Income Tax Appellate Tribunal - Chennai
Asstt. Cit, Salary Circle 11 vs Ian Peter Morris on 20 June, 2005
Equivalent citations: [2006]7SOT279(CHENNAI)
ORDER
T.R. Sood, A.M. The revenue has challenged the order of the Commissioner (Appeals) mainly on the ground that he has erred in deleting the addition of Rs. 21 lakhs alleged to have been received by the assessee on account of restrictive covenant, which was treated by the assessing officer as revenue receipt.
2. The brief facts of the case are that assessee was a founder director of Log-In Systems Innovations Ltd. ("Log-in Systems" for short), from where he was receiving only salary. This company was engaged in the business of software development and consultancy. The entire business of the company was sold as a going concern to Synergy Credit Corporation Ltd. ("Synergy" for short) for Rs. 6 lakhs on 15-10-1993. Synergy also offered appointment to the assessee as Executive Director on 8-10-1993 and he was ultimately appointed in that position with effect from I- I 1- 1993. Through a separate agreement dated 15-10-1993 entered with the assessee, Synergy Credit Corporation Ltd. imposed a restriction on the assessee (ie., Ian Peter Morris) that assessee would not undertake the business of computer software, development and marketing of any kind. In consideration of this, Synergy agreed to make a payment of Rs. 21 lakhs and this sum of Rs. 21 lakhs was treated as capital receipt by the assessee, being made for restrictive covenant in view of the decision of the Supreme Court in cases of Gillanders Arbuthnot & Co. Ltd. v. CIT (1964) 53 ITR 283 and CIT v. Best & Co. (P.) Ltd. (1966) 60 ITR 1 (SC).
3. The assessing officer did not agree with the submissions of the assessee. According to him, assessee received salary from his previous company i.e., Log-In Systems Innovations Ltd. and also from the present company, i.e., Synergy Credit Corporation Ltd. The relationship between the company and the assessee was only employer and employee and as per section 17(1)(iv), any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages are taxable under the head 'Salary'. He further observed that the so-called separate agreement was not a restrictive covenant, but only a service contract between the employer and the employee. He also held that the principles of the decision of Guillanders Arbuthnot & Co. Ltd. (supra) would not apply in the present case because in that case, the agreement was between principal and agent, but here, the agreement was between employer and employee. In this background, the assessing officer held that this sum of Rs. 21 lakhs as part of the salary and subjected it to income-tax.
4. The Commissioner (Appeals) deleted this addition mainly on the basis that consideration paid to the assessee by Synergy was in fact against the restrictive covenant put on the assessee by the said company. He further observed that assessing officer has not brought any material on record, which would indicate that assessee deserved more salary of Rs. 4,20,000 in each of the five years, for which employment agreement was signed.
5. Before us, the learned Departmental Representative referred to the contents of the assessment order and pointed out that in fact the whole transaction entered into by the Synergy with the assessee and all other directors of Log-In Systems is basically one transaction only. This is evident from the fact that Synergy entered into agreement for acquisition of entire business of Log-In Systems vide agreement dated 15-10-1993. While offer of appointment of each of the erstwhile directors of Log-In Systems including the assessee was given on 8-10-1993. On 15-10-1993 itself, an agreement was entered with assessee and other directors imposing restrictive covenant on them for not carrying out the similar development of sophisticated software.
The dates themselves make it clear that basically it was only an offer for employment because business of Log-In Systems was purchased on 15-10-1993, whereas offer for employment was given on 8-10-1993. On 15-10-1993 itself, agreement for restrictive covenant was entered into. He posed a simply query that once letter of offer was already given for employment, the assessee was duty bound to do work for the Synergy and could not have run business outside. If this kind of assumption is ' not made, then all big companies would have entered into separate agreements with their employees for not doing any business on the basis of knowledge or expertise, which they have derived during the course of employment. But this is not practiced in any business or industry all over the country. This is so because there are various laws under which such employees can be held responsible for doing similar business on the basis of technical expertise or knowledge derived during the course of employment. Therefore, whatever money was agreed to be paid was in fact part of salary and only a guise of restrictive covenant was given to hoodwink the revenue against the legitimate tax dues of the Government.
6. He further argued that there was another angle that if Synergy wanted to restrict the assessee for not getting into the business of specific software, then there must be hundreds of other citizens in the country, who might be doing identical development of software, but Synergy had no such power to stop such people for carrying on the business of such specific software. This also shows that this payment was made only in respect of salary by the Synergy to the assessee, which was given the name of restrictive covenant just to save taxes. He also emphasized that this restriction for not developing the software by the assessee was only for five years and duration of the initial offer for employment was also for five years. He further argued that assessing officer has rightly distinguished the decision of Gillanders Arbuthnot & Co. Ltd. (supra) and Best & Co. (P.) Ltd. (supra), because in both those decisions parties in either side were principal or agent and two separate companies and the principles laid down in those cases could not be made applicable to the employer-employee. He submitted that in identical circumstances, the Hon'ble Madras High Court in the case of K. Ramasamy v. CIT (2003) 261 ITR 358 (Mad) were pleased to hold that amount received by the assessee for so-called restrictive covenant was assessable as revenue receipt.
