REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 12044 OF 2016 SHIV RAJ GUPTA Appellant Versus COMMISSIONER OF INCOME-TAX, DELHI-IV Respondent JUDGMENT R.F. Nariman, J. 1. present appeal relating to assessment year 1995-96 is by one Shri Shiv Raj Gupta, who was Chairman and Managing Director of M/s Central Distillery and Breweries Ltd. (hereinafter referred to as CDBL ), which had unit in Meerut manufacturing beer and Indian Made Foreign Liquor (hereinafter referred to as IMFL ). facts leading to appreciation of issues raised in this appeal are as follows. 2. By Memorandum of Understanding (hereinafter referred to as MoU ) dated 13.04.1994, made between appellant and three group Signature Not Verifiedcompanies of M/s Shaw Wallace Company Group (hereinafter referred Digitally signed by SUSHMA KUMARI BAJAJ Date: 2020.07.22 17:28:31 IST Reason: to as SWC group ), appellant, his wife, son, daughter-in-law and two daughters were registered holders of 1,86,109 equity shares of 1 INR 10 each constituting 57.29% of paid-up equity share capital of CDBL listed in Bombay and Delhi Stock Exchanges. break-up of shares held by family members of appellant and appellant himself are as follows: Name of Shareholder Number of Shares held in CDBL Shiv Raj Gupta (Appellant) 38,999 Jayant Gupta (Appellant s Son) 44,658 Roopa Gupta (Appellant s 53,911 Daughter-in-law) Pushpa Gupta (Appellant s 3,303 Wife) Avanti Pandit (Appellant s 5,541 Daughter) Arti Kirloskar (Appellant s 2,760 Daughter) Total 1,86,109 3. said MoU recites that company employed in its factory 350 employees and around 25 staff and other officers in its other offices. MoU then refers to direction of Supreme Court, which was made by Order dated 11.03.1994, which made it clear that company s manufacturing activity at plant at Meerut was suspended 2 until secondary effluent treatment plant is installed and made operative by company. This led to sale of this controlling block of shares, which was sold at price of INR 30 per share (when listed market price of share was only INR 3 per share). It is stated in said MoU that entire sale consideration of Rs.55,83,270/- has since been paid by SWC group to Shri Gupta, as result of which Shri Gupta has irrevocably handed over physical possession, management and control of said brewery and distillery of CDBL to representative of SWC group on 10.02.1994. Among things to be done under MoU, it was made clear that nominees of SWC group would be put in saddle i.e. be made directors on or before 13.04.1994, so that they will constitute absolute majority on board of company. Importantly, both Shri Shiv Raj Gupta and his son Shri Jayant Gupta (who, together with his wife, is major shareholder of family) will resign as Chairman and Managing Director and as Joint Managing Director respectively of CDBL by 13.04.1994. Under Clause 7 of said MoU, personal guarantees given by appellant and his son to UCO Bank, IFCI, ICICI and IREDA for loans amounting to INR 8.44 crores will be indemnified against all claims, actions, etc. in respect thereof. 4. By Deed of Covenant dated 13.04.1994, MoU signed on same day was reiterated, and it was then stated in recitals 3 and 4 as follows: 3 (3) Over past years, Mr. Shivraj Gupta has acquired considerable knowledge, skill, expertise and specialization in liquor business. (4) In furtherance of purchase of said shares, SWC have requested Mr. Shivraj Gupta to give restrictive covenant to and in favour of SWC for not carrying on directly or indirectly any manufacturing or marketing activities, whatsoever, relating to Indian Made Foreign Liquor (IMFL) or Beer for period of 10 years from date hereof which Mr. Gupta has agreed to give for consideration of non-competition fee of Rs. 6,60,00,00 (Rupees Six crores and sixty lacs only) to be paid by SWC to Mr. Gupta. Deed of Covenant is short document containing two clauses, which are set out as follows: 1. In consideration of sum of Rs. 6,00,00,000 (Rupees Six crores only) paid by SWC to Mr. Gupta as advance against aforesaid non-competition fee of Rs. 6,60,00,000 (the receipt whereof, Mr. Gupta hereby admits and acknowledges), Mr. Gupta hereby irrevocably agrees, covenants and undertakes that with effect from date of these presents, Mr. Gupta will not start or engage himself directly or indirectly or provide any service, assistance or support of any nature, whatsoever, to or in relation to manufacturing, dealing and supplying or marketing of Indian Made Foreign Liquor (IMFL) and/or Beer. balance amount of Rs. 60,00,000 (Rupees sixty lacs only) will be paid by SWC to Mr. Gupta on 31st October, 1994. 2. This covenant shall remain in full force and effect for period of 10 years from date of these presents and this covenant will be absolutely and irrevocably binding on Mr. Gupta. 