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Income Tax Appellate Tribunal - Bangalore

Asiatic Industrial Gases Ltd. vs Dy. Cit on 18 November, 2005

ORDER

Gopal Chowdhury, J.M.

1. These cross appeals are filed by the assessee and the revenue; against the appellate order dated 1-9-2003 passed by the Commissioner (Appeals)-I, Bangalore. As the common issues arising out of the order of the Commissioner (Appeals) are involved in these appeals the appeals are disposed off by this common order:

I. Assessees Appeal in ITA No. 1324/Bang./03:

2. At the time of hearing of the appeal, the learned authorised representative for the assessee did not press Ground Nos. 1 & 2. Accordingly the same are dismissed.

3. In the Ground Nos. 3 to 7 common issues are involved and these grounds are as follows:

(i) For that on the facts and in the circumstances of the case, the Commissioner (Appeals) was wholly unjustified in law and in fact in upholding the assessment of Rs. 2,02,25,000 as the appellant's income chargeable under the head "Profits and gains of business."

(ii) For that on the facts and in the circumstances of the case, the authorities below totally failed to appreciate that the said consideration of Rs. 2,02,25,000 having been received for transfer of business network including goodwill thereof, such income was not assessable under the head "Profits and gains of business".

(iii) For that on the facts and in the circumstances of the case, the authorities below failed to appreciate that the said consideration having been received for transfer of "capital asset", the income, if any, could not be assessed under the head "Profits and gains of business".

(iv) For that on the facts and in the circumstances of the case, the said consideration of Rs. 2,02,25,000 having been received for transfer of "capital asset", cost of acquisition of which was incapable of being measured in monetary terms the said amount was not includible in the total income since capital gain could not be quantified.

(v) For that on the facts and in the circumstances of the case, income attributable to the said sum of Rs. 2,02,25,000 be either deleted from the total income or alternatively the assessing officer be directed to assess the income arising from said consideration under the head "Long-term capital gains".

4. In the above mentioned Grounds the assessee has thus objected to the orders of the authorities below assessing the sum of Rs. 2,02,25,000 as business income as against capital receipt claimed by the assessee. In the paper book, the assessee submitted written arguments as placed before the learned Commissioner (Appeals) in support of the above-mentioned grounds and in the course of hearing the learned authorised presentative relied thereon. For the sake of brevity relevant submissions are reproduced below:

The assessee is a Public Limited Company which was hitherto engaged in the business of production and sale of packaged gases viz. Oxygen, Medical Oxygen, Nitrogen, Argon, Hydrogen and dissolved Acetylene. The assessee used to market and sale these gases in cylinders. The assessee had manufacturing facilities at Bangalore and Hyderabad. In connection with sale and marketing of the products the assessec had developed extensive 'Business network' in Karnataka and Andhra Pradesh. The assessee had sales depots at'(1) Avalahalli, (2) Peenya, (3) Chennai, (4) Hospet, and (5) Mettur in Karnataka and (1) Secunderabad, (2) Jeedimetla, and (3) Shahabad in Andhra Pradesh. Besides these sales depots, the assessee also had dealer network for distribution and sale of company's products and at the material time the assessee had 14 dealers through whom the assessee was marketing and selling its products. Besides the sales effected through the dealers the company also had substantial direct sales to industrial customers from whom the assessee used to receive the sales orders underrate contracts or on annual contract basis. The company was one of the reputed producer and seller of industrial gases in the States of Karnataka and Andhra Pradesh and over the years the assessee-company had developed an extensive marketing network and customer base in these southern States.

After the Government of India initiated the economic liberalization policies various foreign companies entered Indian markets. In the field of marketing of industrial gases some of the reputed foreign companies entered Indian markets. Due to increased competition the business environment was not conducive for companies who did not have sufficient financial muscle to withstand the intense competition from the financially sound multinational companies. One of the foreign entrants in India in the field of industrial gases was Praxair India Ltd., a wholly-owned subsidiary of Praxair-Inc., USA. The said Praxair had set up manufacturing bases in different parts of India either by acquisition of existing plants or through green field projects. However, although the said Praxair had manufacturing facilities, it lacked sufficient marketing and distribution expertise, information, data and network. In order to increase its business volume M/s. Praxair India Ltd. therefore approached the assessee with an offer to buy out assessee's marketing and distribution network including Goodwill of assessee's business. After due consideration of the offer made by Praxair the assessee-company agreed for transfer of its business of marketing of industrial gases and agreed to sell, convey and assign to Praxair the marketing and distribution network. The scope of the business transfer was set out in Article 1 of the Agreement dated 23-9-1999, copy of which is enclosed herewith and marked as Annexure-II. In the said Clause 1, the assessee agreed to sell free of all charges, lien, mortgage, encumbrances and impediments the business network and all the Good will pertaining to the business of the assessee. As per article 2 of the preamble of the agreement the 'network' was defined as distribution network of customers, dealers, facilities and depots for the sale and distribution of the products'.

Thus if the Agreement dated 23-9-1999 is read as a whole it will be evident that the assessee-company did not sell the 'Goodwill of business' but agreed to transfer and in fact 'transferred to M/s. Praxair India Ltd. its business of marketing and distribution of industrial gases and also transferred in its favour the distribution network, customers and sales depots.

The assessing officer has put undue emphasis on the term 'goodwill' used by the assessee in the return for drawing adverse inference against the assessee. However, if the agreement as a whole was properly interpreted by the assessing officer then it would have been evident that the goodwill' was one of the assets that was transferred by the assessee to M/s. Praxair. Your honour will note from the agreement that M/s. Praxair had agreed to take over the marketing, selling and distribution network, customer database of the assessee for its business purposes. This was described as 'network' and for transferring such network the transferee had agreed to pay consideration of Rs. 2,02,25,000. In fact, after the execution of the said agreement with M/s. Praxair, a letter was sent by the assessee to all its customers, dealers and business associates informing them about the transfer of assessee's business. A copy of the said letter is enclosed and marked as Annexure 3. In the said letter, the company had requested the customers and dealers of the company to extend full co-operation to M/s. Praxair. The company also requested the customers who had given standing supply orders or executed rate contracts, to suitablv amend their orders so that the Praxair could undertake the sale of products to the said customers. Pursuant to the said agreement, M/s. Praxair also took over charge of all the depots. All costs, charges, expenses and outgoings relating to maintenance and running of the depots were thereafter borne by Praxair. The company's depots except at Avala Halli and Peenya were located in the leased premises. The assessee arranged to transfer the lease of these depots in favour of Praxair wherever so desired. Accordingly, the company terminated its leases and fresh lease agreements were directly executed between the landlords and Praxair. Thus in terms of the Agreement for Transfer of network, the company also undertook to extinguish and determine its leases with the landlords of the said depots. The consideration for extinguishments or termination of leases was included in the said amount of Rs. 2,02,25,000.

The company, in terms of the said agreement, had agreed to transfer and provide the detailed list of all the customers of the company to Praxair and had also agreed to provide the complete list of pending orders received from customers. Accordingly, the company submitted to Praxair the detailed list of the customers along with its pending contracts for supply of products to Praxair. For receipt of this valuable information relating to assessee's customer database and further transferring such business volumes and also for the transferee the information and distribution network including sales depots, the assessee had been paid consolidated lump sum consideration of Rs. 2,02,25,000 by Praxair.

In modern business, the commercial success of corporation depends not only on manufacturing capabilities but it depends largely on the selling, distribution and marketing skills of that organization. In today's commercial world, the marketing, selling and distribution activities constitute very important functions of the business. The success and failure of a commercial organization now depends more on the efficient, effective and timely distribution network. In the present case, Praxair had agreed to take over and in fact took over this important business functions of the assessee along with its tangible and intangible assets, i.e., the selling and distribution network and information and data relating to marketing and selling of the producers. By effectively and forever transferring the customers and the supply contracts, the company had transferred its business of sale and marketing of industrial gases.

