Ita/480/2008 Of Shri Ashok D Souza v. The Income Tax Officer

IN THB HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 23 DAY OF JUNE 2014 PRESENT THR HON BLE MR.JUSTICE N.KUMAR| AND THR HON'BLBE MR..JUSTICBK B.MANOHA ITA NO.480/2008 BBRHIWEE Shri Ashok D ‘Souza»/o.Gerald Vincent D’Souza,Aged about 58 years,No.101, Ashville Apartments,9, Ashoka Road,st.Thomas Town,Bangalore.... Appellant(By Sri.G.Sarangan, Sr. Adv for Sri.Balram.R.Rao, Advand Smt.Vani.H., Advocate) AN): The Income Tax Officer,Ward 14(2),Bangalore.... Respondent (By Sri.K.V.Aravind, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out oforder.dated13-12-2007passed1nNITA.No.899/Bang/2006 for the Assessment Year 2002- 2003, praying that this Hon'ble Court may be pleasedTO: 1.formulate the substantial questions of law|stated therein,stated therein, ll.allow the appeal and set aside the order passedby ITAT, passed in ITA No.899/Bang/2006|dated 13-12-2007 relating to Assessment Year|2002-03, in the interest of justice and equity.by ITAT, passed in ITA No.899/Bang/2006|dated 13-12-2007 relating to Assessment Year|2002-03, in the interest of justice and equity. This appeal coming on for hearing this day,N.KUMAR J.,delivered the following: JUDGMENT The assessee has preferred this appeal undersection 260A of the Income Tax Act, 1961 (hereinafterreferred to as ‘the Act* for short) against the order dated 13-02-2007 passed by the Income Tax AppellateTribunal, Bangalore Bench ‘A’ (hereinaiter referred to as" (the Tribunal* for short) in ITA No.899/Bang/06,whereby the Tribunal held that the case of the assesseefalls under Section 17(3)(i11) of the Act, which cameinto effect from the assessment year 2002-03 and therefore he is liable to pay tax on the non-compete feesand technical knowhow of Rs.12,00,000/-. 2 |The assessee was working with M/s. HBRConsultants which was the proprietary concern ofori.V.Ramakrishnan. It was taken over by M/s.SobhaProjects and Trade Pvt. Ltd. (SPTPL) as a going concerntogether with assets and Hhability. The new companyname has been incorporated as HBR Consultants Pvt.Ltd. (HBPRL). The MOU was entered into betweenori.V.Ramakirshnan and M/s. SP & TPL on 30-08-2000to take over the business of M/s. HBR Consultants. |The assessee continued to work with M/s. HBRPL. —M/s.HBRPL entered into a non-compete agreement withthe assessee on 25-08-2000 and by virtue of thisagreement, the assessee had received Rs.9,00,000/- as_non-compete fees and Rs.3,00,000/- for impartingtechnical knowhow. In all, a sum of Rs.12,00,000/-.The said payments were received during the period ~ 29-08-2001 to 26-08-2002. The assessee claimed that|these amounts were capital receipts and were nottaxable in his hands. The stand of the assessee was notaccepted by the Assessing Authority and hence treatedthe same as ‘profits in heu of salary’ under Section17(1)(iv) of the Act. | 3.|Agegrieved by the said order, the assessee preferredan appeal to the Commissioner of Income Tax (Appeals). —The Appellate Commissioner held that the amountaccrued to the assessee not on the day the contract wasentered i..e. 28-O8-2000. It accrued to him after!rendering services to HBRPL as contracted. He also|held that the payment has direct co-relation with theemployment with HBRPL and it was paid to him after 1or 2 years once it was assured that he was renderingservices as per the contract. Therefore, the case of theassessee iS sSquarely covered under newly insertedclause of 17(3)(i11) of the Act. | 3.|Agegrieved by the said order, the assessee preferredan appeal to the Commissioner of Income Tax (Appeals). —The Appellate Commissioner held that the amountaccrued to the assessee not on the day the contract wasentered i..e. 28-O8-2000. It accrued to him after!rendering services to HBRPL as contracted. He also|held that the payment has direct co-relation with theemployment with HBRPL and it was paid to him after 1or 2 years once it was assured that he was renderingservices as per the contract. Therefore, the case of theassessee iS sSquarely covered under newly insertedclause of 17(3)(i11) of the Act. | 4Agegrieved by the said order, the assessee preferredan appeal to the Tribunal. The Tribunal held that theassessee was awarded profit in lieu of salary being aloyal employee with the earlier employer namelyori.V.Ramakrishnan who himself was’ subjected to betaken over by the present employer. The payment was_not made at the time of signing of the contract butrather it was given later aiter ensuring that the assesseeas employee of H.B.R. Consultants Pvt. Ltd. was.rendering services as per the agreement. This clearlyindicates that the transactions stood covered by theimpugned clause introduced in the Act with theintention to cover such transaction which takes placebefore joining his services and was therefore taxableas profit in lieu of services rendered under Section17(3)(111) which is w.e.f. assessment year 2002-03.The said amount accrued to the assessee only—after the services had been rendered. The payment was in relation to the assessee’s employment with the present employer. Therefore, it does not matter the nomenclature given to such payment and therefore it dismissed the appeal. Aggrieved by the said order, theassessee is 1n appeal before this Court. 