Income Tax Appellate Tribunal - Mumbai
M.N. Karani vs Assistant Commissioner Of Income-Tax on 28 February, 1997
Equivalent citations: [1998]64ITD119(MUM)
ORDER
M. K. Chaturvedi, JM
1. This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals) XXII, Mumbai and pertains to the assessment year 1984-85.
2. The solitary issue neatly identified by Shri B. K. Khare, learned counsel for the assessee, relates to the question whether the amount of Rs. 11,00,000 being the compensation paid to the assessee by M/s. Hindustan Ciba Geigy Ltd. (hereinafter referred to as "HCGL") against RESTRICTIVE COVENANT is exigible to tax ?
Briefly the facts :
3. The assessee did B.Com. from Bombay University in 1949. He worked for 3 years in Stock Exchange out of which he spent two years in London. He had family establishment in Bombay stock Exchange with Mr. Batlivala & Karani. Two years spent in London was with Mr. Robinson & Glynn, Stock Brokers, London and M/s. Vickers Dacosta & Co. and Middland Bank Ltd., Securities Department, Head-Office, London in 1953, Amalgamated Chemicals & Dyestuffs Co. Ltd., Bombay. This was a subsidiary of J. R. Geigy SA Basle, Switzerland. This firm later known as Suhrid-Geigy. Assessee was in the Marketing Division of dyestuffs and textile auxiliaries. The success of the brand TINOPAL (a whitening agent) goes to the credit of the assessee. In January 1961, assessee joined the pharmaceutical division as Deputy to the Managing Director and in December 1962, he took over from him as the Head of the Pharmaceutical Division. He continued to serve to Suhrid-Geigy in this position until leaving the company in August 1973.
4. On 15th August, 1973, assessee joined CIBA of India Ltd., as the Head of its Pharmaceutical Division. This company had merged with CIBA A. G. Basle and J. R. Geigy SA. In 1975, assessee was appointed to the Board of the Company and from which post he retired some time in 1980, handing over charge as head of the Pharmaceutical Division and taking over the responsibility of Government relations and export co-ordination.
5. The assessee entered into a whole-time employment of HCGL as director, staff function, Government relation and export-co-ordination by virtue of an agreement dated 26-11-1981. Clause 10(d) of the agreement reads as under :
"10(d) Not at any time either during the continuance or after the termination of his employment hereunder, except as may be required in connection with his employment hereunder or as may be consented to by the Company in writing, divulge either directly or indirectly to any person, firm or Company or use for himself or another any knowledge, information or documents which Mr. Karani may acquire during the course of and incidental to property, contracts, contractors, customers, methods or working, processes, trade secrets, transactions or affairs of the company or any company, which is, or at the material time may be an associate or a subsidiary of the Company."
6. On 31-3-1982, assessee resigned from HCGL as he intending to start his own consultancy work. He worked as consultant to HCGL. It was claimed that the assessee got in touch with some other companies also and had offered them his services. This fact had come to the notice of the Managing Director of HCGL. It was felt that in case the assessee offers his services to other companies, having similar business activities, the interest of HCGL may get jeopardised. Therefore, the Managing Director of HCGL approached the assessee. By an Agreement dated 11th April, 1983, the assessee agreed on the following terms of the contract for a consideration of Rs. 11 lacs. The relevant terms of the contract are reproduced here as under :
"1. The Ex-Employee hereby undertakes not to engage for a period of five years from the 11th day of April, 1983, in any activity by which the business secrets and technical knowledge of the company and its Swiss associated companies is passed on directly or indirectly to any other company, firm or concern which carries on a business in India which is competitive to the one carried on by the Company.
2. The Ex-Employee hereby undertakes not to join another company, firm or concern which carries on similar business as the company, as a consultant, adviser, employee or director, part-time or whole-time.
3. The Ex-Employee further undertakes not to join another company, firm or concern either as an employee, consultant, adviser or director, where such other company, firm or concern is engaged or is likely to engage in the business of providing consultancy to other companies, the business of which is similar to that carried on by the Company."