It may be true that under the Agreement for Transfer of business, the company had not transferred the physical assets of the company with which the company manufactured and produced goods. However, in any commercial organization, the production of goods is made for the purpose of its marketing and ultimate sell to the customers. The products are not manufactured for the sake of manufacture, but the intention behind manufacturing any commercial product is its sale to the customers at profit. By transferringthe entire marketing network including its customer base, the company had effectively transferred in real terms it's business of sale of industrial gases though the physical ownership of the manufacturing assets were retained by the assessce. However, this fact did not alter the basic character of the transaction which was transfer of business to M/s. Praxair India Ltd., in real terms.

The network for marketing and distribution of products was developed by the assessce by dint of experience and business practices followed by the company over the past several years. These intangible assets were in the nature of self-generating asset akin to goodwill. Over the years, due to experience and skills developed by the company, it had acquired edge in the field of marketing, distribution and sell of industrial gases. The company had developed committed customer network and base from whom firm contracts or rate contracts were received by the company. In the Agreement the parties chose to describe such 'Network of distribution and customers' as 'Network' inclusive of 'goodwill'. Your honour will appreciate that as in the case of 'goodwill', this business network was also a self-generating asset, cost of acquisition was ascertainable in precise monetary terms. Taking cue from provisions of Section 55(2)(a), the assessee had considered the cost of acquisition of such self-generating asset as 'Nil' Accordingly, in computing the total income, the assessee had declared the entire receipt of Rs. 2,02,25,000 as its 'Long-term capital gains'.

The assessing officer has, however, held that there was no question of transfer of goodwill because Praxair was selling it's products under it's own name. Further, no business name or brand name was transferred by the assessee. As such the main ingredient of goodwill was absent assessing officer therefore, held that there being no transfer of goodwill, there could not be any consideration attributable to such non-existing transaction.

The appellant submits that the findings of the assessing officer are based on surmise, conjecture and suspicion. The assessing officer has not properly considered the true scope of the agreement between the assessee and Praxair. As admitted by the assessing officer, Praxair is one of the largest manufacturer of gases in the world. Thus an MNC of the stature of Praxair would not have paid a substantial amount to the assessee without getting in return an asset of corresponding value. M/s. Praxair had entered the Indian market to capture the major market share of industrial gases and therefore the said company would not have paid such huge amount for nothing, There was no commonality of management and business between the assessee and Praxair. The transaction between the company was on arms length basis. As such Praxair would not have paid such substantial amount unless the assessee had really transferred to Praxair 'asset' having substantial value. If the agreement between the assessee and Praxair is read carefully, it will be seen that in return for the consideration, the assessee was obliged to transfer forever its entire marketing distribution network and also its customer base. Such network has been described as'goodwill'by the assessee in the return of income. However, mere use of the nomenclature 'goodwill'did not mean that the entire consideration of Rs. 2,02,25,000 was for'goodwill'alone. It is settled proposition of law that for determining the true tax implications of a transaction, the substance of the transaction is to be considered and not the form or nomenclature or the descriptions used in the documents. As submitted the company had transferred intangible rights and assets in the form of network and customer database etc. which was a self-generating asset akin to 'goodwill'. Such capital asset did not have any cost of acquisition in monetary terms and therefore in the return the same was taken at 'Nil'.

The appellant submits that if the assessing officer's contention is that there was no transfer of goodwill was involved in the present transaction, then one has to ascertain the true tax implications of the transaction on the basis of recitals made in the agreement and also taking into consideration the actual steps taken by parties for transfer of network. Since no cost of acquisition of such business network was ascertainable in monetary terms, then the entire amount received under the agreement was liable to be held as capital receipt. In support of this proposition the reliance is placed on a recent decision of the Madras High Court reported in 129 Taxman 444, (in the case of CIT v. .I.M. Sales Ltd.), a copy of the said judgment is enclosed and marked as Annexure 4. In this case, the assessee was engaged in the business of distribution of products manufactured by three companies. Such business of distribution was carried on by the assessee for 20 years. The agreement for marketing was on principal-to-principal basis. On termination of distributorship agreement, the assessee was paid a lump sum amount of Rs. 42 lakhs. The said amount was paid for having agreed to transfer staff, dealership network, brand image and other marketing infrastructure and also for arising out of termination of distributorship agreement with further restrictive condition that assessee should not, for a period of three years, act as distributor, stockist, dealer or agent of any other manufacturer similar to or competing with company's products. On these facts, the Hon'ble Madras High Court held that the amount was received by the assessee as compensation for impairment of profit-making apparatus of assessee and for sterilization of the very source of income. Hon'ble Madras High Court, therefore, held that the lump sum amount, so received, represented capital receipt not liable to tax, In arriving at such finding, the Hon'ble High Court relied on the decision of the Supreme Court in the case of P.H. Divecha v. CIT 42 ITR 222 (SC) and the decision of the Madras High Court, in the case of CIT v. Seshasayee Bros. (P.) Ltd. 239 ITR 471 (Mad).

If the ratio laid down by the Madras High Court is analyzed then it will be apparent that the same applies to the facts of the appellant's case on all fores. In the present case, the assessee was engaged in the business of sale of industrial gases. For your kind perusal and record, we enclose herewith company's annual accounts for F.Ys. 1999-2000,2000-01 & 2001-02. Your honour will note that in the year ended 31-3-1999, company's sales turnover in respect of gases was Rs. 6,36,97,730. In the year ended 31-3-2000, the said sales turnover was reduced to Rs. 3,33,8,613 This drop in sale was due to sale of company's business network to Praxair in the month of Sept. 1999. Out of the skeleton stock left at the time of transfer of company's business, the sale of gases effected in the year ended 31-3-2001 was Rs. 3,65,011. Out of the aforesaid sale of Rs. 3,45,776 to Praxair in financial years 2001-02 & 2002-03, the assessee did not realize any turnover from sale of gases. From the above facts, it will thus be apparent that as a consequence of the agreement with Praxair, the assessee's business of sale of industrial gases came to a total stop. As is admitted by the assessing officer in the preamble of the assessment order, the assessee's business was manufacturing and trading of industrial and medical gases. Thus the main source giving rise to business profits of the company was the activity of marketing and trading of gases. As a consequence of the agreement with Praxair the entire business network was transferred by the company and the assessee's business of marketing and sale of gases came to a complete halt. For bringing such business to a total stop, M/s. Praxair had paid a lump sum consideration of Rs. 2,02,25,000 to the assessee, In effect, by making payment of the said amount, there was a sterilization of the very source of assessee's income and there was impairment of profit-making apparatus of the assessee. Such consideration was not paid for loss of profit but for loss of profit-earning apparatus. The facts on record will thus clearly demonstrate that subsequent to the said agreement executed in September-1999, no revenue was generated by the company from its erstwhile main activity of marketing and trading of gases. In view of the ratio laid down by the Hon'ble Madras High Court (supra), it is thus established that the consideration received by the assessee was for causing impairment to the profit-making apparatus and for sterilization of source of income and therefore the said amount of Rs. 2,02,25,000 received by the assessee was a capital receipt not liable to tax. The appellant, therefore, submits that the assessing officer was entirely wrong both in facts and in law in holding that the amount of Rs. 2,02,25,000 was a revenue receipt assessable as business profits of the company. The appellant submits that the said amount be held to be capital receipt not liable to tax even under the head capital gain'.