5. bone of contention in this appeal is whether said Deed of Covenant can be said to contain restrictive covenant as result of 4 which payment is made to appellant, or whether it is in fact part of sham transaction which, in guise of being separate Deed of Covenant, is really in nature of payment received by appellant as compensation for terminating his management of CDBL, in which case it would be taxable under Section 28(ii)(a) of Income Tax Act, 1961. Section 28(ii)(a) reads as follows: 28. Profits and gains of business or profession. following income shall be chargeable to income-tax under head "Profits and gains of business or profession", - xxx xxx xxx (ii) any compensation or other payment due to or received by,- (a) any person, by whatever name called, managing whole or substantially whole of affairs of Indian company, at or in connection with termination of his management or modification of terms and conditions relating thereto; 6. By order dated 31.03.1998, Assessing Officer held that despite fact that appellant owned concern, namely, one M/s Maltings Ltd., which also manufactured IMFL, being loss making concern, no real competition could be envisaged between giant, namely, SWC group and this loss making dwarf, as result of which huge amount paid under Deed of Covenant cannot be said to be amount paid in respect of restrictive covenant as to non-competition. It was further held that son of appellant was not paid any such non-compete 5 fee or amount despite fact that he also resigned from his position as Joint Managing Director. It was also held that this was lump sum payment with no reason as to why such huge amount of INR 6.6 crores was being paid. It was also found that there was no penalty clause to enforce performance of obligations under aforesaid Deed of Covenant, as result of which, applying judgment in McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, Deed of Covenant was held to be colourable device to evade tax that is payable under Section 28(ii)(a) of Income Tax Act, 1961. As result thereof, this amount was then brought to tax under aforesaid provision. 7. appeal from Assessing Officer to learned Commissioner of Income Tax (Appeals) was dismissed. When it came before Income Tax Appellate Tribunal (hereinafter referred to as Appellate Tribunal ) learned Accountant Member differed with learned Judicial Member. learned Accountant Member held that two deeds would have to be read separately and that revenue cannot challenge business perception of assessee. Further, it was held that there was no colourable device involved, and that, as result, non-compete fee payable under Deed of Covenant was not taxable under Section 28(ii)(a) or any other provision of Income Tax Act, 1961. learned Judicial Member on other hand substantially agreed with Assessing Officer, as result of which he decided in favour of 6 revenue. reference was then made to third Member, who was also Judicial Member. learned third Member emphasised fact that share worth INR 3 was sold for INR 30 under MoU as result of transfer of control of CDBL. It cannot be said that these shares have been undervalued, neither can it be said that there was any collusion or other sham transaction, as result of which amount of INR 6.6 crores has escaped income tax. He pointed out that by letter dated 02.04.1994, penalty clause was provided for in that, out of amount received by assessee amount of INR 3 crore was to be deposited with SWC group for two years under public deposit scheme, it being made clear that in case there is any breach of terms of MoU resulting in loss, amount of such loss will be deducted from this deposit. result, therefore, was that appeal stood allowed by majority of 2:1 in Appellate Tribunal. 8. revenue preferred appeal under Section 260-A of Income Tax Act, 1961 to High Court. In its grounds of appeal, revenue framed substantial questions of law that arose in matter as follows: A) Whether ITAT has correctly interpreted provisions of Section 28(ii) of Income Tax Act, 1961? B) Whether Ld. ITAT was correct in holding that receipt of Rs.6.6 crores by respondent/assessee as non-competitive fee was capital receipt u/s 28(iv) 7 income tax act and not revenue receipt as envisaged in Section 28(ii) of I.T. Act? C) Whether Ld. ITAT failed to distinguish between nature of capital and nature of benefit in commercial sense in respect of amount of Rs. 6.6 crores received in view of restrictive covenant of deed dated 13.04.1994? D) Whether Ld. Judicial Member of ITAT was correct in recording his difference of opinion that receipt of Rs. 6.6 crores by respondent/assessee was actually colourable exercise to evade tax and same was held to be taxable under Section 28(ii) of Income Tax Act? 9. By impugned judgment of Division Bench of Delhi High Court dated 22.12.2014, Division Bench framed following substantial question of law: Whether, on facts and in circumstances of case, amount of Rs. 6.6 crores received by assessee from SWC is on account of handing over management and control of CDBL (which were earlier under management and control of assessee) to SWC as terminal benefit and is taxable u/s 28(ii) of Income-tax Act or same is exempt as capital receipt being non-competition fee by executing deed of covenant After going through MoU and Deed of Covenant, both dated 13.04.1994, and copiously referring to order of Assessing Officer dated 31.03.1998, High Court agreed with Assessing Officer and first Judicial Member of Appellate Tribunal, stating that Deed of Covenant could not be read as separate document and was not in its real avatar non-compete fee at all. However, in its ultimate conclusion, disagreeing with learned Assessing Officer and 8 minority judgment of Tribunal, High Court went on to state that said sum of INR 6.6 crores could not be brought to tax under Section 28(ii)(a), but would have to be treated as taxable capital gain in hands of appellant, being part of full value of sale consideration paid for transfer of shares. 