7. For the relevant assessment year, assessee filed his return reflecting therein an income of Rs. 1,47,180. This includes pension received from HCGL. To this income Assessing Officer added Rs. 11 lacs. He opined that this amount was received by the assessee for the services rendered by him during his employment with HCGL. The resignation from the company and various other events were made use of as a convenient ploy to help the assessee in getting a huge sum of Rs. 11 lacs without paying any tax thereon. The amount of Rs. 11 lacs was treated income in the hands of the assessee as 'profits in lieu of salary' paid by the former employer. It was stated to be covered by the provisions of section 17 of the Income-tax Act, 1961. The CIT(A) confirmed the addition made on this count.
8. Shri B. K. Khare along with Mr. P. M. John appeared before us on behalf of the assessee. It was vehemently argued that the amount of compensation received as per the terms of contract dated 11-4-1983 is not exigible to tax. The receipt was stated to be to capital nature. Our attention was reveted on the various documents and papers filed in the shape of a paper book. The learned counsel read the clauses of Restrictive Covenant dated 11-4-1983. It was stated that the assessee a acquired the expertise of highest order in the trade. He had very successful carrier as Manager. His association with others (those were in similar trade) could be detrimental to the business interest of HCGL. The arrangement was, therefore, arrived at keeping in view of the business expediency.
9. Reliance was placed on the decision of the Apex Court rendered in the case of Superintendence Co. of India v. Shri Krishan Murgai [1981] 2 SCC 246. Special emphasis was laid on para 18 and para 53 of the order.
10. In the light of the aforesaid decision, it was contended that the Agreement dated 11-4-1983, between HCGL and the assessee was not void under section 27 of the Indian Contract Act, 1872, as it was also an agreement of service contained in restrictive covenant preventing the assessee from working elsewhere during the term covered by the agreement. The doctrine of 'restraint of trade' applies only when the contract of employment comes to an end. It does not apply during the continuance of the contract of employment.
11. Commenting on the contents of clause 10(d) of the Agreement dated 26-11-1981, the learned counsel submitted that the said condition contained in the covenant were good till the assessee was in the service of the company. Such conditions cannot be extended beyond the termination period of the service. Assessee was, therefore, not bound by those conditions. In view of this position of law, HCGL felt that a fresh covenant is required in the interest of business. As a result thereof, compensation was given to the assessee. It cannot be construed to be a subterfuge. The agreement was rendered consequent upon the termination of the services.
12. Coming to the question that assessee was required to give notice of the requisite number of the days, the learned counsel mentioned that employment of the assessee came to an end with the mutual consent. It is always open to the employer to waive the requirement of giving notice. This does not indicate any mala fide intention.
13. Shri Khare further stated that the bona fide of the assessee's claim is beyond the shadow of doubt. No incrimination evidence was ever produced to buttress the reasoning given apropos the so-called subterfuge. Revenue proceeded only on the basis of surmises. On such jejune reasonings, addition cannot be sustained. The payment was received from a well-known company of international repute. If the department intends to prove to the contrary, the burden does not rest on the assessee, it is on the department to prove that the transaction was with, a mala fide intention. No direct or circumstantial evidence to that effect was ever produced. Further, Shri Khare relied on some precedents to support the case.
14. Shri M. P. Kotwal, learned Departmental Representative appeared before us. It was argued that the amount of compensation received by the assessee on account of a restrictive covenant is exigible to tax, inasmuch as, this is a revenue receipt. This amount was given by the former employer in consideration of the past services. In order to avoid the tax liability suitable nomenclature was used. This cannot alter the real character of the receipt.
15. The narrative of the agreement was set out by the Assessing Officer in his order. In order to establish that the restrictive covenant was a ploy to evade tax, following facts were given in chronological manner in the order passed under section 144A of the Act :
(i) Date of renewal of the last employment .. 26-11-1981 (ii) Date of resignation from the company .. 19-11-1982 (iii) Date on which resignation accepted .. 14-12-1982 (iv) Date of retirement .. 31-12-1982 (v) Date from which consultancy services started .. 1-1-1983 (vi) Date on which assessee was approached for a settlement .. 2-2-1983 (vii) Date of resolution vide which the company authorised its Mg. Director to enter into a settlement with the assessee .. 17-3-1983 (viii) Date of proposal vide which the assessee was approached for a final settlement .. 21-3-1983 (ix) Date of settlement .. 11-4-1983
16. Ld. D.R. stated that the 'restrictive covenant', though executed consequent upon the termination of employment still from the facts set out in para 15, it can be inferred that the amount of Rs. 11 lacs was paid as a consideration for the past services. Therefore, the amount is exigible to tax under section 17 of the Act.
