G. Raveendran v. Commissioner of Income-tax
[Citation -2015-LL-0218-8]

Citation 2015-LL-0218-8
Appellant Name G. Raveendran
Respondent Name Commissioner of Income-tax
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 18/02/2015
Judgment View Judgment
Keyword Tags termination of his employment • substantial question of law • recognised provident fund • private limited company • joint venture agreement • employee and employer • trading transaction • cost of acquisition • source of income • insurance policy • lump sum payment • revenue receipt • foreign company • capital receipt • indian currency • indian company • share capital • capital gain • sales agent • brand name • take over • know-how
Bot Summary: Share to the Indian company resulting in formation of CTIL, held that the business of RSM was taken over by CTIL and the new company came into operation from October 1, 1993. The assessee converted his business into a private limited company and the same private limited company has entered into a joint venture project. To look after the business and overall interest in the joint venture company the foreign company has to nominate somebody. The original authority, on considering the joint venture company and also the non-competition agreement has held in paragraph 13 of the order that there was a specific clause barring the assessee-appellant from doing any business akin to the line of business of the joint venture company, including accepting any job in that line. There is no material anywhere before the Assessing Officer or the Commissioner of Income-tax or the Tribunal to say that to look after the business and overall interests of the joint venture company, the foreign company had nominated somebody, much less the assessee and they paid the consideration to take care of the entire joint venture company on such payment. The wordings of the non-competition agreement is clear and proceeds that taking note of the vast experience of the assessee gained over 20 years, and further the assessee being capable of design, manufacture and testing of industrial drives, in which the joint venture company is already there in the market and that the appellant-assessee has set up a company called RSM Electronics, which enjoys good reputation and market recognition and in order to ensure that the appellant-assessee ceases and desists from carrying on the business in industrial drives in the territory so that it could be carried on exclusively by CTIL, the foreign company thought it fit to make a lump sum payment as a component of the non-competition agreement. The fact remains that the take over of the company in the said case took effect from April 1, 1993, based on an agreement dated October 15, 1993, and the assessee in that case was taken on employment on October 8, 1993, and, thereafter, in the course of employment, he also received a non-compete payment on October 15, 1993, from the said company in which he was in employment.


JUDGMENT judgment of court was delivered by R. Sudhakar J.-Aggrieved by order of Tribunal in dismissing appeal filed by him, appellant is before this court by filing present appeal. This court, vide order dated March 3, 2005, admitted appeal on following substantial question of law: "Whether Income-tax Appellate Tribunal is correct in law in holding that amount of 18,000 Pound Sterling (equivalent to Rs. 9,83,385) received by appellant under non-competition agreement dated December 14, 1995, should be taxed as salary income of appellant?" brief facts, which are relevant for considering present case, are set out as hereunder: appellant is engineer, who is experienced in field of industrial drives. appellant is B. E. (Electrical and Electronics) Engineer from Annamalai University. He qualified in M. E. in Control Systems Engineering from PSG College of Technology, Coimbatore, in year 1973. In 1974, it is stated that, he joined as Assistant Development Engineer with research and development Division of M/s. Jyoti Ltd., Baroda. Between 1975 to 1982 he discharged duties as manager (designs) with M/s. Usha Rectifier Corporation, Faridabad. Between 1982 and 1985, appellant functioned as senior manager with DEBIKAY Electronics, Calcutta. Between 1986 and 1989, appellant was working as senior manager with A. B. Controls Ltd., Sahibabad (U. P.). appellant had also underwent following specialised trainings: Training on drives for rolling mills at works of 1984 : CGEE ALSTOM, France. 1985 : Training on DC/AC drives in Allen Bradley, USA 1986 : Training on total quality system in Allen Bradley, UK Training on high power UPS (uninterruptible power 1987 : supply) systems in Exide Electronics, USA 1988 : Training on AC drives in Stromberg, Finland It is further case of appellant that he has rich experience in design, development and commissioning of industrial drives, power electronic equipment, such as high power battery chargers and UPS systems. He has proficiency in design, development and commissioning of drives in core industries such as paper mills, rolling mills, sugar plants, cement plants, etc. It is further stand of appellant that he also acquired proficiency in high power charging equipment to be used by Baba Atomic Research Centre, National Thermal Power Corporation, etc. Similarly, he also gained expertise and proficiency in commissioning of high power UPS systems in Customs Dept., Texas Instruments, Dalmia Cements, etc. proficiency acquired by appellant in industrial drives is put to use in industries where large motors are used for production purposes. Since power of these motors vary between few kilowatts to 100's of kilowatts, for purpose of controlling those motors, appellant-assessee, using his expertise, designed and implemented power electronic controls to drive motors. These power electronic converters (for short "PEC") are called industrial drives. industrial drive system, according to appellant, is specialised equipment involving power system, electronic control system and automation system using programmable logic controller (for short "PLC") and application-oriented software. industrial drive system enhances production efficiency and also results in energy saving. industrial drives, otherwise known as power electronic converters, are widely used in all varieties of industries to provide for optimum use of power and efficiency in production. Based on his experience, appellant, along with another colleague, started private limited company in year 1990 by name RSM Electronics Pvt. Ltd. (for short "RSM") for manufacture of industrial drives, battery charges and UPS systems, with reasonable success. Coming to know of appellant's capacity in these fields, UK based company, viz., M/s. Control Techniques PLC (for short "CT-PLC") joined hands with appellant in year 1992. It is to be mentioned here that Control Techniques, PLC, UK, is world leader in Europe in field of industrial drives. Indian company, RSM Electronics Pvt. Ltd., was engaged as sales agent for selling of products of CT-PLC by way of marketing and offering application/commissioning together with after sales service support to clients. Additionally, RSM also bought drives from CT- PLC for providing complete solution to their customers. In meanwhile, in September, 1993, CT-PLC and RSM realised their joint potential in field of industrial drives and as result, joint venture company was formed in September, 1993, by name Control Techniques India Pvt. Ltd. (for short "CTIL") with 51 per cent. share held by CT-PLC and 49 per cent. share held by RSM. Since expertise of technical personnel of RSM would be key to success of this joint venture, directors of RSM were asked to assume executive responsibility in joint venture company and, accordingly, employment contract was signed by appellant and he became employee of CTIL on September 30, 1993. salary of appellant was paid by CTIL, which is duly constituted and registered company under laws of this country. said company was filing returns of income for all assessment years, including assessment year in question, viz., 1996-97. percentage of shareholding continued in manner stated above up to September 26, 1995. On September 26, 1995, Government of India, Ministry of Industries, Department of Industrial Policy and Promotion, Secretariat for Industrial Approvals, Foreign Collaboration-II Section, granted approval for changing shareholding pattern, which is quoted hereunder: M/s. Control Name and address of Techiniques Plc St. Giles, 1 : foreign collaborator Newtown Powys SY 16 3AJ United Kingdom Item(s) of (1) Static Convertors 2 manufacture/activity covered by : (2) Boards panels foreign collaborator Developed Plot-117b 3 Proposed location : Electronic Estate District Madras State Tamil Nadu Foreign equity participation: Increase from 51 per cent. (Rs. 40.80 lakhs) to 85.00 per cent. (eighty-five per cent.) amounting to Rs. 4 425.00 lakhs (four hundred twenty-five lakhs) in revised paid up capital of Rs. 500 lakhs, in your undertaking. After obtaining approval as above, since stakes of UK company, viz., CT-PLC, was increased from 51 per cent. to 85 per cent., correspondingly, shareholding of RSM came to be reduced from 49 per cent. to 15 per cent. In order to ensure that there is no competition of any kind by appellant consequent to reduction of share capital in joint venture Indian company, viz., CTIL, CT-PLC entered into non-competition agreement with appellant on December 14, 1995. That agreement is now bone of contention between appellant-assessee and respondent-Income-tax Department. For better understanding of issue involved in present case, we are inclined to set out non-competition agreement as such and same is extracted hereinbelow: "Non-competition agreement This agreement made on this 14th day of December, 1995, between G. Raveendran residing at B-6, Rams Maruti Flats, 111, Muthallaman Koil Street, West Mambalam, Madras 600 033, hereinafter called'Raveendran' of one part and Control Techniques plc, company incorporated in UK and having its principal place of business at Newtown, Powys, Wales, United Kingdom, hereinafter called'CT' which expression shall unless repugnant to context of meaning whereof include its successors and assigns of second party. Whereas A. Raveendran has been engaged in area of industrial electronic drive systems for over 20 years in various capacities and has acquired considerable expertise in design, manufacture, testing and commissioning of industrial drive systems and has thorough application know-how of these systems for industrial use for efficient production and energy saving in industry. B. Raveendran, by virtue of said experience gained over last 20 years, set up company RSM Electronics Pvt Ltd. ('RSM') in 1990 for design, manufacture and testing of industrial drive systems and market products in India. RSM has considerable orders from reputed companies and were in direct competition with CT's competitors worldwide. C. RSM Electronics entered into joint venture agreement dated 1st day of October, 1993, with'CT' to form Control Techniques India Pvt. Ltd., (the'CTI') to take over business of'RSM' and run as going concern in India (the territory) and subject to conditions therein specified, to take over from RSM business of industrial drive systems on terms and conditions therein. D. By deed of assignment, Raveendran has irrevocably agreed to cease and desist to engage, directly or indirectly, in industrial drives business save and except Raveendran's participation as shareholder and operating executive of the'CTI' under mutually agreed terms. E. Raveendran is desirous of giving undertaking not to compete with CT. It is expedient to record terms and conditions relating to aforesaid matters in writing: Now, this agreement witnesses and parties hereto mutually agree and state as follows: 1. CT recognises that Raveendran possesses necessary expertise and has with considerable efforts, set up industrial drives system business of RSM and has enjoyed good reputation and sufficient market recognition in territory which has constituted substantial source of income for Raveendran and that Raveendran has spent and incurred substantial expenditure in establishing industrial drives business. 2. Raveendran agrees to give up, part with and cease and desist from carrying on industrial drives business anywhere in territory, and further agrees that such business shall be carried on only by "CTI" wherein Raveendran will be shareholder and partner. 3. Raveendran shall not directly or indirectly own, manage, operate, join, 3. Raveendran shall not directly or indirectly own, manage, operate, join, have interest in, control or participate in ownership, management, operation or control of, or be otherwise connected in any manner with any body corporate, partnership, proprietorship, trust, association or other business entity in India which directly or indirectly engages as commercial activity anywhere in territory in industrial drives business either in its production, distribution, marketing, sale or servicing-whether by using brand name RSM or any other brand or otherwise howsoever, nor shall Raveendran directly or indirectly compete in industrial drives business with CT or otherwise engage itself in industrial drives business for period of 5 years commencing from date of this agreement. 4. In consideration of premises, CT agrees to pay Raveendran amount of GBP 18,000 (Pound Sterling eighteen thousand only) on signing agreement. 5. Notwithstanding anything contained in clause 2 and 3 above Raveendran may carry on industrial drives business solely for 'CTI' and only to limited extent of work entrusted by'CTI'. 6. agreement will be valid for period of 5 years from date of Agreement. 