Research › Search › Judgment

Gujarat High Court · body

2016 DIGILAW 1432 (GUJ)

Ila K. Nanavaty v. Income Tax Officer

2016-07-21

G.R.UDHWANI, K.S.JHAVERI

body2016
JUDGMENT : K.S. Jhaveri, J. 1. Being aggrieved and dissatisfied with the impugned judgment and order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench (hereinafter referred to as 'the Tribunal'), the assessees have preferred the present Tax Appeals assailing the following orders: Tax Appeal No. Date of Tribunal’s ITA/CO No. Assessment Year 125 of 2007 13.10.2006 2593/Ahd/2005 2001-02 126 of 2007 13.10.2006 2594/Ahd/2005 2001-02 1660 of 2008 16.05.2008 3367/Ahd/2004 2001-02 2. The following question of law was raised for consideration by this Court: "TAX APPEALS NO. 125 & 126 OF 2007 "(i) Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in holding that the non-compete fees amounting to Rs. 30 lakhs received by the appellant was revenue receipt in his hands and liable to be taxed as such? (ii) Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in impliedly applying the provisions of Sec. 28(va) of the Act in A.Y 2001-02 resultantly making them retrospective without there being any such legislative intention?" TAX APPEAL NO. 1660 OF 2008 (i) Whether, in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in denying depreciation on the non-compete fees paid by the appellant? (ii) Whether, in the facts and circumstances of the case the Income Tax Tribunal was right in law in holding that non-compete fees paid by the appellant to any professional for giving up his/her personal practice exclusively in favour of the appellant payer for a particular period does not amount to acquisition of business or commercial right with the meaning of S.32 of the Act? (iii) Whether in the facts and under the circumstances of the case, the order of Income Tax Appellate Tribunal is perverse in as much as: 1. It considers the material and evidences which are not emanating from the orders of the authorities below and further erred in considering irrelevant and extraneous materials ignoring the provisions of law; 2. It upholds the conclusions of both the lower authorities entirely on different and factually erroneous grounds; 3. It is incoherent and vague." 3. Mr. B.D. Karia, learned advocate ably assisted by Mr. Vibhuti. It upholds the conclusions of both the lower authorities entirely on different and factually erroneous grounds; 3. It is incoherent and vague." 3. Mr. B.D. Karia, learned advocate ably assisted by Mr. Vibhuti. Nanavati, learned advocate for the assessees submitted that the Tribunal has erred in not appreciating that the assessee had received the impugned non-compete fees as casual and non-recurring capital receipts for giving up his personal medical practice for seven years in favour of Nanavaty Eye Hospitals Pvt. Ltd. - the payer of non compete fees and therefore the same was not eligible to tax. He has referred to clause (3) of the agreement for non competition by assessee with Nanavaty Eye Hospitals Pvt. He submitted that the Tribunal has not considered the agreement dated 15.07.2000 in its true perspective. 3.1 Mr. Karia submitted that earlier assessee was having a partnership firm which was succeeded by a private limited company. He submitted that the said private limited company was a separate and distinct legal entity and in order to protect interest of company, it was though fit by Directors to enter into a non compete agreement with the assessees restraining them from carrying out their other medical practice. He submitted that therefore the amount paid to the assessees was unquestionably non compete fee which ought to have been treated as casual and non recurring capital expense and not revenue expense. 3.2 Mr. Karia submitted that the Tribunal failed to appreciate that Section 28(va) of the Act which could have made the said non compete fees taxable in the hands of the assessee as revenue receipt came into statute book with effect from 01.04.2003 i.e. from A.Y. 2003-04 whereas the assessees received the said non compete fees in A.Y. 2001-02 and therefore the same was not eligible to tax. 3.3 In support of his submissions, Mr. Karia has relied upon the following decisions: (I) Guffic Chem P. Ltd. v. Commissioner of Income Tax, Belgaum and Anr reported in 332 ITR 602; (II) Commissioner of Income Tax v. Excel Industries Ltd. reported in [2013] 358 ITR 295; (III) Elscope Pvt. Ltd. v. Commissioner of Income Tax reported in [2009] 313 ITR 293; (IV) Commissioner of Income Tax v. Smt. Chetanaben B. Sheth reported in [1993] 203 ITR 24 (Gujarat); (V) Commissioner of Income Tax v. Asian Hotels ltd. reported in [2010] 323 ITR 490 (Delhi); (VI) Commissioner of Income Tax, Kolkatta v. Smifs Securities Ltd. reported in 348 ITR 302 paras 10 - 12 1660; (VII) Tax Appeal No. 380 of 2006 rendered on 14.11.2014; (VIII) Tax Appeal Nos. 153 to 157 of 2016 rendered on 21.03.2016." 