Case Law Details
RELEVANT PARAGRAPHS:
16. Coming to the merits of the case, facts in detail have been narrated above. The crucial facts, which are clear on the record are as under:
(i) Said non compete agreement has been accepted by the department while framing the assessments u/s 143(3) where the expenses claimed by the firm payable to assessee as non compete commission has been allowed on mercantile basis.
(ii) Consequent to survey in the premises of the firm, no action u/s 148 or Section 263 had been undertaken in firm’s case to hold adifferent view about the acceptability of the agreement.
(iii) Even in the case of the assessee, the department is accepting the earning of income albeit on a different footing i.e. claiming the same to be salary income in contra distinction to assessee’s claim being business income by virtue of Section 28(va). Though reference is made to colourable devise in the hands of the assessee following Supreme Court judgment in the case of McDowell &. Co. (supra), the same confine only to the issue about business income or salary income as the revenue has chosen to treat the same as salary and not business income. In our view, once these are clear facts, the controversy before us is limited to “whether the income is asses sable under the head “business income” as claimed by the assessee or taxable under the head “salary income” as held by the department; or (b) whether this attempt on the part of the assessee is a colourable device. Coming to the issue about tax ability of the head, it is clear that CIT(A) has held that there is no quarrel to dual capacities of assessee and the assessee’s right by choosing cash system. First we will take the issue about colourable device. In our view, consequent to Hon’ble Supreme Court judgement in the case of Azadi Bachao Aandolan (supra), McDowell & Co.’s case does not have the same force by holding that the arrangements made by the assessee within four coroners of law it reduces taxes, is colourable device. Section 28(va) clearly postulates a specific treatment to the sum received consequent to agreement not to carry out any activity in relation to any business. The assessee’s contention is that this being a specific provision, the income is taxable under this head i.e. business income, it further gives a right to choose one of the acceptable methods of accounting – mercantile or cash method. In our view, once there is a specific provision which assessee consider to be applicable, it will not be a |colourable device to offer the same to tax under that head. Similarly, if assessee has right to choose between cash and mercantile system, it will not be a colourable device on the part of the assessee to choose one of them. The action of the assessee cannot be called colourable merely because it reduces the incidence of tax. The assessee had no intention to fabricate a colourable device is clear from the fact that in computation of incomes, assessee stated these facts, therefore, this arrangement can not be held as colourable device.
17. Now coming to the issue in question about the head of tax ability, the provisions of Section 28(va) have been narrated above. Except from raising general argument about colourable device, lower authorities have not disputed the arguments of the assessee about applicability of Section 28(va). CIT(A) has considered the argument of the assessee and at the end held that this is a colourble device and the income is asses sable under the head as salary income without commenting on inherent merits and scope of Section 28(va). In our view, provisions of Section 28(va) are applicable to assessee’s case as a special provision derive light from the following observations of Hon’ble Supreme Court in the case of N.L. Mehta Cinema Enterprises, 208 ITR 975.
“Held, that the rental income from residential property used and occupied by tenants squarely falls under the head of “Income from house property”. The said income cannot be, therefore, classified, under the head of profits and gains of business. It is irrelevant that the assessee is a business company and the assessee would not have constructed separate residential buildings on the said plot to house its tenants but for purpose of facilitating construction of cinema theatre.”
and the decision of S.G. Mercantile Corporation p. Ltd. vs CIT, 83 ITR 700 as under:
(iv) that where, as in this case, the income could appropriately fall under section 10 as being business income, no resort could be made to section 12.
The liability to tax under section 9 of the Income-tax Act, 1922, is of the owner of the buildings or land appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under section 9 even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon.
The residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded.” It is a settled proposition that when the income can be taxed in two heads, the one which is specific is to be invoked, consequently, Section 28(va), being a specific head, the income earned by assessee by non compete fee is assessable under the head “business income”. Our view is strengthened by the fact that relationship consequent to this agreement is on principal to principal basis and does not flow from the employer-employee relationship. Consequently, the income from non compete commission is asses sable under the head “business income”. Coming to the system of accounting followed by the assessee, it is not a exceptional practice when the source of receipt follows the mercantile system and recipient of income follows cash system. In our view, assessee has further contended that he wanted to be taxed on the amount it actually received. The assessee can so arrange his affairs as law permits and the same cannot be called colourable merely because it results into a lesser or deferred tax liability. In view thereof, we hold that the non compete commission earned by the assessee has to be assessed under the head “business income” on cash system basis, ground Nos.2 & 3 of the assessee are allowed. Since we have upheld the main ground of the assessee, the additional ground raised become infructuous.