7. Any dispute or difference between parties arising from or relating to anything contained in agreement including termination shall be settled by arbitration by two arbitrators to be nominated, one by each party and Indian Arbitration Act shall apply. In witness whereof parties hereto have caused this agreement to be executed day and year first herein above written." non-competition agreement speaks for itself. It provides for consideration of 18,000 Pound Sterling in recognition of appellant's expertise in industrial drives system and taking note of business of RSM and good reputation and market that it enjoys, which was main source of income for appellant. In turn, appellant agreed to give up, part with, cease and desist from carrying on business of industrial drives anywhere in territory, subject to certain conditions, on receipt of consideration of 18,000 Pound Sterling. Accordingly, agreement dated December 14, 1995, was entered into between appellant-assessee and CT-PLC and, accordingly, payment was made. appellant-assessee, in his return of income, showed this amount as capital receipt. Note 2 of return filed for assessment year 1996-97, financial year ending 1996, is relevant for present case and same is extracted hereinbelow, for better clarity: "2. I have received sum of Rs. 9,83,385 from M/s. Control Techniques, England in accordance with non-competition agreement entered into between assessee and said company. This amount is treated as capital receipt in view of legal opinion from M/s. Subaraiya Iyer Padmanabhan and Ramamani, Advocates. This is not received as cash but equivalent shares will be issued by companies." In statement of income, besides this amount received from CT-PLC, appellant-assessee has also shown salary that he received from joint venture Indian company, viz., CTIL. According to assessee-appellant, this amount is capital receipt and, hence, exempt from tax and also entitled to immunity from capital gains as cost of acquisition is "nil". Assessing Officer took view that non-competition agreement, which is fall out of formation of joint venture company between CT-PLC and RSM with 51 per cent. share to UK company and 49 per cent. share to Indian company resulting in formation of CTIL, held that business of RSM was taken over by CTIL and new company came into operation from October 1, 1993. In paragraph 12 of order, Assessing Officer analyses effect of such joint venture on assessee. On first premise, he holds that consequent to merger of CT-PLC with Indian company, viz., RSM, assessee and two other directors of RSM became directors of CTIL. assessee continued in post and received salary, which income was shown as salary for assessment year in question, viz., 1996-97. In paragraph 13 of order, Assessing Officer holds that appellant-assessee being employee of CTIL from October 1, 1993, he was prevented from doing anything in line of business against interests of CTIL, including accepting any job on that line. Therefore, assessee became full time director of CTIL. Assessing Officer further went on to observe that company, viz., RSM was taken over by CTIL as per agreement dated September 17, 1993, and all directors of RSM were taken as directors of CTIL. Assessing Officer, therefore, went on to hold that on December 14, 1995, i.e., date of noncompetition agreement, neither assessee-appellant nor his old company, viz., RSM, was in position to compete with CTIL when assessee-appellant undertook not to work against interest of business of Indian company, viz., CTIL. For better clarity, finding of Assessing Officer is set out as hereunder: "As mentioned above, assessee became employee of company CTI, as early as on October 1, 1993. As per employment contract (copy filed), assessee was prevented from doing anything in line of business against interests of CTI, including accepting any job in that line. So as on October 1, 1993, assessee had become full time director of CTI, dedicating all his expertise for future of CTI. Secondly, company RSM was taken over by CTI as per agreement dated September 17, 1993, and all directors of RSM were taken as directors of CTI. IT record shows that as on December 14, 1995, assessee was continuing as director of CTI on salary. In view of above, as on December 14, 1995, neither assessee nor his old company RSM was in position to compete with CTI and there is, therefore, no sanctity for non-competition agreement in this case. In addition to this, it has to be seen that when assessee was taken over as director he had agreed not to work against business interests of CTI, and very appointment was reward for his non-competition." Assessing Officer, further went on to hold that there was no justification for assessee-appellant for entering into non-competition agreement and for better clarity, reasons recorded by Assessing Officer in paragraphs 14 and 15 of assessment order are extracted hereinbelow: "14. Case law: In this connection, assessee has presented two case law for my consideration, but I find that both case law are not applicable to case of assessee. In CIT v. Saraswati Publicities [1981] 132 ITR 207 (Mad), agreement was between two different concerns working in same field to effect that they will mutually refrain from overlapping in business in respect of specified clients and specified area. In CIT v. Late G. D. Naidu [1987] 165 ITR 63 (Mad), payment was between partners of firm in process of new partners joining and old partners quitting so that business is ultimately handed over to new partners. On one hand, these case law have been delivered much before relevant provisions of capital gains have been successively amended. Secondly, facts of these cases have no similarity with case of assessee, except that assessee has also made agreement in style of non-competition agreement. Where there is no scope for competition, there is no place for non-competition agreement. 15. No competition RSM was in company CTI with 49 per cent. share. assessee was in company as full time director on decent salary and perks. There is nothing on record to show that either RSM or assessee had done anything against interests of CTI in all 27 months of their co- existence with CTI from October 1, 1993, to December 14, 1995. There is, therefore, no question of any non-competition agreement here." Assessing Officer has further given finding that sum of Rs. 9,83,385 is not outcome of non-competition agreement as there was no competition as on December 14, 1995. According to authority, there was no competition on right to carry on business, as assessee was not doing any competing independent business on that date. According to officer, competition ended 27 months earlier when RSM merged with CT-PLC to form CTIL and assessee was made director. Assessing Officer further held that agreement shows rich goodwill that assessee had in field of business which was transferred. It is further observed by Assessing Officer that in sense, entire payment is attributable to goodwill of assessee and that goodwill is self-generated and as cost is "nil" provisions of section 55(2)(a)(ii) of Act will get attracted and as result, entire receipt is taxable as capital gains. Assessing Officer, further held that payment in this case was received from employer on premise that company, CT-PLC and CTIL are one and same stating that UK company, viz., CT-PLC owns 51 per cent. in Indian company. Assessing Officer proceeds to hold that payment is directly related to service assessee was rendering as any payment, whether it be salary, remuneration, commission, etc., forming part of salary as per section 17(1) of Income-tax Act, even if it is casual or non-recurring payment, section 10(3) does not exclude amount from purview of taxation, if said payment is in addition to remuneration. Assessing Officer, therefore, held that abovestated receipt is assessable under head "Salary". In alternative, Assessing Officer concluded as under: "18. Alternatives Whether it is assessed as'capital gain' or'salary', entire receipt is taxable. For sake of clarity, I am bringing sum of Rs. 9,83,385 to assessment under head'Salary' as payment is one between employer and employee and also since it is essentially connected with his past, present and future services. But it is made known that this does not discount scope of assessing it as'capital gains' on goodwill, which