Commissioner of Income-tax, Delhi v. Tara Sinha
[Citation -2017-LL-0811-3]

Citation 2017-LL-0811-3
Appellant Name Commissioner of Income-tax, Delhi
Respondent Name Tara Sinha
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 11/08/2017
Assessment Year 1995-96
Judgment View Judgment
Keyword Tags profit-making structure • non-compete agreement • competitive business • restrictive covenant • chamber of commerce • advertising agency • capital investment • professional firm • source of income • capital receipt • sales promotion • reasonable time • returned income • revenue receipt • compensation
Bot Summary: As part of the proceedings, the AO recorded the Assessee on 9th December, 1997 and the AO vide assessment order dated 26th March, 1998 made an addition of Rs.3,15,31,750/- to the returned income of the Assessee. Mr. Hossain thereafter submits that a perusal of the list of clients of the Assessee, which included some of the most well known companies, both Indian and multinational, clearly shows that the amounts paid to the Assessee were actually part of the terminal benefits but were merely described as a non-compete fee. The growth of TSME after the retirement of the Assessee shows that there has not been any lag or reduction in its revenues and thus the so- called competition from the Assessee could not have dented TSME in any manner. Mr. Navet further submitted that the share transactions could not in any manner be held to be tainted at the instance of the Assessee, inasmuch as, the decision as to who should be the purchaser of the shares was of McCann Erickson and the Assessee had no role to play in the same. Mr. Navet states that, unlike in Shiv Raj Gupta, which was concerned with the manufacturing business, for which a proper manufacturing license would be required, Mrs. Tara Sinha the Assessee was fully equipped to start a competing business from the date she retired from TSME. She, having been single-handedly responsible for setting up TSME in India, commanded a position from which she had the potential to take away not just the clients but even key employees of TSME. Thus, MEW had rightly paid a non-compete fee to the Assessee. In the present case, the real nature of the transaction is that it is a Non- Competition Agreement wherein the Assessee agreed not to be involved in any business in India of advertisement, sale, promotion, public relations etc. Two questions arose for determination, namely, whether the amounts received by the Appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt The second question which arose before this Court was whether the amount received by the Assessee on the condition not to carry on a competitive business was in the nature of capital receipt It was held that the compensation received by the Assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt.


IN HIGH COURT OF DELHI AT NEW DELHI ITA 154/2005 COMMISSIONER OF INCOME TAX, DEL ..... Appellant Through: Mr. Zoheb Hossain, learned Senior Standing Counsel. versus MRS. TARA SINHA ..... Respondent Through: Mr. Rajat Navet, Advocate. CORAM: JUSTICE S. MURALIDHAR JUSTICE PRATHIBA M. SINGH ORDER 11.08.2017 Prathiba M. Singh, J. 1. Respondent Assessee - Mrs. Tara Sinha (hereafter Assessee'), was working as President of M/s Tara Sinha McCann Erickson Pvt. Ltd. ( TSME ), advertising agency. She also held 51% shares of said company, and McCann Erickson Worldwide Inc. ( MEW ) held 40% of shares of TSME. remaining 9% shares were held by Associated Corporate Consultants Pvt. Ltd. 2. Assessee filed her return of income for Assessment Year ( AY ) 1995-96 declaring income of Rs.12,74,721/. During AY i.e. on 9th March, 1995, Assessee resigned from TSME. Upon her retirement, she received payments as under: (i) Terminal benefit in form of gratuity amounting to Rs.2,88,462/-. (ii) Rs.35,13,150/- for sale of her 51% shareholding in TSME to M/s. Gyan Marketing Associates Pvt. Ltd. vide agreement ITA No.154/2005 Page 1 of 17 dated 10th March, 1995. (iii) Rs.3,15,31,750/- towards entering into Non-Compete Agreement with MEW on 10th March, 1995. 3. Assessing Officer ( AO ) issued show cause notice to Assessee as to why amounts received by her from MEW should not be treated as revenue receipt and as to why her claim, that said money is capital receipt, should be rejected. As part of proceedings, AO recorded Assessee on 9th December, 1997 and AO vide assessment order dated 26th March, 1998 made addition of Rs.3,15,31,750/- to returned income of Assessee. 4. Assessee, preferred appeal before Commissioner of Income Tax (Appeals) [ CIT (A) ], who by order dated 24th December, 1998 deleted addition made by AO and held that payment of compensation in lieu of non-compete agreement by Respondent was capital receipt and not chargeable to income tax. 5. Revenue approached Income Tax Appellate Tribunal ( ITAT ) vide ITA No.1258/Del/99. ITAT on 12th December, 2003, dismissed appeal and held that amount received was capital receipt not liable to tax. Revenue has, thus, approached this Court by way of present Appeal. 6. This Court on 15th January, 2007 framed following question of law: "Whether on facts and circumstances of case Income Tax Appellate Tribunal was right in law in holding that sum of Rs.3,15,31,7501- is not taxable ITA No.154/2005 Page 2 of 17 in hands of assessee being capital receipt?" No other question was either pressed or framed. 7. Thus, only question that is to be decided in this case is as to whether sum of Rs.3,15,31,750/-, which was paid as non-compete fee to Assessee is to be treated as being taxable or not. Petitioner s Submissions 8. Mr. Zoheb Hossain, learned Senior Standing Counsel appearing for Petitioner/Revenue, submits that amount of Rs.3,15,31,750/- is nothing but terminal benefit, which was couched as non-compete fee in order to escape payment of tax. 9. Mr. Hossain relies on findings of AO that said payment of non-compete fee and share transactions were actually part of well- orchestrated plan of breaking up entire package of terminal benefits received by her. Mr. Hossain further relies upon finding of AO that all these payments were contiguous in nature i.e., payment of gratuity, sale of shares and non-compete fee. He further relies upon interpretation of AO, that Non-Competition Agreement dated 10th March, 1995 was severely tilted in favour of Assessee and was in effect not serious Non-Competition Agreement. In support of this finding, AO had relied upon clauses in agreement, which did not impose any restrictions on Assessee from competing with MEW outside India and that laws of England were made applicable to contract and also that arbitration would be as per International Chamber of Commerce ( ICC ) ITA No.154/2005 Page 3 of 17 Paris. latter two factors, according to AO, exhibited non-serious nature of Agreement i.e., that MEW never intended to enforce same. Mr. Hossain, thus, submitted that AO had followed judgment of Supreme Court in McDowell Company Pvt. Ltd. v. CIT, 1985 (154) ITR 148, to hold that any transaction ought not to be looked at with blinkers in isolated manner and has to be viewed from context in which it belongs. He, thus submits, that AO had rightly held that entire consideration of Rs.3,15,31,750/- was taxable under Section 28 (ii) of Act. Mr. Hossain thereafter submits that perusal of list of clients of Assessee, which included some of most well known companies, both Indian and multinational, clearly shows that amounts paid to Assessee were actually part of terminal benefits but were merely described as non-compete fee. 10. Mr. Hossain contended that CIT (A) had erred in holding that decision to pay non-compete fee was merely business prudence decision. growth of TSME after retirement of Assessee shows that there has not been any lag or reduction in its revenues and thus so- called competition from Assessee could not have dented TSME in any manner. 11. Mr. Hossain urges that ITAT wrongly upheld decision of CIT (A) by relying on decision of ITAT in Shiv Raj Gupta in ITA No.489/Del/98, which now stands reversed by this Court. 12. foundation of Mr. Hossain s arguments rests on decision of this ITA No.154/2005 Page 4 of 17 Court in CIT v. Shiv Raj Gupta 372 ITR 337 (2015) (hereafter Shiv Raj Gupta ) dated 22nd December, 2014. He specifically relies upon judgment to argue that this Court considered Vodafone judgment of Supreme Court and any camouflage of terminal benefits as non-compete fee, should be held to be `abusive tax avoidance . 13. Mr. Hossain, urges that entire amount of Rs.3,15,31,751/- ought to be treated as taxable income and orders of ITAT and CIT (A) deserve to be set aside. Respondent's Submissions 14. Mr. Rajat Navet, learned counsel appearing for Respondent, submits that Respondent was well acknowledged personality in field of advertising. She was responsible for setting up advertising agency of McCann Erickson Pvt. Ltd. in India. She has enjoyed very high stature in field to extent that McCann Erickson started to call their agency in India by prefixing Assessee s name viz., Tara Sinha McCann Erickson (`TSME ). Her goodwill and reputation in advertising field was unparalleled and thus, amount she received as non-compete fee was truly to avoid her taking away clients of agency, post her retirement. amount paid to her was well deserved and same was not taxable. 