5. Besides relying on the written submissions the learned authorised representative also carried us through the documents filed in the paper book. Referring to Clause '1' of the Agreement dated 23-9-1999 with M/s. Praxair, he submitted that under the agreement the assessee transferred it's business network, benefits and obligations of and under pending contracts together with commercial rights in respect of or relating to the assessee's business of dealing in Industrial Gases. The authorised representative pointed out that the said consideration of Rs. 2,02,25,000 was in respect of transferring intangible rights, obligations, benefits and the business network with the help of which the assessee was carrying on its business of trading in industrial gases. The authorised representative submitted that the business network; information; customer database and distribution network was developed by the assessee over the past several years and no cost of acquisition measurable in monetary terms was incurred. The cost of acquisition of the said business and network was not determinable. Referring to the decision of the Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl CIT learned authorised representative argued that the Business network which was the subject-matter of transfer under the said Agreement constituted a different and distinct "capital asset" which was transferred independent of the fixed assets and current assets of the assessee's business. Referring to the Agreement the A/R pointed out that the said consideration of Rs. 2,02,25,000 did not include the price for stock in trade or current assets but under the agreement consideration for stock in trade was separately paid by Praxair. The A/R argued that under the agreement the subject-matter of transfer was the business network, information relating to customer database, benefits and obligations under the pending contracts and for which the consideration agreed was Rs. 2,02,25,000. The A/R stated that the pending contracts did not constitute the assessee's stock in trade nor any cost was incurred by the assessee for acquiring these contracts which were in the nature of firm purchase orders placed by the customers. The A/R submitted that whether Praxair fulfilled these contracts at profit or loss were of no consequence to the assessee and these pending contracts did not constitute the assessee's trading stock but a separate capital asset which was assigned to Praxair under the agreement at a consolidated consideration. The A/R submitted that since the assessee's business Network including distribution set up; customer database; pending contracts for supply were transferred for a consolidated consideration of Rs. 2,02,25,000, the amount received was a "capital receipt" and not a revenue receipt.

6. On behalf the revenue Sri A. Bhatnagar, the learned commissioner of Income Tax Departmental Representative placed strong reliance on the orders of the authorities below. The learned Commissioner of Income Tax Departmental Representative also placed before us a note giving summary of the findings recorded by the authorities below which is reproduced below for the sake of brevity.

(i) Payment made by Praxair, Rs. 2,02,25,000 to the appellant cannot be attributed to the transfer of goodwill as Praxair has not acquired the business name/brand name etc. from the appellant. In fact, Praxair uses its old name while selling the industrial gases. Praxair is one of the largest manufacturer and distributor of industrial/ medical gases and above. So it is but natural that there is no need for it to use the appellants name and brand.

(ii) In fact, the consideration of Rs. 2,02,25,000 is attributable to transfer of current assets like pending contracts and list/profile of customers, marketing selling and distribution network (kindly refer terms and conditions of the agreement) and accordingly, is not a capital receipt but revenue receipt.

(iii) The appellant's reliance on the decision of Hon'ble High Court of Madras in the case of CIT v. T.I. & M. Sales Ltd. 129 Taxman 444 (Mad) is also misplaced as the same is distinguishable on facts. In the present case, the appellant has not transferred the'physical assets', with the help of which it manufactured gases. So, it cannot be inferred that whole of the business has been transferred and it should be treated as loss to profit-making apparatus as alternatively claimed by the appellant.

(iv) In fact, only a part of the business has been transferred and the fact remains that the appellants business continued even after the date of transfer i.e., 23-9-1999 as the production in the plant at Bangalore and Hyderabad were stopped only with effect from 1-1-2000 and 6-5-2000. Therefore the root of the tree remained. Moreover, there is no restrictive covenant as far as the consideration Rs. 2,02,25,000 is concerned as against which in the cited case the assessee's business of distribution was terminated along with restrictive covenant.

7. The learned CIT D/R further strongly submitted that in the present case the assessee was not selling gases under its own brand name and in fact M/s. Praxair was a world leader in this business and sold the product under its own name. He therefore submitted that there was no transfer of "goodwill". According to the D/R the assessee had essentially transferred the current assets of it's business and therefore the entire amount received from M/s. Praxair; in reality constituted business/ revenue receipt. Referring to the decision of the Supreme Court in the case of CIT v. Rai Bahadur Jairam Valji he argued that where a contract was entered into in the ordinary course of business; any compensation received for it's termination would be revenue receipt. He further argued that it is settled principle that where injury is caused to the stock in trade then the amount received as compensation is a revenue receipt. Further relying on the decision of the Supreme Court in the case of CIT v. Best & Co. (P.) Ltd. (SC) the D/R argued that where any amount has been received in the ordinary course of carrying business; constituted revenue receipt. If a receipt was incidental to carrying on business or where compensation is received for loss of one of the several agencies then the income derived is revenue in nature. In support of this proposition the D/R also relied on the decision of the Supreme Court in the case of Kettlewell Bullen & Co. Ltd. v. CIT . The learned D/R also relied on the decision of the Supreme Court in the case of V. Venugopala Varma Rajah v. CIT to argue that where trees of spontaneous growth are cut, leaving stumps then sale proceeds constitute revenue receipt because the trees were not uprooted. The learned D/R submitted that in the present case the assessee had transferred the business network, customer database and pending contracts but did not transfer the manufacturing infrastructure to Praxair and therefore it could not be said that the assessee's business was uprooted and therefore the amount was received in the course of assessee's business which was revenue receipt liable to be taxed.

8. We have heard the rival submissions, perused the documents filed before us in the form of paper book and considered various case laws cited at the Bar. In the present case the basic facts giving rise to the grounds of appeal are not in dispute. The assessee was engaged in manufacture, sale and distribution of industrial gases and the assessee's principal activity was trading. From the information on record we note that in the recent past almost 90 per cent of the turnover was achieved from trading of gases. In the trading business the distribution network, customer database, purchase contracts, etc. constituted, trading apparatus and the said business was carried on with the help and aid of the said business apparatus. It is not the case of the revenue that such business apparatus in itself constituted stock in trade of the assessee and as admitted by the assessing officer the assessee's business was purchase and sale of industrial gases. It is also not the case of revenue that said trading apparatus was used for trading multiple products or the assessee owned several networks and transferred only one of such network to Praxair.

9. Clause 1 of the Agreement dated 23-9-1999 defined the property to be transferred by the assessee to Praxair. From Para 1. 1 of the agreement we find that the assessee sold, transferred and assigned to Praxair the said business, the said network, benefits and obligations of and under all pending contracts together with all business and commercial rights in respect of or relating to or embedded in the same and all the said cylinders. We also note that as per Para 1.9 Praxair had agreed to take over stock in trade belonging to assessee on the transfer date for which the assessee was to raise separate Invoice on Praxair for the actual purchase cost. The said Clause 1.9 also clarified that payment for such stock in trade would be outside the transfer price, Clause 4 of the Agreement defined consideration payable by Praxair. Clause 4.1 provided that the said sum of Rs. 2,02,25,000 was for sale, transfer and assignment of the said business and said network and benefits and obligations of the pending contracts and all the business and commercial rights associated with or embedded therein and for all the goodwill pertaining thereto. We thus note that the Agreement dated 29-9-1999 clearly defined the assets and rights which the assessee had agreed to sell and transfer in favour of Praxair and the said agreement also defined a separate consideration for transferring such rights, benefits and the business network. A comprehensive reading of the agreement as a whole shows that the assessee had agreed to transfer its business network along with information and database relating to its trading business to Praxair for a consolidated consideration of Rs. 2,02,25,000. We also note that the assessee was predominantly a trading company dealing in industrial gases and, therefore, the distribution network; customer database and pending contracts constituted the "business apparatus" with the help of which the trading business was carried on. Such business apparatus was different and distinct from the stock in trade or current assets of the business and, therefore, such business apparatus constituted a distinct capital asset which under the Agreement dated 23-9-1999 was transferred to Praxair for a specified consideration. The authorities below have held that the assessee's business did not enjoy any goodwill because no brand name was associated with the assessee's business nor such brand name was transferred. In the above circumstances, the basic question to be decided in the present case is what was the subject-matter of "transfer" under the Agreement dated 23-9-1999 with Praxair and what was the nature of the amount received by the assessee from Praxair. From the combined reading of Clauses 1, 2, 3 and 4 and considering other obligations which the assessee undertook under the agreement we find that the assessee had effectively transferred business network including distribution network, information of customer's database, pending contracts and all other rights, benefits and obligations pertaining to such business. The assessee had also agreed to decommission its manufacturing facilities at Bangalore and Hyderabad and had also agreed not to carry on the business of manufacture and sale of industrial gases for a period of 10 years. In other words the assessee had agreed to effectively close down its business of manufacture and sale of industrial gases. However different and distinct considerations were agreed and paid for by Praxair for different obligations and/or for transferring different rights and properties. The "trading apparatus" with the help of which the assessee was carrying on its trading business was effectively transferred to Praxair for a consideration of Rs. 2,02,25,000 and the transaction involved only transfer of information network, distribution set up and intangible rights and benefits. The authorities below as well as the learned Departmental Representative have fairly conceded that the said consideration was not for transfer of any tangible or physical assets. We therefore find that the said sum of Rs. 2,02,25,000 was in respect of transferring the business network and business information relating to the assessee's trading business which was defined in the agreement as the business network.

