Delhi High Court
P.L. Lamba (Huf) vs Asstt. Cit on 2 September, 2003
Equivalent citations: (2004)90TTJ(DEL)388
ORDER
M.V. Nayar, A.M.:
The present appeal has been filed by the assessed against the order of the Commissioner (Appeals) dated 18-11-2002.
2. Grounds No. 1 to 4 are against validity of initiation of proceedings under section 147 of the Income Tax Act ("the Act"), which reads as under :
"l. That the learned Commissioner (Appeals) XXVI, New Delhi, has erred, both on facts and in law in upholding the validity of initiation of proceedings under section 147 of the Income Tax Act. The proceedings initiated and the assessment completed both are misconceived and are thus without jurisdiction.
2. That the learned Commissioner (Appeals) has failed to appreciate that the preconditions envisaged under section 147 of the Income Tax Act, for initiating the proceedings, since were not absent, the initiation of proceedings was without jurisdiction and as such, the assessment framed was to be quashed.
3. That the learned Commissioner (Appeals) has also overlooked that in the instant case, as no notice under section 143(2) of the Income Tax Act had been issued, the instant proceedings had been initiated under section 148, to overcome the period of limitation provided under section 143(2) of the Income Tax Act and as such the instant proceedings initiated are without jurisdiction.
4. That the reliance placed by the learned Commissioner (Appeals) on the decided cases is wholly inapplicable as such of those decisions had been rendered prior to the amendment made in the scheme of Income Tax Act for making assessment under Chapter XIV of the Income Tax Act. "
3. The brief facts are that the assessed filed its Income Tax return on 31-10-1995, declaring total income of Rs. 34,55,190. The appellant entered into a strategic alliance agreement with M/s. Brook Bond Lipton India Ltd. ('BBLIL') on 14-10-1994. In terms of the said agreement the appellant also entered into a non-competition agreement on the same date where under the appellant received a sum of Rs. 50 lacs as compensation. The appellant treated the amount received as a capital receipt.
4. The return filed by the assessed was initially processed under section 143(1)(a) vide intimation dated 19-3-1996. Subsequently, proceedings were initiated by the assessing officer under section 147 vide notice dated 12-3-2001, issued under section 148 of the Income Tax Act.
5. Shri Ajay Vohra, learned counsel for the assessed, submitted that the proceedings under section 147 of the Income Tax Act were initiated on a mere change of opinion, which is not permitted under the law. It was submitted by the counsel that the assessed had made adequate disclosure in the return of income and the accompanying documents. It was submitted that the appellant had, in Part-V of the return of income, declared that Rs. 50 lacs were received as non compete fees. The amount received was claimed as exempt being a capital receipt.
6. It was contended by the counsel that the assessing officer could have issued notice under section 143(2) and made an assessment under section 143(3) if the assessing officer had entertained a belief that the sum of Rs. 50 lacs was wrongly claimed as capital receipt by the appellant. The proceedings under section 147, it was submitted were, thus, initiated on a mere change of opinion in order to review the earlier decision accepting non-taxability of the said receipt. The counsel referred to the decision of the Full Bench of the Delhi High Court in the case of CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del)(FB) to contend that proceedings initiated under section 147 on mere change of opinion are illegal and void ab initio.
7. The other limb of argument of the learned counsel challenging the validity of the initiation of proceedings under section 147 was that the reasons recorded in terms of section 148 were vague. It was further argued that the proceedings were initiated on the basis of the audit objection. The counsel submitted that the assessment proceedings for the immediately succeeding assessment year 1996-97 was completed by the assessing officer on 26-2-1999. Therefore, it was submitted that an audit objection was received in the office of the assessing officer on 8-2-2000. In the said audit objection it was stated that Rs. 50 lacs received by the assessed from BBLIL under a non-competition agreement have escaped taxation. On the basis of the said audit objection, the assessing officer issued a letter dated 12-2-2001, requiring the assessed to show-cause as to why income-tax assessment for the assessment year 1996-97 be not reopened under section 147/148 of the Act. In response thereto, it was submitted by the counsel that the assessed replied vide letter dated 3-3-2001, whereby it was stated that the amount of Rs. 50 lacs had been received by it in the previous year relevant to the assessment year 1995-96 and not in the assessment year 1996-97, as alleged in the letter dated 12-2-2001. In that letter the appellant further claimed that the sum of Rs. 50 lacs received from BBLIL is in the nature of capital receipt not chargeable to tax under the Act.
