brought to tax under head 'Income from salary' or profits in lieu of salary. assessee, by accepting terms and conditions of non- compete agreement, has restrained himself from setting up any business, joining employment; becoming Director of some other concern to compete with business of assessee. Such restrictions accepted by assessee adversely affected income-earning potential by exploiting his entrepreneur skill, knowledge, experience etc. Therefore, non-compete fees is in nature of capital receipt. 11. We also do not find any merit in submissions of revenue that since business carried on by IISC belonged to company, assessee and other directors could not compete with said business having accepted t h e employment of assessee. It is no doubt true that under law, company is legal entity separate and distinct from its directors. It is also fact that business of company is being run through persons who own, man, control and manage business of company. success and failure of company depends on quality, capability and skills of persons who manage, control and run company. For example, business carried on by Reliance Industries is of Company. But success of Reliance Industries is synonymous with late Sh. Dhirubhai Ambani, founder, promoter and shareholder of company and his progeny. Such persons who manage and run company acquire sufficient skill, experience and knowledge, while carrying on business of company. Such knowledge and skill can be of considerable value in setting up their own business or joining employment of some other concern which could directly compete with business of assessee. Besides, these persons also command considerable confidence of public shareholders, employees. For example, if Mukesh Ambani quits Reliance Industries and decides to set up another company, he can easily do so. There would be plenty of other companies willing to employ him on far more attractive terms than what he might be getting from present organisation. Thus, it is not correct to say that since business belongs to company, why existing employer should enter into non-compete agreement with Director or Managing Director. persons buying company are fully aware of potential of Managing Director and other Directors who can exploit their knowledge, skill and experience to disadvantage of business of assessee. intention behind entering into non-compete agreement is to ward off such competition and prevent harm to business of company after takeover. It is not colourable device to evade tax. 11.1 This issue can be seen from another angle. Earlier, assessee was not only Managing Director, but was also founder, promoter and major shareholder of company. same gave feeling of belongingness, partnership in addition to his being Managing Director. But after its takeover by F.I. Group, he ceased to be shareholder of company. His relationship with company, after takeover, is only of Managing Director i.e., Employee. ownership and management vests with F.I. Group. Thus, feeling of belongingness to company would not exist and loyality to organisation would be no more than employee. If assessee gets better terms and conditions from some other company, he may like to quit company. It is precisely for these reasons that company, after its takeover, offered attractive/better terms and conditions for continuing in employment. Since scope of new services agreement is different from agreement for non-compete fees, all payments received under new services agreement would be taxable under head 'Salary'. However, payments received under non-compete agreement being independent in nature for accepting restrictive covenants, would fall in category of capital receipt. 11.2 One may say that case of Reliance Industries is exception to Rule. Let us see facts of present case. In this case also, face value of shares was Rs. 10 per share. shares were quoted in market and average quoted price during 26 weeks was at Rs. 45 per share. Shares have been sold at rate of Rs. 100.90 per share. This only shows that company, before its takeover, was doing very well. Therefore, what has been stated about Reliance Industries would equally hold good to this case, with difference of degree. Therefore, purpose of entering into non-compete difference of degree. Therefore, purpose of entering into non-compete agreement is to restrain such person from undertaking such business or engaging themselves in activities which are detrimental to business of employer-company. Therefore, entering into non-compete agreement for restrictive covenant cannot be considered and treated as part of rendering services to employer while being in employment which would bring such compensation in nature and ambit of profits in lieu of salary. This has been consistent view of various Benches of Tribunal duly supported by various judgments of Supreme Court and of High