2008-TIOL-08-ITAT-DEL-SB

2008-TIOL-08-ITAT-DEL-SB

IN THE INCOME TAX APPELLATE TRIBUNALDELHI BENCHES : NEW DELHI (SPECIAL BENCH)

ITA No. 3104(Del)/2004 Assessment Year : 1998-99

SHRI SAURABH SRIVASTAVAC-482, DEFENCE COLONY, NEW DELHI

Vs

Dy COMMR OF INCOME-TAXCIRCLE-46(1), NEW DELHI

Shri Vimal Gandhi, President, Sh. Jonginder Pall, AM and Sh. A D Jain, JM

Dated : December 7, 2007

Appellant Rep. by : Shri Ajay Vohra, Adv. & Ms. Anju Dudeja, CARespondent Rep. by : Sh. Durga Charan Dash, CIT(DR), Amit Govil, DR & Smt. Y.S. Kakkar, DR

Income Tax - Assessee, a computer engineer, runs a software company - sells his entire stake to a non-resident company and pays capital gains on the consideration received fromn transfer of shares - However, the non-compete fee received for not competing against the company or working with any other company which could be a competitor in the same type of business was claimed to be a capital receipt - AO disallows the same on the ground that the assessee did not lose his source of income as he was hired to remain Managing Director of the same company and the curbs imposed are only for a temporary period - CIT (A) agrees with the AO and the issue finally goes to the Special Bench after the Members referred the issue to the President following a difference of opinion - Going by the facts it is clear that the nature and character of the non-compete fee received by the assessee was for undertaking restrictive covenant to compete with the business of the assessee directly or indirectly and such a payment did not spring from relationship of an employer and employee; the nature and scope of activities spelt out in the new services agreement was different and independent from the non-compete agreement and therefore, not linked directly or indirectly with the employment of the assessee as Managing Director of the Company and thus the non-compete fees is not taxable under the head 'Income from salary' - The non-compete fee is also not taxable under section 28(ii) and 28(iv) of the Act because the assessee was not carrying on any business or profession - Such receipt is also not liable to tax under the head 'Capital Gains' or 'Income from other sources' as it was capital in nature and hence, not liable to tax under any head of income mentioned u/s 14 of the Act - The receipt of a non-compete fees under an agreement has been specifically made taxable under clause (va) of section 28 inserted by the Finance Act, 2002 w.e.f. 1.4.2003 and the legislature has thought of making such amendment applicable from assessment year 2002-2003 and, Therefore, the same is not applicable to the assessment year under consideration.

ORDER

Per : Jonginder Pall :

This appeal of the assessee has been filed against the order of the Commissioner of Income tax (Appeals) (In short 'the CIT(A)'), New Delhi, for the assessment year 1998-99 and the following question has been referred to this Special Bench for its decision :

"Whether, the non-compete fee received by the assessee from FI Plc., U.K. is not liable to tax being in the nature of capital receipt?"

2. The  material facts relevant to the question referred to this Bench are that the assessee was a Computer Engineer associated with Software and Information Technology. He was the promoter and founder of as well as the Managing Director in one Software Company, viz M/s. IIS Infotech Ltd. He held 8,66,450 shares of the said company. The said company was agreed to be taken over by the FI Group Plc. UK and as per the shares purchase agreement dated 4.12.1997 entered into by the U.K. company with the shareholders of M/s. IIS Infotech Ltd, including the assessee, 76% of the subscribed equity capital was agreed to be transferred in favour of the U.K. company by the shareholders in order to effect the said take over. In terms of the said agreement, the assessee sold 8,66,450 shares of M/s. IIS Infotech Ltd to the U.K. Company. The assessee filed return of income for the assessment year under consideration on 31.10.1999 declaring therein total income of Rs.38,29,590/-. In the return, the assessee had shown long-term capital gain of Rs. 8,71,21,723/- on the said sale of 8,66,450 shares of M/s. IIS Infotech Ltd to the U.K. company, in respect of, which exemption was claimed under section 54EA of the Income Tax Act, 1961 (for brevity 'the Act'). In addition to the share transfer agreement, the FI Group also entered into a non-compete agreement with the assessee on the same date, i.e., 4.12.1997, whereby the assessee received a sum of Rs. 1,07,36,570/- during the financial year 1997-98 relevant to the assessment year under consideration. A similar instalment of 1,69,000 £ (Pound sterling) was to be received by the assessee in the subsequent financial year 1998-99 relating to the assessment year 1999-2000. Although the assessee had paid advance tax and self assessment tax in respect of the non-compete fees of Rs.1,07,36,570/- yet in the return of income filed, the assessee claimed exemption in respect of the non-compete fees as being a capital receipt. The assessee also entered into yet another new service agreement with M/s. IIS Infotech Ltd., on 24.02.1998, i.e., after the said company was taken over by the U.K. Company, whereby, the assessee was employed as the Managing Director of the U.K. Company. The salary income received from the said Company in terms of the said agreement was also shown in the return of income filed for the assessment year under consideration. The return filed was processed under section 143(1). However, subsequently, the AO initiated proceedings under section 147 by issue of a notice under section 148 on 31.01.2003, for the reason that the non-compete fees received by the assessee was a revenue receipt liable to tax. In response to such notice, the assessee filed a return on 3.3.2003 declaring the same income as shown in the original return. During the course of assessment proceedings, it was submitted before the AO that as per the Non-Compete Agreement (In short, 'the NCA') entered into with the U.K. Company on 4.12.1997, the assessee was restrained from carrying out any soft-ware development activity for any other person who directly competed with FI and its associate and subsidiary companies in the U.K., the USA, Singapore, Japan and India, for a period of 18 months and the amount of Rs. 1,07,36,570/- paid to him as compensation was in the nature of non-compete fees. Thus, it was contended that the non-compete agreement put a restriction on carrying on any soft-ware development activity for any other person and, therefore, the said amount was a capital receipt. However, the AO took notice of the subsequent services agreement entered into with M/s. IIS Infotech Ltd after the take over, on 24.02.1998, whereby, the assessee continued to be the Managing Director of the Company. He also took notice of the fact that restrictions imposed were only for a limited period of 18 months and these were not absolute restrictions on running any business or such activity by the assessee. He observed that the only limitation undertaken by the assessee was not to harm the business interest of M/s. FI Group Plc. UK. The AO also observed that the very fact that the assessee received a lump sum payment did not make the receipt as that of a capital nature. He also observed that the assessee was not running, or carrying on any business. He was working in the capacity of Managing Director of M/s. IIS Infotech Ltd before entering into non-compete agreement with U.K. Group and continued to work in that capacity after its take over by the U.K.Group. His capacity to work or earn income was not affected adversely because of the non-compete agreement and there was no loss of source of income to the assessee. The AO also referred to the various judgments of the courts relied on by the assessee and observed that the facts of those cases were distinguishable from the facts of the present case. Therefore, the AO held that the ratio of those judgments was not applicable to the facts of the present case. Thus, he rejected the claim of the assessee that the non-compete fees of Rs. 1,07,36,570/- was a capital receipt. Accordingly, the AO held that the amount in question was a revenue receipt liable to tax under section 28(ii) of the Act. In this manner, the AO made an addition of Rs. 1,07,36.570/-.

3. Being aggrieved, the assessee filed an appeal before the CIT(A), where the action of the AO for initiating the proceedings u/s 147 was inter-alia challenged. The submissions made before the AO were reiterated. However, the Ld. CIT(A) upheld the action of the AO for initiating the proceedings u/s 147, by observing that the information with the AO was sufficient to entertain as ex-facie belief that income chargeable to tax had escaped assessment. As regards the merits of the case, the Ld. CIT(A) took notice of the fact that as per the share purchase agreement dated 4.12.1997 with the U.K. Group, the shareholders transferred 76% of the subscribed equity capital to the Indian Company at the agreed price of Rs. 100.90 per share. The assessee was also promoter, founder and the Managing Director of the Indian Company. He also observed that as per the non-compete agreement of the same date made by the U.K. group, the assessee was restrained from engaging in or carrying on any activity or business, which directly competed with M/s. FI. U.K. Group, its associate and subsidiary companies in the U.K., the U.S.A., Singapore, Japan and India. However, the Ld. CIT(A) observed that the assessee continued to work with the group as Managing Director after the take over and therefore, was not, in effect, restrained or inhibited from exploiting his talent to the full, much less from sterlising his income earning apparatus and that in fact, the assessee received a much higher salary and other benefits from the U.K. Group after its take over. He also noticed that the very fact that the nomenclature given in the agreement was 'non-compete agreement', would not change the character of the receipt and, that therefore, the same was a revenue receipt. While taking such a view, the Ld. CIT(A) referred to the decision of his predecessor in the case of Shri S. Dhanbal, another shareholder and a Director of M/s. IIS Infotech Ltd., who too had received a similar amount by way of non-compete fees. The said Director also continued to work for the U.K. based company after its take over and the amount paid was held to be a revenue receipt. It was also held that the so-called non-compete agreement was a collusive and self serving document executed with the sole purpose to evade income-tax. Thus, the action of the AO was upheld. Hence, this appeal before the Tribunal.

