Commissioner of Income Tax and Another vs Sunil Kini K.

N. Kumar, J.—This appeal is by the Revenue challenging the order passed by the Tribunal which has set aside the finding recorded by the Commissioner of income tax (Appeals) that the amount received by the assessee under non-competition agreement constitutes capital gains and as such they are liable to pay tax. The assessee is the legal heir of Dr. K. Bhaskar Kini who along with his two brothers was the promoter/director/shareholder of various companies which were manufacturing and trading in carbon dioxide gas. The said businesses were sold, vide the agreement dated February 9, 1998, to M/s. Praxair Carbon Dioxide P. Ltd., Bangalore. By a separate agreement of even date, Dr. Bhaskar Kini and his brothers entered into non-competition agreement with M/s. Praxair Carbon Dioxide P. Ltd. The consideration paid under the said agreement was Rs. 3 crores. In terms of the said agreement they agreed not to engage in similar business in any capacity for a period of 10 years. Rs. 75 lakhs was the consideration of Dr. Bhaskar Kini. In the return filed by him the said amount was disclosed and exemption was claimed as capital receipt. The return filed by the assessee u/s 143(1) of the Act and refund claimed as per the return was granted. Subsequently, a notice dated April 4, 2002, was issued u/s 148 to reopen the assessment. The amount of Rs. 75 lakhs was taxed as business income relying on clause (va) of section 28 inserted by the Finance Act, 2002; with effect from April 1, 2003. The assessee preferred an appeal. The Commissioner of income tax (Appeals) accepted the assessee''s claim that the receipt in question is a capital receipt. However, he was of the view that the receipt is liable to be taxed as capital gains in view of the amendment effected to section 55(2)(b) by the Finance Act, 1997. He, accordingly, directed the Assessing Officer to compute capital gains as long-term capital gains. Aggrieved by the same, the assessee preferred an appeal to the Tribunal.

It is relevant to point out at this stage that the Revenue did not challenge the said finding of the appellate authority that it was not a revenue receipt and that it was a capital receipt. The Tribunal held that the amount received by the assessee towards non-competition fee from M/s. Praxair Carbon Dioxide P. Ltd. is not taxable. It held that when an amendment was carried out by the Finance Act, 2002, with effect from April 1, 2003, providing for taxation on such non-competition fee u/s 28(va) and when, they have not removed the words right to manufacture, produce or process any article or thing found in section 55(2)(b), it cannot be said that both the provisions do apply to the amounts received by way of non-competition fee. According to the Tribunal, prior to April 1, 2003, such amount was not taxable. Aggrieved by the said order the Revenue has preferred this appeal.

The learned senior counsel appearing for the Revenue contended that it is no doubt true that such an amount received by way of non-competition fee is treated as a business income u/s 28(va) with effect from April 1, 2003. But, prior to that period, it was liable to tax u/s 45 read with section 55. Though under an agreement the assessee has agreed not to use the technical know-how to manufacture the very same products which are the subject matter of transfer, in substance it amounts to giving up the right to manufacture and, therefore, section 55(2)(b) is attracted and rightly the Appellate Tribunal has held it is a capital gain.

Per contra, the learned counsel appearing for the assessee submitted that for an amount to be taxed as a capital gain, the condition precedent is, there should be transfer of a capital asset. In the instant case, the assessee has not transferred any capital asset. It is the company which had transferred the asset under a separate agreement. Under the present agreement, they have agreed not to carry on the very same business which they were carrying on earlier. In other words, they have agreed not to compete with the purchaser of the said business for which they have been paid consideration. Till April 1, 2003, it was not taxable and only from April 1, 2003, the said amount has become taxable. The said amount having received by the assessee on February 9, 1998, prior to April 1, 2003, the same is not taxable and the finding recorded by the Tribunal is legal and valid and do not call for any interference.

The above appeal was admitted on September 12, 2006, to consider the following substantial questions of law :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 75 lakhs received by the assessee from M/s. Praxair Carbon Dioxide Pvt. Ltd. cannot be brought to tax under the head ''Capital gains'' ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 75 lakhs cannot be brought to tax as the same is received as non-competitive fee which can be brought to tax as per sub-section (va) of section 28 with effect from 2002 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no interest u/s 234B of the Act can be leviable on the assessee in order of assessment passed u/s 143(3) read with section 147 of the Act as on intimation had been issued u/s 143(1) of the Act ?