4. Mr. Nitin Mehta, learned advocate appearing for the revenue strongly opposed the arguments advanced by learned counsel for the assessees and submitted that the Assessing Officer has rightly held that the arrangement and so called non compete agreement was colourable device adopted by the assessees to avoid tax payable on such amount. He submitted that issue of non compete fees is secondary inasmuch as what assessee has done is converting their own partnership firm into a private limited company. He submitted that by and large the control of the private limited company remains in the hands of the two assessees as they are major share holders and without them the company could not have survived. 4.1 In support of his submissions, Mr. Mehta has relied upon the following decisions: "(I) Commissioner of Income Tax v. Tata Coffee ltd. reported in [2010] 326 ITR 0214; (II) K. Ramasamy v. Commissioner of Income Tax reported in [2003] ITR 0358." 5. Having gone through the documents placed on record and having heard the submissions advanced by learned advocates for both the sides, we are of the opinion that the Tribunal has committed an error in holding that the non compete fees received by the assessees were revenue receipts and liable to be taxed as such. Clause 3 of the agreement for non competition by assessee with Nanavaty Eye Hospitals Pvt. Ltd. dated 01.07.2000 reads as under: "(3) Parties to second part shall not directly or indirectly engage and/or compete with medical practice in the discipline of ophthalmology either directly or indirectly and in any version of services in the discipline of opthalmology for 7 (seven) years from the date of this agreement with the party of the first part." 5.1 It is required to be noted that the prohibition for medical practice directly or indirectly by the assessee was for seven years from the date of agreement. The assessees have received shares of private limited company as per the valuation for negative covenant for non competition made by the Chartered Accountant and as such the assessees cannot be said to have received any amount towards value of any benefit or perquisites arising from business or the exercise of profession as revenue receipt. 5.2 In the case of Guffic Chem Pvt. Ltd. (supra), the Apex Court has held as under: "7. Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders' case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from 1.4.2003. Hence, the said Section 28(va) is amendatory and not clarificatory. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from 1.4.2003. Hence, the said Section 28(va) is amendatory and not clarificatory. Lastly, in Commissioner of Income-Tax, Nagpur v. Rai Bahadur Jairam Valji reported in 35 ITR 148 it was held by this Court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT(A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of `50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from 1.4.2003." 5.3 Similarly, in the case of Excel Industries Ltd. (supra), the Apex Court has held as under: "27. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic." 5.4 In the case of Elscope Pvt. Ltd(supra), this Court has held that the stand of the revenue that there was business or an adventure in nature of trading towards purchase and sale of industrial undertakings looses sight of this basic issue, namely that the transaction in question had its genesis in shares issued and outstanding call monies payable for shares issued and therefore even provisions of Section 28(iv) of the Act cannot be pressed into service by the Revenue. 6. We are of the view that the non compete fee shall not be covered under section 28(va)of the Act which has come on statute with effect from 01.04.2003 i.e. from A.Y. 2003-04. As the assessment year in question is 2001-02, the provisions of Section 28(va) of the Act cannot be impliedly applied resultantly making them retrospective without there being any such legislative intention and therefore the Tribunal has erred in interpreting the same. 7. The decision cited by the learned advocate for the assessees in the case of Smifs Securities Ltd. (supra) shall be relevant. The Apex Court in the case of Smifs Securities Ltd. (supra) has held as under: "10. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [CIT(A), for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the Assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the Assessee - Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the Assessee - Company stood increased. This finding has also been upheld by the Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding." 8. In that view of the matter we are of the opinion that the authorities committed an error in interpreting non compete clause. This finding has also been upheld by the Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding." 8. In that view of the matter we are of the opinion that the authorities committed an error in interpreting non compete clause. We therefore reverse the decisions passed by both the authorities and accordingly both the questions raised in the present appeal are required to be answered in favour of the assessees and against the revenue. Appeals are allowed accordingly.