ACIT Vs. Dr. B.V. Raju (ITAT Hyderabad Special Bench)- What was transferred by Mr.B.V.Raju under the agreement dt. 27.10.1999 for which he was paid a sum of Rs. 11 crores by ICL. One should also read the above covenants in the non-compete agreement in the light of the preamble to the agreement which gives the background as to why the agreement was being entered into.
The preamble to the non-compete agreement refers to the fact that Mr.B.V.Raju during the course of his employment with Cement Corporation of India, RCL and SVCL acquired a corpus of knowledge, skill, expertise, and experience related to the production, distribution, marketing, running and managing of cement plants and has also acquired or otherwise come in possession of various secret information, know-how and trade secrets relating to the Cement line of business. The preamble refers to India Cements Ltd. and its associate companies having acquired RCL from the original promoters during April, 1998. There is also a reference to the fact that Mr.B.V.Raju together with his family members thereafter continued their business in Cement line with SVCL till October, 1999, when SVCL was proposed to be taken-over by India Cements Ltd., and its associate companies. The preamble further refers to the fact that Mr.B.V.Raju along with other persons entered into an agreement with ICL by which they sold the shares held by them in SVCL. The preamble further declares that with the acquisition of SVCL, the core family promoters of RCL & SVCL were out of Cement business. It is thereafter that ICL with a view to ward off competition desired that Mr.B.V.Raju should be restrained from starting a fresh cement unit, lest it should have a bearing on their business. With that object in view, ICL entered into a Non-Compete Agreement with Mr.B.V.Raju.
The consideration of Rs. 11 crores received by BVRaju was not for sale of any business nor was it for not carrying on any business which he was carrying on, which he had transferred. It was also not a payment for a “right to manufacture, produce or process any article or thing”. As explained earlier, the sum in question was not paid for transfer of any intangible right in respect of manufacture, production or process of cement. The provisions relating to capital gains are therefore not attracted. The amount was paid for “not carrying out any activity in relation to any business” and would fall within the ambit of Sec.28(va)(a) of the Act. The payment in question clearly falls under the category of a payment for “not carrying out any activity in relation to any business” which at the relevant point of time of accrual in the hands of B.V.Raju, viz., 27.10.1999, was a capital receipt not chargeable to tax. Such receipts became taxable on and from 1-4-2003. As held by the Hon’ble Suprme Court in the case of Guffic Chemical Industries (supra), the provisions of Sec.28(va)(a) are not clarificatory and were applicable only prospectively from 1-4-2003. For AY 00-01, they were not applicable. Therefore the receipts in question were capital receipts and not chargeable to tax in AY 00-01.
INCOME TAX APPELLATE TRIBUNAL, HYDERABAD
ITA No. 1034/Hyd/ 2004 -(Assessment Year 2000- 01)
Asstt Commissioner of Income Tax
Vs.
Late Dr. B.V. Raju, Hyderabad
Date of Pronouncement 13.02.2012
ORDER
PER N.V.VASUDEVAN, J.M.:
This Special Bench has been constituted by the Hon’ble President, ITAT, under S.255(3) of the Income Tax Act, 1961 (the Act) to consider and decide the following question, which covers the solitary issue arising out of the appeal filed by the Department for assessment year 2000-01 being ITA No. 1034/Hyd/2004
“Whether on the facts and in the circumstances of the case the consideration receivable by the assessee in terms of the agreement dated 27.07.1999 is assessable to tax as capital gains in accordance with the amended provisions of law prevailing at the relevant point of time relating to the levy of tax on capital gains.”
2. The assessee is an individual. He was a chemical engineer with degrees in Management from Harvard University, USA and Doctorate in Science from JNTU, Hyderabad. He was a doyen of cement industry, who started his carreer as a technocrat and rose to the level of Chairman & Managing Director of Cement Corporation of India, a public sector Corporation. While in this job, he had set up many cement factories in various sites in Madhya Pradesh, Andhra Pradesh, Himachal Pradesh, Assam and Karnatka. The Government of India recognized his services with an award of “Padmasree” and “Padmabhushan”. He promoted and was Chairman of two cement companies, M/s. Raasi Cements Ltd.(RCL) and M/s. Sri Vishnu Cements Ltd.(SVCL). He did not have controlling interest in RCL and SVCL and therefore M/S.India Cements Ltd., took over RCL and SVCL. Both these companies were subject matter of a hostile corporate takeover by rival company viz. M/s. India Cements Securities Ltd. (ICL) and its associated companies. After the takeover, the assessee lost his business and died in pain on 8th June, 2002.
