ORDER
Shamim Yahya, A.M.
1. This appeal by the Revenue and cross-objections by the assessee emanate out of the order of CIT(A) dt. 30th March, 2004 and pertain to asst. yr. 2000-01.
2. The issues raised in the Revenue’s appeal are as under:
(i) The learned CIT(A) erred in holding that the receipt by the assessee of Rs. 57.84 crores was a capital receipt and therefore exempt from taxation.
(ii) The learned CIT(A) failed to appreciate that the sum of Rs. 57,84 crores received by the assessee was taxable under the provisions of Section 28(ii).
(iii) The learned GIT(A) should have appreciated that the agreement dt. 16th April, 1999 or thereabouts was in substance only a cloak to cover the payment of Rs. 57.84 crores to the assessee and the assessee was never in possession of any know-how, which in any case was always an asset of the Coca Cola Company, USA or its authorised suppliers.
(iv) The learned CIT(A) should have appreciated that the taxability of the receipt of Rs. 57.84 crores being a question of law should have been considered also under the provisions of Section 17(3)(i) or alternatively under the provisions of Section 10(3) as a casual and non-recurring receipt.
(v) The learned CIT(A) ought to have held that even otherwise under the scheme of the IT Act, the receipt of Rs. 57.84 crores by the assessee was neither a non-taxable capital receipt nor a receipt exempt under the provisions of Section 10 of the Act and was hence taxable.
(vi) The learned CIT(A) ought to have held that the interest of Rs. 1,15,06,849 on the amount of Rs. 30 crores held escrow had accrued upto 31st March, 2000 in favour of the assessee and was taxable in his hands for the asst. yr. 2000-01.
3. The facts of the case are recapitulated as under:
The assessee, assessed in the status of individual is the managing director of Chennai Bottling Company Ltd. The company was engaged in the business of production and marketing of various beverages, the raw materials, for which (mainly concentrates and syrups) were to be purchased by it from the Coca Cola Company of USA. The two concerns entered into an agreement on 15th Aug., 1994 by which Chennai Bottling Co. Ltd. was to produce beverages, viz., Coca Cola, Fanta, Sprite, Gold Spot, Limca and Thums up on behalf of the US company and market the same.
This agreement subsisted till 14th Aug., 1999, when a new company styled Hindustan Coca Cola Bottling South West (P) Ltd. entered into a business purchase agreement with Chennai Bottling Company on 27th April, 1999. Under the terms of agreement, the entire assets and assumed liabilities of Chennai Bottling Co. Ltd. were purchased by the other company for a compensation of Rs. 29.86 crores. According to the agreement, the dedicated employees of the Chennai Bottling Company were transferred with continuity in the service of the buyer.
Additionally, M/s Hindustan Coca Cola Bottling South West (P) Ltd. entered into an agreement on 16th April, 1999 or thereabouts with the assessee Shri Ram Kumar Giri whereby a sum of Rs. 57,84,00,000 was to be paid to him over a period between 1999 and 2002 in exchange for what is claimed by the assessee non-compete, non-disclosure, non-sharing of know-how as per restrictive covenants specified in the agreement.
According to another agreement dt. 27th April, 1999 between the shareholders of Chennai Bottling Co. Ltd. and M/s Hindustan Coca Cola Bottling South West (P) Ltd. and Shri M. Manickam and the assessee Shri Ram Kumar Giri, all the five share holders of M/s Chennai Bottling Co. Ltd. were to pledge their share holding in the company with the buyer as security for specific performance in terms of the business purchase agreement and agreement for confidential information.
4. The assessee, an individual, filed his return of income claiming that the receipt of Rs. 57.84 crores between 1999 and 2002 was in the nature of capital receipt by way of compensation for agreeing not to carry any competitive business or disclosing to any third party any know-how gained by him. Additionally, interest of Rs. 1,15,06,849 on a deposit of Rs. 30 crores placed in an escrow account by M/s Hindustan Coca Cola Bottling South West (P) Ltd. was stated to be taxable on receipt and not on accrual basis,,
5. The AO held that receipt of Rs. 57.84 crores by the assessee was taxable on accrual basis. He taxed the entire amount in the assessment for the asst. yr. 2000-01. The interest accrued upto the previous year ending 31st March, 2000 on the escrow account was held taxable in this assessment year.