10. It is settled proposition of law that in the course of carrying on business an assessee may acquire various assets with the help of which the business can be carried on. However, such assets do not constitute stock in trade of business. In fact in the present case the stock in trade and other current assets such as debtors were separately paid for and the amount of Rs. 2,02,25,000 was distinctly paid for transferring the business network to Praxair. The said business network constituted a separate and distinct capital asset which under the agreement was transferred to Praxair. In the circumstances we agree with the contention of the A/R that such business network did not constitute current asset or stock in trade and, therefore, consideration received for transferring the business network was not a revenue receipt. In our opinion ratio laid down in the decisions in Rai Bahadur Jairam Valjis case (supra), Best & Co. (P.) Ltd. case (supra), Kettlewell Bullen & Co. Ltd.'s case (supra) and V. Venugopala Varma Rajah's case (supra) do not advance the case of the revenue. Therefore following facts emerged from the above discussion:

(a) In the present case the consideration of Rs. 2,02,25,000 was paid for transferring the business network and not for stock in trade or sundry debtors. Clause 1.5 and 1.9 provided separate and distinct payment for transferring sundry debtors and stock in trade on the transfer date.

(b) We also note that the assessee had only one business till September 1999 which was one of manufacture and sale of industrial gases.

(c) We note that under Clause 1.1 the assessee transferred the business network relating to its trading business. We also note that the assessee also sold and/or transferred gas cylinders for a separate consideration.

(d) We also note that as per Clause 2.3 the assessee had agreed to decommission and close down the said manufacturing facility. Under the agreement dated 23-9-1999 the assessee had thus agreed to effectively close down the only business which it was carrying on till it entered into agreement with Praxair.

(e) We therefore note that in fact the assessee effectively uprooted and closed its business. We therefore find that the said agreement was not related to a transaction undertaken in the ordinary course of assessee's business. The injury thus was not caused to the stock in trade but to the entire business as a whole. We also find that till September 1999 the assessee's only business was manufacture and sale of industrial gases and therefore it was not the case where out of the several businesses of the assessee only one business was being affected or transferred under the agreement dated 23-9-1999.

(h) We therefore find that the amount of Rs. 2,02,25,000 which was received by the assessee was for effectively transferring the "business network" of the assessee with the help of which its trading business was being carried on.

11. The assessing officer relied upon the case of Supreme Court in the case of CIT v. Gangadhar Baijnath . In that case it has been held in page 25 of the order that the question whether a particular receipt is capital or revenue is largely a question of fact but often we come across border line cases which do present difficulties in arriving at a conclusion. However the conclusion has to be drawn on the basis of facts of each case.

The Hon'ble Supreme Court referred the earlier decision of the Supreme Court in the case of Kettlewell Bullen & Co. Ltd. v. CIT and held as follows:

This Court, after considering various decisions rendered by the courts in U.K. and in this country about the principles which govern the determination of the nature of compensation received on the termination of any agency, observed:

On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue; where by the cancellation of an agency trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.

Applying the aforesaid criteria in the, present case, we find that the transactions entered into by the assessee in the present case is not a normal incidence of business. The trading structure of the company has been affected. There has been deprivation of source of income permanently. The company had to close down the business of gas by surrendering the excise licence as we find in pages 115 and 116 of the paper book. Further the company entered into an agreement for non-competing in the same line of business. If we consider the totality of the circumstances of the case it can be concluded that the entire business net work was transferred by the assessee. Therefore, as held by the Hon'ble Supreme Court, the consideration is a capital receipt.

12. We find that our view is supported by the decision of the Madras High Court in the case of CIT v. T.I.M. Sales Ltd. (2003) 129 Taxman 444 (Mad). In that case also the assessee had received a lump sum amount for transferring dealership network; brand image and other marketing infrastructure. Besides the assessee had also agreed not to carry on competing business. On these facts the Hon'ble Madras High Court held that since the amount was paid as compensation for impairment of profit-making apparatus of assessee and for sterilization of the very source of its income the amount received was a capital receipt. For the reasons discussed aforesaid therefore we hold that the impugned sum of Rs. 2,02,25,000 was a capital receipt and could not be assessed as revenue receipt. Ground Nos. 4 to 7 are accordingly allowed.

13. The Ground Nos. 8 to 10 relate to common issues, which are as follows:

(i) For that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred both in law and in fact in confirming assessing officer's action of treating the loss of Rs. 8,85,485 as speculation loss within the meaning of Explanation to Section 73 of the Act.

(ii) For that on the facts and in the circumstances of the case, the said loss of Rs. 8,85,485 having arisen on account of valuation of closing stock and not on account of actual purchase and sale of shares, the authorities below should have held that such loss was not speculation loss within the meaning of Explanation to Section 73.

(iii) For that on the facts and in the circumstances of the case, since the gross total income of the appellant consisted income mainly under the head "capital gains", the authorities below ought to have held that Explanation to Section 73 had no application and therefore the loss in share dealing business should not have been regarded as speculation loss.

14. In the above grounds the assessee has objected to the assessing officer's action of treating loss in share trading business of Rs. 8,85,485 as "deemed speculation loss" within the meaning of Explanation to Section 73. The learned authorised representative submitted that in the impugned order the assessing officer assessed the total income of Rs. 5,06,48,621 which consisted of business income of Rs. 2,19,67,337 and short-term capital gain of Rs. 2,86,81,284. Since more than 51 per cent of the assessed total income consisted was short-term capital gains, the Explanation to Section 73 was not applicable. He argued that Explanation to Section 73 provided 2 exceptions. The first exception clause used income criteria which provided that if more than 51 per cent of the gross total income consisted of capital gains, house property or other sources then the said Explanation had no application. In the second exception clause the nature of business carried on by the assessee was relevant and accordingly in applying the second exception the composition of income was not material. He further submitted that the decision of the Bombay High Court in CIT v. Amritlal & Co. Ltd. on which authorities below relied; was not applicable in the present case because the said decision was rendered in the context of ascertaining the principal business of an assessee for the purpose of applicability of provisions of Section 104 of the Income Tax Act. The authorised representative relying on the Special Bench decisions of the ITAT in Dy. CIT v. Venkateswar Investment & Finance (P.) Ltd. (2005) 93 ITD 177 (Kol.) and Assistant Commissioner v. Concord Commercial (P.) Ltd. (2005) 95 ITD 117 (Mum.) argued that where income criteria was applicable then regard was to be given only to the composition of gross total income and not to the principal business activity. According to him the two exceptions incorporated in the Explanation were mutually exclusive. He therefore submitted that since in the present case the assessee's gross total income mainly consisted of short-term capital gains, therefore Explanation to Section 73 was not applicable.