will remain as equal alternative. It is made clear that receipt is assessable whether it is treated as capital or revenue." In end, Assessing Officer held that amount received as noncompetition fee is salary and in alternative it should be treated as goodwill and capital gains tax was sought to be levied. However, in computation of assessment, said amount was treated as salary. Aggrieved by above order, assessee preferred appeal to Commissioner of Income-tax (Appeals). On consideration of matter, Commissioner of Income-tax (Appeals) held as follows: "3... it would not make any difference, in legal parlance, to treat both as employer, in opinion of Assessing Officer. I agree with stand taken by Assessing Officer in matter. appellant's representatives have sought to build up case to effect that appellant was never employee of CT PLC (UK), therefore, receipt from that company would not constitute salary or addition to salary or payment in lieu of salary but receipt would constitute non-taxable capital receipt paid to appellant in lieu of his foregoing his right to exercise business in industrial drive, etc. I do not agree with this position. appellant's representatives overlooked fact that UK company was closely knit to CTI wherein appellant was employed during relevant previous year, former had substantial interest in latter including influencing policies and decision-making processes of CTI and, therefore, receipt in question earned from CT PLC (UK) is as good as earning from CTI. nomenclature given to receipt, viz., non-competition allowance is only veil blanking identity of payment in lieu of/addition to salary made to appellant and in spirit of hon'ble Supreme Court's decision in case of McDowell and Co., it has to be held that so-called non-competition allowance is only salary/ addition to salary/payment in lieu of salary from CT PLC (UK) which is actually foreign version of Indian employer CTI. Holding so, I affirm assessment of Rs. 9,83,385 as salary." appellant-assessee, aggrieved over finding rendered by Commissioner of Income-tax (Appeals), pursued matter before Tribunal. Tribunal, considering factual matrix and documents placed before it, held as under: "4. Having heard learned representatives on both sides, we also perused material available on record. Admittedly, assessee has received sum of Rs. 18,000 Pound Sterling which is equivalent to Indian currency Rs. 9,83,385 from foreign company Control Techniques PLC. only objection of assessee is that there is no employee and employer relationship to treat payment as salary. According to assessee, it is fee received for non-competition in business. As rightly submitted by learned Departmental representative, if it is non-competition fee, it has to be paid to RSM Electronics Pvt. Ltd., and not to assessee. assessee converted his business into private limited company and same private limited company has entered into joint venture project. Therefore, if at all anything to be paid as non-competition fee, it has to be paid to RSM Electronics Pvt. Ltd. and not to assessee. Furthermore, RSM Electronics Pvt. Ltd. continued to do its business even after formation of joint venture company. assessee himself admits in his letter dated May 16, 1999, addressed to first appellate authority. According to this letter, entire business was not taken over by joint venture company and even on March 31, 1996, RSM Electronics Pvt. Ltd., was in existence and it appears assessee has filed copy of audited accounts to show that RSM Electronics Pvt. Ltd. was in existence. It was case of assessee before first appellate authority that RSM Electronics Pvt. Ltd., was independent company and it was not merged with Control Techniques PLC. If that is factual situation and when RSM Electronics Pvt. Ltd., continued its business even after formation of joint venture, where is necessity to pay any money as non-competition fee? Admittedly, foreign company Control Techniques PLC is having 51 per cent. of shares in newly formed joint venture Indian company. Therefore, to look after business and overall interest in joint venture company foreign company has to nominate somebody. In this case, probably they might have nominated assessee and as consideration for taking care of entire joint venture company, assessee received money. Therefore, it must be construed only as salary assessee received money. Therefore, it must be construed only as salary for taking care of interest of foreign company in newly formed joint venture company. Therefore, it is not correct to say that there is no employer and employee relationship between assessee and foreign company. Therefore, in our view, amount of 18000 Pound Sterling (Rs. 9,83,385 in Indian currency) is taxable as salary." Aggrieved by said order of Tribunal dismissing appeal of assessee, assessee-appellant is before this court by filing present appeal on question of law as admitted above. Learned counsel appearing for appellant-assessee submitted that payment under non-competition agreement dated December 14, 1995, was paid to appellant-assessee by CT-PLC as compensation for restrictive covenant on part of appellant-assessee not to engage in business of industrial drives system anywhere in India for period of five years. That being case, said amount received, partook of character of capital receipt. It is further submission of learned counsel for appellant-assessee that amount towards non-competition agreement was paid by foreign company, viz., CT-PLC, while salary towards employment of appellant-assessee was paid by joint venture Indian company, viz., CTIL. Both transactions being with two different entities, receipt of amount under non-competition agreement from foreign company cannot be construed as salary, when appellant-assessee is not in employment under foreign company, viz., CT-PLC. It is submitted by learned counsel for appellantassessee that section 15 of Act deals with incomes falling under head "Salaries" and section 16 deals with deduction thereof from salaries. Section 15 clearly stipulates what salary means and what incomes should be construed as salary, which have not been construed in proper perspective by authorities below and, therefore, impugned order deserves to be set aside. Per contra, learned standing counsel appearing for respondentRevenue submitted that appellant-assessee having received amounts while under employment with CTIL, said amounts were rightly considered as salary by authorities below as RSM had merged with CT- PLC to form new company CTIL of which appellant-assessee was made director and CT-PLC was holding 51 per cent. of shares in CTIL. Thus, there exists employer-employee relationship and, therefore, any monies received thereof while in employment shall have to be construed as part of salary. Therefore, it is submitted that no interference is called for with order passed by authorities below. Heard Mr. Sridhar, learned counsel appearing for appellant-assessee and Mr. Ravikumar, learned standing counsel appearing for respondent- Revenue and perused materials available on record as also decisions relied on by learned counsel for parties and relevant sections under Income-tax Act on which reliance was placed by parties. Before proceeding to analyse matter in-depth, it is better to have look at legal position in regard to receipt of amount, whether it be treated as