6. The AO, inter alia held, that the entire series of transactions was a colourable device and with the similar objective to minimize tax liability. He, further, held that as to the provisions of Section 28(va), the amendment merely articulates a legal position already extant earlier. It is not that such a situation as envisaged by the amendment was unheard of prior to 1st April, 2003. The amended provision thus makes explicit what could have been an occasion for diverse opinion earlier. It does not follow that income of the kind visualized by the amendment is beyond the ambit of taxation prior to 1st April, 2003. In any case, the agreement dt. 27th April, 1999 relating to protection of ‘know-how’, etc. has been shown to be a devise to mislead the Revenue. Hence, the AO held that the consideration received by the assessee is taxable as a revenue receipt, that too in asst. yr. 2000-01 itself.
7. Upon assessee’s appeal, the learned CIT(A) reversed the finding of the AO and held that the receipt of Rs. 57.84 crores was in the nature of capital receipt and hence not taxable. He also held that interest accrued upto the end of previous year relevant to the asst. yr. 2000-01 was taxable in subsequent assessment year as no enforceable right accrued to the assessee in this assessment year.
8. The learned CIT(A) in his order elaborately dealt with the issue and inter alia held that the AO was wrong in stating that the amount received as non-compete fee was taxable even before the relevant amendments were incorporated in the IT Act on 1st April, 2003. He further held that it is not open to the AO to apply the McDowell principle in each and every case where tax liability is reduced or avoided. In this regard, he placed reliance on Hon’ble Gujarat High Court decision in Banyan & Berry v. CIT and Hon’ble apex Court decision in CWT v. Arvind Narottam . Placing reliance upon Hon’ble apex Court’s decision in Gillanders Arbuthnot & Co. v. CIT , CIT v. Best & Co. (P) Ltd. and a catena of other decisions, the learned CIT(A) held that the receipt of Rs. 57.84 crores held by the assessee was a result of a restrictive covenant being an agreement dt. 27th April, 1999 between the assessee and M/s Hindustan Coca Cola Bottling South West (P) Ltd. and the said amount was capital receipt and therefore, not exigible to tax.
9. Aggrieved by the above order, Revenue is in appeal before us.
10. The learned counsel of the assessee in his expatiation vehemently supported the order of the learned CIT(A). He submitted that:
The ground specified by the Revenue is totally not applicable for the assessee’s case. The Section 28(ii) covers only certain specific transactions as follows:
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of the Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
(c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;
(d) any person, for or in connection with the vesting in the Government or in any corporation owned or controlled by the Government under any law for time being in force, of the management of any property or business;
All the above clauses are outside the purview of the non-compete agreement entered by the assessee.
11. The amendment in the Finance Act, 2002 proves that the above clauses are not applicable to the assessee’s case and Section 28(va) is applicable with effect from the asst. yr. 2003-04 only. Since it has no retrospective application, the law is now well settled by the legislature that the respondent is not liable to pay tax on the non-compete fees received for the asst. yr. 2000-01.
12. The Revenue was not able to prove that the agreement was sham or colourable one. The assessee submits that the business or commercial transactions are to be considered in the competitive world with reference to the capacity of the persons, the competitors’ capacity to poach the person connected with the other party, marketing and distribution capacity, knowledge of business, and its techniques as the key factors. The assessee is very much in the business of bottling Coca Cola and other soft drinks and know-how in possession cannot be underestimated by merely denying of truth by the assessee.
13. The assessee respectfully submits that the Section 17(3)(i) is only for the computation of income under the head ‘Salary’ and assessee is in no way connected in the employment with M/s Hindustan Coca Cola Bottling South West (P) Ltd. at any point of time. There is no employer-employee relationship with M/s Hindustan Coca Cola Bottling South West (P) Ltd.