3. Meanwhile, there was a search conducted in the case of one Shri Ravindra Varma, a close relative of the assessee, who had also worked as Vice Chairman of M/s. Sri Vishnu Cements Ltd. During the course of search, a document was found from the residence of Shri Ravindra Varma in the form of a non-compete agreement. The said agreement was entered into by and between the assessee and M/s. ICL on 27th October, 1999, whereby a sum of Rs. 11 crores was agreed to be paid by ICL to the assessee for agreeing not to participate either directly or indirectly in the business of cement/industry. Late Dr.B.V.Raju filed his return of income for the year under consideration on 30th June, 2000, declaring total income of Rs.2,04,549, besides agricultural income of Rs.4 1,620. Since this amount of Rs. 11 crores received under the agreement dated 27th October, 1999 was not disclosed by the assessee in his return of income filed for the year under consideration, a notice under S.148 of the Act was issued by the assessing officer to the assessee on 7th May, 2002, which was duly served on the Mr. B.V. Raju. Mr. B.V. Raju however died on 8th June, 2002 without complying with the said notice. The assessing officer therefore issued fresh notices under S. 148 of the Act to the legal heirs of the assesse and initiated the assessment proceedings for assessment of income that has escaped assessment of the deceased for the AY 00-01.
4. The preamble to the non-compete agreement dt.27. 10.99 narrates the reason why the agreement was being entered into. Mr.B.V.Raju during the course of his employment with the above referred Companies acquired a corpus of knowledge, skill, expertise, and experience related to the production, distribution, marketing, running and managing of cement plants and has also acquired or otherwise come in possession of various secret information, know-how and trade secrets relating to the Cement line of business. India Cements Ltd. and its associate companies had acquired RCL from the original promoters during April, 1998. Mr.B.V.Raju together with his family members thereafter continued their business in Cement line with SVCL till October, 1999, when SVCL was proposed to be taken-over by India Cements Ltd., and its associate companies. Mr.B.V.Raju along with other persons entered into an agreement with ICL by which they sold the shares held by them in SVCL. With the acquisition of SVCL, the core family promoters of RCL & SVCL were out of Cement business. ICL with a view to ward off competition, desired that Mr.B.V.Raju should be restrained from starting a fresh cement unit, lest it should have a bearing on their business. With that object in view, ICL entered into a Non-Compete Agreement with Mr.B.V.Raju.
5. During the course of assessment proceedings, the assessing officer confronted the legal heirs of Mr.B.V.Raju with regard to the receipt of Rs. 11 crores by the assessee as per the non-compete agreement. They however expressed complete ignorance about the said transaction. The assessing officer, therefore, made a direct enquiry with ICL which revealed that the sum of Rs. 11 crores payable to the assessee as per the non-compete agreement was not paid to him in cash and the same was adjusted against the sums which were due to M/s. Raasi Cement Ltd. by some of the erstwhile customers known to the assessee. RCL got merged with India Cements Ltd., with effect from 1-4-1998. ICL also informed the AO that Mr.B.V.Raju had given an authorization for such adjustment. A copy of such authorization was also furnished to the AO by ICL. The authorization reads thus:
“ICL Securities Limited, Chennai October, 27, 1999
Raasi Cements Limited, Hyderabad
Dear sir,
This has reference to the Non Compete Agreement executed by me today with yourselves. The consideration payable by yourselves aggregating to Rs. 11 Crores may please be adjusted as mentioned in annexure.
Dr.B.v.Raju
Encl: Annexure”
The annexure referred to above to the aforesaid letter reads thus:
“Annexure forming part of the Non Compete Agreement dated October 27,1999
