Income Tax Appellate Tribunal - Mumbai
Late Ashok Mandhana Legal Heir M.A,S ... vs Assessee on 27 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "H", MUMBAI
BEFORE SHRI G.E. VEERABHADRAPPA, HON'BLE PRESIDENT
AND SHRI V. DURGA RAO, JUDICIAL MEMBER
Sl.No. ITA No. AY Appellant Respondent
1 3880/Mum/10 2006-07 Late Ashok Addl.
Mandhana, L/H Commissioner of
Ms. Sneha A. Income-tax, 1 s t
Mandhana, 338 Floor, Piramal
A to Z Chambers,
Industrial Lalbaug, Parel,
Estate,, Ganpat
Rao Kadam Mumbai - 40012
Marg, Lower
Parel, Mumbai -
400 013.
(PAN -
AATPM6904C)
2 3904/Mum/10 2006-07 Addl. Late Ashok
Commissioner Mandhana, L/H
of Income-tax, Ms. Sneha A.
Mandhana,
Mumbai -
Mumbai.
40012
3 3882/Mum/10 2006-07 Neeta Asstt.
Mandhana, 12- Commissioner of
A, Lotus Court, Income-tax,
5 t h Floor, Dr. Range 18(1),
Annie Besant 1 s t Floor, Piramal
Road, Worli, Chambers,
Mumbai - Lalbaug, Parel,
400018
(PAN - Mumbai - 40012
ABDPM3886G)
4 3901/Mum/10 2006-07 Asstt. Neeta Mandhana,
Commissioner Mumbai.
of Income-tax,
Range 18(1),
Mumbai.
5 3879/Mum/10 2006-07 Narayandas Addl.
Mandhana HUF Commissioner of
338A to Z Income-tax,
Industrial Mumbai.
Estate, Ganpat
Rao Kadam
Marg, Lower
2 Ashok Mandhana and others.
Parel, Mumbai -
400 013.
(PAN -
AACHN1666D)
6 3907/Mum/10 2006-07 Addl. Narayandas
Commissioner Mandhana HUF
of Income-tax,
Mumbai
7 3876/Mum/10 2006-07 Nitin Mandhana Addl.
HUF, 338A to Z Commissioner of
Industrial Income-tax,
Estate, Ganpat
Range 18(2) 1 s t
Rao Kadam
Marg, Lower Floor, Piramal
Parel, Mumbai - Chambers,
400 013. Lalbaug, Parel,
(PAN -
AADH5665H) Mumbai - 40012
8 3903/Mum/10 2006-07 Addl. Nitin Mandhana
Commissioner HUF, Mumbai
of Income-tax,
9 3902/Mum/10 2006-07 Asstt. Ms. Kavita S.
Commissioner Mandhana, 12A,
of Income-tax- Lotus Court, 5 t h
18(1), Mumbai Floor, Dr. Annie
Besant Road,
Worli, Mumbai -
400 018.
Assessee by : Mr. Nimesh I. Vora
Revenue by : Mrs. Usha Nair
Date of Hearing : 27/03/2012
Date of Pronouncement : 13/04/2012
ORDER
PER V. DURGA RAO, J.M.:
These are the cross appeals except the appeal No. 3902/Mum/10 filed by the Revenue and the same are directed against the orders of the CIT(A) pertaining to AY 2006-07. Since common issues are involved in these appeals, the same were heard together and, therefore, a common order is passed for the sake of convenience.
3 Ashok Mandhana and others.
2. The grounds are common in all the appeals filed by the assessee, which are as follows from the appeal No. 3880/Mum/10:
"On the facts and circumstances of the case and in law, the learned CIT(A)
1. erred in disregarding Arms Length value of shares transferred ignoring value taken by expert independent and instead allocating value of Rs. 41 towards non-compete out of value of shares transferred.
2. failed to appreciate that no separate consideration was specif ied towards non-compete in the shares purchase agreement which was entered into between independent parties.
3. Without prejudice to above, erred in assessing the value allocated towards non-compete out of sale consideration received on sale of shares as business income u/s 29Iva) and not as capital gains without appreciating the f act that the appellant was not carrying on the business but the company (whose shares are transferred) was carrying on the business."
3. The grounds raised by the revenue are also common in the appeals filed by the revenue, therefore, the same are reproduced from appeal No. 3904/Mum/10 as under:-
"1. On the f acts and in the circumstances of the case and in law, the CIT(A) erred in adopting Earning Capitalization Method for valuation of shares as against the method adopted by the AO of share valuation method as per Wealth Tax Act.
2. On the f acts and circumstances of the case and in law the CIT(A) erred in directing the AO to adopt sale value of Rs. 529/- per share as long term capital gain as against Rs. 365/- per share taken by the AO and Rs. 41/- per share as non compete fees treated as business income as against Rs. 205/- per share taken by the AO."
4. The facts are in brief that the assessee was shareholder of Mandhana Exports (P.) Ltd. (in short "MEPL"), MEPL was a company old and managed by the Mandhana family for a number of years. It was incorporated on 16/09/98 and is in the business of garment accessories, woven labels. This company was mainly run and managed by the Mr. Nitin Mandhana. In the year 1996, the Mandhana family entered into a joint venture with Bornenann and Bick GmBH of a 4 Ashok Mandhana and others.
German Company for further expansion. Thereafter, the name of the company was changed to Mandhana Borneann Industries Pvt. Ltd. (the company) and Borneann was 50% shareholders in the company, 50% being held by the Mandhana family. Subsequently, in the year 2000, there was a global acquisition of Borneann by Paxar BV and as a result of this, 50% of share of Borneann in MEPL was acquired by Paxar BV. During the year under consideration, Paxar BV, other JV Partner decided to acquire stake of Mandhana family in the company. For this purpose, all the shareholders of the Mandhana family had entered into an agreement for transfer of the shares in the company to M/s Paxar BV for a consideration of Rs. 35.60 crore vide an agreement dated April 7, 2005. The assessee share of consideration in proportion of shareholding was Rs. 3,42,00,000/- and another amount of Rs. 42.75 lakhs relates to minor son Abhijit. The consideration on sale of shares received was offered to tax as capital gains. Since the sale of shares was not through a recognized stock exchange in India, tax was computed @ 20% after claiming the indexation. The share purchase agreement contained a clause to that effect that the transferor shall not carry on or be interested in any business which competes with the business of the company. In the assessment order, the AO was of the view that, the sale consideration needs to be allocated towards non-compete and such allocated amount is liable to be taxed as a business income u/s 28(va) of the Act. While doing so, the AO had worked out the value of shares at Rs. 365/- per share by applying the break-up method value as per valuation rules under Wealth Tax Act and the balance value of consideration of Rs. 205/- per share was treated as towards non- compete and treated the same as business income u/s 28(va) of the Act. The assessee had submitted before the AO that no part of sale consideration can be allocated towards non compete and the assessee mere shareholder had not taken part in day-to-day management of the company, hence, no value can be allocated towards non compete 5 Ashok Mandhana and others.
clause. The assessee further submitted that to compute the value of the shares, the AO has worked out the value of the goodwill 1/3 r d value of the shares. He further worked out the value of future cash flow at Rs. 100 per share. However, the AO has not accepted submissions of the assessee, thus, the AO worked out the non compete fee at Rs. 1,38,57,500/- and the same is assessed as business income of the assessee u/s 28(va) of the Act. Similarly, the amount is reduced from long term capital gain offered by the assessee. The AO also disallowed Rs. 3,08,094/- u/s 94(7) of the Act and added back to the long term capital gains of the assessee and the entire income of the assessee assessed at Rs. 3,03,37,760/-. Aggrieved the assessee carried the matter in appeal before the CIT(A).
5. The assessee has reiterated the submissions before the CIT(A) as made before the AO. The CIT(A) after considering the submissions of the assessee, held as under:-
"I have gone through the submissions of the appellant and the remand report f iled before me.
a) As regards contention of the appellant that n'o value can be allocated towards non-compete, the argument s. devoid vf any merits. The agreement specif ically provides for non-compete arrangement and value thereof is embedded in total consideration. The specif ic clause as per the agreement may be reproduced below:
"5.6 Non Compete Covenants
a) Each and evety Seller agrees not to compete with the Purchaser Business directly or indirectly, for a period of 2yers from the date of completion of sale. This inc1ucies Itiat they shall not directly or indirectly carry on or be interested, whether as shareholder, consultant, investor, partner, director, employee or otherwise in any business which competes with the business of the Company. In the event of doubt whethei a picposed activity contravenes this undertaking the Seller may, af ter setting out the facts and circumstances, seek the Purchaser's written conf irmation which shall not be unreasonably withheld.
