Case Law Details
Ashish Tandon Vs ACIT (ITAT Ahmedabad)
Conclusion: Income on sale of a technical concept, that assessee developed on his own, with respect to website malware monitoring was non-compete fee taxable as business income under section 28(va) as the consideration was in respect of parting the knowledge by assessee concerning confidential information relating to the business.
Held: Assessee had claimed an exempt income being income on sale of a technical concept, that assessee developed on his own, with respect to website malware monitoring to safeguard websites from getting infected with malware. Assessee entered into an agreement with his employer, i.e. Indusface India for investment in further development of the concept for commercial exploitation. As per the agreement, assessee had “coined the interesting concept for providing round the clock [24X7X365] or daily or on demand malware monitoring of websites in a zero touch and security as a service (SAAS)” basis and had expressed the willingness to provide the said concept to the company and to assist the company to develop the same into a business idea” on the terms and conditions of the agreement. Indusface India had represented and assured that “it has the necessary expertise and capabilities for exploiting the concept and had intention of developing product and services by utilizing the said concept and was also ready and willing to allocate reasonable funds for developing the product and/ or services and marketing the same”. AO noted that the sale consideration represented sale consideration of a developed concept in which a sum of Rs 4,78,52,797 was invested by the employer (i.e. Indusface India)”. He was of the view that sale consideration was of a developed concept and not the original cost, and, therefore, it could not be said that the asset sold did not have a cost of acquisition. AO concluded that the exemption claimed by assessee was unsustainable in law and proceeded to bring the exempt amount to tax in the hands of the assessee as income from other sources. It was held if “coining of the concept”, as assessee put it, was indeed so valuable that it would, on standalone basis, fetch the assessee Rs 10 crores, there could not have been any logic in allowing a company to commercially exploit or develop the same for 7 years, without any royalty, consideration and arrangement for sharing the results of its commercial exploitation. The terms of the provisions of the agreement do not make commercial sense at all. What was being shown in this agreement, not real. Hon’ble Supreme Court, in Durga Prasad More’s case held that,”If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax . The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents”. It was for assessee to decide as to what was appropriate for justifying his case, and when he did not file a document, with specific prayer for admission of such additional evidence, he could not have a grievance about not been given an opportunity to furnish that evidence. The concept developed by assessee, during the course of his employment, was sold to a third party, and, going by the claim of assessee, the amount of US $ 15,75,000 was received on account of sale of this concept. That was the logical conclusion that must follow in the event of our accepting bonafides of the agreements filed by assessee. What assessee had got as a result of the impugned sale of business by his employer to Trend Micro was a result of fruit of his employment, but, as it had not been received from employer, it was taxable under the head ‘income from other sources’. It was also important to note in the non compete agreement that assessee entered into with Trend Micro, it was specifically stated , the restricted party had obtained knowledge concerning confidential information of IFI and IDFC relating to the business” and it was in consideration thereto, the payment had been made. Thus, it was held that the amount received by assessee was revenue receipt and was taxable as business income u/s 28(va). In any case, cost of acquisition, in the case of non compete rights, under section 55(2)(a) was to be taken as NIL, and, as a corollary thereto, the entire receipts was to be taxed in the hands of assessee. Further, the non compete agreement was not in relation to the concept because at the time of sale of the business by IFC to Trend Micro, IFC had already developed the intangible product in the form of M/s, Indus Guard by utilizing such concept and was earning revenue, by selling products manufactured by utilizing Indus Guard. Thus, the non-compete fee received by assessee was not related to the original right granted by him for exploitation of the concept to M/s. IFC. Hence, the consideration received in lieu of entering into non competent Agreement was not taxable as capital gain in the hands of assessee under any circumstances.Only a part of the consideration received against the foregoing of reversionary right could be held to be a capital gain and in that condition also, the cost of acquisition of such right had to be taken at Nil and the capital gain was to be computed as short term capital gain. There was no escape from the taxation of these receipts in the hands of assessee. The impugned receipt was not in the nature of an exempt income.
FULL TEXT OF THE ITAT JUDGEMENT
1. This is an appeal filed by the assessee and is directed against the order dated 27th June 2017, passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2013-14.
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