Income Tax Appellate Tribunal - Madras
R.K. Swamy vs Assistant Commissioner Of Income-Tax on 8 January, 2003
Equivalent citations: [2004]88ITD185(CHENNAI)
ORDER
N. Barathvaja Sankar, Accountant Member
1. This is an appeal preferred by the assessee Shri R.K. Swamy of Chennai - 600 018 for the assessment year 1997-98 against the appellate order dated 7-3-2002 of the Commissioner (Appeals)-V, Chennai. The grounds of appeal of the assessee read as under :-
1. The order of the learned Commissioner of Income-tax (Appeals) is opposed to law, weight of evidence and facts of the case.
2. The learned CIT(A) erred in directing that the non-compete fee of Rs. 3.20 crores received by the appellant be brought to tax as business income under Section 28(u)(a) of the Income-tax Act, 1961 without appreciating:
(a) the fact that the sum received was a capital receipt not subject to tax;
(b) the various binding decisions of the Hon'ble Supreme Court that were relied upon by the appellant in this regard;
(c) the incontrovertible facts surrounding the appellant's case [The CIT(A) has, in fact, misconstrued and misunderstood the same] and
(d) the circumstances leading to and necessitating payment of the non-compete fee to the appellant as well as the basis of determining the fee.
3. The learned CIT(A) also erred
(a) in not affording to the appellant opportunity to rebut his erroneous sequence of thoughts as apparent from his appellate order;
(b) in not bringing on record and discussing certain facts given and submissions made by the appellant in the course of hearing such as, the corresponding assessment details of the company that made the payment to the appellant and the amendment proposed to Section 28 by the Finance Bill, 2002;
(c) in relying upon certain decisions (mentioned by him in his order) that are not relevant for deciding the issue on hand; and
(d) in not considering the numerous decisions relied upon by the appellant.
2. The succinct facts of the case are that the assessee filed his return of income for the assessment year 1997-98 declaring an income of Rs. 1,30,530 and the same was processed under Section 143(1)(a) of the Act on 15-3-1999. In the return of income filed the assessee claimed a sum of Rs. 3.2 crores being non-competing fees received from R.K. Swamy/ BBDO Advertising Pvt. Ltd. as exempt. The predecessor to the Assessing Officer who passed the present assessment order had reason to believe that income had escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts with reference to the non-taxability of the non-competing fees of Rs. 3.2 crores. Notice under Section 148 of the Act came to be issued. The notice was served on the assessee on 2-3-1999, in response to which the assessee had tiled a letter on 3-3-1999 drawing reference to the return of income earlier filed. In the circumstances the return of income earlier filed was considered for the purpose of assessment and proceedings were continued by the issue of notice under Section 142(1) of the Acton 17-3-1999. During the course of hearing the learned counsel for the assessee drew the attention of the Assessing Officer to the assessee's letters dated 15-4-1999 and 23-4-1999, wherein he had filed copies of correspondences and cited various court decisions to drive home his point that the sum of Rs. 3.2 crores being non-competing fee received by the assessee in pursuance of the agreement entered into by him with R.K. Swamy/BBDO Advertising Pvt. Ltd., is a capital receipt and hence not taxable as per the provisions of the Act. The Assessing Officer also had considered the letter dated 17th January, 1996 written by Shri Srinivasan K. Swamy to Mr. David Sia, Foreign Collaborator, BBDO, Asia Pacific, Bangkok and the reply dated 8-2-1996 from Shri David Sia to Shri Srinivasan K. Swamy. In addition he has also considered the minutes of the meeting of R.K. Swamy/BBDO Advertising Pvt. Ltd. held on 28-2-1996, extracts of which reads as under :-
This meeting of Board of Directors without the assessee discussed mainly about the non-competition agreement. The view of the assessee that he was agreeable to a compromise suggestion was conveyed by one of the Directors. The Board of Directors resolved to approve the draft non-competition agreement as the best solution and the assessee agreed to continue as non-executive chairman of the company. The Board was satisfied that it was wholly in the interests of the company to secure that the assessee did not set up any competing business or join any competitors. The suggestion of BBDO's representative was to prevent such a prejudicial eventuality by payment of adequate forbearance fee for it was necessary to maintain the position prevailing then and the growth of the organization.