4. The Ld. Counsel for the assessee, Sh. Ajay Vohra submitted that the assessee is a computer engineer and has been actively associated with computer software and information technology through his association with a variety of companies and industry associations. The assessee was having a considerable expertise, skills and experience in the knowledge of the business and supply of information technology and computer software products, application and services, etc. The assessee was a promoter and founder of M/s. IIS Infotech Ltd, i.e., "the Indian Company" engaged in the business of computer software development. He was also appointed as Managing Director of the Company since its inception. He submitted that the FI Group Plc. (In short 'FT), a U.K. based public limited company, was engaged in the supply of computer software to major organisations whose business depended mainly on information technology. In order to increase its capacity, facilitate further growth and establish an overseas service provider within the group, the said company evinced interest to take over the Indian Company and entered into a share purchase agreement dated 4.12.1997 with the major shareholders of the Indian Company to purchase 76% of the subscribed equity capital of M/s. IIS Infotech Ltd at an agreed price of 100.90 per share. This agreement was subject to approval from the Govt. of India, the Reserve Bank of India, etc. The Share Purchase Agreement (SPA) was at an arm's length and it is not the allegation of the Revenue that the same was a collusive arrangement. He submitted that shares were purchased at the same rate at which other shareholders also sold the shares to the F.I. Group.

4.1. Shri Vohra further submitted that simultaneously, the FI group U.K. also entered into a non-compete agreement on 4.12.1997 with the assessee and three other Directors of the Company, viz., S/Sh. Rohitsava Chand, S. Dhanabal and Mohit Goyal. A copy of the said agreement is placed at pages 40 to 49 of the paper book. He submitted that as per non-compete agreement, the assessee and three other directors were restrained from engaging in or carrying on any activity or business, which directly competed with the FI Group, its associates and subsidiary companies in the U.K., the U.S.A., Singapore, Japan and India. Besides, the Directors agreed to various restrictive covenants under the said agreement. This agreement was separately signed by each of the four Directors/Managing Director, i.e., the assessee. He submitted that the non-compete agreement was made effective for a period of 18 months. He submitted that clause (d) of article 8.1 of the share purchase agreement contained an obligation of the sellers, as per which, each of the four Directors, viz., S/Sh. Rohitsava Chand, the assessee, S. Dhanbal and Mohit Goyal shall enter into contracts of employment with the company in the agreed form and remain in employment of the company as per the terms and conditions, except if prevented by disability or death. In consideration of the non-compete agreement, each of the four Directors was to receive from the FI Group, U.K., a sum of 1,69,000/- £ (pounds sterling) each on the completion date (i.e., on completion of the share purchase agreement) and on 31st May, 1999, along with interest accrued thereon. An amount of Rs. 1,07,36,570/- was received in the accounting year relevant to the assessment year under consideration. He submitted that subsequently the assessee entered into a fresh service agreement dated 24.02.1998 with M/s. IIS Infotech Ltd; ( a copy placed at pages 50 to 67 of the paper book) whereby, the assessee was appointed as Managing Director of the Company after its take over. Sh. Vohra submitted that the execution of the services agreement was not dependent on payment of the non-compete fees. The other two directors, namely, Sh. S. Dhanbal and Mr. Mohit Goyal also entered into a fresh service agreement on 24.02.1998. However, Shri Rohitsava Chand did not accept the new service agreement and opted out of employment of the company once there was a change of its ownership. Nevertheless, Sh. Rohitsava also received non-compete fees as per agreement dated 4.12.1997. He submitted that like the assessee, Sh. Rohitsava also claimed the first instalment of the non-compete fees as capital receipt. This claim of the assessee was accepted for the assessment year 1998-99. However, for the subsequent assessment year 2000-01, the AO rejected the claim of the assessee for capital receipt and held that since the assessee was not carrying on any business of computer software, there was no question of the foreign company putting any restrictions on him through a non compete agreement. The Ld. AR submitted that the AO further referred to the definition of the term 'income' in clause 24 of section (2) and observed that the same was inclusive in nature and the same took into account not only income in its normal connotation, but also other receipts, to save artificial categories of income. Thus, the AO held that such income was liable to tax as income from other sources. He submitted that in appeal, the Ld. CIT(A) upheld the action of the AO. When the matter was carried in appeal before the Tribunal, the ITAT, Delhi 'B" Bench in ITA No. 4713(Del)/2003, for the assessment year 2000-2001, held that no dent was made in the income earning apparatus of the assessee through a non-compete agreement and, therefore, non-compete fees was a revenue receipt. A copy of the order of the Tribunal is placed at pages 173 to 227 of the paper book. However, the Tribunal has not clarified that if it is a revenue receipt, under what head of income the same is liable to tax.

4.2. He further submitted that even in the case of Shri S. Dhanbal, Director of the Indian Company, who also received non-compete fees of the same amount, the AO did not accept the claim of the assessee that the same was a capital receipt for the assessment year 1998-99. The AO brought to tax such receipt as income from salary. On appeal, the Ld. CIT(A) upheld the action of the AO by observing that the so-called non-compete agreement was a collusive and self serving document prepared for the sole purpose to evade Income tax. He submitted that the assessee filed an appeal before the Tribunal and the ITAT, Delhi Bench "A" : New Delhi, in ITA No.3748(D)/2002, for the assessment year 1998-99 ( a copy of the order placed at pages 86 to 98 of the paper book), held that the receipt in question could not be treated as part of salary and there was no material placed on record to show that the non-compete agreement was a colourable devise to evade tax. Thus, the Tribunal held that the non-compete fees was in the nature of a capital receipt. Sh. Vohra submitted that in the present case, the AO has held that the non-compete fees is taxable under section 28(ii) of the Act. Thus, the Ld. Counsel submitted that the dispute relates to as to whether the non-compete fees is a capital receipt or a revenue receipt and as to if it is a revenue receipt, under what section the same is taxable.

4.3. Arguing further, the Ld. Counsel for the assessee submitted that the Share Transfer Agreement (In short 'the STA') was subject to approval of the Reserve Bank of India and the Stock Exchange Board of India ( In short 'SEBI') Guidelines. He referred to page 80 of the paper book, where the rates of equity shares of IIS Infotech Ltd during the period from Ist June, 1997 to 28th Nov. 1997 have been given. He submitted that as against the average quoted price of 26 weeks at Rs. 45.80 per share, the assessee alongwith other Directors had sold shares @ Rs.100.90 per share. It is not the case of the Revenue that shares were sold at less than the prevailing market rate. Thus, the Ld. Counsel submitted that the non-compete fees could not be considered as part of the sale consideration of shares and, therefore, cannot be brought to tax as capital gain. He further submitted that the non-compete fees cannot be treated as profit in lieu of salary under section 17 of the Act because the date when the agreement was made on 4.12.1997, the U.K. Company had not taken over the business of the Indian Company. Therefore, it cannot be held that the FI Group was an employer of the assessee. Shri Vohra further argued that amount received was in no way related to the services rendered/to be rendered by the assessee. He further submitted that signing of the fresh services agreement was not a condition precedent for receipt of the non-complete fees. He submitted that Shri Rohitsava Chand did not sign the fresh services agreement. Still he received the non-complete fees. He relied on the two judgments of the Hon'ble Calcutta High Court in the cases of 'Saroj Kumar Poddar Vs. JCIT', reported in 279 ITR 573 and CIT Vs. A.S. Wardekar', 283 ITR 432. He, therefore, contended that the amount in question could not be treated as profit in lieu of salary.

4.4. The Ld. A.R. further submitted that in the case of 'Rohitasava Chand Vs. DCIT' (supra), the Tribunal has held that the Non-Compete Agreement did not make any dent in the profit earning apparatus of the assessee and, therefore, it was a revenue receipt. Shri Vohra submitted that even if it was a revenue receipt, the question still remains as to the head of income under which the said receipt could be brought to tax. He submitted that all receipts are not income and cannot be brought to tax until the same fall under any of the heads of income mentioned in section 14 of the Act. Therefore, it is very necessary to first determine the character of the receipt and the head under which it falls before the same could be brought to tax. He relied on the judgment of the Hon'ble Bombay High Court in the case of 'Mehboob Productions Pvt. Ltd; Vs. CIT', reported in 106 ITR 758. He submitted that the burden is entirely on the Revenue to prove that the same was a receipt liable to tax under the heads mentioned in section 14 of the Act. He further argued that the receipt in question cannot be brought to tax under the head 'capital gain' because there was no transfer of capital asset within the meaning of section 45 of the Act. He further submitted that the non-compete fees cannot be brought to tax under the head "Income from other Sources". He relied on the judgement of the Hon'ble Supreme Court in the case of 'CIT Vs. Cadell Weaving Mill Co. P. Ltd And Another', reported in 273 ITR 1.