15. The learned departmental representative on the other hand fully supported the orders of the authorities below. He also submitted before us a Note in support of his contentions which is reproduced below:

Even though the purchase and sale of shares are by way physical delivery of shares, Explanation to Section 73 still applies. Moreover, the predominant activity of the appellant was trading in the industrial gases and in the relevant previous year and the trading in shares was started only after the agreement with Praxair dated 23-9-1999. In fact, as pointed out in the earlier paras the production in the appellant's plants at Bangalore and Hyderabad continued even thereafter. Because, the plant and machinery for production of industrial gases was not transferred to Praxair and the production was stopped in these plants with effect from 1-1-2000 and 6-5-2000. Accordingly, the decision of the Hon'ble High Court of Bombay in the case of CIT v. Amritlal & Co. 212 ITR 540 (Bom) is applicable in the present case. As a result of which, the Explanation to Section 73 applies and the loss on account of trading in shares will be deemed to be speculation loss.

16. We have considered the rival submissions; perused the orders of the authorities below and decisions cited at the Bar. We find that the controversy involved in the present appeal is squarely covered by the decision of the Special Bench of the ITAT, Mumbai in the case of Assistant Commissioner v. Concord Commercials (P.) Ltd. (2005) 95 ITD 117 (Mum). In paras 21 to 24 of the said order the Tribunal has made certain observations which have bearing on the present case. The Tribunal noted that the Explanation to Section 73 contained two exceptions. The first exception was available in the case of a company whose gross total income consisted mainly income chargeable under the head "House property, capital gains and other sources". The first exception was identified by the composition of its gross total income and the thrust was only on the composition of gross total income. Accordingly in order to ascertain the first exception one had to ascertain the composition and character of the gross total income of the relevant year. In the second category of the exception the thrust was on the nature of business carried on as the "principal business". The Tribunal further observed that the two kind of exceptions provided in the Explanation to Section 73 were based on two "independent" tests laid down in the Explanation itself. The test to be applied in the first category was the character of company's gross total income whereas the test to be applied in the second category was the nature of the principal business carried on. If by applying the test of character of gross total income the company falls under the exception category then the test relating to nature of principal business does not apply. The Tribunal observed that the two exceptions provided in Explanation to Section 73 were governed by two different tests and, therefore, each exception is to be examined and applied strictly in accordance with the tests laid down in the Explanation. In the said decision the Special Bench of the Tribunal also considered in detail the decision of the Bombay High Court in the case of CIT v. Amritlal & Co. Ltd. on which reliance was placed by the authorities below in the present case. The Tribunal observed that in Amritlal & Co. Ltd.'s case (supra) the court applied the test of "principal business" carried on by the company in its normal course. The real intention of the court was not to examine the composition of income but the basis and fundamental source of income. The Mumbai Bench of the Tribunal, therefore, held that the decision in Amritlal & Co. Ltd. case (supra) was not applicable because in the case before the Tribunal by applying the character of income it was found that more than 51 per cent of the gross total income consisted of income from other source. The same view has been taken by the Special Bench of ITAT, Kolkata in the case of Dy. CIT v. Venkateshwara Investment & Finance (P.) Ltd. (2005) 93 ITD 177 (Kal), where the Tribunal applied the second test laid down in the explanation with reference to principal business. Applying the ratio laid down by the decisions of the Special Benches of the Tribunal we find that in the present case the assessee's assessed total income for the year under consideration consisted mainly income from capital gains and accordingly the assessee's case was squarely covered by the first exception clause provided in the Explanation to Section 73. We therefore agree with the assessee's contention that the Explanation to Section 73 was not applicable and the loss of Rs. 8,85,485 in the share trading business could not therefore be considered as a "speculation loss". We therefore order accordingly.

II. Departmental Appeal in ITA No. 1369/Bang.103:

17. In the departmental appeal the following grounds have been taken:

1. The order of the Commissioner (Appeals) is opposed to law and facts of the case.

2. The Commissioner (Appeals) erred in deleting the addition made of Rs. 2,02,00,000 on account of the amount received for not competing in the business for a period of ten years.

3. The Commissioner (Appeals) ought to have appreciated that this amount is a revenue receipt and not a capital receipt as held by him.

4. The Commissioner (Appeals) ought to have appreciated that what was transferred was the income and not the source of income as the fixed assets were retained by the assessee, and the assessee's business continued even after the date of transfer.

5. The Commissioner (Appeals) erred in holding that the non-compete fees is assessable only from assessment year 2003-04.

6. The Commissioner (Appeals) ought to have taken into account the Explanatory Notes to Finance Act, 2002, extract of which is reproduced below, which makes it clear that the insertion of Clause (va) to Section 28 was to give certainty to the taxation of such receipts.

For the purpose of giving certainty to the taxation of receipts in the nature of non-compete fees and fees for exclusivity right, the Finance Act, 2002 has included within the scope'profits and gains of business or profession.

7. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be set-aside and that of the assessing officer be restored.

18. At the time of hearing Shri A. Bhatnagar the learned commissioner of Income Tax Departmental Representative filed a written Note in support of the above-mentioned grounds of appeal which are reproduced below for the sake of brevity:

In consideration of Praxair purchasing and paying for the said business, the said Network all the goodwill thereof and the non-compete fee, AIGL hereby irrevocably agrees and will ensure, that neither AIGL nor its associates Goa Oxygen (P) Ltd., Decan Gases and Allied Industries (P) Ltd., nor Mrs. Pramilla Jalan, Ms. Kalpana Jalan and Mr. Ashok Kumar Dabriwala, nor their respective spouses and children, nor any companies or other entities owned or controlled by any of them (hereinafter collectively referred to as the 'Jalans') will compete with Praxair in any of the products and any mixtures of Products, directly or indirectly or by supplying build products to replace cylinder products consumption or by supplying bulk products for cylinder filling by third parties, and accordingly, none of them will manufacture, sell market or distribute products, whether by themselves or through any others, for a period of ten years from the Transfer date.

Section 27 of the Indian Contract Act states - Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Saving of agreement not to carry on business of which goodwill is sold.

Exception: one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him carried on alike business therein.

Thus, as per the Contract Act, any agreement which places restraint on the exercise of business /profession is void. However, there is an exception which provides that it would no apply in the case of seller of goodwill of business. In this case, as has been discussed in earlier paras, no goodwill has been sold hence would no fall within the exception.

Even assuming that exception applies, the exception further states that the refrain should be within specified local limits. In the agreement there is no mention of any such limits. Thus, the exception itself becomes inapplicable.

Accordingly, in terms of Section 27 of the Indian Contract Act, the said transaction is void once it is void, no legal cognizance can be taken of such a covenant. Hence, the amount of Rs. 2,02,25,000 received by the assessee purportedly on account of non-compete cannot be treated as received on account of non-competition covenant.

Since consideration of Rs. 3,10,75,000 paid/payable for Rs. 25,000 gas cylinders is specifically for gas cylinders, there is no issue in respect of such payment. However, consideration of Rs. 2,02,25,000 on account of the so-called transfer of goodwill, as discussed earlier, cannot be attributable to transfer of goodwill (as there was no transfer of goodwill). Similarly, consideration received amounting to Rs. 2,02,00,000 on account of so-called non-compete covenant has to be for something else since such a contract is a void contract. It appears that these amounts have been received on account of transfer/sale of business assets like pending contracts and list/profile of customers which were also parted with. No doubt, they are assets but they are non-capital fixed assets but are current assets (a part of the circulating capital) as they keep changing everyday with the business. Any proceeds on sale of current assets of the business would be business income and not capital receipts. Thus sum of Rs. 2,02,25,000 and Rs. 2,02,00,000 are treated as business receipts and taxed as such.