14. The Revenue failed to prove how the capital receipt can be taxed under any head by merely claiming that there is no specific exemption under Section 10 of the Act. The rules laid down by the Supreme Court and High Court are supporting the assessee.
15. The CIT(A) has rightly held that the interest income not accrued to the respondent cannot be taxed in the asst. yr. 2000-01. The assessee also respectfully submitted the same income was accepted in the subsequent year by the Department after accepting the TDS certificates issued in the name of M/s Hindustan Coca Cola Bottling South West (P) Ltd. The Department accepted the return filed and income offered along with the TDS certificate under the scrutiny assessment under Section 143(3) proves that the Department cannot raise this after accepting the interest income in the subsequent year.
16. The learned Counsel of the assessee in this regard placed reliance on a catena of case laws for his various propositions and submissions.
He further adverted specifically to the following:
Specific attention
The respondent respectfully submits that the similar agreement was considered by the Delhi Tribunal in the case of Dinesh Chand and Ors. v. Jt. CIT (2005) 97 TTJ (Del) 770 : (2005) 95 TTD 209 (Del) the principal promoter of M/s Manosoven Paper & Industries was also a bottler for another area for the State of UP. The very same M/s Hindustan Coca Cola Bottling North West (P) Ltd. has entered the non-compete agreement with the promoter. The non-compete amount received by the promoter was considered by the AO during the assessment. The AO has accepted the amount received by the assessee as capital receipt and not taxed the same. But subsequently under Section 263, the CIT has revised the same. The assessee filed an appeal against the revision. The Tribunal held that in view of the amendment by Finance Act, 2002 the non-compete amount cannot be taxed.
17. Learned Departmental Representative, in his rebuttal, submitted that the said receipt was in the nature of revenue. The assessee’s income earning apparatus had not been cut off by this agreement. Restriction was only for 5 years and for the State of Tamil Nadu. The assessee did not have any particular know-how for which he could have been given compensation. The only knowledge the assessee had was some marketing. He further placed reliance upon Hon’ble apex Court’s decision in CYT v. Best & Co. (P) Ltd. (supra), CIT v. Prabhu Dayal and CIT v. Ashok Leyland .
18. We have heard the rival contentions in the light of the material produced before us and perused the relevant records. The salient features of agreement under which this payment has been made to the assessee are as under:
(a) In consideration of the amount set forth below, the convenantor convenants and agrees that, for five (5) years from the closing, the convenantor shall not at any time after the closing disclose to any person for any purpose or use any know-how in any business or venture, either directly or indirectly through any person, firm, company or other body corporate in which the convenantor owns equity or otherwise, in and around the State of Tamil Nadu and this agreement between the parties hereto shall survive the shareholding of the convenantor in the seller during these five years from the closing date as stated in the business purchase agreement.
(b) The convenantor further agrees that after the closing it shall use all reasonable endeavours to prevent the publication or disclosure of any know-how.
(c) For purposes of this agreement, know-how shall mean all information including that comprised m or derived from manuals, instructions, catalogues, booklets, data disks, tapes, source codes, formula codes and flowcharts relating to the acquired business undertaking provided or products manufactured by the acquired business undertaking.
(d) At any time after the closing, the convenantor shall not do anything that might prejudice carrying on of the acquired business undertaking.
(e) Each covenant contained in this agreement shall be construed as a separate covenant and if one or more of the covenants is held to be against public interest or unlawful or in any way an unreasonable restraint of trade, the remaining covenants shall continue to bind the convenantor.
(f) If any covenant contained in this agreement would be void as drawn but would be valid if the period of application were reduced or if some part of the covenant were deleted, the covenant in question shall apply with such modification as may be necessary to make it valid and effective.
(g) The convenantor shall promptly refer to HCC all enquiries relating to the acquired business undertaking and assign to HCC (so far as it is able) all orders relating to the acquired business undertaking that the convenantor may in the future receive.