6 Ashok Mandhana and others.
PRO VIDED, HOWEVER THAT Mr. N/tin Mandhana shall be at liberty to carry on any business or employment af ter one year from the date of completion of sale. He shall be free to f airly and vigorously solicit Business from entities who are the Company's current or past customers.
b) Each and eve,y Seller agrees, for a period of two years from the date of completion of sale, not to do anything..which would affect adversely the Purchaser's capacity to conduct the business.
This includes that the Sellers do not:
i. Compete with the company in soliciting any Business (as def ined below) from any person who is a customer of the company (or was as of December 8, 2004), client, supplier, dealer or agent of the company, or to persuade any of them to cease doing business or scale down the level of business with the company, and ii. Employ or attempt to employ or assist anyone else to employ or entice away in any manner any person in the employ of the company who possesses industry- specif ic or business critical skills or experience and whose loss is not readily remedied. In the event of doubt whether a proposed activity contravenes this undertaking the Seller may, af ter setting out the f acts and circumstance, seek the Purchaser's written conf irmation which shall not be un,eaonably withheld.
PROVIDED, HOWERVER, THAT the obligajk,ns contained in the sub-clause (b)(i). in so f ar as the pertain to soliciting any business, shall not be applicable to Mr. Nitin Mandhana beyond a period of one year from the execution of the agreement C) The expression 'Business 'for purposes of the foregoing provisions shall mean generally the Garment Accessories ilne of the business and specif ically all the business activities being carried on by MBIL, as of December 8, 2004.
The Purchaser shall take steps to ensure that MBIL shall not employ or attempt to employ or assist anyone else to employ or entice away in any manner any person in the employment of Indus Fila Pvt. Ltd., Indus Infoways Pvt. Ltd. and Propeller Inf otech., for a period of two years from the date of completion. In event of doubt whether a proposed activity contravenes this undertaking the Purchaser may, af ter setting out the f acts and 7 Ashok Mandhana and others.
circumstances, seek the respective company's written conf irmation, which shall nat be unreasonably withheld."
Therefore as per the agreement a portion of the total sale consideration has to be allocated towards non-compete covenants and the action of the Assessing Off icer is based on these f acts and has to be upheld.
b) Appellant's f urther claim that consideration towards non- compete will be liable to capital gain tax and not as business income u/s 28(va) is not correct. Any receipt towards non- compete is made is chargeable to tax vide Sec 28(va) of the Act which is reproduced below '(Va) any sum, whether received or receivble, in cash or kind, under a agreement for-- -
(a) not cariying out any activity in relation to any business, or
(b) not sharing any know-how, patent, copyright, trade-mark, license, franchise or'any other business or commercial right of similar nature or in formation or technique likely to assist in the manuf acture or processing of goods or provision for seivices:
Provided that sub-clause (a) shall not apply to--
(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manuf acture, produce or process any article or thing or right to car!y on any business, which is chargeable under the head "Capital gains'
(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment. Piogramme, in accordance with the terms of agreement entered into with the Government of India.' From the same, it can be seen that part consideration towards non-compete f alls u/s .28(va). Further, proviso to said section provides that any consideration received for transfer of right to manuf acture, produce or process any article or thing or right to carry on any business which is chargeable to capital gains, then provisions of sub-clause (a) to Sec 28(va) will not apply.
In this case, the consideration is not for any of the rights mentioned in proviso and hence, the proviso is not applicable. In any case, the consideration f alls under sub-clause (b) to Sec 28(va) to whibh the proviso is not applicable. Thus, from all angles, allocation towards ..rYon-compete is liable to tax as Business income.
8 Ashok Mandhana and others.
In view of the above discussion, even the decision of Mumbai Tribunal of Mrs. Hami Aspi Balsara (supra) relied upon by the appellant does not help. Therefore in principle the action of the Assessing Off icer in allocating a portion of the consideration towards non-competing covenants and taxing it as business income, is upheld. However, I agree with the appellant that allocation of consideration towards non-compete is not worked out correctly by the AO."