capital receipt or revenue receipt and what is yardstick to be applied in cases of such receipt. In Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC); AIR 1965 SC 65, Supreme Court had occasion to consider payment of non- competition fee. In said case, Supreme Court, considering various case laws on subject, held as under (page 266): "This case raises once again question whether compensation received by agent for premature determination of contract of agency is capital or revenue receipt. question is not capable of solution by application of any single test: its solution must depend on correct appraisal in their true perspective of all relevant facts. As observed in CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC) by Venkatarama Aiyar J.: 'The question whether receipt is capital or income has frequently come up for determination before courts. Various rules have been enunciated as furnishing key to solution of question, but as often observed by highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in determination of question, which 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: Vide, Van Den Berghs, Ltd. v. Clark (H. M. Inspector of Taxes) [1935] 3 ITR (E.C) 17 (HL)'." In case of Oberoi Hotel P. Ltd. v. CIT [1999] 236 ITR 903 (SC), Supreme Court laid down parameters as to heads under which amounts received in particular transaction should fall into. relevant portion of judgment of Supreme Court is extracted hereunder for better clarity (page 908): "It may be broadly stated that what is received for loss of capital is capital receipt: what is received as profit in trading transaction is taxable income. But difficulty arises in ascertaining whether what is received in given case is compensation for loss of source of income, or profit in trading transaction. Where on consideration of circumstances, payment is made to compensate person for cancellation of contract which does not affect trading structure of his business, nor deprive him of what in substance is his source of income, termination of contract being normal incident of business, and such cancellation leaves him free to carry on his trade (freed from contract terminated) receipt is revenue: Where by cancellation of agency trading structure of assessee is impaired, or such cancellation results in loss of what may be regarded as source of assessee's income, payment made to compensate for cancellation of agency agreement is normally capital receipt." In recent decision in Guffic Chem. P. Ltd. v. CIT [2011] 332 ITR 602 (SC), Supreme Court has distinguished difference between "capital receipt" and "revenue receipt" and circumstances in which receipt would fall under particular category. For better appreciation of this case, it is useful to extract relevant portion of said judgment, as hereunder (page 606): "The position in law is clear and well settled. There is dichotomy between receipt of compensation by assessee for loss of agency and receipt of compensation attributable to negative/restrictive covenant. compensation received for loss of agency is revenue receipt whereas compensation attributable to negative/ restrictive covenant is capital receipt... One more aspect needs to be highlighted. Payment received as non- competition fee under negative covenant was always treated as capital receipt till assessment year 2003-04. It is only vide Finance Act, 2002, with effect from April 1, 2003, that said capital receipt is now made taxable (see section 28(va)). Finance Act, 2002, itself indicates that during relevant assessment year compensation received by assessee under non- competition agreement was capital receipt, not taxable under 1961 Act. It became taxable only with effect from April 1, 2003. It is well settled that liability cannot be created retrospectively." It is, therefore, clear from above decisions of Supreme Court that non-competition fee was capital receipt till March 31, 2003, and vide Finance Act, 2002, with effect from April 1, 2003, it became taxable. Keeping above principles laid down by Supreme Court in mind in relation to treating particular receipt as capital or revenue, as also amendment made to Finance Act, 2002, let us now analyse whether amount received by assessee-appellant from CT-PLC would fall under head "Capital receipt", as claimed by assessee-appellant. non-competition agreement and payment made consequent to non-competition agreement dated December 14, 1995, according to appellant-assessee, is capital receipt and it is not paid by employer and that no capital gains would arise as there was no cost incurred. This argument is repelled by Department stating that person, who made payment, viz., CT-PLC, holds 51 per cent. share in CTIL and assessee-appellant also, through joint venture Indian company, viz., CTIL, holds 49 per cent. as director of company and, therefore, amount paid pursuant to non-competition agreement should be considered as salary. To come to conclusion as to nature of receipt of amount, at first instance, it is necessary to look into order of Assessing Officer as to whether reasonings given by Assessing Officer to support his findings, that what was paid and received by appellant-assessee is salary, is correct. findings in paragraph11 of original authority's order "this business of RSM was taken over by CTIL and new company came into operation from October 1, 1993", in relation to non-competition agreement is stated to be erroneous, as joint venture company, CTIL came into existence in September, 1993, with effect from October 1, 1993. company, RSM Electronics, continued its other operations, viz., battery charges, UPS systems, etc. It is only in relation to power electronic converters or industrial drives that RSM entered into joint venture collaboration with CT-PLC to form joint venture company. In view of above reasoning, finding of original authority that business of RSM was taken over by CTIL is not correct. No doubt, fact that two directors of RSM became directors of CTIL and they were receiving salary from that assessment year from joint venture company is not in dispute. original authority, on considering joint venture company and also non-competition agreement has held in paragraph 13 of order that there was specific clause barring assessee-appellant from doing any business akin to line of business of joint venture company, including accepting any job in that line. This finding, according to appellant-assessee, is erroneous in view of terms of conditions, which provides for certain restrictions only. For better clarity, same is extracted hereinbelow: "The foregoing term conditions are conditional on fulfilling all obligations as executive directors of company. agreement will be deemed void if director: (a) accept paid employment from any other person or organisation, or (b) is charged and found guilty by any legally constituted court of any criminal act, or (c) by his actions, brings discredit to, or jeopardises successful operation of company." On reading of above, it is clear that there is nothing in above agreement to indicate that there was any restriction in so far as industrial drives is concerned. restriction is only general restriction to employee not to accept paid employment from any other person or organisation and that he should discharge his duties in accordance with law and should safeguard interests of