19. In this regard, we find that an analogous issue was considered by the Delhi Tribunal in Dinesh Chand and Ors. v. Jt. CIT (supra). In this case, identical agreement, as in this case, was entered into between the assessees. In this case, the Tribunal held as under:
It is observed that the information/know-how in respect of bottling of Coca Cola products was possessed by the assessees in their capacities as directors of the M/s Mansarovar Bottling Co., which was earlier doing the bottling work for HCC. After the closure of the unit of M/s Mansarovar Bottling Co. and taking over of the same by HCC, it was agreed by the assessees not to use the said technology/information for production of the similar products nor to disclose the said information to any other party for a period of five years and since the said agreement for a consideration of Rs. 1.5 crores paid to each of the assessees was for the purpose of avoiding immediate competition, the same was in the nature of non-compete fees. It clearly shows that the assessee had not given away any right to manufacture as contemplated even in the amended provisions of Section 55(2)(a) and, in any case, the said amendment having been specifically made for the purpose of Sections 48 and 49 dealing with the cost in relation to a capital asset for the purpose of computation of capital gain, we are of the view that the same were not attracted to treat the information possessed by the assessee as right to manufacture in order to treat it as a capital asset. Moreover, by the agreement in question entered into with HCC, the assessee had merely agreed not to disclose the said information/technology to third party nor to use the same for manufacturing for a limited period of five years. In those circumstances, it cannot be said that there was either any extinguishment of rights which envisages involuntary act in respect of such technology/information or any relinquishment of rights in favour of HCC since relinquishment does not contemplate a mere restriction for non-use of such right for a limited period of five years. It is thus clear that the agreement between the assessees and HCC did not give rise to any transfer of capital asset within the meaning of Section 2(47) read with the amended provisions of Section 55(2)(a) and the orders passed by the AO in treating the amount of Rs. 1.5 crores received as consideration by each of the four assessees as per the said agreement as capital receipt not liable to capital gains tax, were in accordance with law. A subsequent introduction of Sub-clause (va) to Section 28 by the Finance Act, 2002, making the receipt of an amount of the nature involved in the present case liable to tax as ‘business income’ w.e.f. 1st April, 2003, further fortifies our conclusion because if such amount was already chargeable to capital gains tax as held by the learned CIT, there would have been no occasion/necessity to make the same liable again specifically as ‘business income’ by introducing the said provisions. We may also observe here for the sake of clarity that the case laws relied upon by the learned CIT in his impugned orders as well as cited by the learned Departmental Representative before us involve different type of assets like mining lease, right to manage own business, etc. which cannot be equated with the sort of rights possessed by the assessees in the present case and in any case there being no transfer of the same as discussed hereinabove, the agreement between the assessees and HCC did not give rise to any capital gain liable to tax. As such, considering all the facts and circumstances of the case, we hold that the orders passed by the AO under Section 143(3) accepting the amounts of Rs. 1.5 crores each received by the assessees as capital receipts not liable to tax were in accordance with law and as held by Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) and by Hon’ble Bombay High Court in the case of Gabiial India Ltd. (supra), the learned CIT was not justified in invoking the powers conferred on him under Section 263 to revise the same. We, therefore, set aside his impugned orders passed under Section 263 and restore the orders of the AO passed under Section 143(3).
20. Now coming to the case laws cited by the learned Departmental Representative, we find that the following has been relied upon by the learned Departmental Representative:
1. CIT v. Prabhu Dayal (Deed ByLR)(supra)
The assessee entered into an agreement for exploitation of kankar deposits. The company agreed to pay commission to the assessee, but it failed to do so. Compromise was arrived at for termination of the agreement. Whether compensation for termination is income or capital? The assessee’s activities neither in respect of the services rendered by him in the past nor towards the accumulated commission due to him. It was paid because he gave up his right to get commission in future to which he was entitled under the agreement. It was price paid for surrendering a valuable right which was a capital asset.
2. CIT v. Best & Co. (P) Ltd. (supra)
While the IT authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge and keeping the loss of the agency by the assessee was only a normal trading loss, the covenant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly unconnected with the assessee’s agency termination therefore, that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax.
