1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 12044 OF 2016
SHIV RAJ GUPTA …Appellant
Versus
COMMISSIONER OF INCOME-TAX,
DELHI-IV …Respondent
J U D G M E N T
R.F. Nariman, J.
1. The present appeal relating to assessment year 1995-96 is by one Shri
Shiv Raj Gupta, who was the Chairman and Managing Director of M/s
Central Distillery and Breweries Ltd. (hereinafter referred to as “CDBL”),
which had a unit in Meerut manufacturing beer and Indian Made Foreign
Liquor (hereinafter referred to as “IMFL”). The facts leading to an
appreciation of the issues raised in this appeal are as follows.
2. By a Memorandum of Understanding (hereinafter referred to as “MoU”)
dated 13.04.1994, made between the appellant and three group
companies of M/s Shaw Wallace Company Group (hereinafter referred
to as “SWC group”), the appellant, his wife, son, daughter-in-law and
two daughters were the registered holders of 1,86,109 equity shares of
2
INR 10 each constituting 57.29% of the paid-up equity share capital of
CDBL listed in the Bombay and Delhi Stock Exchanges. The break-up
of the shares held by the family members of the appellant and the
appellant himself are as follows:
Name of the Shareholder Number of Shares held in CDBL
Shiv Raj Gupta (Appellant) 38,999
Jayant Gupta (Appellant’s Son) 44,658
Roopa Gupta (Appellant’s
Daughter-in-law)
53,911
Pushpa Gupta (Appellant’s
Wife)
3,303
Avanti Pandit (Appellant’s
Daughter)
5,541
Arti Kirloskar (Appellant’s
Daughter)
2,760
Total 1,86,109
3. The said MoU recites that the company employed in its factory 350
employees and around 25 staff and other officers in its other offices.
The MoU then refers to a direction of the Supreme Court, which was
made by an Order dated 11.03.1994, which made it clear that the
company’s manufacturing activity at the plant at Meerut was suspended
3
until a secondary effluent treatment plant is installed and made
operative by the company. This led to the sale of this controlling block
of shares, which was sold at the price of INR 30 per share (when the
listed market price of the share was only INR 3 per share). It is stated
in the said MoU that the entire sale consideration of Rs.55,83,270/- has
since been paid by the SWC group to Shri Gupta, as a result of which
Shri Gupta has irrevocably handed over physical possession,
management and control of the said brewery and distillery of CDBL to
a representative of the SWC group on 10.02.1994. Among the things
to be done under the MoU, it was made clear that the nominees of the
SWC group would be put in the saddle i.e. be made directors on or
before 13.04.1994, so that they will constitute an absolute majority on
the board of the company. Importantly, both Shri Shiv Raj Gupta and
his son Shri Jayant Gupta (who, together with his wife, is the major
shareholder of the family) will resign as Chairman and Managing
Director and as Joint Managing Director respectively of CDBL by
13.04.1994. Under Clause 7 of the said MoU, personal guarantees
given by the appellant and his son to UCO Bank, IFCI, ICICI and IREDA
for loans amounting to INR 8.44 crores will be indemnified against all
claims, actions, etc. in respect thereof.
4. By a Deed of Covenant dated 13.04.1994, the MoU signed on the same
day was reiterated, and it was then stated in recitals 3 and 4 as follows:
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“(3) Over the past years, Mr. Shivraj Gupta has acquired
considerable knowledge, skill, expertise and
specialization in liquor business.
(4) In furtherance of the purchase of the said shares,
SWC have requested Mr. Shivraj Gupta to give a
restrictive covenant to and in favour of SWC for not
carrying on directly or indirectly any manufacturing or
marketing activities, whatsoever, relating to Indian
Made Foreign Liquor (IMFL) or Beer for a period of 10
years from the date hereof which Mr. Gupta has agreed
to give for the consideration of a non-competition fee of
Rs. 6,60,00,00 (Rupees Six crores and sixty lacs only)
to be paid by SWC to Mr. Gupta.”