4.5. Arguing further, the Ld. A.R. submitted that since the assessee was not carrying on any business, the amount received by way of non-complete fees cannot be considered as profit arising in the course of any business. Therefore, the amount in question cannot be brought to tax u/s 28(ii) of the Act. He submitted that sub-clause (a) of clause (ii) of Section 28 of the Act regards compensation which is received by any person, managing the whole or substantially the whole of the affairs of an Indian company, at the time of termination of his management or on modification of the terms and conditions relating thereto, as liable to tax Under the head "Profits and gains from business or profession". In the present case, the assessee has not received any compensation for termination of his management of IISC. He was the Managing Director of the Company before take over and continued to be the Managing Director after the take over. Therefore, the non-compete fees cannot be charged to tax u/s 28(ii) of the Act. He relied on the following decisions of the various Benches of the ITAT:

(i) ITAT, Amritsar Bench, in the case of T.S.Manocha Vs. DCIT (2006) 5 SOT 277.

(ii) Third Member decision of ITAT, Delhi Bench in the case of Shiv Raj Gupta Vs. ACIT (ITA No.4886/Del/98 ( copy placed at pages 101 to 134 of the paper book).

(iii) ITAT, Chennai Bench in the case of R.K. Swamy Vs. ACIT, 88 ITD 185.

4.6. The Ld. AR submitted that subsequently, the Finance Act, 2002 inserted clause (va) in section 28 of the Act w.e.f. 1.4.2003, as per which the receipts of the nature as of the one in this case have been specifically made liable to tax. Relying on the decisions of various Benches of ITAT including ITAT, Amritsar Bench in the case of T.S. Manocha Vs. DCIT (supra), the Ld. AR submitted that this amendment has been held to be prospective. Therefore, the same is not applicable to the assessment year under consideration.

4.7. Arguing further, the Ld. A.R. submitted that non-compete fees is not taxable under any of the heads of income mentioned in section 14 of the Act. He submitted that the assessee has received the amount for undertaking a restrictive /negative covenant and, therefore, the same is a capital receipt. He relied on the following judgments:

(i) Gillanders Arbuthnot and Co. Ltd Vs. CIT 53 ITR 283 (SC)

(ii) CIT V. Best and Co. Private Limited 60 ITR 11 (SC)

(iii) Murray (Inspector of Taxes) v. Imperial Chemical Industries Ltd; 71 ITR 661 (SC).

(iv) CIT Vs. Late G.D. Naidu & Ors: 165 ITR 63 (Mad.)

(v) CIT vs. Saraswati Publicities: 132 ITR 207 ( Mad)(SLP dismissed vide 142 ITR (St. 6).

(vi) Ashok Bihari Lal (HUF) Vs. ACIT 99 TTJ 513 (Del.)

(vii) Asiatic Industrial Gases Ltd. Vs. Dy. CIT (2006) 6 SOT 743 (Bang.),

(viii) Dy. CIT vs. Indian Syntans Investments (P) Ltd; 106 TTJ 388 (Chennai).

(ix) Gomti Credits (P) Limited Vs. DCIT : 100 TTJ 1132 (Del.)

5. The Ld. Sr. DR, in addition to the submissions made at the time of hearing of the appeal, also furnished detailed written submissions, stating therein that the Share Purchase Agreement between the FI Group, U.K. and IISC is dated 4.12.1997. Sh. Saurabh Srivastava was a shareholder and the Managing Director of IISC. He submitted that as per the share purchase agreement, the specified date was 9.12.1997, the opening date of the issue through letter of offer for purchase of 24% shares held by others was 19.1.1998, the closing date was 17.2.1998, on which date, the FI Group, UK made a bid to purchase/the shares of IISC. The completion date was 26.2.1998. The effect of the acquisition of the shares of IISC by the FI Group, UK was that the said group became the owner of the IISC on 26.2.1998. He submitted that though the date of the non-compete agreement between the assessee and the FI Group, UK is dated 4.12.1997, yet as per para 6 of this agreement, the same was to become effective simultaneously with the completion of the transaction of sale and purchase of shares under the share purchase agreement. He further stated that as per the non-compete agreement, the consideration of 3,38,000 £ ( pounds sterling) was to be paid in two instalments of Rs. 1,69,000/- £ each on the completion date and on 31.5.1999. In terms of the non-compete agreement, an amount of Rs. 1,07,36,750/-, being the first instalment of the consideration of 1,69,000 £, alongwith the sale consideration of shares of IISC, were credited to the bank account of the assessee on 26.2.1998. The Ld. Sr. DR has submitted that on completion of the share purchase agreement, 76% of the subscribed share capital come to be owned and vested with the F.I. Group.

5.1. The Ld. DR has drawn our attention to clause (d) of article 8.1. of the share purchase agreement, which stipulates that the sellers ( i.e., shareholders of IISC who agreed to sell their 76% holdings to the FI Group, UK) shall ensure that the Directors, namely, S/Sh. Saurabh Srivastava i.e., the assessee, Rohitasava Chand, S. Dhanbal and Mohit Goyal shall have entered into a contract of employment with the company in the agreed form and remained in employment of the company on terms and conditions. The deed for employment had to be entered into on or prior to the completion date, i.e., 26.2.1998. The fresh Service Agreement was entered into on 24.02.1998 between the assessee and IISC (i.e., Company being owned by the FI Group, U.K. after take over). The Ld. DR, therefore, submitted that on the basis of these facts, it has been established that as on the date of payment of the non-compete fees of Rs. 1,07,36,750/- in financial year 1997-98 on 26.2.1998 to the assessee, shares of IISC were beneficial and substantially owned by the FI Group, UK and, therefore, a relationship of employer and employee existed between them.

5.2. The Ld. DR further submitted that Sh. Saurabh Srivastava was the Managing Director of IISC and owner of shares which he agreed to sell to the FI Group, UK. Referring to para IV(3) of the offer letter, the Ld. DR submitted that the share purchase agreement provided that the Executive Directors of that Company including the assessee were to enter into new service agreements with the company on revised terms and conditions, subject to the approval of the Board of Directors and the shareholders. Such new service agreements were to come into force on completion of the share purchase agreement, i.e., 26.2.1998. As per the new service agreement modifying the terms of employment, the assessee was to be appointed as Managing Director from the commencement date, the said date being the completion date under the share purchase agreement. The modified service agreement indicates revised salary and allowances ( details placed at pages 62 to 65 of the paper book). This was done only to ensure the continuity of the management. The Ld. DR submitted that despite acquisition of IISC shares by the FI Group, UK of IISC, the four Executive Directors of IISC who also included the assessee, continued to be retained on the Board of IISC, i.e., the FI Group, UK after take over, on enhanced and better employment terms. Thus, the Ld. DR has submitted that the non-compete fees paid to the assessee and the other 'Directory was integral to the continuation of the employment of the assessee and that therefore, the same arises as a result of employment. The Ld. DR submitted that it is difficult to understand as to with whom or against whom the Managing Director was to compete/non-compete with, since he was the Managing Director of the Company before its take over and continued to be the Managing Director after the take over. Thus, the Ld. DR submitted that the revenue earning apparatus of Sh. Saurabh Srivastava was never dented and his source of income remained intact. On the contrary, the Ld. DR submitted that there has been enhancement in the earning capacity of the assessee after the take over of IISC by the F.I. Group, as income returned in the year 1999-2000 was Rs.38 lacs whereas it increased to Rs.280 lacs in asstt. year 2000-01. He further argued that two conditions for the payment of the non-compete fees were to be satisfied cumulatively, i.e., continuation of employment of Sh. Saurabh Srivastava as Managing Director of IISC after take over and completion of the share purchase agreement. The Ld. DR submitted that the logical inference that can be drawn is that the non-compete agreement would have become inapplicable in case the share purchase agreement was not completed and Sh. Saurabh Srivastava was not employed with IISC after its take over. The Ld. DR submitted that it is a continuation of the employment of Sh. Saurabh Srivastava, which resulted in the yield of additional revenue in the form of the non-compete fees which assumes the character of a revenue receipt.