company. Therefore, finding of Assessing Officer in paragraph 13 that assessee-appellant was prevented from doing anything in line of business against interests of CTIL does not have any relevance to non-competition agreement. On contrary, non- competition agreement, it appears, has been entered into subsequently on December 14, 1995, i.e., after nearly two years and two months to safeguard interests of foreign collaborator, who increased his stakes from 51 per cent. to 85 per cent. on and from September 27, 1995, in joint venture Indian company. Assessing Officer is not right in saying that there is no sanctity for this non-competition agreement in this case because his reasoning that old company was not in position to compete with joint venture company, viz., CTIL, is not issue, as CTIL is only in business of industrial drives as joint venture company. point in issue is whether appellant, as individual, can compete with business of CTIL, if there is no restriction. To avoid any loophole in that, non-compete agreement was signed by CT-PLC to restrain assessee individual from embarking on any such business, which is akin to industrial drives. finding of Assessing Officer is merely based on surmises and conjectures and not borne by any documents. non-competition agreement should be read in relation to language used therein and intentment behind signing of such agreement. Employment by itself is not reason to say that it amounts to non-competition agreement. Such finding cannot be accepted, since person with wide knowledge, as that of appellant, in particular field, is potential threat to foreign company, viz., CT-PLC, as well as to CTIL and, therefore, to curb any such threat of any kind, non-competition agreement appears to have been signed by CT-PLC with appellant-assessee and by no stretch of imagination, payment in lieu of non-competition agreement could be called as salary. further finding of Assessing Officer is that there was no reason to pay amount of Rs. 9,83,385 as on December 14, 1995, as there was no competition and that if there was any competition, it ended 27 months earlier when RSM merged with CT-PLC to form CTIL and assessee was made director. reasoning of Assessing Officer could be found in paragraph 17 of assessment order and for better clarity, said portion is extracted hereunder: "There are two possibilities of appreciating receipt as per agreement either as capital or as revenue. As mentioned earlier, payment of Rs. 9,83,385 is not outcome of non-competition agreement as there was no competition as on December 14, 1995. It is not compensation for right to carry on business as assessee was not doing any competing independent business as on that date. It at all there could be any competition it ended about 27 months back when RSM merged with CT to form CTI and when assessee was made director. reading of agreement shows that in every sense it was only late appreciation of rich goodwill that assessee had in field of business. It is possible that foreign company which concentrated on business was happy to get good associate in RSM and only later they discovered magnetism in assessee. In that sense entire payment is attributable to goodwill of assessee. As goodwill in this case is self-generated, cost is'nil' as per provisions of section 55(2)(1)(ii) which even legal opinion had omitted to consider. Accordingly, entire receipt is taxable as capital gains. There is yet another way of looking at receipt. As on date of payment, assessee was employee of company and payment is received from his employer. In this context, companies CT and CTI are one and same as former is owning 51 per cent. share in latter. Secondly, payment is directly related to services which assessee was rendering. Why it is given is not major issue, since any payment, whether it be salary, remuneration, commission, etc., forms part of salary as per section 17(1). Even if it is casual and non-recurring payment, section 10(3) does not exclude it from taxation if it is addition to remuneration. In view of above, receipt is also assessable under head'Salary'." It is to be kept in mind that RSM never was merged with CT-PLC to form CTIL. CTIL is joint venture company with 51 per cent. shares being held by CT-PLC and 49 per cent. shares being held by RSM as on October 1, 1993, and there appears to be no dispute on that. Assessing Officer has further held that nature of payment, at best, could be attributed as goodwill, paid by foreign company to assessee and to substantiate same, falls back on section 55(2)(a)(ii) and comes to conclusion that it has to be taxed as capital gains. However, Assessing Officer, without following said string to its logical conclusion, further states that payment in this case was received from his employer and, therefore, it is salary for all purposes, which is evident from last portion of paragraph 17, which has been extracted supra, which shows that any form of payment, viz., salary, remuneration, commission, etc., would form part of salary as per section 17(1) of Act. contention of assessee-appellant is that he has clearly shown in his return of income what his salary is, together with note appended, showing capital receipt on basis of non-competition agreement. It is clear from documents on record that salary portion was received from CTIL, whereas non-competition fee has been received from CTPLC and, therefore, both transactions are distinct entities. It is clear from record that payment made by foreign company, viz., CTPLC, consequent to non- competition agreement is for purpose of restraining assessee from engaging in any form of business that will jeopardise its principal shareholding of 51 per cent., which was later on enhanced to 85 per cent., as same should not be compromised on account of wealth of knowledge and capacity of assessee in particular field, viz., industrial drives. original authority himself has accepted that receipt of amount is not capital gain but only salary. Therefore, this court is not elaborating on provisions of section 55(2)(a)(ii) of Act. In any event, such plea would arise if transaction had arisen after April 1, 2003, whereas transaction in this case culminated on December 14, 1995. Though alternative plea was raised in paragraph 18 of assessment order, Assessing Officer clearly holds that said amount of Rs. 9,83,385, received as non-competition fee, pursuant to non-competition agreement, dated December 14, 1995, should be brought to tax under head "Salary", as transaction was between employer and employee. For better clarity, at risk of repetition, paragraph 18 of order of Assessing Officer, is extracted hereinbelow: "18. Alternatives Whether it is assessed as'capital gain' or'salary', entire receipt is taxable. For sake of clarity, I am bringing sum of Rs. 9,83,385 to assessment under head'Salary' as payment is one between employer and employee and also since it is essentially connected with his past, present and future services. But it is made known that this does not discount scope of assessing it as'capital gains' on goodwill, which will remain as equal alternative. It is made clear that receipt is assessable whether it is treated as capital or revenue." income chargeable under head "Salaries" and "Deductions from salaries" fall under sections 15 and 16 of Income-tax Act and they fall under Chapter IV, which deals with "Computation of total income". For better appreciation, said sections 15 and 16 of Act are extracted hereinbelow: "15. Salaries.