8. The counsel submitted that the assessing officer proceeded to issue notice under section 148 on the basis of the said audit objection. Relying on the decision of the Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC), it was claimed that the proceedings under section 147 are illegal. The counsel further challenged the initiation of proceedings under section 147 on the ground that the reasons recorded under section 148 were vague. It was submitted that the reasons recorded do not reflect application of mind by the assessing officer resulting in formation of a reasonable belief that income of the appellant had escaped assessment.
9. The learned Departmental Representative, on the other hand, relied on the order of the Commissioner (Appeals). It was submitted that the challenge to the initiation of proceedings under section 147 by the assessing officer, after having failed to issue notice under section 143(2) has been dealt at length by the Commissioner (Appeals). The learned Departmental Representative relied heavily on the decision of the Gujarat High Court in the case of Praful Chunnilal Patel v. Assistant Commissioner (1999) 236 ITR 832 (Guj) to contend that no bar can be read into the powers of the assessing officer to initiate proceedings under section 147 merely on the ground that the assessing officer had earlier failed to issue notice under section 143(2) of the Act. As regards the initiation of proceedings on the basis of the audit objection, it was submitted that there is nothing on record to suggest that the proceedings under section 147 were initiated on the basis of the audit objection. The learned Departmental Representative further submitted that the reasons recorded under section 148 are proper and cannot be termed as vague.
10. We have given our anxious consideration to the arguments of the counsels for the parties and the facts of the case. We are of the considered view that there is no merit in the contention of the learned authorised representative of the appellant that the proceedings under section 147 were initiated on mere change of opinion.
11. Section 147 of the Income Tax Act empowers the assessing officer to initiate assessment/reassessment proceedings if the assessing officer has reason to believe that the income chargeable to tax has escaped assessment. It is no longer res integra that formation of the reasonable belief on the part of the assessing officer that income of the assessed has escaped assessment prior to initiation of proceedings under section 147 is the foundation/condition precedent for assumption of valid jurisdiction. The question as to whether the reassessment proceedings under section 147 can be initiated on mere change of opinion of the assessing officer came up for consideration before the Full Bench of Delhi High Court in the case of Kelvinator of India Ltd. (supra). Rejecting the contention of the revenue, their Lordships held that in the event it is held that by reason of section 147 if the Income Tax Officer exercises his jurisdiction for initiation of proceedings for reassessment only upon a mere change of opinion, the same may be held as unconstitutional. Their Lordships further held that section 147 of the Act does not postulate conferment of power upon the assessing officer to initiate reassessment proceedings upon his mere change of opinion.
12. In the case before the Delhi High Court in Kelvinator of India Ltd. (supra), reassessment was made of an assessment earlier made under section 143(3) of the Act. However, in the instant appeal, no assessment has been framed under section 143(3) of the Act.
13. The issue that arises for consideration is whether there is application of mind by the assessing officer in a case where only intimation is issued under section 143(l)(a) and no assessment has been completed under section 143(3) of the Act. The scope of adjustments, it is settled law, is limited to only prima facie mistakes. No adjustment under section 143(1)(a) can be made in respect of debatable issues. In our considered view there is no application of mind on the part of the assessing officer at the time of issuing intimation under section 143(1)(a) of the Act. The mere fact that after issuing intimation under section 143(1)(a), the assessing officer does not issue notice under section 143(2), it cannot be said that the assessing officer has impliedly, after application of mind, concurred with the return filed by the assessed. Proceedings under section 147 can be initiated if the conditions precedent for assuming jurisdiction under that section are satisfied.
14. In view of the aforesaid, the ground challenging the initiation of proceeding under section 147 on mere change of opinion fails.
15. As regards the initiation of the proceedings under section 147 on the basis of the audit objection, in the income tax return filed by the appellant, it is true that disclosure was made regarding receipt of Rs. 50 lacs from BBLIL. In Part-V of the return of income, which requires and assessed to disclose/declare all receipts that are claimed exempt under the Act, the said receipt was claimed as exempt.