The Board of Directors acknowledged the contributions, achievements, and accomplishments of the assessee as Managing Director of the company and his charitable and religious dispositions as an outstanding personality.
Finally the Board acknowledged the fact that but for the immense sacrifices and noble services rendered by the assessee from 1-4-1973, the company would not have attained its statute and strength in the advertisement industry.
The Assessing Officer has further extracted in the assessment order from the non-competition agreement dated 29-2-1996 between R.K. Swamy/ BBDO and the assessee, which reads as under :-
It is clearly indicated in the agreement that a non-competing fee was paid to the assessee to settle the disputes that have arisen between the assessee and the company. The agreement placed certain restrictive covenants on the assessee for a period of five years from 28-2-1996. In terms of the agreement the assessee agreed to continue as Chairman of the Board of Directors of the company and Chairman of Hansa Vision, a wholly owned subsidiary company of the company R.K. Swamy/BBDO. The non-competing fee was quantified at Rs. 3.2 crores. The assessee had also agreed for continuance of his name being part of the company's name.
Before the Assessing Officer the assessee's representative relied on the following case laws :-
1. CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 (SC).
2. CIT v. Saraswathi Publicities [1981] 132 ITR 207 (Mad.) (SLP rejected by the Supreme Court).
3. 142 ITR St. page 6.
4. Cillanders Arbulhnol & Co. Ltd. v. GT[1964] 53 ITR 283 (SC).
5. Addl. CIT v. Dr. K.P. Karanth [l983] 139 ITR 479 (AP).
6. CIT v. Automobile Products of India Ltd. [1983] 140 ITR 159' (Bom.).
7. CIT v. Late G.D. Naidu [1987] 165 ITR 632 (Mad.).
After examining the materials and the citations of courts furnished the Assessing Officer was inclined to agree with the assessee that the sum of Rs. 3.2 crores received by the assessee as non-competing fee from the company R.K. Swamy/BBDO was a capital receipt. Then the Assessing Officer after discussing the provisions of Section 2(24)(vi) and the case law in the case of CIT v. Khitshalbhai Palel & Sons [1979] 118 ITR 656 (Bom.) came to the conclusion that in the instant case the assessee was hit by the mischief of Section 2(24)(v/) of the Income-tax Act, as the sum of Rs. 3.2 crores was nothing but capital gains chargeable under Section 45 of the Income-tax Act inasmuch as from the various information provided it was obvious that the sum was paid towards transfer of goodwill by the assessee for a limited period. Later in the same page in the very next paragraph of the assessment order the Assessing Officer after discussing the case law in the case of CIT v. Gulab Chand [l991] 192 ITR 495 (All.) and the decision of the Supreme Court in the case of CIT v. G.R. Karthikeyan [1993] 201 ITR 8662 has observed that:
Since 'goodwill' is a self-generated capital asset and cost of acquisition is Nil, in terms of Section 55(2)(a)(n). the receipt is assessable as capital gains. However, I am of the view that this receipt is assessable in the assessment year 1997-98 as casual and non-recurring income under Section 10(3) of the Income-tax Act for the following reasons :
(i) The assessee claims it as a capital receipt.
(ii) It is a capital receipt chargeable under Section 45 of the Act.
In the case of the assessee for the elaborate analysis of the facts discussed above, I am of the view that the sum of Rs. 3.2 crores is assessable as casual and non-recurring income under Section 10(3) of the Income-tax Act subject to the exemption of Rs. 5,000 provided therein.
Thus the Assessing Officer treated the receipt of Rs. 3.2 crores being non-competing fees received from the company R.K. Swamy/BBDO Pvt. Ltd. as casual and non-recurring income and made an addition of Rs. 3,19,95,000 [after giving an exemption of Rs. 5,000 under Section 10(3)] to the income returned by the assessee. Aggrieved by this the assessee moved the Commissioner (Appeals).