-The following income shall be chargeable to income-tax under head'Salaries'- (a) any salary due from employer or former employer to assessee in previous year, whether paid or not; (b) any salary paid or allowed to him in previous year by or on behalf of employer or former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in previous year by or on behalf of employer or former employer, if not charged to income-tax for any earlier previous year. Explanation 1.-For removal of doubts, it is hereby declared that where any salary paid in advance is included in total income of any person for any previous year, it shall not be included again in total income of person when salary becomes due. Explanation 2.-Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, partner of firm from firm shall not be regarded as'salary' for purposes of this section. 16. Deductions from salaries.-The income chargeable under head Salaries shall be computed after making following deductions, namely:-... (ii) deduction in respect of any allowance in nature of entertainment allowance specifically granted by employer to assessee who is in receipt of salary from Government, sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less; (iii) deduction of any sum paid by assessee on account of tax on employment within meaning of clause (2) of article 276 of Constitution, leviable by or under any law." Section 17 of Income-tax Act deals with "Salary", "Perquisite" and "Profits in lieu of salary". terms "salary" and "profits in lieu of salary", which are relevant for case on hand, are extracted hereinbelow for better clarity: "17.'Salary','perquisite' and'profits in lieu of salary' defined.- For purposes of sections 15 and 16 and of this section, (1) salary includes- (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (va) any payment received by employee in respect of any period of leave not availed of by him; (vi) annual accretion to balance at credit of employee participating in recognised provident fund, to extent to which it is chargeable to tax under rule 6 of Part of Fourth Schedule; (vii) aggregate of all sums that are comprised in transferred balance as referred to in sub-rule (2) of rule 11 of Part of Fourth Schedule of employee participating in recognised provident fund, to extent to which it is chargeable to tax under subrule (4) thereof; and (viii) contribution made by Central Government or any other employer in previous year, to account of employee under pension scheme referred to in section 80CCD;... (3)'profits in lieu of salary' includes- (i) amount of any compensation due to or received by assessee from his employer or former employer at or in connection with termination of his employment or modification of terms and conditions relating thereto; (ii) any payment (other than any payment referred to in clause (10) clause (10A), clause (10B), clause (11), clause (12) clause (13) or clause (13A) of section 10), due to or received by assessee from employer or former employer or from provident or other fund, to extent to which it does not employer or from provident or other fund, to extent to which it does not consist of contributions by assessee or interest on such contributions or any sum received under Keyman insurance policy including sum allocated by way of bonus on such policy. Explanation.-For purposes of this sub-clause, expression 'Keyman insurance policy' shall have meaning assigned to it in clause (10D) of section 10; (iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person- (A) before his joining any employment with that person; or (B) after cessation of his employment with that person." reading of above sections make it clear that salary due from employer or former employer to employee, whether paid or not, section 17 makes it clear that for purpose of sections 15 and 16, "salary" would include, salary, wages, any annuity or pension, gratuity and any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. conjoint reading of both sections 15 and 17 make it clear that salary that is due from employer or former employer alone should be taken for purpose of computation of total income. plea of learned counsel for respondent-Revenue that it will fall under section 17(1)(iv), that any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages would bring within its ambit non-competition fee, is totally misconceived as pre-condition for bringing any payment under head "Salary" as defined under section 17 is that it should be salary due from employer or former employer. In this case, CT-PLC is neither employer nor former employer and of assessee and, therefore, bringing above payment under head "Salary" is unsustainable. Commissioner of Income-tax (Appeals) concurred with Assessing Officer on all issues and Tribunal also dismissed appeal filed by assessee as against order of Commissioner of Income-tax (Appeals). relevant portion of reasoning of Tribunal, which is found in paragraph 4 of its order, has already been extracted above. From same, it is evident that Tribunal has to come to conclusion that payment received by appellant-assessee is salary since noncompetition fee, if at all, has to be paid to RSM and not to assessee because even as per admission of assessee, RSM continued to be in existence and they alone are threat to foreign company, viz., CT-PLC. To buttress this finding, Tribunal records reason that foreign company, CT-PLC is having 51 per cent. share in newly formed joint venture company, viz., CTIL and, therefore, to look after business and overall interests of joint venture Indian company, foreign company has to nominate somebody and probably they have nominated assessee and as consideration to take care of entire joint venture company, assessee received amount. This finding of Tribunal is purely based on surmises and conjectures. It is purely due to misreading of nature of business of joint venture company and nature of payment made under non-competition agreement. As already stated, joint venture company was formed for purpose of manufacture, sales and service of power electronic converters, viz., industrial drives as joint venture between CT- PLC and RSM and directors of RSM, viz., appellant-assessee and others, were also inducted in executive capacity as salaried persons. Therefore, there is no question of RSM being threat to very same joint venture company, viz., CTIL, in which RSM had 49 per cent. shareholding. On contrary, individual assessee is only paid employee of joint venture company. Further, it is evident from record that when shareholding pattern of Indian company, viz., RSM, was reduced from 49 per cent. to 15 per cent. in lieu of grant of approval by Government of India for increasing shareholding pattern of foreign company, viz., CT-PLC, at that stage, foreign collaborator thought it fit to enter into noncompetition agreement with assessee since assessee had knowledge, experience and capacity in field of industrial drives and, therefore, to safeguard interests of joint venture company, in which stakes of foreign company was increased from 51 per cent. to 85 per cent., foreign company thought it fit to increased from 51 per cent. to 85 per cent., foreign company thought it fit to make non-competition agreement with