IN THE ITAT MUMBAI BENCH ‘A’
Anurag Toshniwal
Versus
Deputy Commissioner of Income-tax – 1(3), Mumbai
D. Manmohan, VICE-PRESIDENT
AND N.K. BILLAIYA, ACCOUNTANT MEMBER
IT APPEAL NOs. 7032 & 7034 (MUM.) OF 2012
[ASSESSMENT YEAR 2009-10]
JANUARY 16, 2013
ORDER
N.K. Billaiya, Accountant Member
These two separate appeals pertaining to two different assessees are directed against the two different orders of the Ld. CIT(A)-2, Mumbai dt.11.10.2012 pertaining to A.Y. 2009-2010. As common issues are involved in both these appeals, these appeals were heard together and dispose of this common order for the sake of convenience & brevity.
ITA No 7034/Mum/2012
2. The assessee has challenged the correctness of the order of the Ld. CIT(A) by raising following three grounds of appeal:
1. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in holding that the amount of Rs.5 crore received from M/s. Thermo Electron LLS India P. Ltd. by the appellant was a revenue receipt taxable under the head “profits and gain of business”. He failed to appreciate that when admittedly the appellant is not at all carrying on any business in the previous year, there is no question of any chargeability under the head “profits and gains of business”, as carrying on business is a sine qua non for applicability of s.28.
2. The learned Commissioner of Income-tax (Appeals) failed to appreciate that the payment of Rs.5 Crores was compensation for the total destruction of a source of income, and as such was a capital receipt and not a revenue receipt. The sum was not of revenue character at all.
3. The Learned Commissioner of Income-tax (Appeals) erred in holding that the amount was taxable u/s.28(va), without appreciating that the amount was not received for ‘not carrying out any activity in relation to any business’; and at best, the amount would only be chargeable under the head Capital Gains, as being an amount received on transfer if any, of right to carry on business. He ought to have held that s.28(va) only creates a fiction as to source, but does not deem a capital receipt as income.
3. The facts giving rise to these grievances emanates from the assessment order passed u/s. 143(3) of the Act dt. 30.9.2011. During the course of the scrutiny assessment, the Assessing Officer noted that the assessee has declared a sum of Rs. 5 crores under the head Long Term capital gain being ‘Non-compete fees’ received from M/s. Termo Electron LLS India Pvt. Ltd., against which the assessee has claimed deduction u/s. 54EC of I.T. Act to the tune of Rs. 50 lacs and the balance amount of Rs. 450 lacs claimed to have been deposited in Capital Gain Savings account. The AO questioned the claim of the assessee by issue of notice dt. 12.8.2011 telling the assessee why the sum of Rs. 5 crores declared as ‘Non-compete fees’ should not be treated as income under the head ‘Profit or Gain from business or profession’ u/s. 28(va) of the I.T. Act.
3.1 In response to the said query, the assessee filed a detailed reply dt. 26.9.2011. The assessee strongly contended that the sum of Rs. 5 crores received by the assessee under the agreement as ‘Non-compete fees’ will not be taxable u/s. 28 because the basic condition for assessment under the head “profits & gains of business”, is that the business must be carried out during the previous year. The assessee pointed out that the basic condition is clearly mentioned in sub-cl (1) of Sec. 28 as the assessee is not carrying out any business in the relevant previous year, therefore the basic test or condition for applicability of Sec. 28 is not at all applicable to the facts of the case. The assessee further relied upon the decision of the Hon’ble Supreme Court in the case of Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 wherein the Hon’ble Supreme Court has held that 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. It was claimed by the assessee that on the facts of the present case, the receipt is a capital receipt hence there is no question of bringing it to tax u/s. 28(va) of the Act.
3.2 The submissions of the assessee were carefully perused by the AO who was of the opinion that the ‘Non-compete fees’ received by the assessee is clearly taxable u/s. 28(va) of the Act and accordingly rejected the treatment of Rs. 5 crores as Long term Capital gains as claimed by the assessee and treated the said receipts of Rs. 5 crores as ‘Non-compete fees’ under the head ‘Profit or Gain from business or profession’.