3. Before the learned first appellate authority the assessee's counsel reiterated the same submissions made before the Assessing Officer as his arguments. It was stated that the Assessing Officer having concluded that the amount received by the appellant was a capital receipt, had no reason to conclude that it constituted a casual and non-recurring receipt and in particular when the appellant heavily relied on the ratio of the decision of the Bombay High Court in the case of Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 2653 and the Board's Notification No. 225/83/99 1TA 2 dated 17-3-1999. It was further submitted that the decisions cited by the appellant are in support of the appellant's claim that the amount received was a capital receipt and being soil could not be treated as casual and nonrecurring receipt. Apart from the case laws cited before the Assessing Officer the following case laws were also cited before the Commissioner (Appeals) :-
1. Kelllewell Duller & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC).
2. Automobile Products of India Ltd. 's case (supra).
The counsel also distinguished the facts of the case on hand from the facts of the cases cited by the Assessing Officer, in particular the facts of the case in Gulab Chand(supra) and also the case in G.R. Karthikeyan (supra). In a nutshell the submissions of the appellant's counsel before the Commissioner (Appeals) were as under :
(1) The amount received by the appellant as non-competing fee did not fall under the category of casual and non-recurring income subject to tax under Section 10(3).
(2) The case laws relied on by the Assessing Officer to support his case that the amount received by the appellant is casual and nonrecurring income are not applicable to the appellant's case.
(3) The appellant's case, viz., the sum of Rs. 3.20 croresreceived by the appellant is a capital receipt not subject to capital gains tax under the Act is squarely covered by the decisions of the various Supreme Court and High Courts relied on by the appellant in Serial No. 1 of his written submission and further supported by the decision of the Bombay High Court in Cadell Wvg. Mill Co. (P.) Ltd. 's case (supra). Therefore the finding of the Assessing Officer that the amount received by the appellant is assessable as casual and non-recurring income subject to tax under Section 10(3) of the Income-tax Act is contrary to facts on record clearly impermissible, untenable, unconstitutional and ultra vires the provisions of the Income-tax Act.
(4) The appellant's case was fully covered by the CBDT's instruction No. 1964 elated 17-3-1999.
After considering the submissions of the learned counsel for the assessee the Commissioner (Appeals) for the reasons recorded in the appellate order against paras 1.7 to 1.23 and 1.24 dismissed the assessee's appeal and held that the amount of Rs. 3.20 crores received by the assessee was to be taxed as income under Section 28(ii)(a) of the Act. Still aggrieved against this order of the learned first appellate authority, the appellant is in second appeal before this Tribunal with the grounds of appeal extracted elsewhere in this order.
4.1 At (he time of hearing the learned counsels for the assessee placed on record a paperbook consisting of around 120 pages comprising therein the various materials mentioned in the index to the said paperbook. It has also been certified that all the enclosures are true copies of the originals and that all the documents in the said paperbook are already available in the assessment records for the assessment year 1997-98. Placing the above paperbook on record the learned counsels for the assessee apart from reiterating the submissions made before the Revenue authorities, contended, to say in brief that:
4.2 The receipt of non-compete fee of Rs. 3.2 crores was backed by a binding legal document dated 29-2-1996, being non-competition agreement. The said payment was received by the assessee for curtailing activities of the assessee as detailed in the said agreement for a period of five years.
4.3 On a plain reading of the terms of the agreement for non-competition it is clear that the curtailment of the work is with reference to advertising and advertising related business. It is to be highlighted that advertisement work is a creative work and the profile of the appellant as detailed in page 23 of the paperbook would definitely prove that there was necessity for curtailing him from the competition. In addition, he has held the post of President in All India Management Association, Madras Management Association, Advertising Agencies Association of India, Advertising Standard Council of India, Audit Bureau of Circulation, etc. In addition lie has received awards as follows :-
1. AIMA Award - FIMA in 1978.
2. Hall of Fame Award by Ad. Club, Calcutta in 1985.
3. Distinguished Service Award by Ad. Club, Chennai in 1994.
4. AAAI Award for Excellence in advertising in 1998.
5. Lifetime Achievement Award by MMA and AIMA in 2001.
4.4 The payment of non-compete fee was also worked out on a scientific basis as detailed in page 15 of the paperbook taking into account the estimated billing/income that the company would lose on account of exit of the assessee from the company.
4.5 It is incorrect to question the quantum of payment on the basis of profits earned by the company or on the basis of income earned by the appellant prior to the period of payment of non-compete fee.
4.6 The decision to pay non-compete fee was actually initiated and approved by BBDO, the overseas collaborator of the company (refer page 18 of the paperbook). BBDO had only 20 per cent stake in the company which is not a significant fact for the following reasons :-
(1) Even at the 20 per cent level of shareholding there were 2 directors who were on the board of the company.