appellant-assessee. There is no material anywhere before Assessing Officer or Commissioner of Income-tax (Appeals) or Tribunal to say that to look after business and overall interests of joint venture company, foreign company had nominated somebody, much less assessee and they paid consideration to take care of entire joint venture company on such payment. This fact is not supported by any document or statement. wordings of non-competition agreement is clear and proceeds that taking note of vast experience of assessee gained over 20 years, and further assessee being capable of design, manufacture and testing of industrial drives, in which joint venture company is already there in market and that appellant-assessee has set up company called RSM Electronics, which enjoys good reputation and market recognition and in order to ensure that appellant-assessee ceases and desists from carrying on business in industrial drives in territory so that it could be carried on exclusively by CTIL, foreign company thought it fit to make lump sum payment as component of non-competition agreement. If so-called amount had been paid by CTIL to assessee, then certainly this court could have accepted case of Department- Revenue that it will fall under definition of "salary", whereas in present case, consideration, as has been rightly pointed out, was received from foreign company, viz., CT-PLC by appellant-assessee, which foreign company has no relationship with assessee-appellant in nature of employment. cursory glance at non-competition agreement would throw enough light that compensation received from CT-PLC by appellant-assessee cannot be regarded as profits in lieu of salary and brought to tax under head "Salaries". By accepting terms and conditions of non-competition agreement, assessee has restrained himself from setting up any business, joining any employment or becoming director of some concern so as to open competition. Such restrictions have adversely affected his income earning potential by exploiting his skills, knowledge, experience, etc. clear intention behind CT-PLC entering into noncompetition agreement with appellant- assessee is only to ward off any competition from appellant-assessee, as he could exploit his knowledge, skill and experience to disadvantage of shareholding of CT-PLC in joint venture Indian company, which is evident from non-competition agreement. For purpose of tax, nature of payment in manner as has been paid by foreign company and received by assessee will be primary issue that has to be considered. This payment, under non-competition agreement, by no stretch of imagination could be stated as salary for taking care of interests of foreign company in newly formed joint venture company. Tribunal erred in holding that amount paid by foreign company to assessee-appellant is by employer to employee, which conclusion, on face of it, is not correct, as there is no relationship of employer and employee between foreign company and appellant- assessee and this conclusion arrived at by Tribunal is misreading of agreement. In present case, this court finds that employment contract is between joint venture Indian company, viz., CTIL and assessee and terms and conditions of employment is restricted only in relation to three items, which we have already referred to in earlier part of this order and there is nothing to show that it has any relation with industrial drives in question and, therefore, foreign collaborator was justified in entering into non-competition agreement, i.e., only after September 26, 1995, when Government of India, Ministry of Industries, granted approval to increase shareholding of foreign company in joint venture Indian company. There are clear indications as to why foreign company entered into non-competition agreement after this approval given by Government of India, Ministry of Industries, Department of Industrial Policy and Promotion, Foreign Collaboration-II Section. In so far as decision of this court in Ian Peter Morris v. Asst. CIT (T. C. A. Nos. 225 and 226 dated July 25, 2010), relied on by learned standing counsel appearing for Department-respondent, that was case of transfer of company by four partners wherein one of partners received certain amount. fact remains that take over of company in said case took effect from April 1, 1993, based on agreement dated October 15, 1993, and assessee in that case was taken on employment on October 8, 1993, and, thereafter, in course of employment, he also received non-compete payment on October 15, 1993, from said company in which he was in employment. When payment was made, assessee was in employment and, therefore, reasoning in said decision that such payment will fall under section 17(1)(iv) of Income-tax Act necessarily has to be accepted, which is not case here. In this case, there is no payment in nature provided under section 17(1)(iv) by employer in course of employment to appellantassessee, as non-competition agreement was entered into between foreign company, CT-PLC with appellant-assessee. facts in present case, therefore, stands distinguished. As regards decision of Supreme Court in CIT v. P. Mohanakala [2007] 291 ITR 278 (SC), relied on by learned standing counsel for respondent-Revenue, that concurrent findings of fact should not be normally disturbed, there is no dispute on this proposition. In this case, what is sought to be interpreted is not only facts in case but provisions of sections 15 and 17 of Income-tax Act, which have been misread and misinterpreted by Assessing Officer, Commissioner of Income-tax (Appeals) and Tribunal. interpretation given by Assessing Officer, Commissioner of Income- tax (Appeals) and Tribunal as to nature of transaction, by putting non-competition fee received by assessee-appellant under head "Salary", which is erroneous and conclusion arrived at by authorities below, which is based purely on conjectures and surmises, have been interpreted in its proper perspective. interpretation given by authorities below does not fit into provisions of sections 15 and 17 of Act, as interpreted by Tribunal, but falls within purview of capital receipt, as held by Supreme Court in Guffic's case (supra). Therefore, what has been considered and decided by this court is pure question of law relating to interpretation of particular section in Act, which has been held in favour of appellant- assessee. Therefore, abovesaid decision stands distinguished in facts of present case. On plain interpretation of section 15 read with section 17 of Act, we are unable to subscribe to view of respondent-Revenue as has been confirmed by Commissioner of Income-tax (Appeals) and Tribunal, that payment received in this case is in nature of salary. principles, as laid down by Supreme Court in Guffic's case (supra) is squarely applicable to facts of present case. In view of aforesaid reasoning and findings, this court holds that payment in this case, received by appellant- assessee, is not in nature of salary and it is only capital receipt. Accordingly, substantial question of law is answered in favour of appellant-assessee and against Revenue. In result, this appeal is allowed setting aside order passed by Tribunal. However, in circumstances of case, there shall be no order as to costs. *** G. Raveendran v. Commissioner of Income-tax
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