15. Mr. Navet further submits that it is settled law as decided in several cases that non-compete fee is not taxable. He relies upon following decisions: 1. CIT v. HCL lnfosystems Ltd. 385 ITR 35 (Delhi) (hereafter, HCL ITA No.154/2005 Page 5 of 17 Infosystems ), 2. CIT v. Bisleri Sales Ltd. 377 ITR 144 (Bom) (hereafter, Bisleri Sales ), 3. Khanna and Annadhanam v. CIT 351 ITR 110 (hereafter, Khanna and Annandhanam ), 4. Guffic Chemical Pvt. Ltd. v. CIT 32 ITR 602 (SC) (hereafter, Guffic Chemical ), 5. Rohitasava Chand v. CIT 306 ITR 242 (Del) (hereafter, Rohitasava Chand ), 6. CIT v. A.S. Wardekar 283 ITR 432 (Cal) (hereafter, A.S. Wardekar), 7. CIT v. Saroj Kumar Poddar 279 ITR 573 (Cal) (hereafter, Saroj Kumar Poddar ), 8. CIT v. Saraswati Publicity (1981) 132 ITR 207 (Mad) (hereafter, Saraswati Publicity ), 9. Lachhman Das v. CIT 124 ITR 706 (Del) (hereafter, Lachhman Das ) and, 10. Beak v. Robson (1943) 11 ITR Suppl. 23 16. Mr. Navet further submitted that share transactions could not in any manner be held to be tainted at instance of Assessee, inasmuch as, decision as to who should be purchaser of shares was of McCann Erickson and Assessee had no role to play in same. In any event, according to Mr. Navet, Non-Competition Agreement was entered into with MEW itself and was valid and enforceable agreement in law. He sought to distinguish Shiv Raj Gupta (supra) case based on fact that ITA No.154/2005 Page 6 of 17 in said case, Assessee did not possess license to manufacture or sell IMFL. Assessee therein did not have net worth, which would enable him to set up new venture or pose threat to M/s/ Shaw Wallace Company Group (`SWC ) and that SWC Group was much larger group to whom Assessee would not be pose any threat. Mr. Navet states that, unlike in Shiv Raj Gupta (supra), which was concerned with manufacturing business, for which proper manufacturing license would be required, Mrs. Tara Sinha Assessee was fully equipped to start competing business from date she retired from TSME. She, having been single-handedly responsible for setting up TSME in India, commanded position from which she had potential to take away not just clients but even key employees of TSME. Thus, MEW had rightly paid non-compete fee to Assessee. nature of services being rendered by Assessee were so personal to her that in service industry such individuals being paid non- compete fee is not surprising. According to Mr. Navet, in Shiv Raj Gupta (supra), sum of Rs. 6.6 Crores was paid as consideration for sale of shares and not as non-compete fee. He, thus, submits that present case is covered squarely by ratio of Khanna and Annadhanam (supra), Rohitasava Chand (supra) and HCL lnfosystems Ltd (supra). Analysis and Findings 17. It is not seriously disputed by Revenue that Mrs. Tara Sinha Assessee was acknowledged personality in advertising field in India. Revenue s argument is that money paid as non-compete fee is, in fact, terminal benefit and hence taxable. In order to determine as to whether amount paid as non-compete fee is taxable or not, it is ITA No.154/2005 Page 7 of 17 necessary to take look at relevant Clauses of Non-Competition Agreement, which read as under: 1. Mrs. Sinha covenants and undertakes that she will not at any time during period of two years from date of this Agreement, directly or indirectly, a. be involved in any business in India of marketing communications (advertising, sales promotion, public relations, etc.) as employee, consultant, partner or otherwise in any other concern/company which is competitive with present line of business of MEW; b. solicit or perform services in connection with any business in India of marketing communications (advertising, sales promotion, public relations, etc.) of any existing clients of MEW; c. hire any employee of MEW. 2. In consideration for covenants of Mrs. Sinha set out in Clause 1 hereinabove, MEW shall pay to Mrs. Sinha in India Rupee equivalent of US $ 996,500. 5. This Agreement shall be governed by, and interpreted in accordance with Laws of England. 