As regards the case laws cited by the learned authorised presentative of the assessee (on account of non-compete fees), the same are distinguishable on facts. In most of the cases (cited by the learned authorised representative), the courts have observed that whereby cancellaton of agency, the trading structure of the assessee is impaired, such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is a capital receipt. However, in this case there is no pre-existing contract between the assessee company and Praxair and it is also not a case where there was an existing agency arrangement between the assessee company and Praxair.

I rely on the decision of the Hon'ble Madras High Court in the case of Chemplant Engineers (P) Ltd. v. CIT wherein it was held that the compensation of Rs. 20,000 received for agreeing to refrain from carrying on a competitive business was, in fact, revenue income as it was compensation for loss of future profits. In our case also, by parting with the pending contracts and customer's profile, it (the assessee co.) has foregone its future revenues. Thus the compensation received is discounted value of future revenues. Thus the compensation received is discounted value of future earning, which would be revenue in character. This finding is further corroborated by the fact that as per the agreement, the final compensation payable on account of the so-called goodwill and non-compete covenant was liable to be modified. Clause 6 of the said Agreement, inter alia, states:

AIGL has provided to PRAXAIR customer lists with individual sales volumes and pricing details pertaining to each of its customer, as detailed in the Fifth Schedule hereunder. The transfer price computation is subject due diligence report acceptable to Praxair being obtained by it as per the scope of the due diligence report....

In the event of differences in respect of the sales turnover of products sold by AIGL as per the details in the 5th Schedule, Praxair will be entitled, to make appropriate proportionate adjustments in the consideration payable by it under this agreement.

Total adjustment from consideration payable for the said business and the said Network the goodwill thereof and non compete obligations as aforesaid, subject to a standard margin of +/- in the total present value of AIGL's business....

This clearly proves that the entire consideration of Rs. 2,02,00,000 + Rs. 2,02,25,000 was on account of sale of current assets of the company.

I further rely on the decision of the Hon'ble Supreme Court in the case of CIT v. Gangadhar Baijanath wherein on similar facts, it was held that compensation received was a revenue receipt. I quote the relevant portion of the order.

It was urged on behalf of the assessee that as a result of the agreement dated 7-10-1946, the assessee firm parted with its managing agency rights which but for that agreement would have continued for a period of twenty years with a possibility of renewal. The Managing Agency right given up under that agreement is a capital asset forthe firm and therefore, any compensation paid for the extinguishment of that right is a capital receipt. It was also argued that one of the rights that the assessee firm parted with under that agreementwas the goodwill of the company which is also a capital asset. Consequently, compensation paid in respect of the same must also be considered as capital receipt.

'In our opinion the aforementioned arguments are fallacious. The managing agency rights vested with Bagla Jaipuria & Co. Similar is the case so far as the goodwill is concerned assuming that any goodwill had been built up by that time. Bagla-Jaipuria and Co. continues to be in existence. It had not parted with managing agency rights nor its goodwill taken away. What has happened is that the partners representing the assessee-firm in Bagla Jaipuria and Co. had surrendered their rights in partnership to the remaining partners and obtained certain payments for surrendering their rights. This is not a case of parting with any agency rights. This is really a case of cancellation of a contract which had been entered into in the ordinary course of business. Such contracts are liable, in the ordinary course of business, to be altered or terminated on terms and any payment received in settlement of the rights as result of the termination of the contract really represents the profits which the assessee would have made had the contract been performed. As observed by this Court in Jairarn Valji's case, When once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and in this respect it differs from an agency agreement.

Thus, the receipts of Rs. 2,02,00,000 and Rs. 2,02,25,000 purportedly on account of non-compete covenant and on account of transfer of goodwill cannot be treated as such and are being brought to tax as business income of the appellant company.

18.1 The learned Departmental Representative further submitted that the Explanatory Notes to Finance Act, 2002 clarified that the Amendment of Section 28 was clarificatory in nature because the intention of the amendment was to give certainty to the question of taxability of receipt in the nature of non-competition fees. He therefore submitted that since the amendment was clarificatory in nature it was retrospective in operation and therefore applicable to assessment year 2000-01. He therefore urged that the assessing officer's order on this issue be restored.

19. Sri D.S. Damle, learned authorised representative on the other hand referred to and relied on the written arguments submitted before the learned Commissioner (Appeals). For the sake of brevity the relevant portion of the written submissions are reproduced below:

The appellant submits that the assessing officer has relied on the provisions of Section 27 of Contract Act erroneously. On the facts of the case, the provisions of Section 27 of Contract Act were not contravened and therefore it could not be said that the amount received was revenue receipt liable to be included in the total income.

In this connection, it is also pertinent to note that the Income Tax Act itself as statutorily recognized the agreement containing restrictive covenants. In this regard, attention is invited to the provision of Section 28(va) of the Income Tax Act which have been inserted in the statute by Finance Act, 2002 with effect from 1-4-2003. As per the said Sub-clause (va) any amount whether received or receivable in cash or in kind under an agreement for not carrying out an activity in relation to any business is considered as business income. In the Memorandum explaining provisions of Finance Bill, 2002 (wherein Clause (va) was inserted) it has been clarified as follows: (254 ITR 219 statute).

New provisions for taxing the receipts in the nature of non-competing fees and exclusivity rights.-This amendment proposes to insert a new provision in the Income Tax Act, 1961 for charging any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business; or not to share any know-how, patent copyright, franchise or any business or commercial right of a similar nature or information or technique likely to assist in the manufacture or processing of goods under the head 'Profits and gains of business' or profession. The proposed amendment will take effect from 1-4-2003 and will accordingly apply in relation to the assessment year 2003-04 and subsequent years.

Your honour will thus note that the Income Tax Act, 1961 has also recognized the statutory effect of the agreements which include restrictive covenants. In the above circumstances, the assessing officer's inference that merely because the restrictive covenant was against the provisions of Section 27 of the Contract Act the same was void and therefore the receipt was revenue receipt is not a proper and correct legal inference.

Assuming though not admitting that the said restrictive covenant was void under Section 27 of the said Act then also the inference drawn by the assessing officer that the amount received was a revenue receipt is a fallacious inference. if the contract is considered and held as void then all the financial and legal implications flowing from such void contract also void and therefore nullity in the eyes of law. in other words, the consideration passed between the parties under the void contract is also void and unenforceable in law. if, therefore, the assessing officer's assumption regarding voidability of the agreement is to be accepted then even for the tax purposes, such contract could only be considered as void and non operable. In the circumstances, no income could be inferred from an agreement which itself is held to be void. The appellant, therefore, submits that no adverse inference could be drawn by the assessing officer by merely stating that the restrictive covenant clause was void.

The appellant reiterates that the agreement was legally valid and subsisting and acted upon by the parties in good faith. The restrictive covenant was agreed by and between the parties in the course of its agreement for effective transfer of business including goodwill. Further, having regard to the scope of the contract, capacity and capability and ability of the parties to contract and having regard to the sufficiency of the consideration paid, such restrictive covenant was fair and reasonable for both the parties and therefore the agreement was valid. The first objection of the assessing officer was, therefore, incorrect both in law and in fact.