10. Shri Arvind Datar and Shri Ajay Vohra, learned senior advocates appearing on behalf of appellant, have taken us through orders of Income Tax Authorities, Appellate Tribunal and impugned judgment of High Court. They raised as preliminary submission fact that under Section 260-A, it is only substantial question of law that is framed that can be answered and no other. If some other question is to be answered, Court must first give notice of same to both sides, hear them, pronounce reasoned order and thereafter frame another substantial question of law, which it may then answer. This procedure has not been followed in present case as it is clear that substantial question of law framed did not contain within it question as to whether assessee can be taxed outside provisions of Section 28(ii)(a). entire judgment is, therefore, vitiated and must be set aside on this ground alone. They relied on several judgments to buttress this contention. They then relied upon judgment of learned Accountant Member and of third Member in favour of assessee and reasoning therein, which according to 9 them is unexceptionable and should have been followed by High Court. They also cited judgments to show that prior to 01.04.2003, i.e. before introduction of Section 28(va) by Finance Act 20 of 2002 with effect from aforesaid date, any sum received under agreement for not carrying out any activity in relation to any business was taxed, for first time, under this provision and provision not being retrospective would not apply to facts of present case. 11. Shri Arijit Prasad, learned senior advocate appearing on behalf of revenue, read order of Assessing Officer and order of first learned Judicial Member and adopted reasoning contained therein. According to him, High Court judgment correctly applied both McDowell (supra) and Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613 to arrive at result which it arrived at as it was clear that amount of INR 6.6 crores that was received by assessee was really in nature of payment for sale of shares. He also argued as alternative that in any event it would fall under Section 28 (ii)(a) as was correctly held by learned Assessing Officer and minority judgment of Appellate Tribunal. 12. Having heard learned counsel for both parties, we are of view that appeal needs to succeed first on preliminary ground raised by learned counsel for appellant. Section 260-A of Income Tax Act, 1961 reads as follows: 10 260-A. Appeal to High Court. (1) appeal shall lie to High Court from every order passed in appeal by Appellate Tribunal before date of establishment of National Tax Tribunal, if High Court is satisfied that case involves substantial question of law. (2) Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or assessee aggrieved by any order passed by Appellate Tribunal may file appeal to High Court and such appeal under this sub-section shall be (a) filed within one hundred and twenty days from date on which order appealed against is received by assessee or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner; (b) [***] (c) in form of memorandum of appeal precisely stating therein substantial question of law involved. (2A) High Court may admit appeal after expiry of period of one hundred and twenty days referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing same within that period. (3) Where High Court is satisfied that substantial question of law is involved in any case, it shall formulate that question. (4) appeal shall be heard only on question so formulated, and respondents shall, at hearing of appeal, be allowed to argue that case does not involve such question : Provided that nothing in this sub-section shall be deemed to take away or abridge power of court to hear, for reasons to be recorded, appeal on any other substantial question of law not formulated by it, if it is satisfied that case involves such question. 11 (5) High Court shall decide question of law so formulated and deliver such judgment thereon containing grounds on which such decision is founded and may award such cost as it deems fit. (6) High Court may determine any issue which (a) has not been determined by Appellate Tribunal; or (b) has been wrongly determined by Appellate Tribunal, by reason of decision on such question of law as is referred to in sub-section (1). (7) Save as otherwise provided in this Act, provisions of Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to High Court shall, as far as may be, apply in case of appeals under this section. This provision, being modelled on similar provision that is contained in Section 100 of Code of Civil Procedure, makes it clear that High Court s jurisdiction depends upon