5 |This appeal was admitted to consider the following substantial question of law: | Whether an employee is entitled toreceive a non-compete fees from an Employer|and whether such fee can be assessed as a|salary Income? 6. Sri.Sarangan, learned Senior Counsel assailingthe impugned orders contend that if the non-competefee and technical knowhow is to be treated as profits inlieu of salary under Section 17(3)(i11) of the Act, the saidprovision came to be inserted by the Finance Act, 2001. w.e.f. 1-4-2002 which applies to the assessment year |1-4-9001 to 31-3-2002. As the amount became due to! T theaSSECS SEOT]signingtheagreement28-08-2000, the previous year would be 1-4-2000 to31-3-2001 and therefore, the said provision is notapplicable. The finding of the Tribunal that it accrueson the date of actual payment and therefore, it iscovered under the said provision is ex-facie illegal andrequires to be set aside. dated | [|Per contra, learned counsel appearing for theRevenue submitted that the agreement comes into effectonly alter the assessee renders service and therefore thedate of agreement has no significance. Admittedly thepayments were made on 29-08-2001 and 26-08-2002.and it falls within the assessment year 1-4-2002 to31-3-2003 and therefore the authorities have rightlyheld that said amount is lhlable for tax under theaforesaid provision. 8.|The facts are not in dispute. The assessee was an employee of M/s.HBR Consultants, a_ proprietary concern of Sri.V.Ramakrishnan. It was taken over byM/s.Sobha Projects and Trade Pvt. Ltd. under anagreement dated 30-08-2000 as a on going concern. —subsequently it was incorporated as HBR Consultants.Pvt. Ltd. The assessee continued to work with the new|company. However, the new company had entered intoa non-compete agreement with the assessee on |29-08-2000. Under the agreement, the assessee is to bepaid Rs.12,00,000/- in aggregate which consists ofRs.9,00,000/- as non-compete fees and Rs.3,00,000/-—for imparting technical knowhow. Clause 3 of theagreement reads as under: 3.Modalities of Payments: 8.|The facts are not in dispute. The assessee was an employee of M/s.HBR Consultants, a_ proprietary concern of Sri.V.Ramakrishnan. It was taken over byM/s.Sobha Projects and Trade Pvt. Ltd. under anagreement dated 30-08-2000 as a on going concern. —subsequently it was incorporated as HBR Consultants.Pvt. Ltd. The assessee continued to work with the new|company. However, the new company had entered intoa non-compete agreement with the assessee on |29-08-2000. Under the agreement, the assessee is to bepaid Rs.12,00,000/- in aggregate which consists ofRs.9,00,000/- as non-compete fees and Rs.3,00,000/-—for imparting technical knowhow. Clause 3 of theagreement reads as under: 3.Modalities of Payments: 3.1 In consideration of Ashok agreeingtothe|restrictingcovenantsandtermsmentioned in Para 2? above. HBR Consultants|(P) Ltd. shall pay Ashok an aggregate sum of|Rs.9.00 lakhs which he is already entitled tobe paid in three equal monthly installments|commencing from on or before June 15, July|15, August 15, 2001 respectively. 3DIn consideration ofAshok agreeing|to make available his know how and to’continue to render services to HBR as)mentioned in Para 1.2 and 1.3 above, he shall|be paid a sum of Rs.3.00 lakhs on or before|september 15, 2001. 3.3 The total consideration as in para3.1 and 3.2 above shall be payable to Ashokor his heirs or assigns in the event of death,ulness or any eventuality by which Ashok|may not be in a position to provide his|services, irrespective of any other conditionsof this agreement. Clause 2 of the agreement provides forRestrictive| Covenants and Terms, which read thus: 2D 1The tenure of this agreement 1s as|stated in Para 1.3.) 22During this period and two years|from the date of its termination. 2.1.1 Ashok shall not in any|manner compete with HBRPL in thesame area of business now carried on by HBRPL’s Machine & Machine toolDivision. 2. 1.2 He shall not deal with orrepresent any principal in similarlines of business in any place in Indiaor abroad. 2.1.5.HeShallnot.act.asconsultant or be employed by anyother person dealing in importedwood working machinery either asagents, sellers or consultants; ratherin India nor outside of India. 21.4. He shall not share his.expertise in selling and_ servicingwood working machines or enter intoagency on these lines with anyindividual company or organizationeither than the clients of HBRPL. HeShall not directly or indirectly acquireanyagenciesforwood.workingmachines and in no way competewith HBRPL in the business of sellingandservicingwoodworkingmachines.| QOThis agreement was entered into on 28-08-2000. therefore, the aforesaid amount of Rs.12,00,000/-.became due to the assessee under the agreement. —Clause 3.1 of the agreement only speaks about the Modality of Payments. Clause (il) of Ssub-Section (3) of Section 17 of the Act reads as under: “Profits in lieu of salary includes - anyamount due to or received, whether in lump.sum or otherwise, by any assessee from any.Perfsorl (a) before his joining any employmentwith that person; or (b) after cessation of his employmentwith that person”. 1Q.