16. But the issue that is before us for consideration is whether the assessing officer has initiated the proceeding under section 147 of the Act on the basis of the audit objection or not. If the chain of events is recapitulated, the assessing officer issued intimation under section 143(1)(a) of the Act on 19-3-1996. The audit objection was received by the assessing officer on 8-2-2000. The audit party, commenting on the assessment framed for the assessment year 1996-97, did objected to the treatment of the receipt of Rs. 50 lacs as capital receipt and stated that the said amount has escaped taxation.
17. But it is further noted that the proceedings under section 147 were initiated vide notice dated 12-3-2001, i.e., after one year of the receipt of the objection of the audit party. In the reasons recorded by the assessing officer in terms of section 148 of the Act, there is no mention about the receipt of the audit objection. The reasons recorded, as held hereinbefore, are proper for initiating proceedings under section 147 of the Act.
18. The facts and circumstances of the case suggest that the assessing officer was not guided by the objection of the audit party at the time of issuing notice under section 148 of the Act. We cannot presume that the assessing officer did not independently entertain a belief that the claim of the appellant was erroneous resulting in escapement of income. We are, therefore, of the considered view that the proceedings under section 147 were not initiated on the basis of the audit objection and consequently, the proceedings under section 147 of the Act were validly initiated.
19. The decision of the Apex Court in the case of Indian Eastern & Newspapers (supra), relied upon by the learned authorised representative of the appellant does not, therefore, apply and we hold that the assumption of jurisdiction by the assessing officer under section 147 was proper.
20. As regards the issue regarding taxability of the sum of Rs. 50 lacs in the hand of the appellant raised by way of ground Nos. 5 to 11, briefly stated, the facts are that the appellant was engaged in the business of manufacturing and marketing of various ice cream products under the brand name 'Kwality' through its proprietorship concern, M/s. Kwality Ice Cream Co., Ludhiana (KICC). The appellant is part of the Lamba group, which along with Ghai family owned the Kwality group. KICC was manufacturing ice cream, etc., at its factory and was marketing them under the trademark 'Kwality' through an extensive marketing network of distributors, dealers, vendors and agents in parts of Haryana, Punjab, Himachal Pradesh, Jammu & Kashmir and Union Territory of Chandigarh. KICC was authorised by Shri P.L. Lamba and Shri Sunil Lamba, the owners of the "Kwahty" trademark, to use the said trademark for marketing of varieties of the ice cream which were manufactured by it. The Kwality group comprising of the appellant, Mr. Sunil Lamba, Kwality Restaurant and Ice-cream (1978) Co. and others entered into a strategic alliance agreement with BBLIL on 14-10-1994. Various constituents of the Kwality group were party to the said agreement with BBLIL. The preamble of the agreement read as under :
"Strategic Alliance Agreement dated 14-10-1994 Between K (North) And Brooke Bond Lipton India Ltd. (BBIL) & Unilever Industries (P) Ltd. (UIPL) This agreement of strategic alliance made and entered into at Bombay on this 14-10-1994 by and between Mr. P.L. Lamba and Mr. Sunil Lamba, KIC Food Products Limited, a company incorporated under the Companies Act, 1956, having its office at B/12, Lawrence Road, New Delhi, Delhi Ice Cream Co. (P) Ltd., having its office at A-16, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi, (Divu) Frozen Food Products (P) Ltd., having its office at A-16, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi, Vigro Frozen Foods (P) Ltd., having its office at A-16, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi, Kwality Ice Cream Co., having its office at 90/A, Industrial Area, Ludhiana, Monsanto Manufacturers (P) Ltd., having its registered office at A-32/A, Industrial Area, Sahibabad (UP), Gaylord (P) Ltd., having its registered office at and an administrative office at New Delhi, Kwality Restaurant & Ice Cream (1978) Co.-CP unit, having its office at Connaught Place, New Delhi, Kwality Restaurant & Ice Cream Co. (1978) Co.