substantial question of law being involved in appeal before it. First and foremost, it shall formulate that question and on question so formulated, High Court may then pronounce judgement, either by answering question in affirmative or negative or by stating that case at hand does not involve any such question. If High Court wishes to hear appeal on any other substantial question of law not formulated by it, it may, for reasons to be recorded, formulate and hear such questions if it is satisfied that case involves such question See section 260-A (4). Under sub-section (6), High Court may also determine any issue which, though raised, has not been determined by Appellate 12 Tribunal or has been wrongly determined by Appellate Tribunal by reason of decision on substantial question of law raised. 13. In Kshitish Chandra Purkait v. Santosh Kumar Purkait (1997) 5 SCC 438, this Court referred to Section 100 of Code of Civil Procedure and then stated: 10. We would only add that (a) it is duty cast upon High Court to formulate substantial question of law involved in case even at initial stage; and (b) that in (exceptional) cases, at later point of time, when Court exercises its jurisdiction under proviso to sub-section (5) of Section 100 CPC in formulating substantial question of law, opposite party should be put on notice thereon and should be given fair or proper opportunity to meet point. Proceeding to hear appeal without formulating substantial question of law involved in appeal is illegal and is abnegation or abdication of duty cast on court; and even after formulation of substantial question of law, if fair or proper opportunity is not afforded to opposite side, it will amount to denial of natural justice. above parameters within which High Court has to exercise its jurisdiction under Section 100 CPC should always be borne in mind. We are sorry to state that above aspects are seldom borne in mind in many cases and second appeals are entertained and/or disposed of, without conforming to above discipline. This statement of law was followed in Dnyanoba Bhaurao Shemade v. Maroti Bhaurao Marnor (1999) 2 SCC 471 (See paragraph 10). recent decision of this Court in Biswanath Ghosh v. Gobinda Ghosh (2014) 11 SCC 605 has reiterated these principles in paragraph 16 as follows: 13 16. Section 100 of Code lays down provision with regard to second appeal which reads as under: 100.Second appeal. (1) Save as otherwise expressly provided in body of this Code or by any other law for time being in force, appeal shall lie to High Court from every decree passed in appeal by any court subordinate to High Court, if High Court is satisfied that case involves substantial question of law. (2) appeal may lie under this section from appellate decree passed ex parte. (3) In appeal under this section, memorandum of appeal shall precisely state substantial question of law involved in appeal. (4) Where High Court is satisfied that substantial question of law is involved in any case, it shall formulate that question. (5) appeal shall be heard on question so formulated and respondent shall, at hearing of appeal, be allowed to argue that case does not involve such question: Provided that nothing in this sub-section shall be deemed to take away or abridge power of Court to hear, for reasons to be recorded, appeal on any other substantial question of law, not formulated by it, if it is satisfied that case involves such question. From bare reading of aforesaid provision it is manifestly clear that appeal shall lie to High Court from appellate decree only if High Court is satisfied that case involves substantial question of law. It further mandates that memorandum of appeal precisely states substantial question of law involved in appeal. If such appeal is filed, High Court while admitting or entertaining appeal must record its satisfaction and formulate substantial question of law involved in appeal. appeal shall then be heard on questions so formulated and respondent shall be allowed to argue only on those substantial questions of law. 14 However, proviso to this section empowers court to hear on any substantial question of law not formulated after recording reasons 14. It can be seen that substantial question of law that was raised by High Court did not contain any question as to whether non-compete fee could be taxed under any provision other than Section 28(ii)(a) of Income Tax Act, 1961. Without giving opportunity to parties followed by reasons for framing any other substantial question of law as to taxability of such amount as capital receipt in hands of assessee, High Court answered substantial question of law raised as follows: 63. In view of aforesaid discussion, we deem it appropriate and proper to treat Rs. 6.60 crores as consideration paid for sale of shares, rather than payment under Section 28(ii)(a) of Act. xxx xxx xxx 65. substantial question of law is accordingly answered in favour of appellant-Revenue and against respondent-assessee but holding that Rs.6.60 crores was taxable as capital gains in hands of respondent-assessee being part of full value sale consideration paid for transfer of shares. appellant-Revenue