Courts referred to above. Thus, we are of considered opinion that non-compete fees is not taxable under head 'Salary' either under section 17(3)(i)/17(2)(v). It is pertinent to mention that clause (iii) of sub-section (3) of section 17 has been inserted by Finance Act, 2001 with effect from 1-4-2002, under which, any amount due to or received, whether in lump sum or otherwise by assessee from any person before his joining any employment with that person, or after cessation of his employment with that person, has been included in nature of profits in lieu of salary. But this amendment has been made applicable with effect from 1-4-2001 and, therefore, non-compete fee cannot be brought to tax under amended section also. 12. Now next issue that requires to be decided by this Bench is whether non-compete fees can be brought to tax under section 28(ii) of Act. In present case, assessee was himself not carrying on any business. amount received by way of non-compete fees did not arise to assessee in course of business carried on by assessee. case of revenue is that non-compete fees is covered under sub-clause (a) of clause (ii) of section 28. However, said clause deems compensation which is received by any person managing wholly or substantially affairs of Indian Company at time of termination of his management or on modification of terms and conditions relating thereto as income liable to tax under head 'Profits and gains from business or profession'. It is fact that apart from four directors, namely, assessee, Sh. Rohitsava Chand, Sh. S. Dhanbal and Sh. Mohit Goyal had to resign. assessee continued to be managing director even after takeover. This means that there is no termination of powers of management of assessee. payment of non-compete fee is not in any way, directly or indirectly linked to termination of management. Therefore, non-compete fee is not covered under section 28(ii). following decision of ITAT support this view: (a)The decision of ITAT, Amritsar Bench in case of T.S. Manocha (supra). In this case, company had bottling plant for filling aerated water and it was franchisee of company 'H'. assessee was managing director of company 'J' along with its right and goodwill was sold to 'H' in terms of two agreements dated 6-8-1998 and 17-12-1998 entered into between 'J' & 'H'. One of conditions for sale was that Directors of 'J' would not to indulge in any business which was, in any way, in competition with business of 'H' for period of five years. assessee entered into agreement dated 25-2-1999 with 'H' for undertaking restrictive covenant not to indulge in any business which was, in any way, in competition with business 'H'. In return, assessee received compensation of Rs. 1 crore as non-compete fees from company 'H' and claimed it to be capital receipt. Assessing Officer after taking into account three agreements, held that amount paid by way of non-compete fees was in fact, sale consideration and was paid in guise to reduce profits of company 'J'. Therefore, Assessing Officer brought to tax said amount under section 28(ii)(a) of Act. Ld. CIT(A) confirmed order of Assessing Officer. On further appeal, Tribunal held that non- compete fee was not covered under section 28(ii)(a) and amount was not paid for terminating terms and conditions of service. It was held that compensation of Rs. 1 crore paid to assessee in lieu of restrictive covenant was capital receipt, not liable to tax. (b)The decision of ITAT Delhi Bench (TM) in case of Shiv Raj Gupta v. Asstt. CIT [IT Appeal No. 4898 (Delhi) of 1998, dated 30-5-2001]. In this case, assessee was Chairman-cum-MD of Public Limited Company engaged in business of manufacture of Indian made Foreign Liquor, where assessee and his family members were holding 57.29 per cent of share capital. assessee entered into agreement with SWC for selling his entire holding. Another memorandum of understanding was executed between assessee and SWC which provided that assessee will execute restrictive covenant in favour of SWC for not carrying on directly or indirectly any manufacturing or marketing activity relating to IMFL for period of 10 years from date of agreement. assessee received non-compete fee of Rs. 6.6 crores from SWC which was claimed to capital receipt. Assessing Officer brought to same to tax under section 28(ii) of Act. On appeal, Ld. CIT(A) upheld order. However, on further appeal, Tribunal by majority decision held that amount of Rs. 6.6 crores receives under restrictive covenant was capital receipt not liable to tax. (c)The decision of ITAT, Chennai Bench, in case of R.K. Swamy (supra). In this case, assessee had claimed non-compete fees received in pursuance of agreement entered into by him with R.K.S./BBDO as capital receipt and, hence not taxable. Assessing Officer treated amount as casual and non-recurring income. On appeal, Ld. CIT(A) held