K.rajiv, Legal Representative Oflate Shri.m.s.krishnamurthy v. The Additional Commissioner Of Income Tax, Non Corporate Circle-3

In the High Court of Judicature at MadrasDated : 28.8.2018 The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.905 of 2017 & CMP.No.13875 of 2018 K.Rajiv, legal representative oflate Shri.M.S.Krishnamurthy ...Appellant Vs The Additional Commissioner of Income Tax, Non Corporate Circle-3, No.121, MahatmaGandhi Road, Chennai-34....Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 16.6.2017 made in I.T.A.No.246/Mds/2017on the file of the Income Tax Appellate Tribunal, Chennai Bench'D' for the assessment year 2002-03, agaist the order of theCommissioner of Income Tax(Appeals)-4 dated 28/10/16 in ITANO.102/13-14/ Asessment year 2002-03/CIT(A)-4 against theassessment order dated 29.12.09 for the Assessment year 2002/03passed by the Assistant Commissioner of Income Tax Circle-XV,Chennai-34.For Appellant :Mr.M.V.SwaroopFor Respondent :Mr.T.Ravikumar, SSC Judgment was delivered by T.S.SIVAGNANAM,JThis appeal, by the legal representative of the deceasedassessee - one late Mr.M.S.Krishnamurthy, is directed againstthe order passed by the Income Tax Appellate Tribunal, Chennai'D' Bench in ITA.No.246/Mds/2017 for the assessment year 2002-03, raising the the following substantial questions of law :“i. Whether the Income Tax AppellateTribunal erred in remanding the matter backto the Commissioner of Income Tax (Appeals)second time as there was no factual disputebetween the parties and the Commissioner ofIncome Tax (Appeals) in its subsequent orderhad given a conclusive order on the entirefactual matrix of the case pursuant to the https://hcservices.ecourts.gov.in/hcservices/ ii. Whether the Income Tax AppellateTribunal erred in remanding the matter backto the Commissioner of Income Tax (Appeals)when all the material placed before it werepresent before the Commissioner of IncomeTax (Appeal) when he passed the order ? iii. Whether the Income Tax AppellateTribunal erred in not recording a findingthat the respondent had not produced anyfresh material to be considered, but stillremanding the appellant's case to theCommissioner of Income Tax (Appeals) forfresh consideration on undisputed factualquestions ? And iv. Whether the Income Tax AppellateTribunal erred in not deciding the issuewith regard to relevant year of taxation, onwhich, according to the impugned orderitself, there are no fresh materialsproduced ?" 2. The assessee filed the return of income on 12.12.2002 forthe assessment year 2002-03 admitting a total income ofRs.3,51,885/-. The return was processed under Section 143(1) ofthe Income Tax Act, 1961 (for brevity, the Act) and anintimation was received by the Assessing Officer of the assesseefrom the Assistant Commissioner of Income Tax, Company Circle I(3), Chennai that M/s.Citadel Aurobindo Biotech Limited(hereinafter called the CABL) had paid a sum of Rs.6 Crores tothe assessee being non compete fee and that the payment of suchan amount had been agreed to be paid during the financial yearrelevant to the assessment year 2002-03. 3. Based on such intimation, the assessment was reopened byissuance of a notice dated 23.3.2009 under Section 148 of theAct. The assessee sent a reply dated 30.3.2009 requesting thatthe original return filed might be treated as the return filedin response to the notice under Section 148 of the Act and alsorequested the reasons for reopening. The reasons for reopeningwere furnished by the Assessing Officer vide letter dated25.8.2009. Subsequently, a notice under Section 143(2) of theAct dated 18.9.2009 was issued, in response to which, theassessee filed the reply dated 03.10.2009. 3. Based on such intimation, the assessment was reopened byissuance of a notice dated 23.3.2009 under Section 148 of theAct. The assessee sent a reply dated 30.3.2009 requesting thatthe original return filed might be treated as the return filedin response to the notice under Section 148 of the Act and alsorequested the reasons for reopening. The reasons for reopeningwere furnished by the Assessing Officer vide letter dated25.8.2009. Subsequently, a notice under Section 143(2) of theAct dated 18.9.2009 was issued, in response to which, theassessee filed the reply dated 03.10.2009. 