3. CIT v. Ashok Leyland (supra)
Whether the payment for termination of managing agency which is in the nature of compensation to the managing agents is a capital expenditure? The payment was made to save business expenditure. It was not for acquiring any enduring benefit or income yielding asset. By avoiding some business expenditure, the assessee could not be said to have acquired enduring benefits or any income yielding asset, Therefore, the expenditure was revenue in nature and is deductible.
From the reading of the above, we find that Nos. (1) and (2) do not support the case of Revenue rather they support the assessee’s plea. No. (3) is in connection with termination of managing agency, which is not the case here.
21. Now first we deal with the Revenue’s grouse pertaining to taxability of Rs. 57,84 crores which are as under:
(i) Sum is taxable under the provisions of Section 28(ii) of the Act.
(ii) Payment is a colourable device.
22. A perusal of the Section 28(ii) makes it clear that the sum does not fall within its ambit. Admittedly, this payment, under dispute, has not been made by the employer of the assessee. Neither it is in connection with termination of managing agency nor the case falls where the management is vesting in Government.
23. In this regard, it will also be relevant to refer to Section 28(v)(a) inserted w.e.f. 1st April, 2003 by Finance Act, 2002. As a matter of fact, the case falls under the provisions of Section 28(v)(a). This is also what the Delhi Tribunal in the case cited supra held. Since the amendment was inserted w.e.f. 1st April, 2003, the same is not applicable to this case. These provisions are prospective and not retrospective as held by this Tribunal in the case of R.K. Swamy v. Asstt. CIT (2004) 88 TTJ (Chennai) 940 : (2004) 88 TTD 185 (Chennai). This proposition was duly endorsed in the decision of the Delhi Tribunal cited supra.
24. Despite accepting the fact that the case falls under the ambit of Section 28(v)(a) and hence not taxable under that section, in the present financial year, the AO has proceeded to tax the sum by giving the provision retrospective effect in the garb of labelling the agreement as a colourable device. By no yardstick of interpretation, the transaction which the legislature intends to bring to tax from a particular date can be brought to tax prior to that date by calling it a sham device. Moreover, an identical agreement has been held by the Delhi Tribunal in the case cited supra to be falling under Section 28(v)(a) and there was no murmur by the Revenue in that case that the same is a sham transaction.
(iii) The other grouse is that it should have been considered under the provisions of Section 17(3)(i) or Section 10(3) or has to be taxed anyhow as it was neither a non-taxable capital receipt nor a receipt exempt under the provisions of Section 10.
25. On perusal of Section 17(3)(i), we find that the same is applicable to receipts from employer or former employer which is clearly not the case here. Similarly, extant provision under Section 10(3) deals with receipts which were of a casual and non-recurring nature which is also not the case here.
26. As held by the Delhi Tribunal, in the case cited supra, such agreement is also not a transfer of capital asset exigible to capital gains tax. Moreover the plea that the same is anyhow to be taxed, cannot be sustained. In this regard we find that apex Court in CIT v. D.P. Sandu Bros. Chembur (P) Ltd. held that Section 56 provides for the chargeability of income of every kind only if it is not chargeable to income-tax under any of the heads specified in Section 14, Items A to E. Therefore, if the income is included under any one of the heads, it cannot be brought to tax under the residuary provisions of Section 56. Applying this principle, hence, if the sum in the present case cannot be charged under Section 28, the same cannot be subject to tax under Section 56.
27. Considering the entire gamut of the case as discussed above, drawing support from apex Court decision cited above and adhering to the doctrine of stare decisis with respect to decision of Delhi Tribunal in Dinesh Chand and Ors. case cited supra, we uphold the order of the learned CIT(A) on this issue that the sum of Rs. 57.84 crores received by the assessee is not exigible to tax.