(2) The name of the company was changed from R.K. Swamy Advertising Associates Pvt. Ltd. to R.K. Swamy/BBDO Advertising Pvt. Ltd. indicating BBDO's long term interest and plans for business in India.
(3) Ultimately the controlling interest of BBDO has also come about with them acquiring 50.1 per cent of shares in the company on implementation of various procedural, technical and other practical settlement of issues for the said takeover. Hence, takeover of the company by BBDO was part of overall business plan. Payment of non-compete fees was part of this plan.
4.7 Questioning the necessity of payment would in fact amount to questioning the business plan. Questioning the payment is devoid of merits inasmuch as the department is trying to substitute its viewpoint for that of the persons actually conducting the business. Moreover, it is incorrecton the part of the department to question a bona fide transaction without understanding a genuine threat to business. It is submitted that elimination of potential competition, avoiding erosion in turnover and increasing the volume of the business in the future were the paramount considerations for entering into the agreement.
4.8 The application of Section 28(ii)(a) is totally misconceived. The said provision is applicable to a situation where a person receives compensation at the point of termination or modification of the terms thereto. In the present case the appellant has resigned from the Managing Directorship with effect from 1-2-1996, whereas the non-competition agreement was entered into only on 29-2-1996. Hence in the present case neither was his employment terminated nor was it modified by the company so as to invoke the provisions of Section 28(ii)(a) of the Act and it is a fact that the said receipt was only received for business restraints accepted by the appellant.
4.9 The purpose of the said provision has to be understood before applying the same to the set of facts and the circumstances of the case. It is submitted that Sub-section (ii) of Section 28 should be read in entirely and on plain reading of the sub-section in entirely it would reveal that compensation received by the managing agents, agencies and persons managing the affairs of a company in India al the point of termination, modification of the terms thereto should alone be considered for taxation and not the amount received under separate agreement for non-competition.
4.10 Moreover Sub-clause (va) to Section 28 introduced by the Finance Act, 2002 with effect from 1-4-2003 would strengthen the view of the appellant regarding non-taxability of the receipt of non-compete fee. Further, in view of the insertion of the said sub-clause it is possible to infer that the legislature in its own wisdom wanted to tax receipts of the nature under consideration only with effect from 1-4-2003.
4.11 The receipt, as rightly pointed out by the first appellate authority, is not a casual or non-recurring income in terms of Section 10(3) of the Act. The said receipt is a capital receipt as held in many cases, which are listed out from pages 77 to 83 of the paperbook, as under, and that in fact the Assessing Officer in the order undo1 consideration has conceded that the said receipt is a capital receipt:-
1. Kelllewell Duller & Co. Ltd. 's case (supra).
2. Gillanders Arbuthnot & Co. Ltd. 's case (supra).
3. Best & Co. (P.) Ltd. s case (supra).
4. Saraswathi Publicities' case (supra).
5. Late G.D. Naidu's case (supra).
6. Dr. K.P. Karanth's case (supra).
7. Automobile Products of India Ltd. 's case (supra).
4.12 The written submissions filed before the Assessing Authority (vide pages 77 to 83 of the paperbook) may be taken as part and parcel of our arguments in support of non-taxability of the said receipt.
4.13 The decision of the Madras Bench-C of the Tribunal in 1TA No. 593(Mad.)/2000 dated 2-2-2001 would also clearly justify the claim of the appellant herein that the said receipt would only be a capital receipt and not taxable.
4.14 Moreover the circular of the Board in instruction of 1964 dated 17-3-1999 would also support the arguments of the appellant herein for non-taxability of the said receipt in the hands of the appellant.
4.15 The decisions referred to by the first appellate authority have no application to the facts of the present case. The decision in the case of Ishwar Das v. CIT [1980] 123 ITR 379' (Delhi) was rendered in the context of premature termination of the employment and the decision in CIT v. D.R. Sondhi [2001] 248 ITR 6952 (Delhi) had merely followed the earlier decision hereinbefore referred to. The above two decisions were not rendered in the context of taxability of non-compete fee.
4.16 For the above reasons and the ratio decidendi out of the above case laws, the non-compete fee of Rs. 3.2 croresreceived by the assessee from the company for the restriction on him from competing with the company or assisting any competing business in the field of advertising and advertisement related business would only be capital receipt not subject to income-tax.