5.3. Arguing further, the Ld. DR submitted that the assessee, by agreeing to continue to work only with IISC after the acquisition of 76% of its shareholding by the FI Group, UK, the assessee has received an additional advantage/gain in the form of the non-compete fees in lieu of salary which falls in the category of salary, within the meaning of section 17(3) and, therefore, is taxable as such. The Ld. DR further submitted that any receipt integrally linked with the continuation of the employment of Sh. Saurabh Srivastava, Managing Director with IISC after take over, would fall in the definition of salary. The same can be earned by expressly agreeing to apply the skill/experience in a particular form with the existing employer, or to receive money by expressly agreeing not to apply the skill/experience so gained with any other person except the present employer. He submitted that in both the cases, the immediate source continues to be the employment under the employer and the same is taxable under the head 'Income from salary'. He submitted that in no way the profit earning apparatus of the assessee has been impaired or affected by entering into the non-complete agreement. It was submitted that the definition of salary given in section 17(3) of the Act is an inclusive definition and has a wide meaning. The same would also include amounts or any compensation due to or received by the assessee from his employer or former employer at or in connection with the termination of his employment. He submitted that the terms of appointment of the assessee as Managing Director, the nature of duties, responsibilities, obligations and the limits to his power, the manner of his removal and resignation are clearly spelt out in the services agreements before and after take over. Every power in effect emanates from the articles of association. Thus, the Ld. DR submitted that the assessee was a servant of the company and the income received from the company was taxable under the head 'income from salary'. The Revenue has also relied on the following judgments:

1. Ram Prasad Vs. CIT 86 ITR 122(SC)

2. Karamchari Union Vs. Union of India And Others, 243 ITR 143 (SC).

3. CIT Vs. MSP Rajes, 202 ITR 646 (Kar.)

4. Tuticorin Alkali Chemicals And Fertilizers Ltd; Vs. CIT, 227 ITR 172 (SC).

5.4. The Ld. DR then referred to the respective clauses of the share purchase agreement whereby certain restrictions were placed on the sellers. These restrictions inter-alia included the four Directors (including the assessee) being under obligation to enter into a contract of employment with the Company in the agreed form, and to continue to perform and conduct the cause of the company and its subsidiaries in accordance with and consistent with past practices, etc., from the date of the share purchase agreement till the completion date. Further restrictions were also placed on the sellers from selling, transfer, gift, exchange, disposal, etc., of shares of the company from the date of the share purchase agreement till the completion date except with the prior consent of the buyer, i.e., the FI Group, U.K. The sellers, viz., the assessee and other three Directors were to deliver effective written resignations of Directors other than four Directors, namely, S/Sh. Saurabh Srivastava, the assessee, Rohitsava Chand, Mohit Goyal and S. Dhanbal. Thus, the said agreement ensured the exit of all the Directors from the Board of IISC and its all other associate companies, except four Directors. The Ld. DR has argued that on the completion date of the SPA, the shares of the IISC and all its associate companies stood acquired by the FI Group, UK. Simultaneously, the Board of Management/Directors of IISC and its associate companies were also effectively represented by a set of Directors comprising only of four persons. The Ld. DR has submitted that these features of the share purchase agreement should be read and understood conjointly with the terms of the non-compete agreement dated 4.12.1997 entered into between Sh. Saurabh Srivastava and the FI Group, UK. The non-complete agreement was conditional upon the completion of the share purchase agreement dated 4.12.1997, as the said agreement was to be become effective simultaneously with the completion of transaction of sale and purchase under the SPA. Thus, the Ld. DR has submitted that the payment of the non-compete fees was subject to the following conditions:

i) Exit of all remaining directors of all associate companies and IISC except the four ( as per Article 13.1.1(h) of SPA).

ii) The remaining Directors were now being paid remuneration for enhanced/responsibilities/additional burden cast in the light of all other directors moving out from IISC and its subsidiaries.

iii) The four directors were to be continuously available for employment with IISC and its associates (after take over by the F.I. Group) on such package terms of payment to ensure continuity of management for at least a minimal tenure upto 31/5/99). The total package comprised of non compete fees, modified remuneration package, both integrally linked to continued employment of the assessee and other three Directors with IISC.

iv) The non compete fees agreement was not an independent obligation, in as much as it was inextricably and integrally liked to the New Service Agreement (Article 13, page 59 of assessee's paper book) and hence, by corollary, linked to completion of the Share purchase agreement. The scope of this document cannot be appreciated ignoring the circumstances under which it came into existence.

v) The continuation of employment till 31/5/99 mentioned in the non-compete agreement and effective entering into service agreement for continued availability was an integral part of the completion of the Share Purchase Agreement and thus payment of non compete fees was not an independent obligation, but inextricably and integrally linked with the overall terms of employment, which cannot be missed. In fact, the continuation of service was the integral cause of payment of the non-complete fees, read with the share purchase agreement.

Thus, the Ld. DR has submitted that non-compete fees was paid to four Directors for expressly being in employment with IISC and the receipt emanated directly from the employment with the IISC after takeover. This was, therefore, a profit in lieu of salary. The Ld. DR has submitted that the assessee never lost his income-earning apparatus and there was also no dent made in the income earning apparatus. On the contrary, the assessee received higher remuneration and other benefits from the said company after its take over and the non-compete fees received on account of non-application of knowledge, skill and experience by way of working for others during the course of employment with IISC amounts to a benefit in lieu of salary. Therefore, the same was taxable as such under section 17 of the Act and is a revenue receipt.

5.5. The Ld. DR has also taken an alternate plea that the payment of non-compete fees is taxable u/s 28(ii) of the Act The Ld. DR has submitted that Section 28(ii) of the Act covers any compensation or other payment due to or received by the person, managing the whole or substantially the whole of the affairs of the Indian company, at or in connection with the termination of its management or modification of the terms and conditions relating thereto. The Ld. DR has submitted that this definition is also wide enough to cover the payments like non-compete fees. He has further submitted that the assessee has received a payment of non-compete fees from IISC Delhi, an Indian Company having its registered office in Delhi during the course of his professional engagement of applying his skills/experience with IISC and its associates. The assessee was managing substantially the whole of the affairs of the company as its Managing Director subject to the terms and conditions of the Memorandum of Association and Articles of association of the company. The terms of management were modified as per the share purchase agreement read conjointly with the non compete fees agreement. Therefore, the same is taxable under section 28(ii) of the Act.

5.6. The Ld. DR advanced further alternative argument that the non -compete fees is liable to tax u/s 28(iv) of the Act, because the expression "Profession" is a word of wide import and includes 'vocation', which is only a way of living and a person can have more than one vocation. Clause (iv) of section 28 provides that the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of profession, is chargeable as part of the profit under this Act. It is deemed to be income under clause (va) of sub-section 24 of section 2, which defines 'Income'. The Ld. DR has submitted that the definition of 'income' under sub-section (24) of Section 2 is an inclusive definition. Reliance has been placed on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Nar Hari Dalmia, (1971) 80 ITR 454. Relying on the judgment of the Bombay High Court in the case of D.M. Naterawala Vs. CIT, 122 ITR 880, the Ld. DR pleaded that raising of alternative contentions to determine, the head of taxability is permissible. The Revenue has also relied on two judgments of the Hon'ble Supreme Court in the cases of Kapur Chand Shrimal Vs. CIT, reported in 131 ITR 451 and 40 ITR 398 (there is no such judgment reported in this ITR at page 398), and the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Om Praksh Bidhi Chand, reported in 141 ITR 750, in support of the contention that powers of the Tribunal to pronounce upon the matter in issue are very wide. If on the material on record more than one argument is available for recording the same or similar finding ' and if any of the arguments was not found mentioned in the order of the ITO or AAC, the Tribunal is always entitled to record such a finding, subject to the assessee having been given an opportunity; of being heard in that regard. Thus, the Ld. DR has contended that the very fact that these arguments were not mentioned in the assessment order does not preclude the Tribunal from taking a correct view in the matter - Arbuthorot Vs. CIT reported in 53 ITR 283 (SC). The judgment of the Hon'ble Madras High Court in the case of CIT Vs. Saraswthi Publication, reported in 132 ITR 207 is not applicable because in that case, the sum received on restrictive covenant was held as capital receipt. In the present case, the assessee continued to work as Managing Director and received non-compete fees in connection with his employment. Similarly, the other judgments relied upon by the assessee are held to be distinguishable on facts. Thus, the Ld. DR has concluded that the non compete fees was not a capital receipt but was a revenue receipt. The same was taxable under the head 'Salary' because it was a profit in lieu of salary. He further submitted that alternatively the same was taxable under section 28(ii) and 28(iv) of the Act.