4. The assessee strongly agitated this matter before the Ld. CIT(A) and strongly contended that the assessee himself was not carrying on any business whatsoever and reiterated that it is a basic condition for taxability under the head ‘Profit & Gain of business that the assessee must be carrying on business. It was further pointed out by the assessee that Sec. 28(va) does not indicate that the assessee is deemed to be carrying on any business. It only applies when the basic condition is fulfilled, and has no application in the absence of the assessee carrying on business. The assessee placed reliance on the decision of the Hon’ble ITAT in the case of Mrs. Hami Aspi Balsara v. Asstt. CIT [2010] 126 ITD 100 (Mum). The assessee further pointed out to the Ld. CIT(A) that on a proper interpretation of the agreement between the parties, it will be seen that the fee is not merely a non compete or a fee for not carrying on an activity in relation to business, rather it is paid for transfer of a right to carry on business itself. Therefore, it is taxable under the head ‘capital gains’ u/s. 55(2)(a) of the Act. Since the assessee has transferred its right to carry on business itself, therefore it falls within the proviso of Sec. 28(va) and the amount received brought to tax only under the head ‘capital gains’.
5. The Ld. CIT(A) considered the submissions and the facts of the case and came to a conclusion that as per the agreement, the non compete fee paid to the assessee is for Non competing with the purchaser of the undertaking for only four years which means that the sum of Rs. 5 crores is paid to the assessee for not carrying out the business of similar nature only for four years which means that the payment is not for any transfer of any capital asset which is very much essential for the taxation of capital gains. In the instant case, the assessee has simply agreed not to do similar business for four years. According to the Ld. CIT(A) this action cannot be considered as “Extinquishment of any right in capital asset” because after extinquishment no right will exist thereafter. The Ld. CIT(A) went on to rely on the decisions of Dy. CIT v. Max India Ltd. [2007] 112 TTJ (ASR) 726, Asstt. CIT v. Dr. B.V. Raju [2012] 135 ITD 1. The Ld. CIT(A) also relied upon the decision of John D’Souza v. CIT [Writ Petition No. 321 of 2009, dated 13-8-2009] and in particular relying upon the decision of the ITAT Hyderabad Special Bench (supra) and the Hon’ble Supreme Court’s decision (supra) agreed with the findings of the AO that the Non compete fee of Rs. 5 crores is taxable as business income u/s. 28(va) of the Act.
6. Aggrieved by the findings of Ld. CIT(A) assessee is before us. The Ld. Counsel for the assessee once again strongly relied upon the provisions of Sec. 28(1) and reiterated the stand of the assessee that it is a primary condition that the assessee must carry on the business during the previous year only then the profits and gains will be taxable under the head ‘profits and gains of business’. The Ld. Counsel further argued that Sec. 28(va)(a) has been inserted by the Finance Act, 2002 w.e.f 1.4.2003 and reference is only to any sum whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business. The Ld. Counsel thus concluded that as the main provision of Sec. 28 and also Sec. 28(va) refers to carrying on of business and as the assessee has not carried out any business, therefore there is no question on the taxability of Non compete fee under the head profits and gains of business. On the contrary, it is a capital receipt and has been rightly returned under the head capital gains by the assessee in his return of income. The Ld. Counsel filed a Paper book relying upon the decision of ITAT in the case of Mrs. Hami Aspi Balsara (supra), ACIT v. Savita Mandhana in ITA No. 3900/Mum/2010, Dr. B.V. Raju (supra), Guffic Chem (P.) Ltd. v. CIT [2011] 332 ITR 602.
7. Per contra, the Ld. Departmental Representative strongly relied upon the findings of the lower authorities and pointed out that the Tribunal in the case of Dr. B.V. Raju (supra) has clearly held that prior to amendment brought with effect from 1.4.2003 when there are receipts by a person as Non compete fee under an agreement not to carry on particular business, then it was regarded as capital receipt not chargeable to tax. However, with effect from April 1st 2003, provisions of Sec. 28 has been amended by inserting sub sec. (va) in section 28 and with the amendment to the law Non compete fee even if it is a capital receipt is now chargeable to tax as income from business. The Ld. DR further relied upon the decision of Hon’ble Supreme Court in the case of Guffic Chem (P.) Ltd. (supra) and submitted that with the amendment Non compete fees is taxable under the head profit and gains of business or profession.
8. We have considered the rival submissions and carefully perused the orders of the lower authorities and the decision relied upon by the rival parties. The facts giving rise to the entire dispute show that the assessee is one of the Directors of a company called Chemito Technologies Pvt. Ltd. since 1.7.1983. The said Chemito Technologies Pvt. Ltd. is engaged in the manufacture and assembling of various types of laborating equipment. The said company also owned a division called “Technologies and the Environmental Instrumentation Divison”. Vide agreement dt. 27.5.2008, the company sold this division to M/s. Thermo Electron LLS India Pvt. Ltd. for a consideration of Rs. 58 crores. In this agreement there were Non compete provisions by which the seller for an aggregate period of 4 years shall not , in India , without the prior written consent of purchaser directly or indirectly, whether through affiliates or otherwise :