6. If any dispute or difference of any kind whatsoever not otherwise dealt with herein, shall arise between parties hereto shall promptly and in good faith negotiate with view to its amicable resolution and settlement. In event no amicable resolution or settlement is reached within reasonable time, such dispute or difference shall be referred to and settled by arbitration in accordance with Rules of Conciliation and Arbitration of International Chamber of Commerce (ICC), Paris. venue of arbitration shall be New Delhi. ITA No.154/2005 Page 8 of 17 18. AO relied upon Clauses 3 & 4 of agreement, which read as under: 3. restrictions set out in Clause 1 are considered reasonable by parties, having regard to mutual promises set out in this agreement, and consideration payable to Mrs. Sinha under this Agreement, but in event that any such restriction shall be found to be void but would be valid if some part were deleted, or period or area of application reduced, such restriction shall apply with such modification as may be necessary to make it valid and effective. 4. restrictions set out in each paragraph of Clause 1 constitute separate and independent restrictions. In event that any restriction set out in any paragraph shall held to be unenforceable restrictions set out in other paragraphs shall be unaffected. 19. By relying on clauses 3 & 4, AO came to conclusion that true intention of MEW is not to enforce any of restrictions contained in Clause 1. AO, in opinion of Court, did not construe agreement as whole. AO, incorrectly, interprets Clauses 2, 3 & 4 in holding that they actually contradict each other. AO was clearly wrong in holding that agreement was structured in manner so as to give Assessee adequate loopholes to bypass restrictions with consent of MEW . He termed agreement as being non-serious. AO also appears to have wrongly construed fact that payment was received prior to signing of agreement and hence it is nothing but terminal benefit. ITA No.154/2005 Page 9 of 17 20. In statement of Assessee, which was recorded by AO on 9th December, 1997, she had explained to AO that it was due to her personal efforts that business of company had grown and expanded from one office in Delhi to offices in several cities including Mumbai, Bangalore, Calcutta, Chennai and Kathmandu. She has explained reason to leave TSME, as MEW wanted to drop her name from TSME in order to have competitive advantage in India. She further explained that money being paid to her as non-compete fee was not directly related to remuneration she was receiving from TSME. AO acknowledges as under: 5.2 It is clear from deposition of assessee that concern, TSME was actually brain-child of Mrs. Tara Sinha. In fact, concern took shape around her dining table . It is because of her efforts that agency had grown in stature to what it was at time of transfer of shares. 21. In light of above findings of AO, subsequent conclusion of AO that money paid to her was not non-compete fee but terminal benefit is wholly unsustainable. 22. From record it is clear that TSME was brain child of Assessee. From reading of Clause 1, it is clear that MEW was apprehensive about her retirement and effect it could have on their business and hence insisted on obligations contained. This clause is clear acknowledgement that she did have potential and stature to take away substantial number, if not all, of clients and employees of TSME. non-compete fee paid to her cannot, therefore, be termed as camouflage or well- orchestrated plan to avoid payment of tax. ITA No.154/2005 Page 10 of 17 23. It is to be noticed that during period when TSME had entered India, in 1990, Mrs. Tara Sinha was also operating as Tara Sinha Associates (TSA) for billing of 1279.17 Lakhs for FY 1989-90. It is, therefore, no surprise that her name was added and pre-fixed to name of McCann Erickson when TSME was established. clients of Assessee, at time when she retired from TSME, did include some of most well known Indian and Multinational companies. Non-Competition Agreement dated 10th March, 1995 is, therefore, clearly genuine agreement and Clauses in agreement that same would be governed by laws of England and any disputes would be referred to ICC Paris, cannot be termed as devious method not to seek enforcement, inasmuch as, such clauses appear regularly in several contracts involving international companies. AO reads too much into these two clauses. 24. Insofar as, Clauses 3 & 4 are concerned, these are standard severability clauses which appear in most contracts that have multiple obligations cast on parties. Even if one obligation is held to be illegal or void, other clauses and obligations would be enforceable. These clauses cannot by any stretch of imagination, be held to be ruse to not enforce agreement. 25. CIT (A) and ITAT have rightly held that non-compete fee is not taxable income. 