6. In the rejoinder to the submissions of the Ld. DR, the Ld. AR has submitted that the non-compete fees received by the assessee from the FI Group, UK cannot be treated as a profit in lieu of salary, because there did not exist any relationship of employer and employee between the FI Group and the assessee. He submitted that there is no merit in the contention of the Ld. DR that since a majority of the shares of IIS Infotech Ltd, at the time of payment of non-compete fees to the assessee, were held by the FI Group, UK, the employer - employee relationship existed between the FI Group and the assessee. He submitted that as per its dictionary meaning 'Employer' is a person who controls and directs a worker under express or implied contract of hire and who pays the workers salaries or charges. The Ld. AR has illustrated this point by giving the example: of a wholly owned subsidiary company in India of a foreign company;, He submitted that the employees of the subsidiary company in India would be employees of a subsidiary company and not of the foreign company. The Ld. AR has further submitted that the mere fact that the amount of the non-compete fees was credited to the bank account of the assessee on 26.2.1998, i.e., after signing the fresh service agreement on 24.2.1998 would not change the nature of the non compete fees. He submitted that both the sale consideration of shares and the non compete fees were credited to the account of the assessee on completion of the transaction for sale of shares on 26.2.1998.

6.1. The Ld. AR has further submitted that that there is also no merit in the submissions of the Ld. DR that the non compete fees was a profit in lieu of salary, inasmuchas it was not a compensation from an employer or former employer in connection with the termination of his employment or modification of the terms and conditions under section 17(1)(iv) read with section 17(3)(ii) of the Ac, because the agreement entered into by the FI Group with the assessee on 24.2.1998 was an independent, distinct and separate agreement to retain the services of the assessee as an employee. He further stated that entering into the said agreement was not a condition precedent to the receipt of the non-compete fee. It was not a mandatory condition for the payment of the non-compete fees. This is obvious from the fact that although Sh. Rohitsava Chand opted out of the employment of the Indian Company, yet he received the non-compete fees. He further submitted that two agreements, i.e. the service agreement and the non-compete agreement operate in totally different fields and for different considerations. The non compete agreement was for restraining the assessee from exploiting his entrepreneurial skills in competition with the Indian Company and its other associate companies, and not for rendering services as Director-employee. The Ld. AR has also submitted that the restraints placed upon the assessee under the service agreement are of a general nature, which are normally imposed by all the employers. He submitted that restrictive covenants undertaken by the assessee under the non-compete agreement were independent of the obligations undertaken by the assessee as an employee and were wider in scope, resulting in sterilization of a potential source of income. The Ld. AR submitted that by employing the services of the assessee, the Indian Company has also gained, because it could carry on the business without disruption, interruption, break in continuity, etc., which could have arisen, had a new set of people joined. He further stated that the payment of the non-compete fees was made by the FI Group, UK whereas the employer of the assessee was IIS Infotech Ltd. The Ld. AR has also submitted that the judgment of the Hon'ble Supreme Court in the case of Ram Prashad Vs. CIT, reported in 86 ITR 122 relied upon by the Ld. DR is distinguishable on facts because in that case, the Managing Director had received a certain percentage of gross profit in addition to monthly remuneration. The issue before the Hon'ble Supreme Court was whether the additional amount received was in the nature of salary or not. He submitted that these are not the facts of the present case. He has also submitted that the judgments of the Hon'ble Madras High Court in the case of K.R. Kothadaraman Vs. CIT, 62 ITR 348 and the Hon'ble Karnataka High Court in the case of CIT s. MSP Rajes, 202 ITR 646 being on a different issue, are not applicable to the facts of present case. The Ld. AR, on the other hand, has relied on two judgments of the Hon'ble Calcutta High Court in the cases of Saroj Kumar Poddar Vs. CIT, 279 ITR 573 and CIT Vs. A.S. Wardekar, 283 ITR 432, where the payments received by the assessee for entering into restrictive covenants of not entering into competitive business was held to be a capital receipt despite the fact that assessees had continued in his capacity as non-executive Chairman with the said company. Thus, the Ld. A.R. has submitted that the non-compete fees cannot be treated as a profit in lieu of salary.

6.2. The Ld. AR has also submitted that there is no merit in the alternative submission of the Ld. D.R. that the amount in question is taxable u/s 28(ii) of the Act. He submitted that the assessee was not carrying on any business and, therefore, the non-compete fees cannot be treated as profit and gains from business and profession. He submitted that such receipt cannot also be brought within the purview of section 28(iv) of the Act, because the same does not arise from business or exercise of a profession. He has submitted that the judgment of the Hon'ble Delhi High Court in the case of CIT Vs. Nar Hari Dalmia, 80 ITR 454 is not applicable to the facts of the present case, because the non-compete fees; has not been received in exercise of any profession. He summed up his submissions by stating that the non-compete fees received by the assessee is a capital receipt. The same does not fall under any of the heads of income mentioned in section 14 of the Act. The receipt falls under section 28(va), specifically inserted by the Finance Act, 2002, w.e.f. 1.4.2003. The same is 'not applicable to the assessment year under reference. Therefore, the impugned receipt is not taxable.

7. We have heard both the parties at some length and have given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below, referred to the relevant pages of the paper book, to which, our attention has been drawn and also to the relevant judgments cited by both the parties. From the facts discussed above it is obvious that the assessee has claimed the receipt of the non-compete fees as a capital receipt. However, the Revenue has considered the said receipt as revenue in nature and has accordingly brought it to tax. Now, whether a particular receipt is capital in nature or revenue in nature depends on the facts of each case. The various judicial pronouncements on the subject only help in indicating the broad parameters which have to be taken into account for deciding whether a particular receipt is capital or revenue in nature. Reliance in this regard is placed on the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Rai Bahadur Jairam Valji, (1959) 35 ITR 148, where their Lordships held (headnote):

"In the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. That, however, is not to say that the question is one of fact, for these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts."

In this case, it was further held (headnote):

"Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefore, whether the receipt is a capital receipt or a revenue receipt will, depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade."

Now in the present case, we find that certain judgments were cited before the authorities below in support of the claim that the non-compete fees received by the assessee was capital in nature. First of all, we consider it appropriate to refer to the ratio of those judgments:

(i) CIT Vs. Best & Co. Pvt. Ltd; 60 ITR 11 (SC):

The facts of the case were that a company was carrying on business in innumerable lines, acquired, in the course of its business, selling agencies from manufacturers both in and outside India. One of them was from Imperial Chemical Industries (Exports) Ltd; Glasgow, for distribution of their explosives in certain centres. This agency came into existence in 1900 and was terminable at will. The same continued upto 1947, when Imperial Chemicals Industries (Exports) Ltd; decided that all its agencies in India and Ceylon should be taken over by the principal company and gave notice to the assessee for terminating the agency from April 1, 1948. The assessee was paid compensation for the transfer of the agency, during the three successive years after the termination, calculated on the basis of commission on sales made by the Imperial Chemical Industries (India) Ltd. As a condition of paying the compensation the assessee undertook for a period of five years to refrain from selling or accepting any agency for explosives competitive with those covered by the agency agreement terminated. The assessee claimed compensation received as capital receipts as they represented compensation for termination of the agency and consideration for the restrictive covenant. On these facts, the Hon'ble Supreme Court held (headnote):

"(i) that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period;

(ii) that the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of the compensation which was attributable to the restrictive covenant was a capital receipt and hence not taxable."

In this case, it was further held (head note):

"Whether compensation received by an assessee for loss of agency is a capital or a revenue receipt depends upon the circumstances of each case. But before coming to the conclusion one way or the other, many questions have to be asked and answered: What was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints? If it was a business of taking agencies, how many agencies had it, what was their nature and variety, how were they acquired, how were one or some of them lost and what was the total income they were yielding ? What was its proportion in relation to the total income of the company ? What was the impact of giving it up on the structure of the entire business ? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure ? Or, was the loss an ordinary incident in the course of the business ? But these questions can only be answered satisfactorily if the relevant material is available to the income-tax authorities. The evidence of witnesses in charge of the business, the relevant accounts and balance-sheets of the assessee before and after the loss, other evidence disclosing the previous history of the total business and the relative importance of the agency lost and the present position of the business after the loss of the said agency have to be scrutinised by the department."

The significant feature of this case is that assessee itself was carrying on business. Still the payment attributable to restrictive covenant for a specified period was held to be a capital receipt. Therefore, we do not accept the plea of the Revenue that this judgment is not applicable to this case. Similar is the position in respect of the judgments cited at Sl. No.(iii) to (vii) below. However, the receipt in the case at Sl.No.(ii) below was held to be revenue receipt because it was incidental to the carrying on of business.

ii) Gillanders Arbuthnot And Co. Ltd; Vs. CIT, 53 ITR 283 (SC)

The facts of this case were that the assessee was carrying on business in diverse lines; besides acting as managing agents, shipping agents, purchasing agents and secretaries, besides the assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account under an unwritten agreement which was terminable at will, the assessee acted as sale agents and distributors of explosives manufactured by the Imperial Chemical Industries (Export) Ltd. The agency was terminated and by way of compensation, the assessee was paid for the first three years after termination of the agency two-fifths of the commission accrued on its sales in the territory of the agency computed at the rates at which the assessee had earlier been paid and in addition full commission for the sales effected in the third year at the same rates. The principal company also intended to take a formal undertaking from the assessee to refrain from selling or accepting any agency for explosives or other competitive commodities, but there was no written agreement made in this regard. The issue before the Apex Court was whether the amounts received by the assessee for those three years were capital or revenue in nature. On these facts, the Hon'ble Supreme Court held as under (headnote) :

"......That, having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset, they were of the nature of income.