-CP Unit, having its office at Greater Kailash, New Delhi, Kwality Restaurant & Ice Cream (1978) Co., a partnership firm comprising of Mr. P.L Larnba and Mr. Sunil Lamba, Mrs. Meena Metha & Mrs. Sita Rani having its office at 7, Regal Building, New Delhi Gaylord Bakery and Confectionary (P) Ltd., Ludhiana, represented by Mr. P.L. Lamba and Mr. Sunil Lamba for the said territory, hereinafter collectively referred to as "K (North)(which expression unless it be repugnant to the context or meaning thereof, shall mean and include its successors and permitted assigns) of the one part and TPT. Broke Bond Lipton India Ltd., a company incorporated under the Companies Act, 1882, having its registered office at Brooke House, Shakespears Sarani, Calcutta-700071, through its Director Mr. K.B. Dediseth, hereinafter referred to as "BBLIL" (which expression shall, unless it be repugnant to the context or meaning thereof, would mean and include its successors and assigns) and Unilever Industries (P) Ltd., a company incorporated under the Companies Act, 1956, having its registered office at 165/166, Backbay Reclamation, Bombay-400020, through its Director Mr. M.K. Sharma hereinafter referred to as "UIPL" (which expression shall unless it be repugnant to the context or meaning thereof would mean and include its successors and assigns) of the other part: hereinafter collectively referred to as "Unilever Group"
(emphasis, italicized in print, supplied)
21. In terms of the aforesaid agreement the assessed surrendered in favor of BBLIL its marketing rights in respect of ice cream, etc., for a period of ten years from the effective date of the agreement. It was further agreed under the said agreement that the appellant shall not engage directly or indirectly in marketing and selling of the ice cream products in competition with BBLIL.
In terms of clause 10 of the strategic alliance agreement the appellant and other constituents of the Kwality group undertook to desist from engaging themselves in the competing business. The relevant extracts of the said clause read as under :
"10. Mr. P.L. Lamba and Mr. Sunil Lamba along with six other constituents of K (North) shall execute at the time of the execution of this agreement, a noncompetition Agreement in favor of BBLIL against payment of a consideration of Rs. 7.50 crores (Rupees seven crores and fifty lakhs only) comprising of Rs. 1 crore to Mr. Sunil Lamba. Rs. 1 crore to Mr. P.L. Lamba, Rs. 2 crores to Kwality Restaurant & Ice Cream (1978) Co., Rs. 0.50 crore to Kwality Ice Cream Co., Ludhiana, Rs. 0.25 crore to Vigro Frozen Foods (P) Ltd., Rs. 0.25 crore to Delhi Ice Cream Co. (P) Ltd., Rs. 0.50 crore to Monsanto Manufacturers (P) Ltd. and Rs. 2 crores to KIC Foods Products Ltd. on terms and conditions contained therein being Annexures "J", "K", "L", "M'', "N" "O", "P" and "O" respectively hereto which provides among others for :
(a) An undertaking from constituents of K (North) that as a corporate entity/firms constituents of K (North) shall not, directly or indirectly, engage, undertake or commence within the said territory, the business of marketing and selling ice creams, ice lollies and dairy and non-dairy frozen desserts which appear look, taste or feel like, by consumer preference, ice cream, ice lollies, dairy based frozen desserts and non-dairy frozen deserts for a period of ten years from the effective date of such agreement , the true or the real owner of K (North) representing the said territory and/or throughout India, as the case may be, shall not engage in the business of marketing and selling ice creams, ice lollies and dairy and non-dairy frozen desserts under any brand name or enter into any agreement with other entities who are in the business of manufacturing or selling and marketing such products, save and except the arrangement they have with BBLIL under this agreement ..........".
22. In terms of the aforesaid clause 10, a separate non-compete agreement was entered into by the appellant with BBLIL, on the same date whereunder the appellant was paid a sum of Rs. 50 lacs for agreeing to desist from doing the business of marketing and selling ice cream, ice lollies and frozen dessert for a period of ten years from the effective date. The relevant clause of the said agreement reads as under :
"1. In consideration of a sum of Rs. 0.50 crore (Rupees fifty lacs only) being paid by BBLIL in the manner hereinbelow to KICL, KICL hereby surrenders in favor of BBLIL all its marketing rights in respect of ice cream, ice lollies, and dairy and non-dairy based frozen desserts and hereby further undertake subject to clause 10 of the strategic alliance agreement that they will desist from doing any business of marketing and selling ice creams, ice lollies and dairy and non-dairy based frozen desserts for ten years form the effective date, diractly or indirectly .........."