17. Ld. D.R. submitted that the assessee joined HCGL in July 1973. He reviewed his contract of employment in 1977 and 1981. The last renewal of contract of employment was made on 26-11-1981 and the terms of contract were to expire on July 1985. Suddenly in November 1982, he realised that he is getting old and should leave the employment to start his own consultancy services. This, according to the learned D.R. is unbelievable.
18. It was further argued that as per the terms of agreement dated 26-11-1981, assessee was under an obligation to give six months' notice to resign from the company. But, the assessee sent his letter of resignation on 19-11-1982. He was allowed to retire with effect from 31-12-1982. This shows that the assessee gave a notice of only one month and 11 days as against 180 days stipulated in the agreement. If the assessee was so indispensible why did the company allow the assessee to retire without giving the requisite time for notice of 180 days. Further, the assessee in his resignation letter mentioned that he was to start his own consultancy services after retirement. When the company had this knowledge, it is not known by the company could not act immediately about the impact of consultancy services to be undertaken why the assessee on its business. Why the company took one month time be become aware of this aspect.
19. The learned D.R. further stated that as per the claim of the assessee he started his consultancy services in January 1983. He was approached by a few competitors of HCGL. Assessee furnished a copy of letter dated 17-1-1983 addressed by him to the Chairman, Cosme Mathias Menezes Pvt. Ltd. In this letter, he mentioned that he had experience of five years in export business. He did not refer anything about his association with HCGL. Besides this, he could not produce any other material to demonstrate that he was contacted or he was approached by anybody else in connection with the consultancy services.
20. According to ld. D.R., the assessee purposely avoided any reference to the business or trade secrets of HCGL. As per the agreement dated 26-11-1981, he was specifically prohibited from divulging to any person any knowledge, information which he acquired during the course of and incidental to his employment concerning the business, property, methods of working, processes, trade secrets, transactions or affairs of the HCGL.
This prohibition applied to the assessee during the term of employment and even after the termination of employment. In the eventuality of violation of these provisions of agreement, assessee could have been sued in a court of law. It was vehemently contended by Shri Kotwal, learned DR that the 'restrictive covenant' is not the cause of payment and the real cause lies somewhere else, i.e. understanding between the assessee and the company. The learned D.R. relied on the decision of the Apex Court rendered in the case of McDowel & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11.
21. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. The Apex Court in the case of McDowel & Co. Ltd. (supra) has held that it is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. There is behind taxation laws as much moral sanction as is behind any other welfare legislation. It is up to the Court to take stock to determine the mature of new and sophisticated legal devices to avoid tax and to expose the device for what they really are and to refuse to give judicial benediction.
22. The applicability of this decision depends on the factual matrix of the case. It is imperative that Assessing Officer should establish beyond the shadow of doubt, the existence of subterfuge. Merely on the basis of conjectures and surmises no inference can be drawn. The maxim of English Law as propounded by Holroyd J., prescribes :
"IT IS BETTER THAT TEN GUILTY MAN SHOULD ESCAPE RATHER THAN ONE INNOCENT SHOULD SUFFER".
23. The general conspectus of the main plank of Shri Khare's argument was that revenue proceeded merely on the basis of surmises. There was no clinching evidence to buttress the point that the amount paid to the assessee was a 'subterfuge' and the 'restrictive covenant' was not the cause for the payment, the real cause lies somewhere else, i.e., understanding between the assessee and the HCGL. What is the material or evidence with the department to say so and to arrive at this conclusion - nothing to this effect was discussed in the impugned order.
24. It is patently clear that the 'restrictive covenant' was entered into consequent upon the termination of employment with HCGL. As per the terms of employment, assessee was duty bound not to divulge the secrets of the business. We have perused the relevant clauses, apropos the same as mentioned in the Indenture filed before us. Now the question arises "whether the conditions contained in the terms of employment could be extended beyond the date of termination of his services ?"
25. Apex Court in the case of Shri Krishan Murgai (supra) has held that under section 27 of the Contract Act, if the service covenant extends beyond the term of the service it is void. It is further laid down in the judgment that no single Indian decision was brought to the notice of the Court, where injunction was granted against the employee after the termination of his employment. This be so, HCGL was not in a position to enforce the term for not divulging the secrets, consequent upon the termination of employment. We, therefore, do not find much force in the plea of the revenue made on this count.