The assessing officer has relied on the decision of Kerala High Court which suggests that the payment was in the nature of gift. The appellant, however, fails to understand the true purport of the said judgment in the context of assessce's case. It is submitted that the facts involved in the said case was totally different from the facts involved in the present case and therefore the ratio has no application. Assuming though not admitting the said ratio was applicable; the appellant fails to appreciate as to how the said decision helps the cause of the revenue. After analyzing the terms and conditions of the transaction in that case, the court held that the amount paid really represented the gift. If the analogy is to be accepted then it would mean that the amount paid by Praxair was a gracious payment in the nature of gift. Such gracious payment in the nature of gift could not be regarded as "revenue income" of the assessee. The said amount, if regarded as gift still represented capital receipt of the assessee not liable to tax.

The assessing officer has held that the case laws cited by the appellant company were not applicable. Before the assessing officer the assessee had relied on the following laws:

(i) CIT v. Shaw Wallace & Co. AIR 1932 PC 138

(ii) CIT v. Vazir Sultan & Sons

(iii) P.H. Divecha v. CIT ( 1963148 ITR 222 (SC)

(iv) Kettlewell Bullen & Co. Ltd v. CIT

(v) Karam Chand Thapar & Bros. (P.) Ltd. v. CIT

(vi) Gillanders Arbuthnot & Co. Ltd. v. CIT

(vii) CIT v. Best & Co. (P.) Ltd.

The appellant submits that the assessing officer has committed an error by not appreciating the ratio laid down by the court in the above decisions by not referring to the apparent facts of the cases involved in these decisions. It is true that in some of the cases, the assessee had received the compensation on termination of agency. On these facts, the assessing officer had held that in the present case there was no pre-existing contract between the assessee and Praxair for marketing, or distribution of products. The assessing officer has however committed an error in referring to the mere form of transaction, The assessing officer should have considered substance of the transaction and the ratio laid down by the court. After analyzing the true purport of the agreement where under the amounts were paid, the courts had held that as a consequence of the agreement there was an impairment of profit-making apparatus of the assessee. There was sterilization of income yielding process and therefore any amount received as a consequence thereof, was a capital receipt not liable to tax. The courts held that the restrictive covenant prevented the assessee from pursuing activities for carrying on business operations. The courts also held that the amounts received were not discounted value of the future earning but the compensation or amounts were received for the disability suffered by the assessee by agreeing to refrain from carrying on business activity for specified period, It is, therefore, essential to understand that in the case restrictive covenant, the amount is paid not for loss of any income, but the amount is received for agreeing not to carry on particular business activity for specified period of time or in a specified area. For such restrictive covenant whereby the assessee accepts sterilization of its income yielding operation, the amount received is capital receipt not liable to tax. This is the ratio laid down by the above mentioned decisions. If the reference is made to the decision of the Calcutta High Court in the case of CIT v. Saroj Kumar Poddar and to the decision of the Madras High Court in the case of CIT v. I.T. & M. Sales Ltd. (supra) and to the Income Tax Appellate Tribunal, Calcutta in the case of Asstt. CIT v. A.S. Wardekar (2001) 77 ITD 405 (Cal), your honour will note that after taking into account the aforesaid judicial decisions, the Hon'ble court held that the amount received for restrictive covenant were capital receipt not liable to tax. The ratio laid down by these judicial decisions fully apply.

In the present case, a separate and distinct amount of Rs. 2,02,00,000 was paid by Praxair to the assessee. The said amount was paid for specific restrictive covenant of not carrying on competing business by assessee and its associates for a period of 10 years. During such period, there was total sterilization and impairment of assessee's income yielding apparatus and therefore the lump sum amount received represented capital receipt not liable to tax. The same view is also expressed by judicial authorities in the following decisions:

(i) CIT v. Saraswathi Publicities

(ii) CIT v. P.K. Das

(iii) CIT v. G.D. Naidu

(iv) CIT v. P. Mariappa Gounder

(v) CIT v. Automobile Products of India Ltd.

All the above decisions clearly support the assessee's claim that the amount was capital receipt not liable to tax.

As stated in the foregoing, Praxair India; arm of the Multi National Praxair, USA had entered Indian Markets with the main objective of securing major market share of industrial gases business. In order to become dominant player in the said business, the said company had acquired "merger and acquisition" route whereby the said company acquired manufacturing, marketing and distribution networks of Indian Companies engaged in the business of Industrial gases. In 1997; M/s. Praxair India Pvt. Ltd. had entered into agreements with M/s. Asiatic Oxygen Ltd. (AOL) another reputed company in the field of industrial gases having manufacturing operations and marketing network in the States of West Bengal, Tamil Nadu, Andhra Pradesh and Karnataka. The said Asiatic Oxygen Ltd. was the former holding company of the appellant. Under the agreement the said Praxair acquired manufacturing of the said company located in West Bengal and Tamil Nadu along with entire marketing set up sales organizations, customer list, pending contracts, market and goodwill of AOL. In addition AOL and Sri B.K. Jalan, the Chairman and Managing Director of AOL agreed with Praxair that they would not directly or indirectly engage in relation to manufacture and dealing in industrial gases for a period of 10 years. In consideration of agreeing for such restrictive covenant, M/s. Praxair paid Rs. 9 crores to Sri B.K. Jalan. In the Income Tax assessment of Sri B.K. Jalan for assessment year 1999-2000 the assessing officer included the said sum of Rs. 9 crores as a revenue receipt and brought to tax. The matter was taken before Commissioner (Appeals) XXXIV, Calcutta who vide his order dated 5-7-2002 in Appeal No. 26/Commissioner (Appeals)XXXIV/CIR.54/02-03 held that the amount received by Sri B. K. Jalan as consideration for the restrictive covenant was capital receipt not liable to tax. A copy of the said order is enclosed. In particular the Commissioner (Appeals) made the following observation on page 5:

The assessing officer appears to have overlooked the fact that after complying with the terms of agreement entered into with Praxair simultaneously the appellant was to be left with no plant or customers or markets or selling organizations for a period of 10 years. Therefore it is incorrect to hold that restriction placed on the appellant amounted to some restrictions in the assessee's income earning apparatus. I agree with the submissions of the appellant that the income earning capacity of the appellant from the business of industrial gases was effectively plugged by the non-compete agreement.

The appellant was also carrying on the business of marketing its industrial gases in the Southern States of Karnataka and Andhra Pradesh where the assessee was the competitor of Asiatic Oxygen Ltd. M/s Praxair therefore felt that continuance of the said business by the appellant would pose serious competition and threat to its industrial gas business which it had acquired from Asiatic Oxygen Ltd. at a considerable price. M/s. Praxair thought it commercially prudent to buy off the marketing, selling, distribution network including customer base and list of the appellant-company so that it would effectively neutralize the threat that the appellant company posed to Praxair. In addition to buying off such network, customers and pending contracts, Praxair also desired to ensure that no threat or competition is posed to its business from the assessee and its associates who also had experience and knowledge in the business of industrial gases. In order to ward off such future threat and competition Praxair thought it prudent to pay additional consideration of Rs. 2,02,00,000 to the appellant so that it would be ensured that for the next 10 years there would not be any competition either from the appellant or from the promoter Directors and group companies of the appellant to the business of Praxair. It would thus appear that Praxair in a systematic manner wanted to acquire not only the major existing market share but it was also ensuring that it would not face serious competition to its business for a considerable future time. For deriving such enduring benefit in the market place Praxair had agreed to pay Rs. 2,02,00,000 to the company who had knowledge, experience and resources for posing competition to its business. Accordingly Praxair had entered into agreement putting restrictive covenants on such persons and thereby ensured that Praxair would not face serious competition for a long period of 10 years. The amount paid for such restrictive covenant thus ensured that the earning capacity of such parties from the business of industrial gases was effectively plugged. It is therefore submitted that the decision of the Commissioner (Appeals) XXXIV, Calcutta, in the case of Sri B. K. Jalan is squarely applicable to appellant's case as well. The appellant therefore prays that the assessing officer be directed to exclude the sum of Rs. 2,02,00,000 from the total income of the appellant.