28. Hence, the Revenue’s appeal on this issue is dismissed.
29. The next issue raised is that the learned C1T(A) ought to have held that the interest of Rs. 1,15,06,849 on the amount of Rs. 30 crores held escrow had accrued upto 31st March, 2000 in favour of the assessee and was taxable in his hands for the asst. yr. 2000-01.
30. On this issue, the AO noticed that under an escrow agreement dt. 11th Nov., 1999 a sum of Rs. 30 crores was kept in an escrow account in the bank of Nova Scotia. The deposit stood in the name of M/s Hindustan Coca Cola Beverages (P) Ltd. (formerly known as Coca Cola Bottling South West (P) Ltd.). The assessee was permitted to avail of a loan against the said deposit and in fact in the financial year 1999-2000 (relevant to the assessment year under appeal) he availed loan to the extent of approximately 6.55 crores. The AO further noticed that bank statement of the relevant account reflected interest accrual of Rs. 1,15,06,849 for the financial year 1999-2000. The assessee submitted before him that interest arising from the escrow account deposit was shown as his income in the return filed by him for the asst. yr. 2001-02 and therefore there was no case to tax any interest income in the assessment year under appeal. The AO, however, relied on the relevant bank statement and brought the amount of Rs. 1,15,06,849 as income taxable in the assessment year under appeal.
31. Before the learned CIT(A), it was submitted that in terms of the escrow agreement accrual of interest income to the assessee was subject to the occurrence of the closing as agreed under the business purchase agreement and receipt by the escrow agent and written confirmation thereof from M/s Chennai Bottling Co. and M/s Hindustan Coca Cola Bottling South West (P) Ltd. It was further submitted that the closing date was extended to 30th April, 2000 through an instrument dt. 25th April, 2000, in writing signed by the parties to the business purchase agreement dt. 27th April, 1999. Thus, prior to 1st May, 2000, there was no accrual of interest in favour of the assessee to that interest income. Credit of interest of Rs. 1,15,06,849 for the financial year 1999-2000 in the escrow account did not give rise to an enforceable right in favour of the assessee. Therefore, it cannot be construed that the said interest accrued to him and was income taxable in the assessment year under appeal. That the assessee had access to a loan from the escrow deposit has no relevance for ascertaining the fact of accrual of interest in his favour. The interest accrued to him subsequent to the ‘closing’ was declared by him as income in the return for the asst. yr. 2001-02. On consideration of the aforesaid, the learned CIT(A) held that there was no scope to bring this interest income as income of the assessee taxable in the assessment year under appeal.
32. Before us, the learned Counsel of the assessee vehemently supported the CIT(A)’s order and submitted that the said interest income has been offered to taxation by the assessee in the next assessment year and the same has been duly accepted by the Department. He further submitted that the TDS certificate issued in this regard was also accepted by the Department for the subsequent assessment year. The learned Counsel of the assessee, in this regard, further placed reliance upon the Hon’ble apex Court decision in E.D. Sassoon and Co. Ltd. and Ors. v. CIT , CIT v. Ashokbhai Chimmanbhai and Godra Electricity Co. Ltd. v. CIT .
33. We have heard both the counsel and perused the records. Considering the aforesaid, we find ourselves in agreement with the order of the learned CIT(A). On the fact of the case, the assessee cannot be said to have got right over the interest till the occurrence of the closing date as per the escrow agreement. The fact that the said interest income was offered for taxation in the next assessment year and the TDS certificate for the same was also accepted by the Revenue in the next assessment year, further fortified the claim of the assessee. Section 199(1) stipulates that credit be given for the TDS certificate for the assessment year for which such income is assessable. Since the Revenue has accepted the TDS certificate for the next assessment year, it has no case to tax this sum in previous assessment year. Hence, we uphold the orders of the learned CIT(A) on this issue also.
34. The cross-objection filed by the assessee is only supportive in nature to the learned CIT(A)’s order. Since we have already upheld the CIT(A)’s order in the Revenue’s appeal, the cross-objection now becomes infructuous.
35. In the result, the Revenue’s appeal is dismissed and assessee’s cross-objection is dismissed as infructuous.