4. After verification of the details furnished and goingthrough the return of income, the assessment was completed forthe assessed income of Rs.6,03,51,885/- as against the return ofincome of Rs.3,51,885/-. In the assessment order, the AssessingOfficer added back the entire amount of Rs.6 Crores being theamount of non compete fee received by the assessee from the CABLand treated the same as income from business and professionreceived and accrued during the year under consideration. 5. Aggrieved by the said order, the assessee filed an appealbefore Commissioner of Income Tax (Appeals)-XII [for brevitythe CIT (A)], who, by order dated 24.9.2010, partly allowed theappeal in favour of the assessee i.e. with regard to addition ofRs.6 Crores under the head 'non compete fee'. As against theorder passed by the Appellate Authority, the Departmentpreferred an appeal before the Tribunal. The Tribunal, by orderdated 15.2.2012, set aside the order passed by the AppellateAuthority and restored the matter back to the file of the CIT(A) with certain directions. On remand, the CIT (A) took up thematter for adjudication. While so, it came to light that theassessee – the said Mr.M.S.Krishnamurthy died on 06.1.2012 andhis legal representative and son – Mr.K.Rajiv was permitted torepresent the deceased assessee. 6. The CIT (A), vide order dated 28.10.2016, partly allowedthe appeal filed by the assessee by holding that the amount ofRs.6 Crores received/ receivable by the assessee was treatedonly as capital receipt, that since he was not an employee ofthe new company, the receipt of non compete fee could not betreated as profit in lieu of salary and that therefore, theaddition of Rs.6 Crores was deleted. As against the order dated28.10.2016 passed by the CIT (A), the Revenue preferred anappeal before the Tribunal. The Tribunal, by the impugned orderdated 16.6.2017, partly allowed the appeal filed by the Revenuefor statistical purposes and remanded the matter once again tothe CIT (A). Aggrieved by that, the appellant is before thisCourt. 7. We have heard Mr.M.V.Swaroop, learned counsel for theappellant and Mr.T.Ravikumar, learned Senior Standing Counselfor the Revenue.8. The short issue, which falls for consideration, is as towhether the Tribunal could have remanded the matter for thesecond time to the CIT (A) for a decision as to whether the sumof Rs.6 Crores received/receivable by the assessee should betreated as a capital receipt or a revenue receipt. 7. We have heard Mr.M.V.Swaroop, learned counsel for theappellant and Mr.T.Ravikumar, learned Senior Standing Counselfor the Revenue.8. The short issue, which falls for consideration, is as towhether the Tribunal could have remanded the matter for thesecond time to the CIT (A) for a decision as to whether the sumof Rs.6 Crores received/receivable by the assessee should betreated as a capital receipt or a revenue receipt. 9. in the decision in the case of Cholamandalam MS GeneralInsurance Co. Vs. Assistant/Deputy CIT [reported in (2014) 41Taxmann.com 29], two of the questions, which fell forconsideration, were as to whether the Tribunal exercised itspower of remand judiciously and in accordance with law and as towhether the Tribunal was right in law in remanding the matterback to the file of the Assessing Officer even when no newmaterial had been produced before it and when all the materialswere placed before the lower authorities. While answering thesaid questions, the Division Bench of this Court held that inthe background of the jurisdiction of the Tribunal as a FactFinding Authority, the Tribunal should have acted with greatercircumspection to order a remand, particularly when the Revenueitself did not dispute that the materials were all those thatwere considered by the Assessing Officer. It was pointed outthat remand is not a power to be exercised in a routine manner and should be used sparingly as an exception only when the factswarranted such course of action. It was held that the Tribunalshould have arrived at its own conclusion on facts after dueconsideration of the materials before it, which were nodifferent from which were placed before the Authorities below. 10. In the case before us, there is no dispute in respect ofthe fact that the assessee did not place any new material beforethe Tribunal even in the first round, when it passed the orderdated 15.2.2012 remanding the matter to the CIT (A). A perusalof the order passed by the Tribunal dated 15.2.2012 would showthat the Tribunal referred to the case of two other directors ofthe company namely Mr.P.Rajendra Rao and Mr.M.Ranjan Rao and inthe case of those assessees, certain documents were filed bythem at the appellate stage. Therefore, the Tribunal passed anorder to remand the matter. When this was placed before theTribunal, it appears that the authorized representative of theassessee did not raise a serious objection to the remand. TheTribunal, following the decision in the case of the saidMr.M.Ranjan Rao, allowed the appeal filed by the Revenue andremanded the matter to the CIT (A). 