6. In so far as addition in respect of 94(7) is concerned, after considering the submissions of the assessee, the CIT(A) held as under:-
"5.3 I have carefully considered the f acts of the case, arguments of the AO and the submissions of the AR of the appellant. On perusal of the same, it is clear that all conditions of section 94(7) needs to be cumulatively satisf ied. In this case, f irst & second conditions are not satisf ied. The shares have been purchased before 5.4.2005 and it does not f all within a period of 3 months from 31/09/2005 which is the record date. Similarly, the second condition is also not satisf ied as the shares have been sold on 31/03/06. This date does not f all within 3 months from the record date. Hence, invocation of provisions of section 94(7) is not correct. I, accordingly, direct the AO to allow long term capital loss on sale of shares as claimed by the appellant. This ground of appeal is allowed."
7. Against the order of the CIT(A), the assessee as well as the revenue are in appeals before us.
8. At the time of hearing before us, the learned counsel for the assessee canvassed that the issues involved in these appeals are squarely covered by the assessee's own group case for AY 2006-07 vide ITA No. 3881/Mum/10 and 3877/Mum/10 and others in the case of Govindlal Mandhana, order dated 15 t h February, 2010, wherein the JM was one of the party. A copy of the said order is available on record.
9. On the other hand, the learned DR has fairly accepted the submissions made by the learned counsel for the assessee.
9 Ashok Mandhana and others.
10. We have heard both the sides, perused the record and gone through the orders of the authorities below. All the assesses, who are in appeals before us are the shareholders of the Mandhana Exports Pvt. Ltd. and they entered into a common agreement dated 7 t h April, 2005 at Bangalore to sell their shares in the company. After careful consideration of all the relevant material, we find that the issues involved in all these appeals are covered by the order of the co- ordinate bench of the Tribunal, Mumbai in the case of Govindlal Mandhana (supra), who is also common shareholder, entered into a common agreement dated 7 t h April, 2005. The Tribunal has held in the said case as under:-
"6. We have considered the issue. Before adverting to the arguments of the learned Departmental Representative, the following facts are to be placed on record. The assessees before us were shareholders in Mandhana Exports Pvt Ltd
- a closely held company owned and managed by Mandhana family for a number of years. In the year 1996, the assessee company entered into a joint venture arrangement with Bornemann and Bick GmbH, Germany, under which 50% of Equity shares were allotted to this German company and the name of the company was changed to Mandhana Boremann Industries Pvt Ltd ('Mandhana Boremann', in short) . As this German company was acquired by a Dutch company by the name of Paxar BV, the shareholdings in Mandhana Boremann were transferred to Paxar BV. In the relevant previous year, Paxar BV acquired all the shares held by Mandhana family for a consideration of `570 per share which worked out to ` 45.60 crores. All the shareholders in Mandhana family entered into an agreement with Paxar BV for the purpose of this transfer of shares, and one of the clauses in the agreement also provided that the transferor shall not carry on, or be interested in, any business which competes with the business of Mandhana Boremann.
7. As seen from the share purchase agreement placed on record, 19 Members entered into agreement with Paxar BV Corporation of Netherland for sale of their 50% shares of 8 lakh fully paid up equity shares of `10/- each. The consideration on payment was fixed at a fixed price of 456 million at a price of `570/- per share and purchase consideration shall be payable to pro-rata to each of the sellers in lump sum simultaneously at completion of the agreement. There is a non-compete clause against all sellers as part of sale covenants vide Para 5.6 wherein each and every seller agrees not to compete with the business directly or indirectly for a period of 2 years from the date of completion of sale. However, this clause exempts Mr. Nitin Mandhana for a period of one year as there is separate retention agreement indicating his services for a period of one year and for which separate amount was paid. Clause 5.6(c) specifies 'business' as under:-
"The expression business for purposes of the foregoing provisions shall mean and include generally the Garment Accessories line of business and 10 Ashok Mandhana and others.