will be entitled to costs as per Delhi High Court Rules. Clearly, without any recorded reasons and without framing any substantial question of law on whether said amount could be taxed under any other provision of Income Tax Act, High Court went ahead and held that amount of INR 6.6 crores received by assessee was received as part of full value of sale consideration 15 paid for transfer of shares and not for handing over management and control of CDBL and is consequently not taxable under Section 28(ii)(a) of Income Tax Act. Nor is it exempt as capital receipt being non- compete fee, as it is taxable as capital gain in hands of respondent-assessee as part of full value of sale consideration paid for transfer of shares. This finding would clearly be in teeth of Section 260-A (4), requiring judgment to be set aside on this score. 15. Coming to merits, High Court found: 22. No doubt, market price of each share was only Rs.3/- per share and purchase price under MOU was Rs.30/-, but total consideration received was merely about Rs.56 lacs. What was allegedly paid as non-compete fee was ten times more, i.e. Rs.6.60 crores. figure per se does not appear to be realistic payment made on account of non-compete fee, dehors and without reference to sale of shares, loss of management and control of CDBL. assessee had attributed astronomical sum as payment toward non-compete fee, unconnected with sale of shares and hence not taxable. Noticeably, price received for sale of shares, it is accepted was taxable as capital gain. contention that quoted price of each share was mere Rs. 3 only, viz. price as declared of Rs. 30/- is fallacious and off beam. argument of assessee suffers from basic and fundamental flaw which is conspicuous and evident. This finding flies in face of settled law. catena of judgments has held that commercial expediency has to be adjudged from point of view of assessee and that Income Tax Department cannot enter into thicket of reasonableness of amounts paid by assessee. 16 This Court in CIT v. Walchand & Co. (1967) 3 SCR 214 stated as follows: It is open to Tribunal to come to conclusion either that alleged payment is not real or that it is not incurred by assessee in character of trader or that it is not laid out wholly and exclusively for purpose of business of assessee and to disallow it. But it is not function of Tribunal to determine remuneration which in their view should be paid to in employee of assessee. When claim for allowance under Section 10(2)(xv) of Income Tax Act is made, Income Tax Authorities have to decide whether expenditure claimed as allowance was incurred voluntarily and on grounds of commercial expediency. In applying test of commercial expediency for determining whether expenditure was wholly and exclusively laid out for purpose of business, reasonableness of expenditure has to be adjudged from point of view of businessman and not of Revenue. [at page 217] aforesaid judgment was followed by this Court in J.K. Woollen Manufacturers v. CIT (1969) 1 SCR 525 where Court held: As pointed out by this Court in CIT v. Walchand & Co. Private Ltd. [(1967) 65 ITR 381 : (AIR 1967 SC 1435)] in applying test of commercial expediency for determining whether expenditure was wholly and exclusively laid out for purpose of business, reasonableness of expenditure has to be adjudged from point of view of businessman and not of Income Tax Department. It is, of course, open to Appellate Tribunal to come to conclusion either that alleged payment is not real or that it is not incurred by assessee in character of trader or it is not laid out wholly and exclusively for purpose of business of assessee and to disallow it. But it is not function of Tribunal to determine remuneration which in their view should be paid to employee of assessee. [at page 529-530] 17 This Court in CIT v. Panipat Woollen & General Mills Co. Ltd. (1976) 2 SCC 5 stated as follows: 6. Before coming to facts it may be necessary to mention that there can be no dispute with respect to two important propositions: (1) that in order to fall within Section 10(2)(xv) of Act deduction claimed must amount to expenditure which was laid out or expended wholly and exclusively for purpose of business, profession or vocation. This will naturally depend upon facts of each case, (2) that in order to determine question of reasonableness of expenditure, test of commercial expediency would have to be adjudged from point of view of businessman and not of Income tax Department. Further, this Court in Shahzada Nand & Sons v. CIT (1977) 3 SCC 432 reiterated this principle as follows: 4. But it is well settled that these factors are to be considered from point of view of normal, prudent businessman. reasonableness of payment with reference to these factors has to be judged not on any subjective standard of assessing authority but from point of view of commercial expediency What is requirement of commercial expediency must be judged not in light of 19th Century laissez- faire doctrine which regarded man as economic being concerned only to protect and advance his self- interest but in context of current socio-economic thinking which