7. On the other hand, the learned authorised representative while strongly supporting the order of the CIT(Appeals) submitted that offer of appointment was given on 8-10-1993 and the company known as Log-In Systems and entire business of the company was acquired by Synergy on 15-10-1993. He pointed out that the agreement regarding restrictive covenant was also entered on 15-10-1993, whereas the assessee joined the service with Synergy only with effect from I- I 1- 1993, which means, there was no relationship of employer-employee on the date of agreement for restrictive covenant, i.e., on 15-10-1993. At this stage, the Tribunal directed the learned counsel of assessee to file copy of letter of offer by Synergy and the case was adjourned. On the adjourned date, the learned counsel of assessee showed his inability to produce the letter of offer by Synergy, which contained various terms & conditions of employment. However, he made further submission that the Commissioner (Appeals) has correctly observed that assessing officer has not brought any material on record that assessee's salary would have been more by Rs. 4,20,000 per year, if the compensation of Rs. 21 lakhs was divided into five years. In fact, the salary of Rs. 1,77,200 p.a. by Synergy was just and reasonable. He argued that assessee was an export in Computer software and banking industry and restrictive covenant was in respect of his expertise and there is nothing wrong in these agreements.
8. The learned authorised representative further pointed out that section 17(3)(iii) which covers this type of payments was inserted by the Finance Act, 2001, with effect from 1-4-2002. Therefore, in any case, such payments cannot be taxed.
9. In the rejoinder, the learned Departmental Representative submitted that in respect of this contention that section 17(3)(iii) was introduced with effect from 1-4-2002, this provision should be held to be of clarificatory nature because earlier also such payments were taxable. In any case, section 17(1)(iv) as well as section 17(3)(ii) would cover this kind of payment.
10. We have considered the rival submissions carefully and have gone through the relevant material on record. There is no dispute regarding the facts that assessee was director in Log-In Systems and the entire business of this company was acquired by Synergy for Rs. 6 lakhs vide agreement dated 15-10-1993. On the same date ie., 15-10-1993, Synergy entered into a restrictive covenant agreement with the assessee for not carrying out the business of computer software development and paid a sum of Rs. 21 lakhs. On 8-10-1993, Synergy gave an offer to the assessee for joining that company as an Executive Director on the salary of Rs. 1,77,200 p.a. and assessee joined the services with effect from 1-11-1993. It is clear frorn the facts of the case that all events are part of the same transaction. The assessee along with some of his colleagues was carrying on business of computer software development which was sold to another company where assessee along with his colleagues who were working in Log-in Systems joined the new company. Though the learned counsel of assessee was specifically directed to file the copies of the letter of offer by Synergy, for which he showed his inability to file the same. But otherwise it becomes clear that Synergy has not got any extra advantage by entering into restrictive covenant agreement. Assessee was duty bound to sincerely work for Synergy and if he violated the terms of employment which are not before us, then that company could have in any case taken action against such employees. Even by entering into restrictive covenant agreement only advantage which Synergy is getting is that it can take legal action against the assessee if he indulges in development of computer software for others. This fact itself makes it clear that this is merely payment against the salary. We are unable to agree that assessee was not employee at the material time. The fact that remains is that assessee was already offered employment on 8-10-1993 and restrictive covenant was entered into on 15-10-1993, which means the arrangement had already been entered by which assessee would join Synergy as employee. It is a simple case of relationship of employer and employee. From these facts, it becomes clear that the so-called restrictive covenant agreement was only a part of the contract for employment, but a different name was given only to save taxes. The so-called restrictive covenant agreement is only a make believe agreement mainly intended to change the nature of receipt. This issue has been recently examined by the Hon'ble jurisdictional High Court in the case of K. Ramasamy (supra). In that case, the assessees who were brothers were partners in a firm which was carrying on a business of running a chain of hotels in the city of Coimbatore. These brothers incorporated a new company on 5-7-1984 and business of the hotel was leased out to new company from 16-7-1984 for yearly rent exceeding Rs. 40 lakhs. On that date, another agreement was entered by the company with the four brothers which was styled as a deed of compensation and a sum of Rs. 20 lakhs was made payable in five equal instalments to the four brothers as consideration for their promise not to carry on the business of running hotels individually or in association with others for a period of five years. On these facts, the Hon'ble High Court held as follows :
"Held, that the finding that the paymen' made by the company to these brothers was in the nature of revenue receipt in the hands of the brothers, would not negate the separate juristic existence of the company. The company continued to remain a legal entity with a right to hold property, to contract, etc. The true character of the payment made by it to these brothers who were shareholders and directors and who were partners of the firm and who had owned the buildings and the equipment used by the company for running the hotel, had to be judged by looking at the reality after removing or piercing the veil of the company, as the circumstances of the case justified such an exercise. The purpose of deed of compensation in reality was only to screen the payment made under that deed from liability to income-tax in the hands of the assessee. The Tribunal was right in law in holding that the compensation of Rs. 1,00,000 received by the assessees from the company during the previous years ended 31-3-1986, relevant to the assessment year 1986-87 constituted a revenue receipt assessable as income."
11. The facts in the case before are almost identical, because assessee was part owner of the Log-In Systems along with his colleagues which was sold to Synergy. All the four directors of Log-In Systems became Executive Directors of Synergy and all such four directors were paid a sum of Rs. 21 lakhs each for not carrying on the business of computer software development. We are of the considered opinion that Rs. 21 lakhs is definitely in the nature of revenue receipt and since the same has been received during the course of employment, same has to be treated as part of salary.
12. During the course of hearing, we had raised another query that whether we should examine this issue that the amount should be made taxable in each of the five years of the contract for employment. The learned counsel of the assessee had refused to raise this new issue, by fairly conceding that even if the amount was directed to be taxable for five years, no difference would be made to the overall tax liability of the assessee, because tax rates in all those years were same and assessee was already paying taxes at the highest rates.
13. As far as the contention of insertion of section 17(3)(iii) is concerned, different clauses are reproduced as under :-
'17(1)(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;"
"17(3)(ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy."
"17(3)(iii) any amount due to received, whether in lump sum or otherwise, by any assessee from any person-
(A) before his joining any employment with that person; or (B) after cessation of his employment with that person."
14. We agree with the contention of the learned authorised representative that section 17(3)(iii) cannot be held to be with retrospective effect because this provision is fasting on new kind of liability on the assessee and thus it cannot be held to be retrospective. However, at the same time, we are of the opinion that the dispute raised before us regarding the compensation is well covered by section 17(1)(iv) and/or 17(3)(ii).
15. In these circumstances, we set aside the order of the learned Commissioner (Appeals) and restore that of the assessing officer by holding that Rs. 21 lakhs received by the assessee was in the nature of revenue receipt.
16. In the result, the appeal is allowed.
CO 53/Mds./2000
17. The assessee has raised various cross -objections, but at the time of hearing, the learned authorised representative submitted that particularly two issues have been challenged, viz-, reopening of the assessment and levy of interest under sections 234B and 234C.
Reopening
18. The learned authorised representative submitted that before processing the case under section 143(1)(a), the assessing officer had asked certain clarifications, which were duly filed by the assessee and therefore) the intimation issued by him was basically an order under section 143(2) and the same cannot be reopened.
19. On the other hand, the learned Departmental Representative submitted that the first intimation under section 143(1)(a) was passed and same cannot be treated to be 143(2) order. In any case, after the amendment of the section with effect from 1-4-1989, there is no restriction for reopening the assessment when order is passed under section 143(1)(a). If the other ingredients of section 147 are satisfied, then the assessing officer is free to initiate reassessment proceedings. In this regard, he relied upon the decision of Allahabad High Court in the case of Pradeep Kumar Har Saran Lal v. Assessing Officer (1998) 229 ITR 46 (All).
20. After considering the rival submissions, we think that intimation under section 143(1)(a) cannot be treated as an order under section 143(2) merely because some clarifications were sought for by the assessing officer. This cannot also be treated as a change of opinion, because in case of intimation passed under section 143(1)(a), basically no opinion is formed. As far as restriction of reopening the intimations under section 143(1)(a) is concerned, the Hon'ble Allahabad High Court in the case of Pradeep Kumar Har Saran Lal (supra) has observed as under :
"Simple because the return of the assessee has been accepted without scrutiny and in good faith the assessing officer is not precluded from initiating a proceeding satisfying the conditions therefore where the income has escaped assessment. There is nothing either in section 143 or in section 147 that can support such a view. The provisions of a tax statute should be interpreted in a manner leading to the result that everybody pays his due tax.... In our view, a return after its acceptance, whether in a summary manner or after scrutiny, may itself lead to reassessment proceedings provided the conditions for reassessment under section 147 exist.... It is not the summary acceptance of the return under section 143(1)(a) that can operate as a bar against reassessment. It is, rather, the further disclosure made by the assessee in the course of proceedings under section 143(3) whereby the assessee may take out his case from the mischief of section 147. Therefore, the scope for initiating reassessment proceedings in an assessment made under section 143(1)(a) is far wider than in an assessment made under section 143(2) read with section 143(3). In our view, the power that can be exercised under section 143(2) to correct the assessment made under section 143(i) does not exclude the power of the assessing officer to reopen the assessment under section 141 if the ingredients of section 147 are satisfied. It is open to the assessing officer to invoke the jurisdiction under section 147, notwithstanding the fact that there are other remedies open to him under the Act. It cannot, therefore, be accepted that the reassessment under section 147 is vitiated because the assessing officer failed to invoke his power to correct the assessment already completed under section 143(1) by issuing a notice under section 143(2) of the Act."
21. Following the above decision, we hold that assessment has been correctly reopened by the assessing officer.
Interest under sections 234B and 234C
22. After hearing both the parties, we find that imposition of interest under sections 234B and 234C is of consequential nature and the assessing officer is directed to impose the same as per provisions of law.
23. In the result, the cross-objections are rejected.