Similar separate non-compete agreements were entered into by the other constituents of the Kwalilty group with BBLIL in terms of clause 10 of the strategic alliance agreement.
The assessed claimed the said sum of Rs. 50 lacs as a capital receipt not chargeable to tax, being received in lieu of sterilization of the income earning apparatus and for taking upon itself the restrictive covenant of not engaging in competitive business. The assessing officer in the assessment completed under section 143(3)/147 held that the consideration received by the appellant was for the loss of goodwill. The assessing officer observed that the transaction entered into by the appellant was given the colour of transfer of marketing rights, etc., only to circumvent the taxation of the said sum. Taking the cost of acquisition of the goodwill as nil, the assessing officer brought to tax the entire receipt of Rs. 50 lacs as capital gain.
23. In appeal filed by assessed, the Commissioner (Appeals) however, held that the strategic alliance agreement was entered into by the Kwality group to synergise its activities with the activity of BBLIL which was also engaged in production of marketing of ice cream under the brand name "Walls". The Commissioner (Appeals) consequently, held that the amount of Rs. 50 lacs received by the appellant to be a business receipt assessable under section 28 of the Act.
24. Before us, the learned counsel for the assessed assailed the order of the Commissioner (Appeals). It was submitted that the sum of Rs. 50 lacs was received by the assessed in lieu of sterlization/substantial injury to the income earning apparatus of the assessed. It was further submitted that the amount was received under the non-compete agreement. The said amount was, it was submitted, received for not engaging itself into a competing business with that the BBLIL for a period of ten years from the effective date of the agreement.
25. The learned counsel vehemently argued that the lower authorities have totally misconstrued the strategic alliance agreement. It was further submitted that the lower authorities ignored the non-compete agreement entered on the same dated, i.e., 14-10-1994, whereunder the said amount was received. The learned counsel relied on the decision of the Supreme Court in the cases of Kettlewell Bullen & Co. v. CIT (1964) 53 ITR 261 (SC) , CIT v. Prabhu Dayal (1971) 82 ITR 804 (SC) and CIT v. Bombay Burmah Trading Corpn. (1986) 161 ITR 386 (SC) to contend that any amount received in lieu of destruction of the profit earning apparatus is in the nature of capital receipt not chargeable to tax under the Act.
26. It was further contended that the amount received for refraining from competitive business or for undertaking a restrictive covenant is in the nature of capital receipt and heavy reliance was placed on the following authorities :
CBDT Instruction No. 1964, dated 17-3-1999
(i) Chalpark, Co. Ltd. v. CIT (1991) 191 ITR 249 (Mad)
(ii) Asstt. CIT v. Prakash G. Heblkar (2002) 83 1TD 495 (Mumbai)
(iii) Saroj Kumar Poddar v. Jt. CIT (2001) 77 ITD 326 (Cal)
(iv) Assistant Commissioner v. A.S. Wardekar (2001) 77 ITD 405 (Cal)
(v) Income Tax Officer v. Anil Kumar Rudra (1999) 71 ITD 96 (Mumbai)
(vi) Spade Electro (P) Ltd. v. Assistant Commissioner (1997) 60 ITD 600 (Hyd)
(vii) M.N. Karani v. Asstt. CIT (1998) 64 ITD 119 (Mumbai)
(viii) K.S.S. Mani v. Income Tax Officer (1995) 54 ITD 76 (Mad)
27. The learned counsel further stated that the issue regarding the taxability of a sum under a non-compete agreement is also covered by the unreported decision of the Third Member of the Delhi Tribunal in the case of Shivraj Gupta in ITA No. 4898/Del/1998 dated 30-5-2001. A copy of the said order was filed in the Bench.