11. Thus, it is evidently clear that there is absolutely nofresh material produced by the legal representative of thedeceased assessee before the CIT (A) or before the Tribunal.Nevertheless, on remand, the matter was taken up forconsideration by the CIT (A). Thus, the scope of remand orderpassed by the Tribunal was essentially to examine the nature ofreceipt/ receivable of Rs.6 Crores and as to whether it is acapital receipt or revenue receipt. Further, the scope of remandwas to compare the case of the assessee with that of the othertwo directors namely the said Mr.P. Rajendra Rao and the saidMr.M.Ranjan Rao. We find that the CIT (A) had scrupulouslyfollowed the directions issued by the Tribunal, taken note ofthe judicial precedents as well as the factual position anddiscussed the differences and the substantiating featuresbetween the assessee and the two directors such as the saidMr.P.Rajendra Rao and the said Mr.M.Ranjan Rao. 12. This distinction in the nature of differences in thefacts of the case was brought out by the CIT (A) in a tabulatedform in paragraph 17 of the order dated 28.10.2016. From thedetails furnished therein, it is clear that the assessee wasnever an employee in the new company and therefore, the assesseehad a scope to compete. Further, there was no employer –employee relationship between the payer company and the assesseeand therefore, the payment could not be assessed under the head'salary'. Further, the CIT (A) held that the legalrepresentative of the deceased assessee had not raised any newpoint at first appellate stage for deciding the issues.13. Thus, in our considered view, there was no sufficientmaterial before the Tribunal to remand the case for a freshconsideration at the first instance. Nevertheless, we refrainfrom dwelling upon the said subject further because the assessee accepted the order and participated in the de novo proceedingsbefore the CIT (A). The next issue, which was taken up forconsideration by the CIT (A) was with regard to the distinctionbetween the non compete fee and the good will. The CIT (A) heldthat the addition of Rs.6 Crores should be deleted. 14. Further, it is relevant to point out that out of Rs.6Crores, the assessee received only Rs.1 Crore and by the timethe remaining payment was made, the company namely the CABLbecame defunct for having incurred huge losses during thefinancial years 2003-04 and 2004-05 with negative net worth ofRs.68.49 Crores. When the Revenue carried the matter by way ofappeal challenging the order of the CIT (A) dated 28.10.2016,the Tribunal ought to have decided the issue, if, in itsopinion, the finding rendered by the CIT (A) was eitherfactually incorrect or legally not tenable. However, there wasno such finding to that effect. But, the Tribunal proceeded onthe basis that the assessee should bring materials or evidenceon record to substantiate or prove his claim. 15. As pointed out earlier, the assessee had not producedany new material at any point of time or at the first appellatestage. Therefore, the Tribunal should have decided the issue oneway or the other and taken a stand as to whether the amountreceived/receivable was a capital receipt or a revenue receipt.The reasons assigned by the Tribunal are not convincing and someof the reasons appear to be the personal opinion of the Tribunaland not borne out by records. One such observation made by theTribunal is that because of the advanced stage of the life ofthe assessee, it is unlikely that he would start a new venturerisking both the regular income that he could otherwise fetch byself employment or by service. We find that there is no materialon record to arrive at such a finding. 15. As pointed out earlier, the assessee had not producedany new material at any point of time or at the first appellatestage. Therefore, the Tribunal should have decided the issue oneway or the other and taken a stand as to whether the amountreceived/receivable was a capital receipt or a revenue receipt.The reasons assigned by the Tribunal are not convincing and someof the reasons appear to be the personal opinion of the Tribunaland not borne out by records. One such observation made by theTribunal is that because of the advanced stage of the life ofthe assessee, it is unlikely that he would start a new venturerisking both the regular income that he could otherwise fetch byself employment or by service. We find that there is no materialon record to arrive at such a finding. 