specifically all the business activities being carried on by MBIL as of December 8, 2004"
The above covenant indicate that after sale of shares, the group of persons collectively were prevented in dong any business in the garment accessories line of business carried on by the company and this was part of many sale covenants agreed at the time of sale of 50% of share holding in the company to the foreign company. There is no specific consideration paid as non-compete amount. Even though respective assessees have business income, only the company is doing the 'business' as specified in the agreement. Respective assessees business is independent and separate of the line of business in which company was involved and for which non- compete clause was agreed. Therefore, even if Assessing Officer's opinion is to be considered as correct that the share price was fixed for non-compete clause also, since respective persons are not in the business of company's line of business, the amount cannot be considered as business income in the absence of any business activity in similar line. It can only be considered as capital gain amount received as part of sale consideration upon sale of shares by individual members. These aspects were considered in the Coordinate Bench decision of Homi Apsi Balsara's vs. ACIT 30 DTR 576 wherein that assessee also sold shares through share purchase agreement which had also a clause for non compete. Considering the fact that the assessee on her own was not carrying on the business and it is the company which was carrying in the business and as per Section 55(2)A where the capital asset is in nature of right to carry on business, it was held that it will fall within the ambit of capital gains. The facts in the above said case equally applies to the facts in the present case.
8. Considering these aspects the Coordinate Bench decided in favour of the assessee in the case of Shashikant G. Mandhana, HUF in ITA No.3908/Mum/2010 and in the case of Savita N. Mandhana in ITA Nos.3900 and 3878/Mum/2008. The Coordinate Bench decision is as under:
"4. We find that, even in the case of Homi Aspi Balsara (supra) there was a specific non compete obligation and yet the coordinate bench was of the view that no part of the sale consideration of shares could be attributed to be taxed in the hands of the assessee as business income under section 28(va)- as is clearly discernable from the following observations made by the coordinate bench: The A.O has determined the book value of shares and has treated the difference between the sale price of shares and its book value as consideration towards non-compete fees. Admittedly, in the share purchase agreement no consideration was assigned towards non- compete fees and the parties had entered into the share purchase agreement after mutually settling the price of shares. The A.O. has primarily relied on Article 11.1 of the share purchase agreement to infer that assessee had paid amount towards non-compete fees.
Article 11.1 reads as under:-
"In consideration of the Purchase price received by the Sellers under this Agreement, the sufficiency of which is hereby acknowledged, the Sellers agree that for a period of 5 years from Completion, the Sellers shall not be engaged in any of the Restricted Business in India."
11 Ashok Mandhana and others.
This clause clearly shows that in the purchase price of shares, consideration towards Restraint Clause was embedded. But the same was not specifically mentioned in the Share Purchase Agreement, As rightly pointed by the ld. Counsel for the assessee, non-compete fees could be payable primarily with respect to manufacturing company viz. Balasara Home Products. As regards other two IPR companies viz. Balasara Hygiene Products and Besta Cosmetics, since value of IPR was not reflected in the balance sheet, which constituted major part of the share price, the same had to be determined before arriving at the true book value of share of these two companies. The A.O. has computed approximately 80% of the consideration towards non-compete fees which, in any case, is not in conformity with the settled principles of valuation of shares. Therefore, we are of the opinion that the basis adopted for assigning consideration towards non-compete fees was not correct. Now the question would be how to assign the consideration towards non-compete fees. We really do not need to enter this area particularly because the difference, between the sale price of share and the true book value of the share, if allocated towards non-compete fees, was to be computed u/s.55(2)(a). This would be clear from subsequent discussions. Admittedly, assessee on her own was not carrying on business and it was the company in which she was share holder was carrying on the business. Section 55 2(a) reads as under:-
"Section 55(2)(a) " (a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business] [or a right to manufacture, produce or process any article or thing] [or right to carry on any business], tenancy rights, stage carriage permits or look hours, -"
Thus, it is evident that where capital asset is in the nature of right to carry on business, then the same will come within the ambit of capital gain tax.