that non- compete fee was taxable under section 28(ii) (a) of Act. On further appeal, t h e Tribunal held that section 28(ii)(a) covers payments for termination of managing agency or modification of terms or modes of appointment of employees or persons managing whole or substantially whole of affairs of Indian company. It was held that once person has already resigned from managing directorship, agreement could not be termed as modification of terms of appointment. It was held that amount received by assessee was for restrictive covenant undertaken for period of 5 years and same was not liable to tax under section 28(ii)(a) of Act. (d)The Ld. DR has relied on judgment of Hon'ble Delhi High Court in case of Nar Hari Dalmia (supra). In this case, assessee was part-time director of company and was paid foreign tour expenses of Rs. 29,793 for self and his wife. This amount was not allowed as expenditure incurred by company. question was whether said amount constituted income of director under section 2(6C)(iii) of old Act. It was held that amount was received by assessee in exercise of occupation and, therefore, was assessable in hands of assessee. This decision would not be applicable to facts of present case as assessee was not carrying on any profession and, therefore, receipt would not fall under section 28(iv) of Act. 12.1 Ld. DR has also argued that non-compete fees would be taxable under section 28(iv) of Act because expression 'Profession' is again of widest amplitude. He has relied on following judgments: (i) Dr. K. George Thomas v. CIT [1985] 156 ITR 412 (SC). In this case, issue before Hon'ble Supreme Court was whether donations received by assessee for propagating religious faith and in business of publishing newspaper, would be taxable as receipts arising from carrying on of vocation. assessee was lecturer in College in Kerala till 1953, had obtained Ph. D degree in USA during 1953 to 1957. He associated himself with Indian Gospel Mission in USA, which collected money through t h e Indian Christian Crusade. On returning to India, appellant was propagating ideals of Indian Christian Crusade and was engaged in movement for spread of religion and for fighting forces of atheism. Later, in 1959, he started publishing daily newspaper. During period relating to assessment years 1960-61 and 1961-62, assessee received donations amounting to Rs. 2,90,220 and Rs. 3,63,750 respectively through Indian Christian Crusade from his friends in USA. On these facts, Tribunal held that receipts were casual and non-recurring receipts and did not arise in course of exercise of any vocation. On reference, High Court held that receipt arise from exercise of occupation by assessee and were, therefore not casual and non-recurring receipts. On further appeal, Hon'ble Supreme Court affirmed view of High Court and held as under (headnote): ' Held, affirming decision of High Court, that appellant carried on vocation of practising against atheism and in course of such vocation and for purpose of same, he received amounts in question as donations for furtherance of objects of his vocation. There was link between activities of appellant and payments received by him and link was close enough. receipts arose to appellant from carrying on of his vocation and they were not casual and non-recurring receipts and were taxable.' (ii)CIT v. G.R. Karthikeyan [1993] 201 ITR 866 (SC). In this case, assessee was individual, who had income from salary and business. assessee received prize in car rally for testing skills and endurance. question before Hon'ble Supreme Court was whether sum of Rs. 22,000 was taxable in hands of assessee. Tribunal held that receipt was casual in nature and not income and, therefore, same was not taxable. On further appeal, High Court upheld order of ITAT. However, when matter was carried in appeal before Hon'ble Supreme Court, decision of High Court was reversed and it was observed that definition of income in section 2(24) of Act was of wider amplitude. Though receipt by assessee was casual in nature, yet it was held that same was income as defined in section 2(24) of Act. From above, it is clear that issue raised before Hon'ble Supreme Court was different. nature of receipt was not for undertaking any restrictive covenant as in present case. Therefore, Hon'ble Supreme Court has no occasion to consider case whether same was capital or revenue receipt. On contrary, various judgments cited supra are directly on issue involved in present case where it has been held that compensation received for undertaking restrictive covenants are capital in nature. (iii)P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC). In this case, assessee after his retirement from Government service w s spending his time in studying and teaching Vedanta Philosophy and received amounts from time to time on