16. The Tribunal ought to have examined the case based uponthe covenants contained in the agreement dated 27.3.2002 betweenthe CABL and the assessee namely the said lateMr.M.S.Krishnamurthy. The said agreement states that for aperiod of ten years, the assessee would refrain himself fromcarrying on the business of marketing/promoting ethicalallopathic branded pharmaceutical formulations in the Union ofIndia and the Kingdom of Nepal. The covenanter namely theassessee acknowledged that if he was not restricted fromcompeting with the CABL, the CABL would potentially sufferconsiderable economic prejudice including the loss of custom andgoodwill. Accordingly, it was decided that to protect theinterests of the CABL, the covenanter namely the assessee agreedto a restraint of trade undertaking in favour of the CABL toensure that he was precluded from carrying on certainactivities, which would be harmful to the business of the CABL.The said agreement further states that in consideration for therestraint undertakings given by the covenanter, the CABL should,within a period of ten years from the date of the saidagreement, pay the covenanter an aggregate amount of Rs.6 Crores. 17. Thus, it is evidently clear that the case of theassessee could not have been treated on par with other personssuch as the said Mr.P.Rajendra Rao and the said Mr.M.Ranjan Raofor the simple reason that the said persons had become theemployees of the payer company, that the payment was receivedfrom the prospective employer and that the Department made asubmission that there was no scope for competition. However, thefacts of the present case are wholly different. 18. The Tribunal does not dispute the covenants contained inthe said agreement nor can it dispute the same in the absence ofany evidence produced by the Department. In the said agreement,the non compete fee clause is clear by the assessee agreeing notto enter into any trade or start a similar production or enterinto any competition with another party and the payment of noncompete fee is for an action by the payee on a future date. Thesaid payment of non compete fee is bound by a contractualrequirement and it is a contractual right conferred on theassessee and in the event any violation, it was well open to theassessee to enforce the terms of the contract. 19. Thus, we find that the order of remand passed by theTribunal is wholly unjustified and the facts as brought out bythe CIT (A) after the first remand vide order dated 28.10.2016are just and proper and in the absence of any new materialproduced by the assessee, the question of remanding the matterdoes not arise. 20. Accordingly, the tax case appeal filed by the assesseeis allowed, the order of the Tribunal dated 16.6.2017 is setaside and the order passed by the CIT (A) dated 28.10.2016 isrestored. The questions of law raised for consideration areanswered in favour of the assessee and against the Revenue. Nocosts. Consequently, the connected CMP is closed. Assistant Registrar(CS IX) Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Chennai 'D' Bench, Chennai. 19. Thus, we find that the order of remand passed by theTribunal is wholly unjustified and the facts as brought out bythe CIT (A) after the first remand vide order dated 28.10.2016are just and proper and in the absence of any new materialproduced by the assessee, the question of remanding the matterdoes not arise. 20. Accordingly, the tax case appeal filed by the assesseeis allowed, the order of the Tribunal dated 16.6.2017 is setaside and the order passed by the CIT (A) dated 28.10.2016 isrestored. The questions of law raised for consideration areanswered in favour of the assessee and against the Revenue. Nocosts. Consequently, the connected CMP is closed. Assistant Registrar(CS IX) Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Chennai 'D' Bench, Chennai. https://hcservices.ecourts.gov.in/hcservices/ 2.The Additional Commissioner of Income Tax, Non CorporateCircle-3, No.121, Mahatma Gandhi Road, Chennai-34.Circle-3, No.121, Mahatma Gandhi Road, Chennai-34. TCA.No.905 of 2017 &CMP.No.13875 of 2018 ss(co)nr 26/09/2018