Under the agreement dated February 9, 1998, executed by the three promoters of Chemicon P. Ltd., Mahalsa Gases and Chemicals P. Ltd. and Coastal Gases and Chemicals P. Ltd. and M/s. Chemical Industries Consulting Bureau, a partnership firm they agreed to refrain from competing with M/s. Praxair Carbon Dioxide P. Ltd. For a period of 10 years they shall not directly or indirectly, either as individuals or as employees, partners, officers, owners, directors, promoters, collaborators, advisors, consultants or in any other capacity whatsoever, of any entity whatsoever, render services to, or be otherwise employed by or associated with, any person or entity which competes or intends to compete with Praxair, with respect to the products. Therefore, under the agreement, they did not transfer any right to manufacture, produce or process any article or thing. This is an independent agreement entered into by the promoters with the purchasers of all the assets of the aforesaid companies and the partnership firm. It is in this background, we have to find out whether the amount received under this agreement is taxable under the Act.

Section 28 deals with profits and gains of business or profession. Section 28(va) was inserted by the Finance Act, 2002, with effect from April 1, 2003, which reads as under:

Profits and gains of business or profession.--The following income shall be chargeable to income tax under the head ''Profits and gains of business or profession'',-...

(va) any sum, whether received or receivable in cash or kind, under an agreement for-

(a) not carrying out any activity in relation to any business; or

(b) not sharing any know-how, patent copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services :

A reading of the aforesaid provision makes it very clear any sum, whether received or receivable, in cash or kind, under an agreement, for not carrying out any activity in relation to any business; or not sharing any know-how or technique likely to assist in the manufacture or processing of goods or provision for services is chargeable to income tax under the heading "Profits and gains of business or profession". Prior to this amendment which came into effect from April 1, 2003, the said amount was not chargeable to tax either u/s 28 or under any other provisions of the Act. If there was a provision under which the said income could have been charged to income tax, Parliament would not have inserted this provision by way of an amendment. It is because of want of provision when the said income could not be taxed after realising the loop hole in the legislation, this amendment was brought about. Therefore, the said income is chargeable to income tax only from April 1, 2003. This view of ours find support from a recent judgment of the apex court in the case of Guffic Chem P. Ltd. Vs. Commissioner of Income Tax, Belgaum and Another, it is observed as under:

Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only, vide the Finance Act, 2002, with effect from April 1, 2003 that the said capital receipt is now made a taxable (see section 23(va)). The Finance Act, 2002, itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from April 1, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from April 1, 2003. Hence, the said section 28(va) is amendatory and not clarificatory.

Therefore, when the said provision is held to be not clarificatory, but amendatory, it follows earlier to the said provision the said amount was not taxable. The said provision was not inserted to by way of a clarification. It was introduced only by way of amendatory. Prior to the insertion of that provision there was no provision in the Act for providing for charging tax on such income. However, from April 1, 2003, it is treated as an income chargeable to tax under the heading of "Profits and gains". Though prior to that Act it was treated as a capital asset it was not taxable under the head. In this background, the contention that because it was treated as a capital asset, the appellate authority was justified in holding that it is capital gains and, therefore, it is chargeable to tax as such is not justified.

The argument is section 55(2)(a) is attracted to the facts of the case. It provides that for the purposes of sections 48 and 49, "cost of acquisition" in relation to a capital asset being goodwill of a business or a trade mark of brand name associated with a business or a right to manufacture produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours. In the first place, section 55 is not a charging section. Secondly, it deals with right to manufacture, produce or process any article or thing. The assessee is not the person who has transferred the assets of the companies and the firms in which he was actively involved. Under a separate agreement for transfer of assets and right to manufacture, separate consideration has been paid and for which tax is collected from the companies which received the consideration for such transfer. The present agreement no doubt came to be executed contemporaneously on the same day. But the consideration paid under this agreement is to the assessee not to compete with the purchaser in respect of the subject matter of the other agreement. In the first place, the assessee has not transferred any capital asset to the purchaser. It has not transferred any right to produce or manufacture any article. The consideration paid to him is not to compete. Therefore, the case would not fall u/s 55(2) of the Act. It is because it was not falling u/s 55(2) and was not falling under any other provisions of the Act, Parliament thought it fit to insert the aforesaid new provision by way of an amendment. Therefore, only from April 1, 2003, the consideration received under a non-competition agreement is chargeable to tax under the heading of "Profits and gains of business". Therefore, the order passed by the Tribunal setting aside the order passed by the appellate authority is legal and valid and cannot be found fault with. Accordingly, the substantial questions Nos. 1 and 2 framed are answered in favour of the assessee and against the Revenue. The third substantial question is regarding the payment of interest. Since there is no liability to pay tax, the question of payment of interest would not arise and, therefore, the third substantial question does not arise for consideration. Accordingly, it is not answered.