5.1 On the other hand, the learned departmental representative strongly supported the orders of the Revenue authorities and contended, to say in brief, that.
5.2 The anticipated loss of the company on account of Shri R.K. Swamy's levying is not borne by facts.
5.3 The ratio of share holding remained unaltered even after the exit of Shri R.K. Swamy.
5.4 Considering the income returned by Shri R.K. Swamy and considering the findings mentioned in the order of the Commissioner (Appeals), there is no way to agree with the assessee's contention that the amount received was in the nature of non-competing fee. Even the income returned by the appellant in the earlier years did not warrant such a payment. Further it is also to be noted that Shri R.K. Swamy Continued to be associated with the company even after the agreement. It was not a mere formal association but for involvement in policy matters, etc. 5.5 The question to be considered is the nature of the receipt. The Delhi High Court has considered this issue while rendering the decision in the case of Ishwar Das (supra). According to this decision the provisions of Section 28(ii)(d) of the Income-tax Act are applicable. The provision is as under :-
Any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto.
It is another matter that the Court did not allow this aspect of the issue to be elaborated since the appellant had not made such a plea before the income-tax authorities in that case. It is necessary to note that the above provisions covers not only cases of termination but modification of the terms and conditions of employment, etc. The facts of the present case are covered by the provisions in either way - whether you take the outcome of the agreement either as termination of service or modification of service.
5.6 Again, the Delhi High Court in its decision in the case of D.R. Sondhi (supra) elaborated the same point. It of course referred to the earlier decision in the case of Ishwar Das (supra). The relevant portion of the headnote reads as under :-
Section 28(n)(a) of the Income-tax Act, 1961, deals with a case where any compensation or other payment is due or received by any person, by whatever name called, who was managing the whole or substantially the whole of the affairs of an Indian company, or in connection with the termination of his management or the modification of the terms and conditions relating thereto. Such income shall be chargeable to income-tax under the head 'Profits and gains of business or profession'. The primary significance of the word 'compensation' is equivalence and the secondary or more common meaning is something given or obtained as an equivalent. The large number of ways in which this expression compensation has been interpreted has one common factor running through them all, that is compensation is regarded as an equivalent or recompense which makes good the lack of variation of something else. Flowing from the concept enlargement of the meaning of this expression takes in that which compensates for loss or provision, amends remunerates or recompenses.
5.7 In the light of the above discussion and following the ratio of above decisions it is to be held that the amount received by the appellant is to be brought to income-tax under Section 28(ii)(a) of the Act as profits and gains of business or profession. The receipt cannot be certainly considered as salary or profit in lieu of salary, if one takes into account the salary received by the appellant before the date of agreement or the pension he was entitled to subsequently. In other words it is difficult to link even on estimate basis the amount paid to the services rendered. It is also not in the nature of casual and non-recurring income if one takes into account the amount of deliberation and thinking that had gone into the drafting of the agreement.
5.8 The Commissioner (Appeals) has considered the ratio of the case laws cited by the appellant vide pages 77 to 83 of the paperbook and came to the conclusion that these decisions are on the point whether non-competing fee is a capital receipt. The Commissioner (Appeals) has rightly held with specific reference to the facts and circumstances of the case that either by its very nature or by quantum the amount in question could not be considered as non-competing fee. In this connection the Calcutta High Court in the case of Kelllewell Buller & Co. Ltd. (supra) had observed as under :-
Where by the cancellation of an agency, the trading structure of the assessee is improved or such cancellation results in loss of what may be regarded as a source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is a capital receipt.
5.9 The facts of the present case do not fit into the above assertion. Some of the cases like Best & Co. (P.) Ltd. (supra) and Saraswathi Publicities (supra), refer to restrictive covenants. These decisions are also not applicable in view of the continued association of the appellant with the company. The decision in the case of Automobile Products of India Ltd. (supra) is also not applicable since the appellant has not substantiated the effect of Shri R.K. Swamy leaving the company but continuing as chairman of the company.