Section 28 (va) reads as under:-
Section 28 (va) "any sum, whether received or receivable, in cash or kind, under an agreement for - (a) Not carrying out any activity in relation to any business; or (b) Not sharing any know-how, patent, copy right, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. Provided that sub-clause (a) shall not apply to - (i) Any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head "Capital gains", Thus, section 28 (va) would be attracted where the assessee was carrying on business and not where assessee only had right to carry on business in the form of capital asset. Further as per Circular No. 763 dated 18/2/1998 by Finance Act, 1997 the amendments were made in section 55(2)(a) of the Act to bring extinguishment of right to manufacture, produce or process any article or thing or right to carry on
12 Ashok Mandhana and others.
any business within the ambit of capital gain tax. Similarly Circular No.8 of 2002 dated 27/8/2002 explaining the provisions of Finance Act, 2002 by which clause (va) was inserted in section 28 of the Act, clarifies that receipts for transfer of rights to manufacture produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head capital gain would not be taxable as profits and gains of business. Thus, the difference between the sale consideration and true value of shares was chargeable as capital gains. .........
5. Respectfully following the esteemed views of the coordinate bench, with which we are in respectful agreement, we hold that the amounts held to be attributable to non compete obligations are taxable as capital gains and not as business income. To this extent, we hold that the order of the CIT(A) is indeed vitiated in law, and, to that extent, that grievance of the assessee must be upheld. There is no dispute that the assessee has already included entire consideration for sale of shares, including what could be attributed to non compete obligations, as capital gains. In this view of the matter, the exercise of bifurcation between consideration attributable to sale of shares and for non compete obligations is rendered academic and infructuous. We may also add that it is not even in dispute that the assessee before us was not actively engaged in the business and so far as the assessee actively engaged in the business is concerned, it has been stated at the bar that income attributable to non compete obligations has been offered to tax as business income, but then, given the uncontroverted position that the assessee was not actively engaged in business, it is not really necessary to examine that aspect of the matter any further. The stand of the assessee, in treating entire consideration received on sale of shares as taxable under the head 'capital gains' must therefore be upheld.
6. For the detailed reasons set out above, and respectfully following the coordinate bench in Homi Apsi Balsara's case (supra), we hold that the entire consideration has been rightly offered to tax under the head capital gains. The partial relief granted by the CIT(A), by reducing the quantum of amount attributable to non compete obligations, is thus rendered academic and infructuous. The grievance and the stand of the assessee, on the other hand, is upheld".
9. The learned Departmental Representative in the course of the argument relied on the decision of Coordinate Bench in the case of Nayan C. Shah vs. DCIT 14 Taxmann.com 155 (Mum). In that the facts are:
"The assessee had promoted a company called Paramount Health Care Management Company Pvt. Ltd. (PHMC) for the purpose of providing Third party administration and managed care service. A German Company namely 'MR' was interested in becoming a shareholder of the said company. For this purpose a Memorandum of Understanding (MoU) was entered into between the assessee and 'MR'. Under the MoU, it was inter alia agreed that 'PHMC'. will increase its share capital by issue of further shares and 'MR' would subscribe to 500000 no. of shares being 33.33 per cent of shareholding in the 'PHMC'. As 'MR' had acquired 33.33 per cent of shares in the 'PHMC' and had the option to go upto 51 per cent they insisted that assessee should give up right to carry on such business as may be carried on by 'PHMC'. Accordingly, the assessee entered into a 13 Ashok Mandhana and others.
non-compete agreement with 'MR'. In terms of said agreement the assessee received an amount of `43,14,775/-. The said payment was made to assessee for agreeing not to carry on the business in competition with Indian company into which 'MR' had invested. The assessee claimed that said amount was a capital receipt. The assessee's case was that the payment was for not carrying on any business and hence provisions of section 28(va) would not be applicable, in view of the proviso under that section. The Assessing Officer did not accept the submissions of the assessee and brought to tax the entire amount as business profits under section 28(va). On appeal, the Commissioner (Appeals) also held that the payment fell under section 28(va) and confirmed the action of the Assessing Officer, in treating the entire receipt as business profits".