26. Why the requirement for six months' notice was dispensed with ? In our opinion, this is the discretion of the employer. This condition was not mandatory. In the absence of any material to the contrary no adverse inference can be drawn.
27. The Apex Court, in Shri Krishan Murgai's case (supra) laid down that the agreement of service, containing restrictive covenant preventing the employee for working elsewhere during the term covered by the agreement, are not void under section 27 of the Contract Act, on the ground that they are in restraint of trade. Such agreements are enforceable. The reason is obvious. The doctrine of restraint of trade never applies during the continuance of contract of agreement, it applies only when the contract comes to an end.
28. It is all very well to paint justice blind, but she does better without a bandage round her eyes. She should be blind indeed to favour or prejudice, but clear to see which way lies the truth, and the less dust there is about the better. Let the counsel one after the other put the weights into the scales - the nicely calculated less or more - but the Judge at the end decides which way the balance tilts, be it ever so slightly.
29. Equity is the life of legal fiction. This principle is canonised in the well-known maxim :
"IN FICTIONE JURIS SEMPER ACQUITAS EXISTIT".
The meaning of fiction in English Law is not defined. "Fictio" in Roman system, was a technical form of pleading. The strict meaning of legal fiction in English jurisprudence is contained in the dictum :
"PROESUMPTIO JURIS ET DE JURE."
which means irrebutable presumption of law. That which does not appear will not be presumed to exist. This is the principle laid down in the maxim :
"DE NON APPARENTIBUS ET NON EXISTENTIBUS EADEM EST RATIO".
30. In the impugned order, the CIT(A) proceeded on the lines that the tax officials can go beyond the apparent to find out the real state of affairs. In our opinion, there should be some basis, there should be some material, there should be some evidence to proceed with the matter. Merely on the basis of assumptions and presumptions no citizen can be declared to be guilty of evasion of tax. Assessing Officer is required to act like an honest constable. He is not expected to work like Sherlock Holmes.
31. This aspect of the jurisprudence which inculcate the theory of going beyond the apparent .... should be narrowly watched jealously regarded and never to be pressed beyond its true limits. The onus to prove the contrary lies upon the party who alleges it not upon one who denies it. This principle is embeded in the common law dictum :
"AFFERMENTI NON NEGANTI INCUMBIT PROBATIO."
32. Having regard to the facts and the circumstances of the case and after considering the precedent relied upon in the matter, we are of the opinion that the case of the assessee falls beyond the ken of the ratio laid down in the case of McDowel. There is no ample material with the department to challenge the bona fide of the agreement. As such, it cannot be construed to be a subterfuge.
33. Now the question arises whether the payment made against the 'restrictive covenant' was a capital receipt or a revenue receipt in the hands of the assessee. Ex gratia payments on cessation of employment was treated as capital receipt in the case of CIT v. Ajit Kumar Bose [1987] 165 ITR 90/[1986] 26 Taxman 510 (Cal.). In the case of Lachhman Dass v. CIT [1980] 124 ITR 706 (Delhi), it was held that payment made to the assessee had no relation to the services rendered by them as employees but were merely payments sanctioned by the employers, to compensate them. They were, therefore, payments made on personal grounds and there was no element of remuneration of services in this payment. The payments received by the assessee did not fall under section 17(3)(ii) and were not taxable in their hands. Any payment merely because it is made by an employer to an employee will not fall within the ken of section 17(3)(ii). This section cannot include those payments which are made not on account of master-servant relationship, but on account of personal consideration or for reasons unconnected with the employment.
34. The Apex Court in the case of Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 has 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 a capital receipt.
35. Now the question remains to be decided is : Whether the amount of Rs. 11 lakhs, received by the assessee can be said to be profit from his employment ? We answer this question in the negative. The reason is, it was not a remuneration or reward or return for his services in any sense of the word. The fact of employment was the cause without which the occurrence would not have happened (CAUSA SINE QUA NON). It was not the immediate cause (CAUSA CAUSANS). It did not, therefore, arise therefrom. The receipt in question cannot be construed to be of revenue nature. It was clearly a capital receipt. In view of this, the amount of Rs. 11 lakhs, being the compensation paid to the assessee to HCGL against a RESTRICTIVE COVENANT, is not exigible to tax.
36. In the result, the appeal stands allowed.