Commissioner of Income Tax vs Amol Narendra Dalal

S.J. Kathawalla, J.—The above appeal was admitted on the following substantial question of law.

Whether the amount received by a cable operator for not competing with the purchaser in future is taxable?

The relevant facts in the matter are briefly set out hereunder:

(a) One Amol Narendra Dalai was carrying on his sole proprietary business of cable T.V. operations and was running cable T.V. network in Borivli (West) and in other areas of Mumbai suburbs since January, 1989, in the name of M/s. Home Video Services. The assessee sold/transferred his business as a going concern to M/s. Aasia Industrial Technologies Pvt. Ltd., a company of the Hinduja group, vide agreement dated November 25, 1994, for a consideration of Rs. 12,50,000 (first agreement). On the same day, i.e., on November 25, 1994, the assessee entered into another agreement with M/s. Aasia Industrial Technologies Pvt. Ltd. (the purchasers) whereunder the assessee agreed not to carry on any business or activity in future in respect of cable T.V. net work and not to compete with the purchaser within the territory of Mumbai suburbs, (second agreement). Under the second agreement, the assessee received an amount Rs. 11 lakhs from M/s. Aasia Industrial Technologies Pvt. Ltd. (purchaser).

(b) The assessee in his return filed for the assessment year 1995-96 offered the amount of Rs. 12,50,000 as "long-term capital gain". However, the second payment of Rs. 11 lakhs under the second agreement was not offered to tax and was claimed as capital receipt. The Assessing Officer by his order dated January 27, 1998, passed u/s 143(3) rejected the assessee''s claim and treated the total amount received from the company as long-term gain.

(c) The assessee went in appeal before the Commissioner of Income Tax (Appeals) impugning the order of the Assessing Officer. However, the Commissioner of Income Tax (Appeals) by his order dated July 16, 1998, upheld the order of the Assessing Officer dated January 27, 1998.

(d) Being aggrieved by the said order passed by the Commissioner of Income Tax (Appeals) on July 16, 1998, the assessee filed an appeal before the Tribunal. The Departmental representative contended before the Tribunal that the assessee had already transferred his clientele to the said company under the first agreement dated November 25, 1994, in terms of which he received Rs. 12,50,000 and, therefore, there was nothing left for the assessee to make any further transfer under the second agreement under which he received an amount of Rs. 11 lakhs. It was contended that the said amount of Rs. 11 lakhs was, therefore, towards the transfer of the goodwill of the assessee.

(e) The Tribunal by its order dated August 28, 1999, gave a categorical finding in favour of the assessee that there was no transfer of the goodwill under the second agreement whereunder the assessee received Rs. 11 lakhs from the said company. It was held that the said amount of Rs. 11 lakhs was received by the assessee in view of his having undertaken not to carry on any business in competition with the said company, i.e., M/s. Aasia Industrial Technologies Pvt. Ltd. The said amount of Rs. 11 lakhs received by the assessee was, therefore, in view of such restriction and negative covenant, namely, not to compete with the said company. The Tribunal also held that the said issue was squarely covered in favour of the assessee by the decision of the Tribunal in the case of ITO v. Shri Anilkumar Rudra decided by the Tribunal by its order dated October 9, 1998, in I.T.A. No. 8975/Bom/90. The Tribunal also relied on the decision in the case of Bharat Forge Co. Ltd. Vs. Commissioner of Income Tax, and the decision of the hon''ble Supreme Court of India in the case of Vania Silk Mills (P) Ltd. Vs. Commissioner of Income Tax, Ahmedabad [OVERRULED], .

(f) The Tribunal, therefore, allowed the appeal of the assessee.

(g) Being aggrieved by the order of the Tribunal dated August 28, 1999, the appellant (Revenue) filed the above appeal which was admitted on the substantial question of law set out in paragraph No. 1 above.

Mr. Kazi, learned Counsel appearing for the Revenue before us only reiterated the Department''s argument advanced before the Tribunal, namely, that since the assessee had already transferred his clientele to the said company under the first agreement dated November 25, 1994, for a consideration of Rs. 12,50,000 there was nothing left for the assessee to transfer and, therefore, the amount of Rs. 11 lakhs received by the assessee under the second agreement dated November 25, 1994, should not be treated as amount received for not competing in future with the purchaser, but should be treated as amount paid to the assessee for transfer of the goodwill of the assessee in favour of the purchaser. Mr. Kazi submitted that if the assessee has received the amount of Rs. 11 lakhs for not competing with the purchaser in future, the same is not taxable but if he has received the sum for transferring his goodwill in favour of the purchaser, the same is required to be taxed. After drawing attention of Mr. Kazi that the Tribunal has come to a categorical conclusion that there is no transfer of goodwill under the second agreement dated November 25, 1994, and there is no evidence that the said agreement is sham and that the amount of Rs. 11 lakhs was received by the assessee for having undertaken not to carry on any business in future in competition with the said company in the territory of Mumbai suburbs, we called upon Mr. Kazi to explain the basis on which he was submitting that the said second agreement pertains to transfer of goodwill and is not towards the agreement for not competing with the purchaser, Mr. Kazi except for saying that "this is the Department''s view" could not submit any further.

After hearing advocates of the parties and perusing the impugned order, we are of the view that the Tribunal has taken a correct view that the said amount of Rs. 11 lakhs has been received by the assessee for having undertaken not to carry on any business in future in competition with M/s. Aasia Industrial Technologies Pvt. Ltd. (purchaser) within the territory of Mumbai suburbs. The finding of the Tribunal that there is no evidence that the said agreement is sham is accepted by the Revenue. The Department''s argument before the Tribunal and before us that after having transferred his clientele by the first agreement dated November 25, 1994, the assessee had nothing left with him to make any further transfer under the second agreement and, therefore, the second agreement was only for transfer of the goodwill for which the assessee received Rs. 11 lakhs and which ought to be taxed is untenable and baseless. It is very clear that under the first agreement the assessee transferred his entire clientele (business) to M/s. Aasia Industrial Technologies Pvt. Ltd. (purchaser) for a consideration of Rs. 12,50,000 and under the second agreement undertook not to compete with the said company in future in the suburbs for a consideration of Rs. 11 lakhs which amount admittedly cannot be made taxable under the heading "Capital gain".

In view of the aforesaid we answer the above question of law in favour of the assessee and against the Revenue. The appeal filed by the Revenue is dismissed. There will, however, be no order as to costs.