places general interest of community above personal interest of individual and believes that business or undertaking is product of combined efforts of employer and employees and where there is sufficiently large profit, after providing for salary or remuneration of employer and employees and other prior charges 18 such as interest on capital, depreciation, reserves etc., part of it should in all fairness go to employees. Also, this Court in S.A. Builders Ltd. v. CIT (2007) 1 SCC 781 held as follows: 36. We agree with view taken by Delhi High Court in CIT v. Dalmia Cement (B) Ltd. [(2002) 254 ITR 377 (Del)] that once it is established that there was nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), Revenue cannot justifiably claim to put itself in armchair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. No businessman can be compelled to maximise its profit. Income Tax Authorities must put themselves in shoes of assessee and see how prudent businessman would act. authorities must not look at matter from their own viewpoint but that of prudent businessman. As already stated above, we have to see transfer of borrowed funds to sister concern from point of view of commercial expediency and not from point of view whether amount was advanced for earning profits. same principle has also been cited with approval by recent judgment of this Court in Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC 359 where Court held as follows: 11. Insofar as loans to sister concern/subsidiary company are concerned, law in this behalf is recapitulated by this Court in S.A. Builders Ltd. v. CIT [S.A. Builders Ltd. v. CIT, (2007) 1 SCC 781]. After taking note of and discussing on scope of commercial expediency, Court summed up legal position in following manner: (SCC pp. 787-88, paras 27-31) 19 xxx xxx xxx 31. It has been repeatedly held by this Court that expression for purpose of business is wider in scope than expression for purpose of earning profits vide CIT v. Malayalam Plantation Ltd. [CIT v. Malayalam Plantation Ltd., (1964) 53 ITR 140 (SC)] , CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., (1971) 3 SCC 344] , etc. 12. In process, Court also agreed that view taken by Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [CIT v. Dalmia Cement (B.) Ltd., 2001 SCC OnLine Del 1447 : (2002) 254 ITR 377] wherein High Court had held that (SCC OnLine Del para 8) once it is established that there is nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), Revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. It further held that no businessman can be compelled to maximise his profit and that Income Tax Authorities must put themselves in shoes of assessee and see how prudent businessman would act. authorities must not look at matter from their own viewpoint but that of prudent businessman. 16. High Court s next finding based on judgment in Vodafone (supra) is as follows: 56. In view of aforesaid discussion and our findings on true and real nature of transaction camouflaged as non-compete fee , we have no hesitation and reservation that respondent- assessee had indulged in abusive tax avoidance. 17. We may only reiterate as correctly found by majority judgments of Appellate Tribunal, that: 20 (i) share of face value of INR 10 and market value of INR 3 was sold for INR 30 as result of control premium having to be paid. (ii) It is important to note that each member of family was paid for his/her shares in company, lion s share being paid to assessee s son and wife as they held most number of shares within said family. (iii) non-compete fee of INR 6.6 crores was paid only to assessee. This was for reason stated in Deed of Covenant, namely, that Shri Shiv Raj Gupta had acquired considerable knowledge, skill, expertise and specialisation in liquor business. There is no doubt that on facts he has been Chairman and Managing Director of CDBL for period of about 35 years; that he also owned concern, namely M/s Maltings Ltd., which manufactured and sold IMFL and beer and that he was President of All India Distilleries Association and H.P. Distilleries Association. (iv) It is further recorded in judgment of Accounting Member that amount of INR 6.6 crores was arrived at as result of negotiations between SWC group and appellant. 21 (v) That restrictive covenant for period of 10 years resulted in payment of INR 66 lakhs per year so that appellant will not start or engage himself, directly or indirectly, or provide any service, assistance or support of any nature, whatsoever, to or in relation to manufacturing, dealing and supplying or marketing of IMFL and/or Beer. Given personal expertise of assessee, perception of SWC group was that Shri Gupta could either start rival business or engage himself in rival business, which would include manufacturing and marketing of IMFL and Beer at which he was old hand, having experience of 35 years. (vi) As was correctly held by second Judicial Member, it was also clear that withholding of INR 3 crores out of INR 6.6 crores for period of two years by way of public deposit with SWC group for purpose of deduction of any loss on account of any breach of MoU, was akin to penalty clause, making it clear thereby that there was no colourable device involved in having two separate agreements for two entirely separate and distinct purposes. 