28. The learned counsel further stated that the Delhi Tribunal in the case of another constituent of the Kwality group viz., Shri Sunil Lamba and the Calcutta Tribunal in the case of Kwality Ice Cream Ltd. have held that the amount received form BBLIL under the strategic alliance agreement dated 14-10-1994, is in the nature of capital receipt. A copy of the decision of the Delhi Tribunal dated 7-5-2003, in the case of Sunil Lamba v. Dy. CIT in ITA No. 3006/Del/2000 was filed in the Bench and the copy of the decision of the Calcutta Tribunal in ITA No. 1768/Del/1999 formed part of the compilation filed by the appellant.
29. The learned Departmental Representative, on the other hand, strongly relied on the order of the Commissioner (Appeals) to contend that the amount received by the appellant was in the nature of business receipt. The learned Departmental Representative, was not able to distinguish decision in the case of Sunil Lamba (supra). The learned Departmental Representative merely stated that in the case of Sunil Lamba (supra), the assessed had challenged the exercise of revisionary power under section 263 by the Commissioner. It was stated that the said decision could not be considered as an authority for the issue under consideration.
30. We have carefully considered the rival submissions in light of the facts on record and perused the case law cited at the Bar, and the order of the Delhi Tribunal in the case of Sunil Lamba (supra), the Third Member decision in the case of Shivraj Gupta (supra), and the decision of the Calcutta Tribunal.
31. In the case of Sunil Lamba (supra), the assessment was completed under section 143(3) of the Act. In the return filed by the assessed, the amount of Rs. 1 crore received under the strategic alliance agreement with BBLIL was shown as a capital receipt non-liable to tax. The assessing officer accepted the claim of the assessed. Subsequently, the order of the assessing officer was revised by the Commissioner exercising powers under section 263 of the Act. The Commissioner set aside the order of the assessing officer and directed the assessing officer to examine the taxability of the receipt of Rs. 1 crore that was claimed as exempt by the assessed. The Commissioner directed that the issue may be decided as per law by the assessing officer. The order of the Commissioner was subject to challenge before the 'A' Bench of the Delhi Tribunal.
32. Adjudicating the appeal filed by the assessed, the Tribunal not only decided the issue of assumption of jurisdiction by the Commissioner but also the issue" regarding taxability of the said sum of Rs. 1 crore. Following the Third Member decision of the Delhi Tribunal, in the case of Shivraj Gupta (supra), the Bench observed as under :
"16. However, we have also considered the issue on merits. The assessed was engaged in the marketing and distribution of ice cream and other related products. Under an agreement, he assigned his rights of marketing to BBL with the conditions that he will not engage himself directly or indirectly in such activities for a period of 10 years not only in relation to the products of the affiliated concerns but of any other concern. A sum of Rs. 1 crore was received in consideration thereof. Such amount was, therefore, received under a restrictive covenant of not engaging himself directly or indirectly in the activities carried on by it. The Hon'ble Supreme Court in the case of Universal Radiators v. CIT (1993) 201 ITR 800 (SC) has indicated the following norms to decide whether the amount was revenue receipt or capital receipt :
'Whether payment is made to compensate any loss of the use of any goods in which the assessed does not carry on any business or the payment is a test equivalent to the cost incurred by the assessed but excess accrues due to fortuitous circumstances or is a windfall than the accrual may be a receipt but it would not be an income arising from business and, therefore, not taxable under the Act'. "
17. Similarly, in the case of J.C. Chandiok v. Dy. CIT (1999) 69 TTD 75 (Del)(SB), decided by the Special Bench of the Tribunal, Delhi, it was held as under :
'All receipts by an assessed cannot necessarily be deemed to be income of the assessed for the purpose of income-tax. The question whether a particular receipt is an income or not depends on the nature of the receipt and the true scope and effect of the relevant taxing provision. The assessing officer cannot assess any receipt by using panoply of section of section 10(3). He can assess only those receipts that amount to income. The taxability of an amount would depend on the nature and character of the receipt.'
18. The Hon'ble Supreme Court in the case of Gillanders Arbuthnot & Co. Ltd. (1964) 53 ITR 283 (SC) considered similar issue and held as under :
'Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of terminated agency is prima facie of the nature of a capital receipt.'
19. The Hon'ble Rajasthan High Court in the case of CIT v. Rao Raja Kalyan Singh (1974) 97 ITR 690 (Raj) held as under :
'Where a compensation is received for the sterilization or destruction of a revenue yielding asset the character of such receipt cannot be anything but capital'.
