Income Tax Act, 1961 – ss.28(ii)(a) and 260-A – Payment made as non-competition fee – Taxability of – Appellant was the C chairman and Managing director of a Company-CDBL – A SWC group entered into a MOU with the appellant and paid the entire sale consideration to the appellant for the said Company-CDBL – Consequent to which, appellant handed over physical possession, management and control of the said brewery and distillery of CDBL – By a deed of Covenant, Rs. 6.6 crores was paid by SWC to the D appellant as non-competition fee for not carrying on directly or indirectly any manufacturing or marketing activities relating to Indian Made Foreign Liquor for a period of 10 years – The Assessing Officer held that the deed of covenant was a colourable device to evade tax payable u/s. 28(ii)(a) of the Income Tax Act, E 1961 – The appeals before the Commissioner of Income Tax (appeals) were dismissed – However, the Income Tax Appellate Tribunal allowed the appeals by majority of 2:1 – The revenue preferred an appeal u/s.260-A of the 1961 Act – The High Court held that the said sum of Rs. 6.6 crores could not be brought to tax u/s. 28(ii)(a), but would have to be treated as a taxable capital gain F in the hands of the appellant, being part of the full value of the sale consideration paid for transfer of shares – On appeal, held: The substantial question of law raised by the High Court did not contain any question as to whether the non-compete fee could be taxed under any provision other than s.28(ii)(a) of the 1961 Act – Without recording any reason and without framing any substantial question of law regarding the same, the High Court held that the amount of Rs. 6.6 crores was received as part of the full value of sale consideration paid for transfer of shares and not for handing over management and control of CDBL and is consequently not taxable u/s. 28(ii)(a) – Nor is it exempt as a capital receipt being non-compete fee, as it is taxable as a capital gain in the hands of assessee as part of the full value of sale consideration paid for transfer of shares – This finding is in teeth of s. 260-A(4), requiring the judgment to be set aside on this score – Also, the reasons given by the Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines by the Supreme Court Judgments, which state that the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other – Further, it was correctly held by the majority judgments of the Appellate Tribunal, inter alia, that the withholding of Rs. 3 crores out of Rs. 6.6 crores for a period of two years by way of a public deposit with the SWC group for the purpose of deduction of any loss on account of any breach of MOU, was akin to a penalty clause, making it clear thereby that there was no colourable device involved in having two separate agreements for two entirely separate and distinct purposes – Besides, the judgment of the Supreme Court in Guffic Chem (P) Ltd. v. CIT was followed – Consequently, the impugned judgment of the High Court was set aside.
Allowing the appeal, the Court
HELD: 1.1 It can be seen that the substantial question of law that was raised by the High Court did not contain any question as to whether the non-compete fee could be taxed under any provision other than Section 28(ii)(a) of the Income Tax Act, 1961. Without giving an opportunity to the parties followed by reasons for framing any other substantial question of law as to the taxability of such amount as a capital receipt in the hands of the assessee. [Para 14][888-B-C]
1.2 Without any recorded reasons and without framing any substantial question of law on whether the said amount could be taxed under any other provision of the Income Tax Act, the High Court went ahead and held that the amount of INR 6.6 crores received by the assessee was received as part of the full value of sale consideration paid for transfer of shares – and not for handing over management and control of CDBL and is consequently not taxable under Section 28(ii)(a) of the Income Tax Act. Nor is it exempt as a capital receipt being non-compete fee, as it is taxable as a capital gain in the hands of the respondent-assessee as part of the full value of sale consideration paid for transfer of shares. This finding would clearly be in the teeth of Section 260-A (4), requiring the judgment to be set aside on this score. A catena of judgments has held that commercial expediency has to be adjudged from the point of view of the assessee and that the Income Tax Department cannot enter into the thicket of reasonableness of amounts paid by the assessee. [Paras 14 and 15][888-F-H; 889-D-E]
2. This Court may only reiterate as correctly found by the majority judgments of the Appellate Tribunal, that:
(i) A share of the face value of INR 10 and market value of INR 3 was sold for INR 30 as a result of control premium having to be paid.
(ii) It is important to note that each member of the family was paid for his/her shares in the company, the lion’s share being paid to the assessee’s son and wife as they held the most number of shares within the said family.
(iii) The non-compete fee of INR 6.6 crores was paid only to the assessee. This was for the reason stated in the Deed of Covenant, namely, that the appellant had acquired considerable knowledge, skill, expertise and specialisation in the liquor business. There is no doubt that on facts he has been Chairman and Managing Director of CDBL for a period of about 35 years; that he also owned a concern, namely M/s Maltings Ltd., which manufactured and sold IMFL and beer and that he was the President of All India Distilleries Association and H.P. Distilleries Association.
(iv) It is further recorded in the judgment of the Accounting Member that the amount of INR 6.6 crores was arrived at as a result of negotiations between the SWC group and the appellant.
(v) That the restrictive covenant for a period of 10 years resulted in the payment of INR 66 lakhs per year so that the appellant “…will not start or engage himself, directly or indirectly, or provide any service, assistance or support of any nature, whatsoever, to or in relation to the manufacturing, dealing and supplying or marketing of IMFL and/or Beer.” Given the personal expertise of the assessee, the perception of the SWC group was that the appellant could either start a rival business or engage himself in a rival business, which would include manufacturing and marketing of IMFL and Beer at which he was an old hand, having experience of 35 years.
(vi) As was correctly held by the second Judicial Member, it was also clear that the withholding of INR 3 crores out of INR
6.6 crores for a period of two years by way of a public deposit with the SWC group for the purpose of deduction of any loss on account of any breach of the MoU, was akin to a penalty clause, making it clear thereby that there was no colourable device involved in having two separate agreements for two entirely separate and distinct purposes. [Para 17][892-H; 893-A-H]
3. The reasons given by the Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines drawn by the judgments cited, which state that the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other. [Para 18][894-A]
Kshitish Chandra Purkait v. Santosh Kumar Purkait (1997) 5 SCC 438 : [1997] 1 Suppl. SCR 201;
Biswanath Ghosh v. Gobinda Ghosh (2014) 11 SCC
605 : [2014] 3 SCR 1097; CIT v. Walchand & Co. [1967] 3 SCR 214; J.K. Woollen Manufacturers v. CIT [1969] 1 SCR 525; CIT v. Panipat Woollen & General Mills Co. Ltd. (1976) 2 SCC 5 : [1976] 3 SCR 186; Shahzada Nand & Sons v. CIT (1977) 3 SCC 432 : [1977] 3 SCR 529; S.A. Builders Ltd. v. CIT (2007) 1 SCC 781 : [2006] 10 Suppl. SCR 1077; Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC 359; Guffic Chem (P) Ltd. v. CIT (2011) 4 SCC 254 : [2011] 3 SCR 899 – relied on.
McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230 : [1985]
3 SCR 791;Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613 : [2012] 1 SCR 573; Dnyanoba Bhaurao Shemade v. Maroti Bhaurao
Marnor (1999) 2 SCC 471 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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