It was held that:
"On reading of the non-compete agreement gives the impression that 'MR' and the assessee had agreed upon two types of payments (i) US$1.25 million on the first year for the assessee not to undertake various activities provided in clause 1 of the Non compete agreement. And (ii) a further compensation to the assessee, who is also the Managing Director of the Joint Venture companies, based on the business results of the company to be computed on the basis of the formula given in the non-compete agreement, which is based on the performance and profitability for a period of 5 years. Thus the payment made during the year can be considered only as payment made for the services rendered by the assessee to the non-resident transferee, based on the performance/profitability. Thus the payment has been rightly assessed as revenue receipt. Even if the entire agreement is considered as a single one and the payment is part of the non compete fee paid, the issue has to be considered in the context of section 28(v)(a) introduced w.e.f. 1.4.2003. The compensation accrues and is receivable only under the year in appeal. Therefore, the taxability of the amount is considered as per the provisions of law prevailing for this year. Hence the receipt should be analyzed in the context of section 28(va). Section 28(va) deems that payment for certain restrictive covenants would be in the nature of business income/revenue receipt. The exception to this would be any amount received on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business which is chargeable under the head capital gains.
In the present case, the assessee has agreed not to do any business in competition with 'MR'. At the same time he has continued to do business which he was carrying on earlier, for the foreign company. The assessee argued that professional activities of radiology and imaging has been given up in view of non compete agreement and that should be considered as giving up his right to carry on any business. But it is a fact that even after the non-compete agreement the assessee is continuing with the same activities for German company. Therefore, whether the restrictive covenant agreed to by the assessee would amount to transfer of right to carry on any business is to be seen.
14 Ashok Mandhana and others.
The first aspect is that the assessee has not transferred any right to do business. It is only self imposed restriction upon himself not to enter into business in competition with the non-resident. The Amritsar Tribunal in the case of Dy. CIT vs. Max India Ltd (2007) 112 TTJ 726 has held that when the assessee signed the negative covenant not to carry on manufacture or trade in produce for certain period of time, it amounted not only to self imposed restriction and not a transfer. The right to manufacture or trade remained intact after the period for which negative covenants were signed. Even though the Tribunal in that case held in favour of the assessee as it related to the year prior to 2003-04, the ratio that mere restriction not to carry out manufacture or trade in competition would not amount to transfer of right to carry on any business, would be applicable to the instant case.
In the circumstances, it cannot be said that the assessee had transferred completely its right to carry on any business; in fact, the assessee had continued to do his activity in the same line even after entering into this non-compete agreement. Agreement not to compete with the third party in the business will not encompass totality of right to carry on any business. The right to carry on any business is larger in scope and range and agreement not to complete with the business of a particular person is only part of its right. The agreement not to compete with the particular person in his business does not prevent the assessee from carrying on the same business in a manner which will not compete with the business of that person. Therefore, it is opined that the agreement not to compete with the business of the person would not amount to restriction of carrying on any business and much less constitute a transfer of right to carry on any business.
Therefore, when the assessee entered into an agreement not to carry on any business in competition with the transferee, the consideration for the negative covenant of non-competition will fall within the sub-clause (2) of section 28(va), i.e. sum received for not arriving on any activities in relation to any business and cannot fall within the exclusion contemplated in the proviso viz., not transfer of right to carrying on any business. Thus, it is held that the payment restriction for not to compete German company can be classified only as agreement not transfer of a right to carry on any activities in relation to any business and will not fall under transfer of right to carry on business.
Although the impugned payment made to the assessee is to be considered as a part of the non-compete agreement, it cannot be considered as payment made to the assessee for transfer of the right to carry on any business during the year. It cannot be agreed that this payment made after five years, on the basis of the performance and profitability of the company for the past five years is also part of the compensation for the assessee for refraining from carrying on any business. It is in the nature of share of profits earned by the joint venture in excess of the estimated profits. That is why the payment is made after 5 years taking into account performance of the company for all the 5 years.
15 Ashok Mandhana and others.
Therefore, the amount of `43,14,775/- received by the assessee during the year, can be considered either as compensation for the assessee agreeing not to carry out any activity in relation to any business (attracting clause (a) of section 28(va) or the payment is for the services rendered by the assessee for the non-resident computed on the basis of the profitability of the venture for the 5 years. Either way, it is revenue receipt in the hands of the assessee. In this view of the matter, it is held that the amount received by the assessee has been properly assessed as revenue receipt in the hands of the assessee".
10. As can be seen from the above the facts in the case more relate to Nitin Mandhana case ( managing Director and one of the Share holder), the case in which the assessee offered the amount as business income accordingly. Since the facts in the assessee's case are entirely different, the principles laid down by the above Coordinate bench does not apply to the present case.
