Shiv Raj Gupta Vs CIT (Supreme Court)
The issue under consideration is whether the non-compete fee could be taxed under any provision other than Section 28(ii)(a) of the Income Tax Act, 1961?
In the present case, a share of the face value of INR 10 and market value of INR 3 was sold for INR 30 as a result of control premium having to be paid. It is important to note that each member of the family was paid for his/her shares in the company, the lion’s share being paid to the assessee’s son and wife as they held the most number of shares within the said. The non-compete fee of INR 6 crores was paid only to the assessee. This was for the reason stated in the Deed of Covenant, namely, that Shri Shiv Raj Gupta had acquired considerable knowledge, skill, expertise and specialisation in the liquor business. There is no doubt that on facts he has been Chairman and Managing Director of CDBL for a period of about 35 years; that he also owned a concern, namely M/s Maltings Ltd., which manufactured and sold IMFL and beer and that he was the President of All India Distilleries Association and H.P. Distilleries Association. Given the personal expertise of the assessee, the perception of the SWC group was that Shri Gupta could either start a rival business or engage himself in a rival business, which would include manufacturing and marketing of IMFL and Beer at which he was an old hand, having experience of 35 years.
Supreme Court states that, as was correctly held by the second Judicial Member, it was also clear that the withholding of INR 3 crores out of INR 6.6 crores for a period of two years by way of a public deposit with the SWC group for the purpose of deduction of any loss on account of any breach of the MoU, was akin to a 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.The position in law is clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital receipt. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(v-a) and that too with effect from 1-4-2003. Hence, the said Section 28(v-a) is amendatory and not clarificatory.
Accordingly, Supreme Court allowed the appeal.
FULL TEXT OF THE SUPREME COURT JUDGEMENT
1. The present appeal relating to assessment year 1995-96 is by one Shri Shiv Raj Gupta, who was the Chairman and Managing Director of M/s Central Distillery and Breweries Ltd. (hereinafter referred to as “CDBL”), which had a unit in Meerut manufacturing beer and Indian Made Foreign Liquor (hereinafter referred to as “IMFL”). The facts leading to an appreciation of the issues raised in this appeal are as follows.
2. By a Memorandum of Understanding (hereinafter referred to as “MoU”) dated 13.04.1994, made between the appellant and three group companies of M/s Shaw Wallace Company Group (hereinafter referred to as “SWC group”), the appellant, his wife, son, daughter-in-law and two daughters were the registered holders of 1,86,109 equity shares of INR 10 each constituting 57.29% of the paid-up equity share capital of CDBL listed in the Bombay and Delhi Stock Exchanges. The break-up of the shares held by the family members of the appellant and the appellant himself are as follows:
