Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income Tax vs Ashit M. Patel on 30 May, 2005
Equivalent citations: (2005)96TTJ(MUM)439
ORDER
Pramod Kumar, A.M.
1. This is an appeal filed by the Revenue and is directed against the order dt. 14th June, 2001, passed by the CIT(A) in the matter of assessment under Section 143(3) of the IT Act for the asst. yr. 1997-98.
2. Grievance of the Revenue is that on the facts and in the circumstances of the case the CIT(A) erred in holding that the sum of Rs. 30 lakhs, being the amount received by the assessee from M/s Firemenich SA in terms of the restricted convenant and taxed by the AO as income from business and profession, was a capital receipt and not chargeable to tax. The short issue that we are really required to decide, therefore, is whether the compensation received by the assessee is capital in nature or is of revenue in nature.
3. The factual matrix of the case is like this. The assessee was managing director of a company by the name of M.C. Davar Aromatics Ltd. (MCDAL, in short), since inception but his association with the MCDAL ceased w.e.f. 2nd Sept., 1996. MCDAL had a collaboration agreement with a Swiss company by the name of Firemenich SA. As managing director of MCDAL,, the assessee obviously had access to some sensitive information in the nature of trade secrets, company knowledge and other information relating to MCDAL as well as Firemenich. To prevent the assessee from taking up an employment, which could be detrimental to the interests of the Swiss company as well, the said Swiss company entered into an arrangement with the assessee which forbed the assessee from taking up any assignment in an advisory capacity or otherwise with the competitors of Firemenich in India during the next three years. It was in consideration of this undertaking and on the terms of non-compete agreement at pp. 19 to 22 of the paper book, that the assessee received a sum of Rs. 30 lakhs. The AO has brought this receipt of Rs. 30 lakhs to tax as a revenue receipt under the head 'Income from business and profession' on the ground that the assessee is carrying on business as partner in other concerns which are sister-concerns of MCDAL, and the benefit has arisen to the assessee in the course of the said business. The AO also held that "Firemenich and the assessee had reached an understanding in the guise of an agreement in order to claim it as a capital receipt and to avoid tax on such receipt". In the backdrop of mainly these observations, the AO brought the said sum of Rs. 30,00,000 to tax. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the impugned addition by holding the same to be in the nature of capital receipt and thus outside the ambit of taxable receipts. Revenue is aggrieved and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. As rightly concluded by the CIT(A), there appears to be no basis, save and except for the suspicion of the AO for AO's coming to the conclusion that this non-compete agreement between Firemenich and the assessee is only to avoid taxes and is, therefore, a sham agreement. On the other hand, there is overwhelming material on record to establish the factual background in which the said agreement was entered into. The assessee's close association with MCDAL and MCDAL being "engaged in the manufacture, compounding, diluting, marketing and sale of fragrances, flavours and related systems pursuant to the agency agreement in force between MCDAL and Firemenich" is free from any doubt or controversy. The factum of assessee being in know of information which, on reaching the hands of the competitors, could be detrimental to the interests of the both the companies is also not in dispute. There is nothing unusual in one of the affected parties entering into non-compete agreement with the assessee. The allegation of the Revenue is not based on any cogent material. It is also well-settled in law that non-compete fees is a capital fees inasmuch as it is in lieu of a source of earnings. This proposition is supported by a large number of judicial precedents. In the case of Asstt. CIT v. Kamlesh S. Sonawala (ITA No. 4705/Mum/1991, order dt. 28th May, 1998), a co-ordinate Bench was of the view that non-compete fees is a capital receipt and is not exigible to tax. The same is the situation in the case before us. In any event, as held by another co-ordinate Bench in the case of Shaw Wallace & Co. Ltd. v. Dy. CIT (2001) 71 TTJ (Cal) 478 : (2002) 80 ITD 156 (Cal), the well-settled legal position is that the onus is on the Revenue to establish that the sum being sought to be taxed in the hands of the assessee is a revenue receipt, though once that onus is discharged it is for the assessee to establish that it is not taxable. The onus of the Revenue has not been discharged in the present case. A mere bland statement that the impugned receipt is a taxable receipt and under a sham agreement has no meaning. The agreement being a sham agreement is to be proved by the Revenue. That has not been done. Everything proceeds on assumptions. In the light of these discussions, we are of the considered view that the CIT(A) rightly deleted the impugned disallowance by holding the same to be a capital receipt. In any event, we also find that a co-ordinate Bench of this Tribunal, in the case of Kushal N. Desai v. Jt. CIT (ITA No. 5025/Mum/2000, order dt. 28th May, 2002) has held that Section 28(va), whereby all sums received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business have been brought to tax, is only retrospective in nature w.e.f. asst. yr. 2003-04. Therefore, for this reason also, the CIT(A)'s conclusions meet our approval.
6. For the reasons set out above, we approve the conclusions arrived at by the C1T(A) and decline to interfere in the matter.
7. In the result, Revenue's appeal is dismissed.