26. similar issue had arisen as far back as in 1942 before House of Lords in Beak v. Robson (supra). relevant portion reads as under: ITA No.154/2005 Page 11 of 17 sum of 7,000 is not paid for anything done in performing services in respect of which Robson is- chargeable under Schedule E. consideration which he has to give under-the covenant is to be given not during period of his employment, but after its termination. He is giving to company for sum of 7,000 benefit of covenant which will only come into effect when service is concluded. I agree with Court of Appeal in view that to treat this 7,000 as profit arising from respondent's office is to ignore real nature of transaction. It is quite true that, if he had not entered into agreement to serve as director and manager, he would not have received 7,000. But that is not same thing as saying that 7,000 is profit from his office of director so as to attract tax under Schedule E. Attorney-General points out that it is not uncommon in managerial agreements to include covenant not to compete after service is terminated without any separate consideration being allocated to covenant, and it was suggested that decision in favour of respondent in this case might involve apportionment of remuneration which manager receives under his agreement between profit of his office and price, paid to secure covenant. I propose to say nothing about that, and to decide pre sent case purely upon terms of agreement of October 4, 1937. That agreement is admitted to be bona fide -contract and, so regarded, 7,000 cannot properly be treated as profit arising from respondent's office or employment. Thus, amount of 7000 pounds paid to Mr. Robson for agreeing not to engage in competing business within 50 miles of Newcastle-upon-Tyne without company s consent, was held to be not taxable. House of Lords thus held that test is to establish `real nature of transaction . ITA No.154/2005 Page 12 of 17 27. In present case, `real nature of transaction is that it is Non- Competition Agreement wherein Assessee agreed not to be involved in any business in India of advertisement, sale, promotion, public relations etc., which is competitive with MEW or solicit any client of MEW or hire any employee of MEW. 28. In lieu of these covenants and undertakings, she was paid amount of US dollars 996,500 i.e. Rs.3,15,31,750/- at prevalent exchange rates. Assessee, as clearly ascertainable from record, was lady who enjoyed stature in advertising industry and Non-Competition Agreement, by which she agreed not to compete in India with MEW, was clearly not sham. She is now 82 years of age and considering that Revenue s appeal challenges concurrent findings of CIT (A) and ITAT, we do not find any cause to interfere. 29. In Khanna and Annadhanam (supra), this Court followed judgment of Supreme Court in Kettlewell Bullen and Company Ltd. v. CIT, [1964] 53 ITR 261 SC, and held that any payment made which represents compensation for loss of source of income would be capital in nature and that it would not be taxable. This Court, while commenting upon amounts paid to Chartered Accountant s firm, for terminating arrangement with Delloitte Haskins and Sells (DHS) held as under: It is somewhat difficult to conceive of professional firm of chartered accountants entering ITA No.154/2005 Page 13 of 17 into such arrangements with international firms of chartered accountants, as assessee, in present case, had done, with same frequency and regularity with which companies carrying on business take agencies, simultaneously running risk of such agencies being terminated with strong possibility of fresh agencies being taken. In firm of chartered accountants there, could be separate sources of professional income such as tax work, audit work, certification work, opinion work as also referred work. Under arrangement with DHS there was regular inflow of referred work from DHS through Calcutta firm in respect of clients based in Delhi and nearby areas; There is no evidence that assessee-firm had entered into similar arrangements with other international firms of chartered accountants. arrangement with DHS was in vogue for fairly long period of time (13 years) and had acquired a-kind of permanency as source of income. When that source was unexpectedly terminated, it amounted to impairment of profit-making structure or apparatus of assessee-firm. It is for that loss of source-of income that compensation was calculated and paid to assessee. compensation was thus substitute for source. In our opinion, Tribunal was wrong in treating receipt as being revenue in nature . 