5.10 The Commissioner (Appeals)'s order read as a whole, has given the finding that the amount received by the assessee cannot be considered as non-competing fee and is, therefore, to be treated as revenue in nature. Further, the Commissioner (Appeals) has given a finding that such a receipt has to be assessed as per the provisions of Section 28(ii)(a) of the Income-tax Act. In view of the above submissions it is pleaded that there is no necessity to disturb the order of the Commissioner (Appeals).
6.1 We have heard the rival submissions and considered the facts and the materials on record including the contents of the paperbook and the case laws relied upon before us. The fact remains that the document, namely, the non-competition agreement between the assessee and the company RK Swamy/BBDO Advertising Pvt. Ltd. was entered into on 29-2-1996, whereas the assessee resigned as managing director of the company with effect from 1-2-1996 itself. This fact has been incorporated in the agreement for non-competition itself. The fact that the assessee has sent his resignation letter with effect from 1-1-1996 is also evidenced by the letter dated 17-1-1996 from Srinivasan K. Swamy, joint managing director, addressed to Mr. David Sia of Bangkok. In the minutes of-the meeting of the Board of Directors of RK Swamy/BBDO Advertising Pvt. Ltd., held on 28-2-1996 the facts and the circumstances leading to the necessity of entering into the non-competition agreement had been explained by the Board. Only after the approval by the Board, which was conscious about the damage that would be faced by the company if the assessee severred connection with the company, the non-competition agreement was entered into between the assessee and the company. From the letter dated 17-1-1996 written by Shri Srinivasan K. Swamy to Mr. David Sia it transpires that some earlier employees of the company and others who had set up independent shops in the last few years were also ready to utilise the services of Shri R.K. Swamy in any manner he wished to offer them and that if it was allowed to happen it could seriously affect the growth of the company: The Board of Directors of the company in the minutes of the meeting held on 23-2-1996 have considered the matter of resignal ion by the assessee, as seen at para 7 of the minutes. From the said minutes it is seen :
The Chairman has experienced certain unhappiness about some matters including the growth in expenditure which has not been effectively brought under control. The Chairman has not drawn his salary for the month of February, 1996. The Director of Finance tabled a draft noncompetition agreement proposed to be signed by the company and Mr. R.K. Swamy. The Board was informed by Director Finance that Mr. R.K. Swamy was originally firm on complete severance with the company and would like to be associated with other like-minded persons/firms/companies. He is now agreeable to the compromise suggestion given by BBDO who are the collaborator shareholders of the company. Director of Finance said that BBDO has also perused and approved the draft agreement proposed to be entered into. After considering various alternatives the Board approved the draft noncompetition agreement as the best solution and authorised Mr. V.S. Chakrapani, Director Finance to sign the same on behalf of: the company. The Board noted that Shri R.K. Swamy who has refused to function as Managing Director from 1-2-1996 and has ceased to be as such has however agreed to continue to be non-executive chairman of the company. The Board was satisfied that it was wholly in the interests of the company to secure that Shri R.K. Swamy did not set up any competing business or join an)' competitors to prevent such a prejudicial eventuality by payment of adequate forbearance fee is necessary to maintain the present position and the growth of the organisation. The Board requested Mr. R.K. Swamy to guide and advise the company on all policy mailers and important areas of its activities when such guidance is solicited, but however that it shall be entirely in the discretion of Mr. R.K. Swamy to assist the company or not. The Board approved the non-competition agreement as given in annexurc-2 unanimously.
The Assessing Officer both in the proceedings under Section 143(1) and under Section 147 treated the amount received by the assessee is non-compete fee only. However, in the assessment under Section 143(3) read with Section 147 the Assessing Officer treated the amount received as casual and non-recurring income. The learned first appellate authority has held that it cannot be treated as casual and non-recurring income for the reasons incorporated in his order. The Commissioner (Appeals) has treated the amount under consideration as taxable income under Section 28(n)(fl)' Now we are called upon to adjudicate whether the Commissioner (Appeals) was correct in treating the amount received by the assessee as income taxable under Section 28(n)(a). The assessee's contention is that the said provision is applicable to a situation where a person receives compensation at the time of termination or modification of the terms and conditions of his appointment, whereas in this case on hand the assessee had already resigned as managing director with effect from 1-2-1996, whereas the agreement was entered into on 29-2-1996 after a thorough study of the situation by the Board of directors at its meeting held on 28-2-1996 for the reasons stated in the minutes and also in the agreement. In such circumstances by no stretch of imagination the said receipt can be treated as having been received for the modification of the terms of the appointment. We find force in the above contention of the learned counsel for the assessee. The provision of Section 28(n)(«) is meant for termination of managing agency or modification of terms or modes of appointment of employees or persons managing the whole or substantially the whole of the affairs of the Indian company. Once the person has already resigned from the managing directorship, we cannot view the agreement entered into after a month of the event as modification of the terms of appointment.
