Ita/47/2012 Of The Commissioner Of Income Tax, Thiruvananthapuram v. Sjro.chandrasekhar Balagopal Tc-Ix/1323

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU FRIDAY, THE 13TH DAY OF OCTOBER 2017/21ST ASWINA, 1939 ITA.No. 47 of 2012 -------------------AGAINST THE ORDER IN ITA 1309/2004 of I.T.A.TRIBUNAL,COCHIN BENCHDATED 29-07-2011 APPELLANT/APPELLANT: -------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM BY ADV. SRI.P.K.R.MENON, SC FOR INCOME TAX RESPONDENT/APPELLANT: --------------------- SHRI.CHANDRASEKHAR BALAGOPAL, TC-IX/1323 SREEPOORNAM, SASTHAMANGALAM, THIRUVANANTHAPURAM-695 010. R BY ADV. SRI.ABRAHAM GEORGE JACOB R BY ADV. SRI.VIKRAM RAMAKRISHNAN R BY ADV.SRI.D.ANAND THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 13-10-2017,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX PETITIONER'S ANNEXURES: ANNEXURE A: TRUE COPY OF THE ORDER OF THE ASSESSINGOFFICER 143(3) DATED 15.3.2004.ANNEXURE B: TRUE COPY OF THE ORDER OF THE COMMISSIONEROF INCOME TAX (APPEALS) DATED 6.12.2004. ANNEXURE C: TRUE COPY OF THE ORDER OF THE INCOME TAXAPPELLATE TRIBUNAL DATED 28.4.2006. ANNEXURE D: TRUE COPY OF JUDGMENT OF THE HON'BLE HIGHCOURT DATED 2.4.2009. ANNEXURE D1: TRUE COPY OF THE ORDER OF THE INCOME TAXAPPELLATE TRIBUNAL DATED 29.7.2011. ANNEXURE E: TRUE COPY OF THE AGREEMENT BETWEEN M/SPENINSULA POLYMERS LIMITED AND TERUMO CORPORATION,JAPAN. ANTONY DOMINIC, J. & DAMA SESHADRI NAIDU, J. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - I.T.A.No.47 of 2012 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 13[th] day of October, 2017 Antony Dominic, J. JUDGMENT This appeal filed by the Revenue is against the order passedby the Income Tax Appellate Tribunal, Cochin Bench, in ITA1309/04 concerning the assessment year 2000-2001. The saidappeal was filed by the respondent assessee calling in question theorder of assessment passed against it, which was confirmed by the1[st] Appellate Authority whereby the amounts received by himpursuant to Annexure E, non-competition agreement, was held tobe a revenue receipt, was set aside by the Tribunal on theconclusion that it is a capital receipt. 2. The facts of the case, in brief, are that the assessee alongwith another person were the promoters of M/S PeninsulaPolymers Limited, Thiruvananthapuram. He was also theManaging Director of the company. Subsequently, the shares of the I.T.A.No.47 of 2012 assessee and the other person were acquired by M/S TerumoCorporation of Japan. As part of the process, a non-competitionagreement was entered into between the parties on 21[st] June 1999.In terms of that agreement, for the commitments made by theassessee and the other person (the promoters group), they werepaid a one time payment of Rs.5.2 crores. Out of Rs.5.2 crores, theassessee has received Rs.3.9 crores. It was this Rs.3.9 crores thatwas held to be a revenue receipt by the Assessing Officer,overruling the objection of the assessee that it was a capital receipt in consideration of his non-competition agreement. Thisassessment was confirmed by the 1[st] Appellate Authority and wasset aside by the Tribunal holding it to be a capital receipt. It is inthis background, the appeal is filed by the Revenue raising thefollowing questions of law for the consideration of this court: “1. Whether on the facts and in the circumstances ofthe case and also in view of the fact that the paymentwas made not on or for termination of employment butin modification of or pursuant to modification of theterms and conditions thereto, is not the amount I.T.A.No.47 of 2012 : 3 : received by the assessee under a compromiseagreement styled as non-compete agreementassessable:- (a) as compensation or other payment due to orreceived under Section 28(ii)(a) of the Income Tax Act? (b) as revenue receipt/income?” “1. Whether on the facts and in the circumstances ofthe case and also in view of the fact that the paymentwas made not on or for termination of employment butin modification of or pursuant to modification of theterms and conditions thereto, is not the amount I.T.A.No.47 of 2012 : 3 : received by the assessee under a compromiseagreement styled as non-compete agreementassessable:- (a) as compensation or other payment due to orreceived under Section 28(ii)(a) of the Income Tax Act? (b) as revenue receipt/income?” 3. We heard the Senior Counsel for the Revenue andSri.D.Anand, counsel for the assessee. 4. While the learned Senior Counsel for the Revenue contended that the payment received by the assessee pursuant tothe non competition agreement dated 21[st] June 1999 is a revenuereceipt, with liability to be taxed, the same was contradicted by the learned counsel appearing for the assessee contending it to be acapital receipt. 5. Having considered the rival submissions made by bothsides, we feel that the answer to the two questions framed forconsideration of this court would depend upon our conclusion as towhether the receipt of Rs.3.9 crores by the assessee is a revenuereceipt as contended by the Revenue or a capital receipt as I.T.A.No.47 of 2012 : 4 : contended by the assessee. That if Rs.3.2 crores received by theassessee is as non- competition fee, as contended by him, it is acapital receipt is the law settled by the Apex Court in Gillanders Arbuthnot and Co. Ltd. v. CIT (1964) 53 ITR 283 (SC) and GufficChem Pvt. Ltd. v. Commissioner of Income Tax (2011) (4) SCC254. Therefore,we shall examine the question whether thepayment received by the assessee is a non-competition fee, ascontended by him. 6. Agreement dated 21[st] June 1999 is the document, on thebasis of which the payment has been received by the assessee.Clause 4 providing for payments by Terumo Corporation reads thus: “4. Payments by Terumo Corporation: 4.01 In consideration of the commitments of thePromoter Group hereunder Terumo Corporationagrees to pay Rupees fifty two million (Rs.52,000,000)on the Effective Date in a manner as agreed betweenthe parties hereto. 