20. The Calcutta Bench of Tribunal in the case of Assistant Commissioner v. A.S. Wardekar (2001) 77 ITD 405 (Cal) considered similar issues. It held as under :
'In this case, the amount was received by the assessed in consideration of his agreeing and undertaking not to engage himself directly or indirectly in any activity, industrial, commercial or otherwise which in any manner competes or conflicts with the existing business and activity of WIEL (taken over by UBL) for a period of five years from the date of agreement. This was thus, a restrictive covanant between the assessed and the UBL (who acquired controlling interest in WIEL). The receipt of a sum of Rs. 175 lakhs, thus, was capital in and not liable to income-tax as per ratio of the case reported at Gillanders Arbuthnoth & Co. Ltd. (supra)'."
33. The same view was taken by Calcutta Bench of the Tribunal in the case of Saroj Kumar Poddar v. A. CIT (2001) 77 ITD 119 (Cal) and in the case of Assistant Commissioner v. Prakash Ji Habalkar (2002) 83 ITD 495 (Mumbai), by Hon'ble Madras High Court in the case of CIT v. Saraswati Publicities (1981) 132 ITR 207 (Mad).
34. The Delhi Bench of the Tribunal in the case of Shivraj Gupta (ITA No. 489/Del/1998) considered similar issues. On a difference of opinion, the Third Member vide its order dated 30-5-2001, has held as under :
"On the basis of above discussion, I am of the considered view that assessed got the amount of Rs. 6.6 crores under restrictive covenant and that was no colourable device adopted by the assessed in getting this amount, and case is not hit by the ratio of decision of Hon'ble Supreme Court in the case of McDowell (supra). Accordingly, I concur with the finding and conclusion arrived at by the learned AM."
35. The same view was taken by the Delhi Bench of the Tribunal in the case of pronouncement Inder Kumar Khosla (ITA No. 2047/Del/2001). Looking to the above judicial pronouncement, it cannot be said that the order passed by the assessing officer was erroneous insofar prejudicial to the interest of the revenue. Thus, even on merits the Commissioner was not justified in assming jurisdiction under section 263 of the Act. The order under section 263 is, therefore, quashed.
36. The taxability of the amount received by the assessed under the non-compete arrangement with BBLIL is also covered by decision of the Calcutta Tribunal in the case of another constituent, Kwality Ice Cream (P) Ltd. (supra). The relevant observations of the Tribunal are reproduced as under :
"22. We have gone through the rival submissions and perused the records. We have noticed that the assessing officer elaborating the nature of this receipt held that even if the receipt was capital, the same was taxable as per the decision of the Hon'ble Allahabad High Court (supra). Further, it has been noticed that the assessing officer found that the receipt was casual receipt under section 10(3) of the Income Tax Act and was accordingly taxable. The assessing officer made meticulous effort to ascertain the nature of this particular receipt and inspite of citing various judicial pronouncements, it is not clear to him as to its nature. We have noticed that non-competition aguement results in a restrictive covenant and the connotation receipt in lieu thereof is a capital receipt and this conclusion of the learned Commissioner (Appeals) finds support from the judgment of the Madras High Court in the case of CIT v. Saraswathi Publicities (1981) 132 ITR 207 (Mad). The facts of the same case which is squarely applicable in the instant manner are under consideration. It was further held by the Hon'ble Madras High Court in the judgment mentioned above that receipt referrable to restrictive convenant was not liable to tax. The learned counsel for the assessed also brought to our notice the decision of the Kettlewell Bullen & Co. Ltd. v. CIT (1964) 53 ITR 261 (SC) which is applicable in the present facts and circumstances of the case. On a careful consideration of the facts enumerated above, we hold that none of the decisions, mentioned above, of the Apex Court and High Court supports the contention that the capital receipt should be taxed as income. We further hold that this particular receipt is not a casual receipt as envisaged under section 10(3) of the Income Tax Act and it is not taxable under that section. In view of the above discussion, we are of the opinion that there is no infirmity in the order of the learned Commissioner (Appeals) which is, therefore, sustained."
