Delhi High Court
Pr. Commissioner Of Income Tax-11 vs Satya Sheel Khosla on 29 January, 2018
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: 29.01.2018
+ ITA 289/2016
PR. COMMISSIONER OF INCOME TAX-11 ..... Appellant
Through: Mr. Rahul Chaudhary, Sr. Standing
Counsel for Income Tax Department.
versus
SATYA SHEEL KHOSLA ..... Respondent
Through: Mr. C.S. Aggarwal, Sr. Adv. with
Ms. Mohna M. Lal, Mr. Madhur Aggarwal &
Mr. Uma Shankar, Advs.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A. K. CHAWLA
S. RAVINDRA BHAT, J.(ORAL)
1. The sole question of law urged by the Revenue in its appeal
under Section 260A of the Income Tax Act, 1961 (hereafter
referred to as "the Act") was whether the amount of `1,32,00,000/-
per annum received by the assessee/respondent for two years was
more of a revenue character and was therefore taxable by virtue of
Section 17(3) or under Section 28(va) of the Act.
2. The facts are that the assessee was promoter and Director of
Integra Overseas Pvt. Ltd. (hereafter referred to as "Integra")
established to manufacture two-wheelers in India. On account of
shareholding transfer, he was appointed as Managing Director of
Integra; M/s Suzuki Motor Corporation became a major
shareholder in Integra and eventually that company's name was
changed to M/s Suzuki Motorcycle India Pvt. Ltd. The assessee
terminated his relationship as a joint venture partner in M/s Suzuki
Motorcycle India Pvt. Ltd. and stepped down as Managing
Director of that company. He entered into an agreement whereby
Suzuki India agreed to pay `1.32 crores to him for not providing
"the benefit of his knowledge of regulatory matters, negotiating
skills and strategic planning expertise to any other person in India
in the two wheeler segment for a period of two years from the date
of the Agreeement". The assessee claimed that this amount
received was exempt on the basis of an opinion by a lawyer. He
also placed on record the agreement between himself and Suzuki
India. The recitals of that agreement read as follows:
"WHEREAS Suzuki Motor Corporation, Japan
("SMC") and Mr. Sheel have been joint venture
partners in the Company;
AND WHEREAS pursuant to a joint venture
agreement between Mr. Sheel and SMC, Mr. Sheel
was appointed as the managing director of the
Company by virtue of his being the Indian joint
venture partner;
AND WHEREAS Mr. Sheel wishes to step down as
managing director of the Company as he is no
longer the joint venture partner of SMC:"
3. The AO was of the opinion that the amounts received were
revenue in character and therefore brought them to tax.
The CIT(A) rejected the contentions of the assessee and upheld the
Revenue's arguments. The ITAT relied upon Ram Pershad v.
Commissioner of Income Tax (1972) 86 ITR 122 and also Guffic
Chem. P. Ltd. v. Commissioner of Income Tax (2011) 332 ITR 602.
It thereafter held as follows:
"We agree with Shri Aggarwal that as the sum of
Rs. 1,32,00,000 was paid by Suzuki India to the
appellant in consideration of not providing "the
benefit of his knowledge of regulatory matters,
negotiating skills and strategic planning expertise
to any other person in India in the two wheeler
segment" it cannot be regarded as non-
competition fee because it has not been paid for
not competing with the payer, but for not providing
the benefit of his knowledge, expertise, skills etc. to
any other person in the two wheeler segment. The
views expressed by Shri Bhardwaj in his opinion
and the contention by Shri Aggarwal that section
28(va) taxes a sum received for a restrictive
covenant in relation to a business, but not a
profession is also supported by the observations in
paragraph 28 on page 692 of Kanga and
Palkhivala's "Law and Practice of Income-tax"
that clause (va) of section 28 of the Income-tax Act
"taxes a sum received for a restrictive covenant in
relation to a business, but not a profession"; and,
therefore, does not fall within the ambit of section
28(va). We may add that in the case of Guffic
Chem. P. Ltd. vs. Commissioner of Income-tax
(ibid) at page 606 the Hon'ble Supreme Court of
India has observed that compensation attributable
to a negative/restrictive covenant is a capital
receipt. Hence, as the sum received by the
appellant does not fall within the ambit of section
28(va), it is not chargeable to tax as it constitutes
a capital receipt."
4. Counsel for the Revenue urges that the ITAT fell into error
in holding that the amounts essentially received as non-compete
fee, were capital and not income. He expressly referred to Section
28(va) and submitted that even prior to this amendment through
Finance Act of 2016 (effective from 01.04.2017), amounts
received towards restraining the recipient for carrying on any
business or commercial activity were covered. He highlighted that
the amendment bringing to tax such amounts was made with effect
from 2002 in view of the previous decisions of the Supreme Court.
It was contended that regardless of the insertion of the expression
"profession", to the Act in 2017, the object of the nature of activity
carried on by the payer of the assessee was relevant. Learned
senior counsel for the assessee submitted that this Court should not
interfere with the findings of the ITAT. It was submitted that the
law as it stood and it was interpreted by the Supreme Court in
Guffic Chem. P. Ltd. (supra) was applied and there is no infirmity
to the impugned order.
5. In the present case, it is apparent that the assessee received
`1.32 crores for only 2 years. Concededly, there can be two ways
of looking at such receipts. In all such cases, there cannot be a
straight jacket black and white formula; the analysis to be
conducted by the tax authorities or administration has to be a fact
dependent one. The assessee had a dual role - both as shareholder
and as Managing Director. As Managing Director, he received
only the non-compete amounts for two years. It is quite possible
that he could have been given this amount as a capital receipt at
one go for whatever reasons and that the amount be spread over
two years. Undoubtedly, the Parliament has intervened and
deemed that such amounts - so far as they relate to consideration
for professionals should be treated as income by virtue of the
amendment of 2017. However, with respect to the Revenue's
contention that regardless of that amendment even in the
pre-existing law, this amount had to be treated as receipts and
therefore taxable as income, cannot be accepted. Recently, the
Gujarat High Court in Commissioner of Income Tax v. Anjum G.
Balakhia (2017) 393 ITR 320 analyzed the relevant provisions of
Section 28 - and also noticed any subsequent amendments. The
Court took note of Guffic Chem. P. Ltd. (supra). It also noted
Commissioner of Income Tax v. Sapthagiri Distilleries Ltd. (2015)
53 Taxmann.com 218 (SC), where the Supreme Court had held that
compensation received towards loss of source of income and non-
competition fee would be treated only as capital receipts and not
liable to tax. Having regard to these decisions and the fact that the
view of the ITAT is a plausible one, no question of law arises. The
appeal is, therefore, dismissed.
S. RAVINDRA BHAT, J
A. K. CHAWLA, J
JANUARY 29, 2018
kks