18. reasons given by learned Assessing Officer and minority judgment of Appellate Tribunal are all reasons which transgress 22 lines drawn by judgments cited, which state that revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other. For example, stating that there was no rationale behind payment of INR 6.6 crores and that assessee was not probable or perceptible threat or competitor to SWC group is perception of Assessing Officer, which cannot take place of business reality from point of view of assessee, as has been pointed out by us hereinabove. fact that M/s Maltings Ltd. had incurred loss in previous year is again neither here nor there. It may in future be direct threat to SWC group and may turn around and make profits in future years. Besides, M/s Maltings Ltd. is only one concern of assessee it is assessee s expertise in this field on all counts that was threat perception of SWC group which cannot be second guessed by revenue. Equally fact that there was no penalty clause for violation of Deed of Covenant, has been found by us to be incorrect given letter dated 02.04.1994. fact that respondent-assessee in his letter dated 26.03.1998 in reply to show cause notice had stated that SWC group had gained substantial commercial advantage by purchase of shares in CDBL as turnover increased from INR 9.79 crores in accounting period ending 31.03.1991 to INR 45.17 crores in accounting period ending 31.03.1997 is again neither here nor there. As matter of fact, SWC 23 group, due to its own advertisement and marketing efforts, may well have reached this figure after period of six years (the date 30.09.1995 is wrongly recorded by High Court in paragraph 19 correct date as per letter dated 26.03.1998 is 31.03.1991, as has been pointed out by us hereinabove). 19. It only remains for us to point out judgment in Guffic Chem (P) Ltd. v. CIT (2011) 4 SCC 254. In this case, question set out by Court is as follows: Whether payment under agreement not to compete (negative covenant agreement) is capital receipt or revenue receipt is question which arises for determination in this case? Here, Court was dealing with amount of INR 50 lakhs received by appellant-assessee from Ranbaxy as non-compete fee under agreement dated 31.03.1997. This Court in negating application of Section 28(ii)(a) to such receipt, held as follows: Decision 4. 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. 5. above dichotomy is clearly spelt out in judgment of this Court in Gillanders case [(1964) 53 ITR 283 (SC)] , in which facts were as follows: 24 assessee in that case carried on business in diverse fields besides acting as managing agents, shipping agents, purchasing agents and secretaries. assessee 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. 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. 6. Two questions arose for determination in Gillanders case [(1964) 53 ITR 283 (SC)] , 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. 7. This dichotomy has not been appreciated by High Court in its impugned judgment. High Court has misinterpreted judgment of this Court in Gillanders case [(1964) 53 ITR 283 (SC)] . In present case, Department has not impugned genuineness of transaction. In present case, we are of view that High Court has erred in interfering with concurrent findings of fact recorded by CIT (A) and Tribunal. 25 8. 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 2003-2004. It is only vide Finance Act, 2002 with effect from 1-4-2003 that said capital receipt is now made taxable [see Section 28(v-a)]. 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 1-4-2003. It is well settled that liability cannot be created retrospectively. In present case, compensation received under non-competition agreement became taxable as capital receipt and not as revenue receipt by specific legislative mandate vide Section 28(v-a) and that too with effect from 1-4-2003. Hence, said Section 28(v-a) is amendatory and not clarificatory. 9. Lastly, in CIT v. Rai Bahadur Jairam Valji [(1959) 35 ITR 148 (SC)] it was held by this Court that if contract is entered into in ordinary course of business, any compensation received for its termination (loss of agency) would be revenue receipt. In present case, both CIT(A) as well as Tribunal, came to conclusion that agreement entered into by assessee with Ranbaxy led to loss of source of business; that payment was received under negative covenant and therefore receipt of Rs. 50 lakhs by assessee from Ranbaxy was in nature of capital receipt. In fact, in order to put end to litigation, Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from 1-4-2003. 26 20. Respectfully following aforesaid decision, we allow appeal and set aside impugned judgment for all reasons given by us above. All pending applications, if any, stand disposed of in terms of judgment. .. J. (R. F. Nariman) .. J. (Navin Sinha) .. J. (B.R. Gavai) New Delhi 22nd July, 2020. 27 Shiv Raj Gupta v. Commissioner of Income-tax, Delhi-IV