|In the instant case, the aforesaid amount of Rs.12,00,000/- became due and payable to the assesseebefore his joining any employment with the newcompany. Till this amendment was introduced to theIncome Tax Act, the amounts falling under this clausewere not taxable. Therefore, non-compete fees andtechnical knowhow due and payable to the assessee ason 28-08-2000 was not taxable. It became taxable only from 1-4-2002. Therefore, all the three authoritiescommitted an error in holding that the amount became Section 17 of the Act reads as under: “Profits in lieu of salary includes - anyamount due to or received, whether in lump.sum or otherwise, by any assessee from any.Perfsorl (a) before his joining any employmentwith that person; or (b) after cessation of his employmentwith that person”. 1Q.|In the instant case, the aforesaid amount of Rs.12,00,000/- became due and payable to the assesseebefore his joining any employment with the newcompany. Till this amendment was introduced to theIncome Tax Act, the amounts falling under this clausewere not taxable. Therefore, non-compete fees andtechnical knowhow due and payable to the assessee ason 28-08-2000 was not taxable. It became taxable only from 1-4-2002. Therefore, all the three authoritiescommitted an error in holding that the amount became due on the day which is mentioned in clause (ili) or onthe date of actual payments which were made betweenI9-8-I9001 and V6-8-2002. #£=Therefore the amendprovision is attracted. The aforementioned amount isnot salary, it is not paid for any services rendered and itwas paid in lieu of restrictive covenants and terms ascontained in the agreement which would be in force fora period of seven years. Under this agreement, theassessee Shall not in any manner compete with HBRPLin the same area of business now carried on by HBRPL’s|Machine & Machine tool Division. He shall not deal|with or represent any principal in similar lines ofbusiness in any place in India or abroad. Further heshall not act as consultant or be employed by any otherperson dealing in imported wood working machineryeither as agents, sellers or consultants; neither in Indianor outside of India. He shall not share his expertise inselling and servicing wood working machine or enterinto agency on these lines with any individual company or organization either than the clients of HBRPL. HeShall not directly or indirectly acquire any agencies forwood working machines and in no way compete withHBRPL in the business of selling and servicing woodworking machines. It is because the assessee had over24 years of experience in the field of marketing. Aftercompleting his post graduation in Engineering from IIT,Madras, he joined HBR Consultants, a proprietaryCONTCeTTot V.RamakrishnanaT|Bangalore,an?organization engaged in dealing and consultancy ofimported wood working equipments, in the capacity asthe Marketing Director in January90 and worked withthem for the past 10 years. He gained extensive andvaluable experience in the field of wood working andwide Knowledge of the wood working equipmentsavailable world-wide as well as intimate connection withvarious customers with a strong image of solutionprovider owing to his high level of technical knowledgefrom his engineering back ground. Assessee also possesses a knowledge of an a personal relationshipwith the foreign principals represented by HBR. 11.)When a new company which took over theproprietary concern wanted to continue the very samebusiness, no doubt, they wanted the assistance of theassessee for which they were agreeable to pay salary.But they wanted to ensure that the assessee would notpart with his experience and technical knowhow,knowledge and other business secrets to any otherpersons, which would directly affect their business. Itwas constrained to foreclose such eventuality. Hence,they entered into an agreement with the assessee on28-08-2000 with the atoresaid covenants and terms andfor that purpose, they paid a sum of Rs.9.00 lakhstowards non-compete fees and Rs.3.00 lakhs towardstechnical knowhow. It was not paid as apart of salaryas understood by the Assessing Authority. It may fallwithin the definition of ‘profits in lieu of salaryPp as now introduced in sub-clause (111) of sub-Section (3) ofsection 17 of the Act. However, the said provision cameinto force on 1-4-2002 and the agreement having beenentered into on 28-08-2000, the amount due under theaforesaid head was not taxable. That is how the'|assessee did not ofter the said amount for tax. The!Appellate Authorities committed an error in holding thatit is the date on which, the payment is to be made orthe date on which actual payments is to be made is tobe taken into consideration, forgetting that the amountbecame due on signing the agreement. Section 17(3)(i11)categorically states profits in lieu of salary means thatany amount due to or received, whether in lump sum orotherwise by any assessee from any person before hejoining any employment with that person. Therefore,the impugned orders passed are erroneous and requiresto be set aside. The substantial question of law isanswered in favour of the assessee and against theRevenue. 12.)Accordingly, we pass the following: ORDER The appeal is allowed. The impugned orderpassed by the authorities are hereby set aside and it isheld that the income of the assessee under the headingnon-compete fee and technical knowhow to the extent ofRs.12,00,000/- is not liable for tax on the date theamount became due i.e. on 28-08-2000. Ordered accordingly. od/-JUDGE sd/- JUDGE. | mpk/-