There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital."

(iii) Kettlewell Bullen And Co. Ltd Vs. CIT, 53 ITR 261 (SC)

The facts of the case before the Hon'ble Supreme Court were that the assessee was formed for carrying on the business of managing agencies, was the managing agent of six companies including the Fort William Jute Co. Pursuant to an arrangement with M/s. Mugneeram Bangur and Co; whereby the latter agreed (i) to purchase the entire holding of shares of the assessee in the Fort William Jute Co; the managed company; (ii) to procure repayment of all loans made by the assessee to managed company and (iii) to procure that the managed company will compensate the assessee for loss of office by the payment of the sum of Rs.3.50 lac after the assessee resigned its managing agency and reimburse that amount to the managed company. The assessee submitted resignation of the managing agency and received the compensation of Rs. 3.50 lacs from the managed company. Under the terms of the managing agency agreement, the managing company was not obliged to pay any compensation to the assessee for voluntary resignation of the managing agency. The question was whether the amount received by the assessee to relinquish the managing agency was a revenue receipt or a capital receipt. On these facts, the Hon'ble Supreme Court held (head note):

"Held, on facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co."

(iv) A.S. Bhargava Vs. CIT, 88 ITR 14 (Delhi)

In this case, assessee was allotted a petrol pump and service station. The assessee transferred the dealership rights to a company for a consideration of fully paid up shares of the face value of Rs.30,000/-. The question was whether the consideration was a revenue receipt in the hands of the assessee. On these facts, the Hon'ble Delhi High Court held as under (head note):

"that the consideration received by the assessee was for the transfer of a capital asset and constituted a capital receipt.

Held also, that the value of the consideration was not the face value of the shares but their market value at the relevant time."

(v) CIT Vs. T.I. & M. Sales Ltd; 259 ITR 166 (Mad).

The facts of the case before the Hon'ble Madras High Court were that the assessee had been distributing, on principal basis, products of three companies for the last 20 years. Under the distribution agreement the assessee was to maintain adequate sales organisation at various places and offices to carry on its business at such places. The distributorship, agreement was terminated in 1984 for a lump sum payment of Rs. 42 lakhs to be paid in quarterly instalments. Under the said agreement, the assessee was to transfer the staff, dealership' network, brand images and other marketing infrastructures. The assessee was also prohibited for a period of three years from acting as distributor, stockist, dealer or agent of any other company. As a result of transfer of the entire establishment including the dealership network established by it, the turnover of the assessee had declined from Rs.71.14 crores to Rs.7.17 crores. On these facts, the Hon'ble Madras High Court held as under (headnote):

"affirming the decision of the Appellate Tribunal, (i) that the amount paid to the assessee was compensation for impairment of the profit-making apparatus of the assessee and for the sterlisation of the very source of its income;

(ii). that the distributorship agreement in principal to principal basis was not an agency agreement and did not fall within section 28(ii)(c) of the Income-tax Act, 1961;

(iii) that merely because the compensation had been quantified on three counts, viz; cost of trained man-power, compensation for cost of dealers and compensation for loss of profits, it could not be said that the assessee had recouped or been reimbursed the expenses in the past or that it had been reimbursed the profit that was not available as a result of the termination of the distribution agreement:

(iv) that, therefore, the Tribunal was right in treating the amount received by the assessee as a capital receipt."

(vi) CIT Vs. Late G.D.Naidu and Others 165 ITR 63 (Mad.)

In this case, the assessee and his son were partners in five different firms carrying on transport business. Subsequently, the other partners took over the entire business of firms in stages. New firms were composed of entirely new partners. The AO held that the compensation received by the assessee and his son was revenue in nature. However, the Tribunal bifurcated the compensation into three categories viz,(a) share in the assets, (b) share in the good will, and (c) share in the restrictive covenants in terms of section 36(2) of the partnership Act. On these facts, the Tribunal held that the compensation relatable to the restrictive covenant was a capital receipt not liable to tax. On further appeal, the Hon'ble Madras High Court held as (headnote):

" that so far as the cash compensation paid by the new partners referable to the assets and goodwill of the firm was concerned, the cash took the place of the assets of the partnership and the compensation paid for restrictive covenant not to carry on similar business for a period of five years was in the nature of a separate transaction unconnected with the business of the asset of the partnership. The Tribunal was right in its view that the total compensation paid by the firms to the old partners was for (a) the share in the assets (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets and the share of the goodwill would be on capital account as it was in the nature of an initial outgoing and the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature. The Tribunal was also right in its view that the amount received by the recipients was not liable to tax either as income or capital gains. No question of any liability to penalty would also arise in the instant case, because the assessees were merely contending for a particular position contrary to the view taken by the Income-tax Officer which would not call for any penalty."

Although the amount paid by the payee for restrictive covenant was held to be revenue expenditure and, hence allowable, yet the compensation received by the assessee and his son for not carrying on bus business for five years was held to be for restrictive covenants on capital account and hence, not taxable either as income or capital gains.

(vii) CIT Vs. Sarswathi Publicities, 132 ITR 207 (Mad.)

In this case, the assessee had secured the rights for distribution and exhibition of advertisement films with a right to enter into an agreement with other persons for distribution and exhibition. The assessee entered into an agreement with 'B' which had similar agreements with various firms for the purpose of seeing that the business of each other did not suffer by competition in certain States. The agreements were extended and modified. Subsequently, the assessee agreed not to represent or otherwise do business in film shots and any sort of advertisement on the cinema screens for Hindustan Lever Ltd; or handle any film advertising business till the end of 1975 and further agreed to refrain from carrying on the business with Hindustan Lever Ltd. In consideration of these; terms, the assessee received a compensation of Rs. 1,50,000/-. In these facts, the Hon'ble Madras High Court held as under (headnote):

"that as the receipt was referable to the restrictive covenant, it was a capital receipt not liable to income-tax."

(viii) K. Ramasamy Vs. CIT 261 ITR 358 (Mad).

In this case the partners of the firm dissolved the firm and formed the company. All the partners became the shareholders of the company and compensation was paid by the assessee to the partners of the erstwhile firm for not to engage in similar business. It was held by Madras High Court that the amount received by the partners would be assessable as revenue receipt as the same partners entered into transactions by introducing a corporate personality. These are not the facts of this case. Therefore, this judgment is not applicable to the facts of the present case.

(ix) Boeing Vs. CIT: 250 ITR 667 (Madras)

In this case, the assessee was carrying on cloth business and during the course of such business, the assessee received a gift of Rs .50,000/-from a company in a gift scheme for having purchased cloth exceeding certain value. The assessee claimed the receipt as nonrecurring and hence not taxable. However, on these facts, it was held that the value of gift of Rs.50,000/- was a benefit convertible into money arising from business and, therefore, was taxable as business. As already held, the non-compete fees received by the assessee did not arise to the assessee from carrying on any business. The same was for accepting the restrictive covenant and, therefore, this judgment is also not applicable to the facts of the present case.

(x) D.M. Neterwala Vs. CIT 122 ITR 880 (Bom.)

In this case, the assessee was a Director of a Company. In terms of an agreement with the promoters, shares were allotted to Director. On these facts, it was held that the share received by the Director was a benefit or perquisite received from a company by a Director was a benefit assessable to tax.

This judgment is not applicable to the facts of the present case because non-compete fees was not paid to the assessee in his capacity as the Managing Director; The same was paid for undertaking restrictive covenants and, therefore, this decision is also not applicable to the facts of the present case.

(xi) Karamchari Union Vs. Union of India and others: 243 ITR 143

In this case, the issue raised before the Hon'ble Supreme Court was whether Dearness Allowance, City Compensatory Allowance, and House Rent Allowance received from the employer were taxable as profit in lieu of salary under section 17 of the Act. Their lordships of Supreme Court considered the meaning of "Profit" in context of section 17 and observed that an advantage or gain by receipt of payment by employee was a benefit liable to tax under section 17 of the Act.

As mentioned earlier, the assessee had not received non-compete fees by virtue of his being an employee of the company. This payment is independent of his joining as Managing Director of the Company after its take over. Therefore, there is no relationship of an employer and employee so far the payment of non-compete fee is concerned. Therefore, this judgment is not applicable to the facts of the present case.