11. Further in the case of Ramesh D. Tainwala vs. Income Tax Officer 15 taxmann.com 181 (Mum.), the facts are as under.
"The assessee was one of the promoters of 'TP Ltd' and together with other promoters held substantial shares in the company. By an agreement 'I Ltd' (acquirer) agreed to purchase shareholding of the assessee along with other promoters of 'TP Ltd'. The acquirer with a view to ensure that the promoters after sale of the shares did not indulge in competing business entered into a non-compete agreement whereby the assessee was paid `2 crores for agreeing not to carry on or be engaged, concerned or interest in any competing business for a period of 11 years. The sum of 2 crores was not offered to tax by the assessee in the return of income filed for the relevant assessment year. Later on, the assessee filed a letter in which he claimed that sum of `2 crores being compensation for agreeing not to engage in the business in which the assessee had sole expertise and knowledge was compensation received for giving up a source of income which was a capital receipt and not income chargeable to tax. The Assessing Officer held that the receipt in question was a fee received for not carrying out any activity in relation to any business and, therefore, chargeable to tax under section 28(va). On appeal, the Commissioner (Appeals) confirmed the view of the Assessing Officer. In the instant appeal, the assessee contended that sum received in cash, on account of transfer of right to carry on any business would be chargeable under the head 'capital gains'. ...
It was held as seen from the above facts, there was a separate share purchase agreement as well as non-compete agreement for which an amount of `2 crores was paid, the amount of which was not offered to tax by assessee. On the set of facts, it was held that the amount was taxable as business income.
12. In this case, the assessee was only share holder in the company in which the entire group was having 50% share holding and upon acquiring the 50% share, there are sale covenants towards non-compete. Considering the above facts, while appreciating the efforts made by the Departmental Representative in trying to distinguish, we are unable to differ from the findings of the Coordinate bench in the other shareholder's cases. Respectfully following the decision of 16 Ashok Mandhana and others.
coordinate bench in other share holders case with which we agree, we hold that the assessee's contentions are to be upheld and accordingly the Assessing Officer is directed to treat the entire amount as sale consideration for sale of shares and no amount be assigned to non-compete and to assess under the head Capital gains only.
13. Since the assessee's grounds are allowed, the Revenue grounds in reducing the amount from `205/- to `41/- as was done by the CIT (A) becomes infructuous and academic in nature and therefore, the Revenue grounds are dismissed.
14. In the result the assessee's appeals are allowed and Revenue appeals are dismissed."
11. Since the issues are materially identical to that of the case decided by the Tribunal in the group case of the assessee viz. Govindlal Mandhana (supra), respectfully following the decision of the coordinate bench in the said case, all the appeals filed by the assessee are allowed.
12. As the assessee's grounds are allowed, the revenue grounds in reducing the amount from Rs. 205/- to Rs. 41/- as was done by the CIT(A) becomes infructuous and academic in nature and therefore, revenue grounds are dismissed.
13. In the result, appeals of the asesssee are allowed and the appeals of the revenue are dismissed.
Pronounced in the open court on this 13 t h day of April, 2012.
Sd/- Sd/-
(G.E. VEERABHADRAPPA) (V. DURGA RAO)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 13 t h April, 2012
kv
17 Ashok Mandhana and others.
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A) concerned.
4) The CIT concerned.
5) The Departmental Representative, "H" Bench, I.T.A.T.,
Mumbai.
By Order
//true copy//
Asst. Registrar,
I.T.A.T., Mumbai.
De scription Date Intls
S.No.
1. Draft dicta te d on 10/04/12 Sr.P .S./P.S
2. Draft place d be fore author 11/04/12 Sr.P .S/PS
Draft proposed & placed be fore the JM/AM
3 se cond Me mbe r
4 Draft discussed/approved by se cond JM/AM
Membe r
5 Approved Draft come s to the Sr.P.S./PS Sr.P .S./P.S
6. Ke pt for pronounce me nt on Sr. P.S ./P.S.
7. File se nt to the Be nch Clerk Sr.P .S./P.S
8 Date on which fi le goe s to the He ad
Cle rk
9 Date of Dispatch of orde r