Facts I

The Assessee, who was the Chairman and Managing Director of Central Distillery and Breweries Ltd. (CDBL), along with his family members was holding substantial part of shares in the said company which they sold to three companies   of the Shaw Wallace Company Group (SWC group). As a consequence thereof, management and control of the said company was also irrevocably handed over     to a representative of the SWC group. By a separate Deed of Covenant, only the Assessee gave a non-compete covenant to the purchaser companies for which it received an independent consideration. The Assessee claimed the amount received towards non-compete as capital receipt not chargeable to tax, while the AO concluded that this was a colourable device to avoid tax and assessed the same      as business income being compensation for termination of management under section 28(ii)(a) of the Income-tax Act. One of the reasons given by the AO and      as emphasized by the High Court was that the consideration towards non-compete was more than ten times the aggregate consideration for transfer of shares. Though the CIT(A) had upheld the view taken by the AO, the Tribunal by a majority decision (reference being made to a Third Member in view of difference of opinion between the Division Bench) accepted the Assessee’s claim. In the appeal filed by the Revenue before the High Court the substantial questions of law as  urged emphasized on application of section 28(ii) to the facts of the present case. The High Court agreed with the AO  that the Deed of Covenant cannot be regarded   as a separate document and hence the receipt was not towards non-compete. It, however, held that the said amount should be assessed as capital gains being a   part of the full value of consideration received for the transfer of shares.

 

Issue I

Whether it was open for the High Court to pronounce on an issue other than the substantial question of law as earlier framed, and the procedure to be followed     for consideration of such question.

 

 

Views I

Referring to sub-sections (4) and (6) of section 260A of the Income-tax Act and section 100 of the Code of Civil Procedure, 1908, the Court has concluded that     the High Court can pronounce judgment on an appeal only after first formulating the substantial question of law. If it wishes to hear the appeal on any other substantial question of law, it may, for reasons to be recorded formulate and hear such questions, if it is satisfied that the case involves such question. The High Court may also determine an issue, though raised, which has not been determined   by the Appellate Tribunal or wrongly determined by it. Referring to its earlier judgments in the case of Kshitish Chandra Purkait v. Santosh Kumar Purkait (1997) 5 SCC 438, Dnyanoba Bhaurao Shemade v. Maruti Bhaurao Marnor (1999) 2 SCC 471 and Biswanath Ghosh v. Gobinda Ghosh (2014) 11 SCC 605, it  has been emphasized that proceeding to hear the appeal without formulating the substantial question of law involved in the appeal is illegal and is in abnegation    or abdication of the duty cast on Court. Even after formulation of the substantial question of law, it will amount to denial of natural justice, if a fair or proper opportunity is not afforded to the opposite side. That this procedure should also apply to any other substantial questions of law as later sought to be framed by the Court which should be done only after recording of reasons. The finding as given by the High Court holding the consideration towards non-compete as chargeable   to tax as capital gains being full value of consideration for transfer of shares has been set aside as clearly contrary to section 260A(4).

 

Held I

In the appeal under section 260A of the Act, the High Court can determine any other substantial question than the one earlier formulated by it, provided the said question is involved in the case, an opportunity of hearing is given to the opposite side and reasons are recorded in support of formulation of such question.

 

Issue II

Whether the consideration received as per the Deed of Covenant towards non- compete could be regarded as full value of consideration for transfer of shares   and assessable as capital gains or for termination of management and control of   the said company and assessable as business income as per section 28(ii) of the Income-tax Act.

 

Views II

Relying on its earlier judgments in the cases of CIT v.  Walchand & Co. (1967)        3 SCR 214, J. K. Woollen Manufacturers v. CIT (1969) 1 SCR 525, CIT v. Panipat Woollen  &  General Mills Co. Ltd. (1976) 2  SCC 5,  Shahzada Nand  & Sons v. CIT (1977) 3 SCC 432, S. A. Builders Ltd. v. CIT (2007) 1 SCC 781

and Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC 359 and applying the principle

 

 

of commercial expediency, it is concluded that where payment is real, made in    the character of a trader and laid out or  expended wholly and  exclusively  for the purpose of the business, then, it is not for the Revenue to determine the necessity or quantum thereof. Hence, execution of Deed of Covenant and the fact relating to receipt towards non-compete being in excess of ten times the full value    of consideration for transfer of shares should not be relevant. For  this purpose,    the Court has also referred to the fact that shares of the face value of Rs.10 per  share and market value of Rs.3 per share was sold for Rs.30 per share. That the assessee was Chairman and Managing Director of CDBL for a period of 35 years  and hence had acquired considerable knowledge, skill, expertise and specialization  in its business. That whether the assessee was a probable or perceptible threat     or competitor to the SWC group was to be considered by the purchaser of shares and not the Revenue. Lastly, based on its judgment in the case of Guffic Chem    (P.) Ltd. v. CIT (2011) 4 SCC 254 the consideration for non-compete has been accepted as a capital receipt not chargeable to tax.

 

Held II

Amount received towards non-compete has been accepted as such on the facts      of that case and hence was a capital receipt not chargeable to tax. (AY.1995 -96)  (CA No 12044 of 2016 dt. 22-7-2020)

Editorial : Receipt towards non-compete is chargeable to tax as business income   in view of insertion of clause (va) in section 28 by the Finance Act, 2002 with   effect from 01.04.2003 i.e., from assessment year 2003-04. However, the discussion  on commercialexpediency i.e., whether an expenditure ought to have been incurred or the quantum thereof, is the prerogative of the businessman and could not be gone into by the Revenue would be relevant for allowance of a deduction under section 37 or disallowance under section 40A(2) of the Income-tax Act or application of the transfer pricing provisions.

“You don’t know who is important to you until you actually lose them.”

– Mahatma Gandhi