(xii) Tuticorn Alkali Chemicals And Fertilizers Ltd: Vs. CIT: 227 ITR 172 (SC)

In the case before the Hon'ble Supreme Court, the issue was whether interest on borrowed funds prior to commencement of business was assessable as income from other sources. The Hon'ble Supreme Court has held that the interest income was taxable under the head "Income from other sources". In the present case, the receipt of non-compete fees is not in the nature of interest, which could be brought to tax under the head "Income from other sources".

8. The significant feature of all the above mentioned cases is that assessees were themselves carrying on business. These are not the cases of salaried employees or the Managing Director or Directors employed with the business concerns. Still, the principles emerging from the ratio of the various judgments cited above is that whether particular receipt is capital or revenue in nature would depend on the facts of each case. However, the payments received for impairment of income earning apparatus, sterlisation of source of income or transfer of a capital asset would generally fall in the category of capital receipts. Further, the compensation received for undertaking restrictive covenants of not competing with the business of the assessee also generally fall in the nature of capital receipt until the same is incidental to the carrying on of business. Thus, the receipts which are incidental to carrying on the business and which do not affect the source of income would generally fall in the category of revenue receipts. In all those cases, where the compensations received-for composite partly for transfer of capital assets, incidental to the carrying on the business and partly, for undertaking restrictive covenant of not competing with the business of assessees, the compensation relatable to such activity would be a capital receipt. The ratio of these judgments to the extent the same is relatable to restrictive covenants is applicable to the present case. The present case also requires to be decided in the light of the legal position discussed above.

9. Before we deal with the merits of the case, certain important facts need to be noticed. Before take over by the FI Group, UK, the principal shareholders including the assessee held 76% of the issued and subscribed share capital of IISC. As per share purchase agreement dated 4.12.1097, the specified date was 9.12.1997, the offer letter to other shareholders, i.e., the opening date was 19.1.1998 and the closing date was 17.2.1998. On the completion date, i.e., 26.02.1998, 76% of the shares of IISC stood owned and vested in the FI Group, UK on completion of the share purchase agreement. This fact is also confirmed by the credit of sale proceeds of shares in the Canara Bank. The the non-compete agreement became effective simultaneously with the completion of the transaction of sale and purchase of the shares under the share purchase agreement. The first instalment of the non-compete fees was also credited to the bank account of the assessee alongwith the sale proceeds of shares on 26.2.1998. Clause (d) of Article 8.1. of the share purchase agreement stipulated that the sellers (i.e. shareholders who had agreed to sell 76% of their holding to the F.I. Group, UK) to ensure that the directors namely S/Sh. Rohitsava Chand, Saurabh Srivastava, S. Dhanbal and Mohit Goyal shall have entered into a contract of employment with the company in the agreed form and remained in employment of the Company on terms and conditions stipulated therein. Thus, continuation of the employment of the company by these four persons was an obligation stipulated in the share purchase agreement. We are not inclined to accept the submission of the assessee that continuing in employment with the IISC after take over was not the condition laid down in the share purchase agreement. If it were so, this clause should have not been included in the agreement for sale and purchase of shares. The contract for employment was also to be in the agreed form and was to be entered into on or prior to the completion date i.e. 26.02.1998. In fact, Sh. Saurabh Srivastava entered into the service agreement on 24.2.1998 and received the non-compete fees of Rs.1,07,36,750/- on 26.2.1998 alongwith consideration for sale of shares. It is also a fact that Sh. Saurabh Srivastava was the Managing Director of the Company IISC right from its inception and continued in the same position after take over by the FI Group, UK, without any break. The only difference was that earlier the ownership, control and management of the company vested with the persons holding 76% share and after take over, the ownership, control and management vested with the F.I. Group, UK. The Non-compete fees agreement was also dependent upon the completion of the share purchase agreement. However, the payment of non-compete fees to the assessee and three other Directors was not dependent on their continuing in employment with the IISC after take over. If it were so, Shri Rohitsava Chand who quit the employment after take over would have not received the non-compete fees. It is also a fact that there were other Directors of the company who had not been paid non-compete fees and the sellers were under an obligation to procure their resignations. Therefore, even though the date of the agreements, i.e., for sale of shares and non-complete fees was 4.12.1997, yet the date when these became effective was the completion date of the share purchase agreement, i.e., 26.2.1998. No doubt, there were certain obligations cast on the sellers between the dates of the agreement, i.e., 4.12.1997 to the completion date, i.e., 26.2.1998, yet these were to become effective only on the date of take over by the FI Group. Therefore, the Revenue is correct in saying that on the date of payment of non-compete fees to the assessee, the shares of IISC were substantially owned by the FI Group, UK and, therefore, an employer-employee relationship existed between them. Now, the question to be to reproduce hereunder the restrictive covenants stipulated in the non-compete agreement. These are as under:

Subject to the provisions of this agreement and conditional upon completion and in consideration of the premises and the Covenantee agreeing to pay the consideration stated in Article 3 below:

Save as otherwise disclosed to the Covenantee and accepted by the Covenantee in writing from time to time provided however, such acceptance shall not be unreasonably wit held by the Covenantee, the covenantor shall not for the period upto May 31,1999 directly or indirectly, either alone or jointly with or on behalf of any person, firm, company or entity and whether on his own account as principal, partner, shareholder (unless such shareholding is less than 10% of the issued share capital of company concerned and is held by a way of bonafide investment only) director, employee, consultant or in any other capacity whatsoever:

a) Solicit or interfere with or endeavour in the relevant territory to entice away from the Covenantee group any person, firm, company or entity who was a client or customer of the Covenantee Group in relation to the relevant business in the months (12) prior to the completion date or becomes a client or customer of the Covenantee Group in relation to the relevant business prior to May 31,1999.

b) Be concerned with the supply of services of products in the relevant territory to any person, firm, company or entity which is or was a client or customer of the Covenantee Group in relation to the relevant business in the months (12) prior to the completion date or becomes a client or customer of the Covenantee Group in relation to the relevant business prior to May 31, 1999 where such services or products are identical or similar to or in competition with those services or products supplied by the Covenantee Group.

c) Solicit or interfere with or endeavour in the relevant territory to entice away from the Covenantee group any person, firm, company, or entity who is or was a supplier of the services or goods to the Covenantee Group in relation to the relevant business in the months (12) prior to the completion date or becomes a supplier of the service or goods Covenantee Group in relation to the relevant business prior to May 31,1999.

d) Offer to employ or engage or solicit the employment or engagement of any person who, at the time of or immediately prior to the date of making an offer to employ or engage or solicitation was an employee of the Covenantee Group, provided that nothing contained herein shall prevent the Covenator from making an offer to employ or engage his personal staff such as secretary, personal assistant or driver.

e) Save as consistent with the provisions of any agreement entered into with the company, represent himself as being in any way connected with or interested in the business of the Covenantee Group.

In consideration of the aforesaid restrictive covenants and undertakings applicable upto 31.05.999, the assessee was to receive from the FI Group Plc. the following amounts:

(a) a sum of GBP 1,69,000 on the completion date as specified in the agreement.

(b) a sum of GBP 1,69,000 on 31.5.1999 and interest accrued thereon.

A bare reading of the restrictive covenant shows that the assessee alongwith other three directors had undertaken for the period of 18 months upto May 31, 1999, directly or indirectly, either alone or jointly with or on behalf of any person, firm, company or entity, to solicit or interfere with or endeavour in the relevant territozy to entice away from the Company any person, firm, company or entity who was a client or customer of the assessee in respect of business in the 12 months prior to the completion date, or who becomes a client after the said period prior to 31st May, 1999. The assessee was also not to supply of the services of products in the specified territory to any person which is or was a client or a customer of the company during the period of 12 months prior to the completion date or becomes a client prior to May 31,1999. The assessee had accepted similar restrictions in respect of persons who were supplier of services or goods to the IISC for the above mentioned period. The assessee was also estopped from employing or engaging or soliciting the employment of any person who was an employee of the IISC except of the category of persons mentioned therein. The assessee was also restrained from representing himself as being in any way connected with or entrusted with the business of the covenantee group. Thus, all these stipulations were in the nature of restrictive covenants for not doing something to compete with the business of the assessee and associate companies upto a period of 18 months from the date of agreement dated 4.12.1997 to 31.5.1999.

10. Now the question is that since the assessee had continued with the company as the Managing Director, whether the non-compete fee received by the assessee for accepting the restrictive covenant would be liable to tax under the head 'salary' as profit in lieu of salary. A similar issue came up before the various Benches of the Tribunal and the High Courts. It would be appropriate to refer to some of the judgments and the decisions of the ITAT, Benches cited by the parties before the Special Bench:-

(i) CIT Vs. A.S. Wardekar, 283 ITR 432 (Cal.)