6.2 It is true that an item which is treated as capital in nature in the hands of the payer need not be capital but can be treated as revenue in the hands of the recipient. But in this case on hand the very same payment under the same non-competition agreement entered into between the two parties (R.K. Swamy/BBDO and Shri R.K. Swamy) has been treated as non-compete fee in the hands of the payer, namely R.K. Swamy/BBDO, but treated as payment received for modification of terms of appointment in the hands of the assessee Shri R.K. Swamy (recipient). We find that this is a peculiar stand that the very same department has taken while interpreting the very same document between the very same two parties in a different way while dealing with the assessments of the parties. In our considered opinion perhaps the Commissioner (Appeals) was influenced by the huge sum involved and the lax that would be coming to the exchequer if it is to be treated as revenue receipt in the hands of Shri R.K. Swamy. In other words the Revenue cannot blow hot and cold on the same situation. In this connection the assessee's counsel contended that questioning the necessity of the payment would -in fact amount to questioning the business plan and questioning the payment is devoid of merits inasmuch as the department is trying to substitute its viewpoint for that of the persons actually conducting the business and it is incorrect on the part of the department to question a bona fide transaction without understanding a genuine threat to the business and that elimination of potential competition avoiding erosion in turnover and increasing the volume of the business in the future were the paramount considerations for entering into the agreement.
6.3 In this connection, in the interpretation of a document the following principles are relevant. Anson's Law of Contract would state the principle in these words : "The preferred object of the court in constructing a written contract is to discover the intention of the parties, the written declaration of whose minds it is. But this intention must be ascertained from the document itself, it is not permissible to go outside the words there set down and to substitute for those a guess as to what the parties might have intended in the circumstances". Docs the Tax Court have a larger jurisdiction in this regard ? "No Court of law would deny the propriety of looking at an agreement between the parties as a whole. But that docs not mean that because it is a tax case, the Court can rewrite the agreement and substitute for the terms upon which the parties agreed, either terms as to which they have not even been consulted". The Supreme Court of India has held in the case of C/7'v. Dwarkadas Khetan & Co. [1961] 41 ITR 528 at 533 that 'it is not the province of a Court to make a new agreement for the parties'. The Supreme Court in the case of C/7'v. Delhi Flour Mills Co. Ltd. [ 1959] 35 ITR 15, on the basis of this principle held that the provision for deduction of taxes for ascertaining the divisible profits for remunerating managing agents would include Excess Profits Tax in view of the plain language of the agreement to include all taxes though this tax was never contemplated as it was not in existence then. The Rules observed by Courts as regards written agreements are :-
(i) Plain and literal meaning - Words are ordinarily to be understood in their plain and literal meanings.
(ii) Interpretation to make the document valid - Ambiguity in the document will be resolved by an interpretation which will make the document valid rather than void or ineffective, Repugnant clauses which are inconsistent with intention will be ignored.
(iii) Construction to aid intention of parties - Construction should be such as to effective intention of the parties, and such intention is to be collected from the whole of the agreement.
The minutes of the meeting of the directors and the terms of the subsequent agreement for non-competition are all to be considered in the light of the above observations. If clone so it is to be treated as fees received for non-competition only and it can by no stretch of imagination be treated as payment received for modification of the terms and conditions of employment. Another reason for the Commissioner (Appeals) for holding it as taxable under Section 28(n)(«) is that Shri R.K. Swamy continued to be associated with the company even after the agreement. In this case we have to observe that competition need not always be from outside only. On the other hand it can also be from "within. In our considered view the managing director of one company is not generally prohibited from being a director in some other company and render services as director of that other company. In this case on hand Shri R.K. Swamy, the assessee, was contemplating such association and only to restrict him from that this agreement was entered into by the company. So there is no harm in the assessee continuing in the company without being a managing director. So far this reason it need not be treated as taxable under Section 2S(ii)(a) of the Act. Again, the Commissioner (Appeals) was worried about the quantum worked out by the parties. In our view the Commissioner (Appeals) has no jurisdiction to question the quantum arrived at on a scientific basis by the parties and agreed between themselves. The case laws relied upon by the Commissioner (Appeals) are distinguishable on facts of the present case on hand. In view of the above discussion we have to hold that the Commissioner (Appeals) went wrong in treating the receipt as taxable under Section 28(ii)(a) of the Act.