account of same. Hon'ble Supreme Court observed that assessee was carrying on vocation and payments received were in course of carrying on of such vocation. Therefore, it was held to be in nature of income. As mentioned above, assessee was not carrying on any vocation or profession, therefore, impugned receipts cannot be considered as revenue in nature. As already mentioned above, non-compete fees did not arise to assessee from carrying on of business or profession. We have already held that assessee was not carrying on any business or profession, therefore, impugned receipt would neither be taxable under section 28(ii) or 28(iv) of Act. None of judgments cited by Ld. DR is applicable to facts of present case because in those cases, assessees were carrying on either business or profession. Thus, we hold accordingly. 13. Now next aspect that requires to be considered is that once it is held that non-compete fees received by assessee is capital receipt, whether same is liable to tax as capital gains. Section 45 of Act deals with income falling in nature of capital gains. same can be brought to tax only if there is transfer of capital asset. In present case, assessee has not transferred any capital asset. On contrary, assessee has undertaken restrictive covenants for not doing something. Therefore, same does not amount to transfer of capital asset. Thus, non-compete fees is not liable to capital gains. 14. last aspect of case is whether impugned receipt can be brought to tax under residuary head i.e., 'Income from other sources'. authorities below have not brought receipt to tax under head 'Income from other sources'. Even in written submissions filed before Bench, no such plea has been taken. Even otherwise, we have already explained nature and character of non-compete fee. same is for undertaking restrictive covenants of not undertaking or engaging himself in business of assessee or joining employment with any other concern. Therefore, non- compete fees is capital receipt not liable to tax. 15. There are some other judgments referred to by Ld. DR decided on facts of individual cases. There is no mention in written submissions filed as to how those judgments are applicable to facts of present case. We have referred to various judgments cited by both parties relevant to issue as discussed above. Therefore, we do not consider it necessary to refer to such judgments which are not applicable to issue involved. 16. Thus, from detailed discussions in preceding paragraphs, it is clear that nature and character of non-compete fee received by assessee was for undertaking restrictive covenant to compete with business of assessee directly or indirectly. These are not at all linked with services rendered in past or to be rendered in future. Such payments did not spring from relationship of employer and employee. nature and scope of activities spelt out in new services agreement was different and independent from non-compete agreement. Therefore, payment cannot be linked directly or indirectly with employment of assessee as Managing Director of Company. Therefore, non-compete fees is not taxable under head 'Income from salary'. non-compete fee is also not taxable under section 28(ii) and 28(iv) of Act because assessee was not carrying on any business or profession. Such receipt is also not liable to tax under head 'Capital gains' or 'Income from other sources'. non-compete fees for undertaking restrictive covenants was capital in nature and hence, not liable to tax under any head of income mentioned under section 14 of Act. receipt of non-compete fees under agreement has been specifically made taxable under clause (va) of section 28 inserted by Finance Act, 2002 with effect from 1-4-2003. Legislature, in their wisdom, has thought of making such amendment applicable from assessment year 2002-03. Therefore, same is not applicable to assessment year under consideration. 17. Thus, having regard to these facts and circumstances of case and legal position discussed above, we hold that non-compete fees received b y assessee from F.I. Plc., UK being in nature of capital receipt not liable to tax. Accordingly, question referred to Special Bench is decided in favour of assessee and against revenue after setting aside orders of authorities below. These grounds of appeal are allowed. 18. As regards appeal referred to Special Bench, there are only two more grounds, i.e., 1 and 1.1 which relate to upholding action of Assessing Officer for reopening assessment under section 147. At time o f hearing of appeal, Ld. Counsel for assessee, Sh. Ajay Vohra submitted that these grounds are not pressed. Therefore, these grounds are dismissed as not pressed. 19. In result, appeal filed by assessee is allowed. *** SAURABH SRIVASTAVA v. DEPUTY COMMISSIONER OF INCOME TAX
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