30. In Guffic Chemical Pvt. Ltd. (supra), Supreme Court held that non-compete fee of Rs.50 Lakhs received by Ranbaxy was capital receipt. Supreme Court categorically held as under: Decision 5 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 ITA No.154/2005 Page 14 of 17 agency is revenue receipt whereas compensation attributable to negative/restrictive covenant is capital receipt. 6 above-dichotomy is clearly spelt out in-the judgment of this court in Gillanders' case (supra) in which facts were as follows. assessee in that case carded on business in diverse fields besides acting as managing agents, shipping agents, purchasing agents and secretaries. assesse also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account 'Under agreement which was terminable at will assessee acted as sole agent of explosives manufactured by imperial Chemical Industries (Export) Ltd manufactured by Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation Imperial Chemical Industries (Export) Ltd. paid for first three years after termination of agency two-fifths of commission accrued on its sales in territory of agency of Appellant and in addition in third year full commission was paid for sales in that year. Imperial Chemical Industries (Export) Ltd. took formal undertaking from Assessee to refrain from selling or accepting any agency for explosives. 7. Two questions arose for determination, namely, whether amounts received by Appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? second question which arose before this Court was whether amount received by Assessee (compensation) on condition not to carry on competitive business was in nature of capital receipt? It was held that compensation received by Assessee for loss of agency was revenue receipt whereas compensation received for refraining from carrying on competitive business was capital receipt. ITA No.154/2005 Page 15 of 17 This dichotomy has not been appreciated by High Court in its impugned judgment. High Court has misinterpreted judgment of this Court in Gillanders' case (supra) . 31. Similar was view of Delhi High Court in Rohitasava Chand (supra), which dealt with payment of non-compete fee to Assessee which included transaction for sale of shares. This Court after reviewing entire case law on subject, held as under: 24. There is no doubt that non-compete agreement incorporates restrictive covenant on right of assessed to carry on his activity of development of software. It may not alter structure of his activity, in sense that he could carry on same activity in organization in which he had small stake, but it certainly impairs carrying on of his activity. To that extent it is loss of source of income for him and it is of enduring nature, as contrasted with transitory or ephemeral loss. During currency of non-compete agreement, assessed was restrained from soliciting, interfering, engaging in or endeavoring to carry on any activity, including supply or services or goods concerning software development. non-compete agreement was independent of first agreement whereby assessed agreed to transfer his shares to foreign company. Under circumstances, looking to case law on subject and terms of non-compete agreement, particularly restrictive covenant, it is difficult to agree with view taken by Tribunal. receipt in hands of assessed was certainly capital receipt in as much as it dented his profit making capabilities . 32. view of Calcutta High Court in Saroj Kumar Poddar (supra) ITA No.154/2005 Page 16 of 17 and Madras High Court in Saraswati Publicity (supra) are to same effect. 33. present case is clearly distinguishable from Shiv Raj Gupta (supra) case in which decision of this Court was made in context of facts of said case involving specialised regulated business like manufacture and sale of liquor which requires specific liquor license in each State, manufacturing capability and capital investment, all of which Assessee therein did not possess. 34. In facts of present case, this Court is persuaded to follow decisions in Guffic Chemical Pvt. Ltd (supra), Khanna and Annadhanam (supra) and Rohitasava Chand (supra) to hold that Non-Competition Agreement is genuine and payment made thereunder is indeed non- compete fee. 35. question of law framed is answered in affirmative i.e. in favour of Assessee and against Revenue. 36. appeal is dismissed but with no order as to costs. PRATHIBA M. SINGH, J S.MURALIDHAR, J AUGUST 11, 2017 dk ITA No.154/2005 Page 17 of 17 Commissioner of Income-tax, Delhi v. Tara Sinha
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