The facts of this case were that the assessee promoted a firm which was subsequently converted into a Limited Company. Most of the shares were held by the assessee and his close relatives. The company made public issues. The assessee negotiated the sale of all the shares to UBL. The agreement also provided that the assessee would continue on the Board of Directors as Chairman. The UBL i.e. the buyer however, thought it expedient to bind the assessee by written agreement restraining him from undertaking any business similar to the business of company as the assessee was carrying on before and could have carried on in future. In consideration of such undertaking, the buyer Company agreed to pay the assessee a consideration of Rs.175 lakhs. The AO brought the said amount to tax on the ground that the receipt was of casual and non-recurring nature. On further appeals, the Ld. CIT(A) and the Tribunal held the compensation of Rs. 175 lakhs as not assessable. On appeal to the High Court, it was held that the compensation of Rs. 175 lakhs received by the assessee for entering into a restrictive covenant of not entering into competitive business was a capital receipt and, therefore, not liable to tax. It is significant to note that the compensation received was held to be a capital receipt though the assessee continued to be the chairman of the company after take over by UBL.

(ii) CIT Vs. Saroj Kumar Poddar, 279 ITR 573 (Cal.)

The facts of this case were that the assessee had collaborated with Gillette to set up Industrial Unit in India for manufacturing and marketing shaving blades and other shaving products manufactured by the Gillette in USA. The Indian Company known as Indian Shaving Products Limited (In short I.S.P.') was formed in which the assessee remained as a non-executive chairman. Gillette continued to remain the major and dominant shareholder of ISP and had full powers to appoint managerial personnel including the M.D. or Chief Executive Officer of ISP. During the period from 1982 to 1996, the assessee acquired considerable knowledge and expertise in the field of manufacture of shaving blades and other products. The assessee was approached by some other concerns to assist or associate with them in setting up a rival unit in India for manufacturing similar products. The assessee brought this fact to the knowledge of ISP. Thereupon Gillette prevailed upon the assessee not to assist or associate with any new company or person or entrepreneur to produce in India similar product to those made by Gillette. The Gillette entered into a non-compete agreement with the assessee on 18.1.1996, whereby the assessee undertook the restrictive covenant of not assisting or associating with any other concerns to manufacture similar items. As per agreement, Gillette agreed to pay to the assessee a sum of Rs. 8 crores as consideration. The AO brought the said receipt to tax as a professional receipt. On appeal, the Tribunal held that it was a capital receipt. On further appeal to the High Court, it was held as under (headnote):

"Held, dismissing the appeal, that the amount under the agreement had been paid to the assessee to restrain the assessee from engaging , whether directly or indirectly in any business which undertook or was engaged in the manufacture or marketing or distribution of razor blads, shaving systems or shaving preparations. That amount could not be taxed as a revenue receipt, especially when no material had been brought on record by the Assessing Officer to justify that the agreement dated December 15, 1996, was a colourable device."

In this case even though the assessee continued to be the chairman of ISP, the non-compete fees received for undertaking restrictive covenant was held to be a capital receipt.

(iii) Ram Prashad Vs. CIT 86 ITR 22 (SC)

In this case, the issue before the Hon'ble Supreme Court was whether certain percentage of gross profit in addition to monthly remuneration received by the Managing Director would be treated as salary or business income. While deciding this case, the Hon'ble Apex Court also considered the issue whether the Managing Director is to be treated as servant or agent of Indian Company. The Hon'ble Supreme Court held that nature of employment of the Managing Director may be determined by articles of association of a company and/or agreement, if any, under which a contractual relationship between Director and the Company has been brought about. In case the Director is constituted a employee of the company, the remuneration will be assessable under the head "Salary". If the company itself is carrying on the business and the Managing Director is employed to manage its affairs in terms of its articles and the agreement, and he could be dismissed or his employment can be terminated by the company if his working is not found satisfactory, the Hon'ble Supreme court observed that it can hardly be said that he is not a servant of the company.

The issue before the Hon'ble Supreme Court was whether certain percentage of gross profits received in addition to salary was taxable under the head salary. But the percentage of profit received was not for undertaking restrictive covenants. Therefore, this decision is not applicable to the present case.

(iv) CIT Vs. M.S.P. Rajes, 202 ITR 646 (Kar.)

In this case also, the issue before the Hon'ble Karnataka High Court was whether Managing Director was an employee of the Company and the remuneration received was taxable under the head "Salary" i.e. same issue as considered by the Hon'ble Supreme Court in the case of Ram Prashad Vs. CIT. This decision is again not applicable to the facts of the present case.

(v) K.R. Kothandaraman Vs. CIT 62 ITR 348(Mad.)

In this case also, the Managing Director of the Company was paid monthly remuneration and certain percentage of profit. Monthly remuneration due to the Managing Director was credited to assessee's account. The assessee relinquished the remuneration credited to his account after end of assessment year. The Revenue brought the remuneration to tax as salary. The action of the AO was upheld up to the level of the Tribunal on the ground that relationship of the Managing Director with the Company was an employee. On further appeal, the Hon'ble Madras High Court held that as per terms of the agreement and the functions assigned to the assessee, the Managing Director was an employee of the company and, therefore, the remuneration was taxable under the head 'Income from salary'. This decision is also not applicable to the facts of the present case. What is important for deciding the issue in this case is whether the non-compete fees arose to the assessee as a result of employer and employee relationship or it was independent of the same.

(vi) The decision of IT AT, Bombay Bench in the case of ITO Vs. Anil Kumar Rudra, reported in 71 ITD 96

In this case, the assessee was employed as an Engineer and a Geologist with M/s. Vulcan -Laval Ltd; which manufactured Industrial machinery. He worked with the company for 27 years from 1954 to 1981 and when he retired on 22.9.1981, he was the head of mining and drilling Division. The employer-company entered into an agreement dated 29.7.1982 i.e. about 10 months after the date of retirement, whereby the assessee was to receive an amount of Rs. 1 lakh in return for a covenant not to accept employment with any other employer. The AO held that the amount of Rs. 1 lakh received by the assessee was in the nature of profits in lieu of salary and, therefore, was assessable to tax under section 17(3)(i) of the Act. On appeal, the Ld. CIT(A) deleted the addition on the ground that that there was no employer-employee relationship. On further appeal, the Tribunal held that the amount received by the assessee by virtue of a restrictive covenant not to accept employment with any other employer had to be regarded only as a capital receipt and, thus, not liable to tax.

(vii) The decision of ITAT, Madras Bench in the case of K.S.S. Mani Vs. I.T.O. reported in 54 ITD 76

In this case, the assessee was an employee of M/s. Larsen & Toubro Ltd; and vide agreement dated 28.11.1983 was appointed as a whole-time director for five years from 28.12.1983. The assessee resigned from director in 1986. An agreement was entered into by the assessee with the employer by which he was to be paid Rs. 2 lakhs in two instalments for not undertaking for 3 years any activity or employment which could be prejudicial to the interests of the company. The AO treated the amount as profit in lieu of salary under section 17(3) of the Act. On appeal, the Ld. CIT(A) confirmed the order of the AO. On further appeal, the Tribunal held that compensation received by the assessee was nothing but capital receipt for loss of profit earning source and, therefore, was not assessable under section 17(3) of the Act.

(viii) The decision of ITAT, Bombay Bench in the case of ACIT Vs. Parkash G. Heblkar, reported in 83 ITD 495

In this case, the assessee was employed since 2.4.1979 with M/s. Tata Unisys Ltd; in a senior position, in the company's computer consultancy division. His last assignment was a Senior vice President of the new business unit. Since the assessee wanted to start his own consultancy business, he resigned from employment w.e.f. 31.03.1990. The assessee and the employer-company entered into an agreement dated 26.02.1990 under which assessee was retrained from soliciting and/or engaging, in any manner whatsoever, to employer's affiliates or customers and also from soliciting and/or engaging in any manner whatsoever for rendering services to employers, customers for which the assessee was to be paid a sum of rs. 5.50 lacs on or before 30.4.1990. The AO held the amounts as profits in lieu of salary under section 17(3)(i) of the Act. However, the Tribunal held that the compensation received was not a profit in lieu of salary and, therefore, the same was not taxable under the head 'salary'. The compensation being attributable to restrictive covenant was held to be a capital receipt, not liable to tax.

(ix) The decision of ITAT, Delhi Bench in the case of S. Dhanbal Vs. ACIT, New Delhi, in ITA No.3748/D/2002 for the assessment year 1998-99.

Shri S. Dhanbal was also one of the four Directors in IISC who transferred shares as per share purchase agreement and continued to work as a Director in the said Company after its take over and also received non-compete fees of the same amount as received by the assessee in the present case. The assessee claimed the same as a capital receipt not liable to tax. The AO brought the non-compete fees to tax as income from salary. On appeal, the Ld. CIT(A) upheld the addition by observing that the so-called non-compete agreement was a collusive and self serving document prepared for the sole purpose to evade Income-tax. On further appeal, the Tribunal held that the compensation receiv