6.4 Having held it as non-compete fees, let us now consider whether the non-compete fee received by the assessee from R.K. Swamy/BBDO is taxable as income in its hands for the relevant assessment year. Sub-clause (vet) to Section 28 was introduced by the Finance Act, 2002 with effect from 1-4-2003, which reads as under :-
28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession'.-
** ** ** (va) any sum, whether received or receivable in cash or kind under an agreement for-
(a) not carrying out any activity in relation to any business; or
(b) not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or technique likely to assist in the manufacture or processing of goods or provision for services :
Provided that Sub-clause (a) shall not apply to-
(i) any sum, whether received or receivable in cash or kind on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head 'Capital gains'.
(ii) any sum received as compensation from the multilateral fund of the Montreal Protocol on substances that Deplete the Ozone layer under the United Nations Environment Programme in accordance with the terms of agreement entered into with the Government of India.
Explanation.-For the purpose of this clause.-
(i)'agree men I/ includes any arrangement or understanding or action in concert,-
(A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;
(ii) 'service' means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.
The above sub-section alongwith the proviso and explanation comes into effect only from 1-4-2003. In other words this sub-section is introduced only prospectively and not retrospectively. Hence upto 1-4-2003 the amounts referred to in the sub-clause received by any assessee are not taxable under Section 28(va) of the Act. The following case laws relied upon by the assessee also support the case of the assessee that non-compete fee received by him was capital in nature not subject to income-tax :-
1. Keltlewell Duller & Co. Ltd. 's case (supra).
2. Gillanders Arbulhnol & Co. Ltd.'s case (supra).
3. Best & Co. (P.) Lid's case (supra).
4. Saraswathi Publicities' case (supra).
5. Late G.D. Naidit's case (supra).
6. Dr. K.P. Karanth's case (supra).
7. Automobile Products of India Ltd. 's case (supra).
8. Order dated 2-2-2001 of the Tribunal (C-Bench, Chennai) in IT A No. 593 (Mds.)/2000 in the case of PL. Chemical Ltd. v. ACJT.
Out of the above cases, the Supreme Court in Gillanders Arbuthnot & Co. Ltd. 's case (supra) held that: "Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated, or for loss of goodwill is prima facie of the nature of capital receipt". In Best & Co. (P.) Ltd. 's case (supra) the Supreme Court has held that: "The compensation agreed to be paid was not only in lieu of the giving up the agency but also for the assessee accepting a restrictive covenant for a specified period. As far as the loss of agency was concerned, it was only a normal trading' loss and the income received on that account was only a revenue receipt. But, with reference to the loss on account of the restrictive covenant, after referring to the decision in Gillanders Arbuthnot & Co. Ltd.'s case (supra), the Supreme Court reiterated that the restrictive covenant was an independent obligation undertaken by the assessee not to compete with the new agent in the same field and that part of the compensation attributable to the restrictive covenant was a capital receipt, not assessable to tax". In Samswathi Publicities 'case (supra) the Madras High Court has held that: "the amount of consideration referable to the restrictive covenant was a capital receipt not liable to income-tax". Again, the Madras High Court in Late G.D. Naidu's case (supra) )vas held that : "the compensation relatable to the restrictive covenant was a capital receipt not liable to capital gains tax".
6.5 From the above discussion we are of the considered opinion that the amount received by the assessee Shri R.K. Swamy in the sum of Rs. 3.20 crores from R.K. Swamy/BBDO Advertising Pvt. Ltd., was the outcome of the non-competition agreement dated 29-2-1996 in view of the restrictive covenant put on him for a period of five years and such amount received by the assessee for restrictive covenant is not to be subjected to income-tax, as held by the Supreme Court and the Madras High Court, as noted above. Thus we are inclined to allow the appeal filed by the assessee.
7. In the result the assessee's appeal is allowed.