4.02 If so required by the laws of India or Japan,Terumo Corporation shall deduct applicable incometax at source and pay the net amount to the Promoter : 5 : Group. Terumo Corporation shall promptly issue anddeliver requisite certificates and other documentsevidencing the deduction of tax at source and paymentthereof.” 7. Reading of clause 4.01, makes it amply clear that the payment of Rs.5.2 million rupees was made to the Promoters Group consisting of the assessee and the other person was inconsideration of the commitments of the Promoter Group. Thecommitments made by the Promoter Group have been defined inclause 3 of the agreement which read thus: “3. Commitments by the Promoter Group 3.01 The Promoter Group shall endeavour tofurther the objectives of the joint venture asenvisaged in the Joint Venture Agreement dated June21, 1999 and shall always act in the best interest ofthe Company. 3.02 Notwithstanding the provision of theJoint Venture Agreement to be entered into betweenTerumo MH and the Promoter Group, neithermember of the Promoter Group, whether by himselfor relatives or through any kind of body corporatecontrolled by them, shall, directly or indirectly, carryon or be engaged in, be employed or concerned withor interested in or advise or become affiliated with or permit his name to be used by, any person orpersons, firms, associations, syndicate company orcorporation carrying on, engaged in, concerned withor interested in marketing or manufacturing in anymanner whatsoever any trade or business similar toor competing with the business of the Company inIndia or any other country in the world. 3.02 Notwithstanding the provision of theJoint Venture Agreement to be entered into betweenTerumo MH and the Promoter Group, neithermember of the Promoter Group, whether by himselfor relatives or through any kind of body corporatecontrolled by them, shall, directly or indirectly, carryon or be engaged in, be employed or concerned withor interested in or advise or become affiliated with or permit his name to be used by, any person orpersons, firms, associations, syndicate company orcorporation carrying on, engaged in, concerned withor interested in marketing or manufacturing in anymanner whatsoever any trade or business similar toor competing with the business of the Company inIndia or any other country in the world. 3.03 The Promoter Group agrees that allrestrictions contained in this Agreement arereasonable and valid and not unduly burdensome tohim. If any provision of this Agreement is found to beinvalid, the parties shall revise such provision inorder to reach the same purpose and intent of suchprovision as closely as possible and so that it shallconform to legal requirements and the remainder ofthis Agreement and that provision as so amendedshall continue in full force and effect.” 8. Reading of clause 3.02, makes it clear beyond any doubtthat the members of the Promoter Group consisting of the assesseeand Sri.C.Padmakumar are prohibited from engaging in orinterested in marketing or manufacturing in any mannerwhatsoever any trade or business similar to or competing with thebusiness of the Terumo Corporation in India or any other countryin the world. A combined reading of clauses 3 and 4 of the agreement, therefore, shows that payment of Rs.5.2 million wasmade by Terumo Corporation for the commitments of the PromoterGroup and that the commitments of the Promoter Group ascontained in clause 3, is the non-competition agreement asincorporated therein. Evidently, therefore, the payment received bythe assessee is towards the non competition fee. However, learnedSenior counsel for the assessee had referred to the preambleportion of the agreement and contended that the agreement hasbeen in consideration of the commitments of the Promoter Group,which included their continuance of the management of thecompany also. True, there is such a recital, but, however, when itcomes to the agreement part as incorporated in the document thecommitments are there contained in clause 3 of the agreement, inconsideration of which, payment in question was made. 9. We may, in this context also state that there is separateemployment agreement between Peninsula Polymers and theassessee entered into on 21.7.1999, dealing with the terms and continuation of the continued employment of the assessee as theManaging Director of the company. It was taking note of theprovisions of the non-competition agreement dated 21.6.1999 andthe employment agreement dated 21.7.1999 that the Tribunal hasheld that the payment received by the assessee is in considerationtowards the non-competition fee, and that, therefore, it is a capitalreceipt. Such a conclusion arrived at by the Tribunal does notsuffer from any legal infirmity for this court to interfere. We,therefore, answer the questions of law in favour of the assessee andagainst the Revenue. The appeal is accordingly disposed of. SD/- ANTONY DOMINIC JUDGE SD/- DAMA SESHADRI NAIDU JUDGE