The assessing officer in the impugned order has placed reliance on the decision of the Supreme Court in the case of CIT v. Gangadhar Baijnath to draw conclusion that the amounts received were revenue in character. However, it is submitted that the facts involved in that particular case were totally different from the one involved in the present appeal. In the said case the court found that the firm having Managing Agency continued to remain in existence and the firm did not part with Managing Agency rights. All that had happened was that some of the partners had surrendered their rights in partnership to the remaining partners and obtained certain amount for surrendering their rights.

In the present case there is no question of transfer of any rights in any contract. In the present case the consideration of Rs. 2,02,00,000 was received by the assessee as a consideration for accepting the restrictive covenant. Under the agreement the assessee agreed not to carry on business activity directly or indirectly in competition to the business carried on by Praxair for a period of 10 years and the amount received for accepting such restrictive covenant which effectively plugged assessee's income yielding capacity for 10 years was capital receipt. This view is well supported by large number of judicial decisions cited in the foregoing. The appellant, therefore, submits that the assessing officer be directed to exclude from total income the sum of Rs. 2,02,00,000.

20. In the Paper-book filed, the assessee also furnished copy of the unreported decision of the Calcutta High Court in the case of CIT v. A.S. Wardekar (IT Appeal No. 333 of 2000, dated 3-5-2005) wherein the Calcutta High Court while upholding the order of the Tribunal held that the amount received by the assessee in consideration of accepting restrictive covenant was capital receipt not liable to tax. The learned A/R also filed a copy of the decision of 'A' Bench of the ITAT, Kolkata in the case of Asstt. CIT v. Ajay Kumar Kanoria, E/E of Late B. K. Jalan (IT Appeal No. 1707 (Kol.) of 2002, dated 25-3-2004) wherein the ITAT held that Rs. 900 lakhs received by Sri Balkrishna Jalan from M/s Praxair India Ltd. as a consideration for accepting non-competition covenant was a capital receipt. He also relied on the decision of Hyderabad Bench of the ITAT in the case of N. Sandeep Reddy v. Asstt. CIT (2005) 95 ITD 33 to argue that amendment to Section 28(va) was prospective in operation and accordingly applied to assessment year 2003-04 and onwards and not retrospectively.

21. We have heard the rival submissions, perused the orders of the authorities below and case laws cited at the Bar. As per Clause (2) of the Agreement dated 23-9-1999 the assessee along with its Promoter Directors and Associate Companies agreed not to carry on or engage in any of the Packaged Gases business directly or indirectly nor engage in manufacture, sell, market and distribute gases for a period of 10 years from the transfer date. In Clause 4.1 it was provided that Praxair would pay Rs. 2,02,00,000 towards non-compete obligations undertaken by AIGL and others. We thus find that under the Agreement dated 23-9-1999 the appellant along with its Promoter Directors and Associates had undertaken not to carry on a competing business for a period of 10 years in consideration of Rs. 2,02,00,000 being paid by Praxair. The assessing officer held that under Section 27 of the Contract Act such restrictive covenant was void. We however find that in catena of decisions on which reliance has been placed by the rival parties, Supreme Court and High Courts considered the question of liability of tax arising from consideration received for accepting restrictive covenant and in none of the judgments the issue of taxability or otherwise was decided against the assessee in the light of Section 27 of the Contract Act. Further for the purposes of determining the tax liability it is wholly immaterial whether an agreement was void or voidable. Moreover even though the provisions of Section 27 of the Contract Act have not been amended, yet the Finance Act, 2002 specifically provided that such receipts would be considered as "income" under Section 2(24) read with Section 28(va). We are therefore of the view that the question of taxability of amount received by an assessee under a restrictive covenant has to be decided independent of Section 27 of the Indian Contract Act. Moreover even if such restrictive covenant may be considered as void under the Contract Act, yet that fact in itself does not lead to conclusion that the amount received for accepting restrictive covenant is a revenue receipt. in this appeal, therefore, we have to decide the question of taxability of such compensation independent of provisions of the Indian Contract Act.

22. The Hon'ble Supreme Court in the cases reported in CIT v. Best & Co. (P.) Ltd. , Kettlewell Bullen & Co. Ltd. v. CIT , Madras High Court in the case of CIT v. Saraswathi Publicities , CIT v. G.D. Naidu , CIT v. P. Mariappa Gounder , CIT v. T.I. & M. Sales Ltd. (2003) 129 Taxman 444, Calcutta High Court in the case of Saroj Kumar Poddar (supra) and A.S. Wardekar (supra) considered the question of taxability of compensation received by an assessee as a consideration for accepting restrictive covenant of not carrying on competitive business. On due consideration of the nature of restrictive covenant the Courts held that the amount received by an assessee for agreeing not to carry on the competitive business was a capital receipt not liable to tax. We also find that the Co-ordinate 'A' Bench of the ITAT, Kolkata in the case of Asstt. CIT v. Ajay Kumar Kanoria, E/F, of Late B.K. Jalan (IT Appeal No. 1707 (Kol.) of 2002, dated 25-3-2004) considered the question of taxability of compensation received by him from Praxair. Late B.K. Jalan was Promoter Director of M/s. Asiatic Oxygen Ltd. and M/s. Praxair India Ltd. had taken over the business of the said company. The said Shri B.K. Jalan was holding substantial Equity of the said company and had experience of over 35 years in running the Industrial Gas business. Under the Agreement dated 12-12-1997 Praxair paid a sum of Rs. 9 crores to Shri B.K. Jalan in consideration of his accepting a restrictive covenant of not carrying competing business with Praxair for a period of 10 years. On these facts the ITAT, Kolkata following the decision of the Supreme Court in the case of Oberoi Hotels (P.) Ltd. v. CIT and the Calcutta High Court in the case of Saroj Kumar Poddar (supra) held that consideration of Rs. 900 lakhs received for the non-competition covenant was a "capital receipt" not liable to tax.

23. We also find that a similar issue came up for consideration bcfore'A' Bench of the ITAT, Bangalore in the case of Asstt. CIT v. J.P. Deshpande (IT Appeal No. 24 (Bang.) of 2005, and in the order dated 20-7-2005) the Tribunal held that the amount received for non-competition obligation was a capital receipt not chargeable to tax. In arriving at the said conclusion the Tribunal relied on the decisions of the Supreme Court in the case of Gillanders Arbuthnot & Co. Ltd. v. CIT , Kettlewell Bullen & Co. Ltd. v. CIT and decision of the Madras High Court in the case of CIT v. G.D. Naidu . The Co-ordinate Bench also held that the amendment to Section 28(va) was made effective from 1-4-2003 and it was prospective in operation and not retrospective. We thus find that the issues involved in the departmental appeal are squarely covered by the earlier decision of the Coordinate Bench of the ITAT, Bangalore in its order dated 20-7-2005. Respectfully following the said appellate order and also following the ratio laid down in various judicial decisions of the Supreme Court in Gillanders Arbuthnot & Co. Ltd. v. CIT , Kettlewell Bullen & Co. Ltd. v. CIT , CIT v. Best & Co. (P.) Ltd. and the decision of the Madras High Court in CIT v. Saraswathi Publicities , CIT v. G.D, Naidu , CIT v. T.I. & M. Sales Ltd. (2003) 129 Taxman 444 (Mad) and the decision of the Calcutta High Court in the case of Saroj Kumar Poddar (supra), we hold that the Commissioner (Appeals) was justified in holding the sum of Rs. 2,02,00,000 received as a consideration for restrictive covenant in the form of non-competition obligation, was a capital receipt in the result, the assessee's appeal is partly allowed and the departmental appeal is dismissed.