37. The issue regarding the taxability of any sum received under a non-compete arrangement is also squarely covered by the Instruction No. 1964, dated 17-3-1999, issued by the CBDT. The relevant extracts of the instructions read as under :
"(4) Recently, the Board has received references where clarifications have been sought on the taxability of compensation received for agreed absence of competition or under agreement containing restrictive convenants. In this connection, it may be clarified that the taxability of such compensation under the Income Tax Act depends upon the nature and circumstances of each case with reference to the agreement in question. The first issue that may have to be decided in such cases is whether the capital asset in question is goodwill of a business or a right to manufacture, produce or process any article or thing. This is because the amendment made by the Finance Act, 1997, in section 55(2) enlarging the scope of a capital asset is structured in such a manner that it is either "goodwill" or "a right to manufacture produce or process an article or thing"
(i) where the capital asset transferred is in the nature of goodwill of a business, recourse to section 55(2) can be made only from assessment year 1988-89 and subsequent assessment years.
(ii) where the capital asset transferred is in the nature of a right to manufacture produce or process an article or thing, recourse to section 55(2) can he made only from assessment year 1998-99 in respect of any consideration received for the transfer thereof which includes extinguishment or curtailment of such right. In this connection, attention is invited to clause 19 of the memorandum explaining the provisions of the Finance Bill, 1997, wherein it has been pointed out that consideration received on extinguishment of such a right is in the nature of capital receipt and is not liable to tax under the head 'capital gains' up to assessment year 1997-98. It is clarified that even where such transfer, extinguishment or curtailment of such a right is complete or in part the taxability of the consideration will remain unaffected, i.e., the same will not be taxable under the head capital gains only up to assessment year 1997-98 and will become taxable from the assessment year 1998-99 and subsequent assessment years.
(iii) where the capital assets are intangible assets (like trademark, etc., listed in para 2 above) not being in the nature of goodwill of a business, the issue to be decided, depends upon one vital factor whether such assets ought to be transferred was initially acquired at a cost or whether it was self generated. In the event, such asset was acquired at a consideration, capital gains will have to be calculated in accordance with law in this behalf. However, where such asset in question is a self-generating asset, no capital gains will be levied up to assessment year 1997-98, after which date capital gains will become leviable. It may be clarified that mere payment of some amount for registration of such intangible asset like trademark, etc. may not constitute the cost of acquisition for the purpose of computation of capital gains."
(emphasis, italicized in print, supplied) The Board has, thus clarified that where the capital asset-transferred by the assessed is in the nature of a right to manufacture, produce or process an article or thing, recourse to section 55(2) can be made only from assessment year 1998-99. It was further clarified that any consideration received on extinguishment of a right is in the nature of capital receipt and is not liable to tax as capital gains up to assessment year 1997-98.
38. It is further noted that the legislature has, in its wisdom, amended the provisions of section 28 by the Finance Act, 2002, with effect from 1-4-2003 to insert a new clause (va). The said clause provides that any sum received for not carrying out any activity in relation to any business shall be chargeable to tax under the head "profits and gains of business and profession". Further, section 55(2)(b)(1) and section 55(2)(a) were also amended by the said Finance Act with effect from 1-4-2003, to deem the cost of improvement/acquisition in relation to a capital asset being right to carry on any business as nil. The said amendments are applicable prospectively from assessment year 2003-04 and thereafter. The amendments do not have retrospective effect and are, therefore, not applicable to the year under appeal.
39. Respectfully following the decisions of the Delhi and Calcutta Benches of the Tribunal in the case of constituents of the Kwality Group (supra) and the instructions issued by the Board, we are of the considered view that the sum of Rs. 50 lacs received by the assessed under the non-compete arrangement with BBLIL is in the nature of capital receipt not chargeable to tax under the Act. The legislature, in its wisdom, has made amendments under various sections to bring to tax such receipts, which, however, as discussed above, are not applicable to the year under consideration. Accordingly, the ground raised by the appellant against the taxability of the sum of Rs. 50 lacs received under the non-compete arrangement is allowed.
40. The last ground of appeal is against the levy of interest. Since the addition made has been deleted on merit, the levy of interest being consequential needs no further comment.
41. The appeal filed by the assessed is allowed.