Karnataka H.C : The sum of Rs. 75 lakhs received by the assessee from M/s. Praxair Carbon Dioxide Pvt. Ltd., towards transfer of certain rights and not carrying on similar business was not liable to tax under the head “Capital gains” despite the amendment to section 55(1)(b)(1) and section 56(2)(a) as held in its earlier order

High Court Of Karnataka

CIT, Bangalore vs. K. Chandrakanth Kini

Assessment Year : 1999-2000

Section : 28(Va)

N. Kumar And Ravi Malimath, JJ.

IT Appeal No. 906 Of 2007

July 18, 2011

JUDGMENT

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 Appeals that the amount received by the assessee under non-competition agreement constitutes capital gains and as such they are liable to pay tax.

2. 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 9-2-1998 to M/s. Praxair Carbon Dioxide Private Limited, 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. In the return filed by him, the said amount was disclosed and exemption was claimed as capital receipt. The return filed by the assessee under section 143(1) of the Act and refund claimed as per the return was granted. Subsequently, a notice dated 31-3-2004 was issued order section 148 on the ground that the income escaped assessment. The assessee preferred an appeal. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. Aggrieved by the same, the assessee preferred an appeal to the Tribunal.

3. The Tribunal following its judgment in ITA No. 958/Bang/04 in case of the assessee’s brother allowed the appeal. Aggrieved by the said order, the revenue has preferred this appeal.

4. 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 under section 28(va) with effect from 1-4-2003. But, prior to that period it was liable to tax under section 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.

5. 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 1-4-2003 it was not taxable and only from 1-4-2003 the said amount has become taxable. The said amount having received by the assessee on 9-2-1998, prior to 1-4-2003, the same is not taxable and the finding recorded by the Tribunal is legal and valid and do not call for any interference.

6. The above appeal was admitted on 18-6-2008 to consider the following substantial questions of law :—

  1. Whether 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., towards transfer of certain rights and not carrying on similar business was not liable to tax under the head “Capital gains” despite the amendment to section 55(1)(b)(1) and section 56(2)(a) as held in its earlier order?

2.Whether the Tribunal was right in applying its conclusion arrived at in the case of Mr. Sunil Kini by holding that with effect from Finance Act of 2002 section 28(va) of the Act has been amended to bring to it tax under the head “Business income” and therefore the question of bringing the same to tax under the head “capital gains” for the period earlier to the amendment did not arise?”

7. Under the agreement dated 9-2-1998 executed by the three promoters of Chemicon Private Limited, Mahalsa Gases and Chemicals Private Limited and Coastal Gases and Chemicals Private Limited and M/s. Chemical Industries Consulting Bureau, a partnership firm, they agreed to refrain from competing with M/s. Praxair Carbon Dioxide Private Limited. For a period of 10 years they shall not directly or indirectly, either as individuals or as employees, partners, officers, owners, directors, promoters, collaborators, advisers, consultants or in any other capacity whatsoever, of am 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.

8. Section 28 deals with profits and gains of business or profession. Section 28(va) was inserted by Finance Act, 2002 with effect from 1-4-2003 which reads as under :—

“28. 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 1-4-2003 the said amount was not chargeable to tax either under section 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, the 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 1-4-2003. This view of ours find support from a recent judgment of the Apex Court in the case of Guffic Chem (P.) Ltd. v. CIT [2011] 332 ITR 602 / 198 Taxman 78 / 10 taxmann.com 105. At page 607 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 28(va)]. The Finance Act, 2002, itself indicates that during the relevant assessment near 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”.

9. 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 1-4-2008 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.

10. The agreement 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 or 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, on 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 under section 55(2) of the Act. It is because it was not falling under section 55(2) and was not falling under any other provisions of the Act, the Parliament thought it fit to insert the aforesaid new provision by way of an amendment. Therefore, only from 1-4-2003 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, both the substantial questions framed are answered in favour of the assessee and against the revenue.

[Citation : 347 ITR 388]

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