The Deed of Covenant is a short document containing two clauses,
which are set out as follows:
“1. In consideration of the sum of Rs. 6,00,00,000
(Rupees Six crores only) paid by SWC to Mr. Gupta as
an advance against the aforesaid non-competition fee
of Rs. 6,60,00,000 (the receipt whereof, Mr. Gupta
hereby admits and acknowledges), Mr. Gupta hereby
irrevocably agrees, covenants and undertakes that with
effect from the date of these presents, Mr. Gupta will
not start or engage himself directly or indirectly or
provide any service, assistance or support of any
nature, whatsoever, to or in relation to the
manufacturing, dealing and supplying or marketing of
Indian Made Foreign Liquor (IMFL) and/or Beer. The
balance amount of Rs. 60,00,000 (Rupees sixty lacs
only) will be paid by SWC to Mr. Gupta on 31st October,
1994.
2. This covenant shall remain in full force and effect for
a period of 10 years from the date of these presents and
this covenant will be absolutely and irrevocably binding
on Mr. Gupta.”
5. The bone of contention in this appeal is whether the said Deed of
Covenant can be said to contain a restrictive covenant as a result of
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which payment is made to the appellant, or whether it is in fact part of a
sham transaction which, in the guise of being a separate Deed of
Covenant, is really in the nature of payment received by the appellant
as compensation for terminating his management of CDBL, in which
case it would be taxable under Section 28(ii)(a) of the Income Tax Act,
1961. Section 28(ii)(a) reads as follows:
“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", -
xxx xxx xxx
(ii) any compensation or other payment due to or
received by,-
(a) any person, by whatever name called, managing the
whole or substantially the whole of the affairs of an
Indian company, at or in connection with the termination
of his management or the modification of the terms and
conditions relating thereto;”
6. By an order dated 31.03.1998, the Assessing Officer held that despite
the fact that the appellant owned a concern, namely, one M/s Maltings
Ltd., which also manufactured IMFL, being a loss making concern, no
real competition could be envisaged between a giant, namely, the SWC
group and this loss making dwarf, as a result of which the huge amount
paid under the Deed of Covenant cannot be said to be an amount paid
in respect of a restrictive covenant as to non-competition. It was further
held that the son of the appellant was not paid any such non-compete
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fee or amount despite the fact that he also resigned from his position
as Joint Managing Director. It was also held that this was a lump sum
payment with no reason as to why such a huge amount of INR 6.6
crores was being paid. It was also found that there was no penalty
clause to enforce the performance of obligations under the aforesaid
Deed of Covenant, as a result of which, applying the judgment in
McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, the Deed of Covenant
was held to be a colourable device to evade tax that is payable under
Section 28(ii)(a) of the Income Tax Act, 1961. As a result thereof, this
amount was then brought to tax under the aforesaid provision.
7. An appeal from the Assessing Officer to the learned Commissioner of
Income Tax (Appeals) was dismissed. When it came before the Income
Tax Appellate Tribunal (hereinafter referred to as “Appellate Tribunal”)
the learned Accountant Member differed with the learned Judicial
Member. The learned Accountant Member held that the two deeds
would have to be read separately and that revenue cannot challenge
the business perception of the assessee. Further, it was held that there
was no colourable device involved, and that, as a result, non-compete
fee payable under the Deed of Covenant was not taxable under Section
28(ii)(a) or any other provision of the Income Tax Act, 1961. The
learned Judicial Member on the other hand substantially agreed with
the Assessing Officer, as a result of which he decided in favour of the
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revenue. A reference was then made to a third Member, who was also
a Judicial Member. The learned third Member emphasised the fact that
a share worth INR 3 was sold for INR 30 under the MoU as a result of
transfer of control of the CDBL. It cannot be said that these shares have
been undervalued, neither can it be said that there was any collusion
or other sham transaction, as a result of which the amount of INR 6.6
crores has escaped income tax. He pointed out that by a letter dated
02.04.1994, a “penalty clause” was provided for in that, out of the
amount received by the assessee an amount of INR 3 crore was to be
deposited with the SWC group for two years under a public deposit
scheme, it being made clear that in case there is any breach of the
terms of the MoU resulting in loss, the amount of such loss will be
deducted from this deposit. The result, therefore, was that the appeal
stood allowed by a majority of 2:1 in the Appellate Tribunal.
8. The revenue preferred an appeal under Section 260-A of the Income
Tax Act, 1961 to the High Court. In its grounds of appeal, the revenue
framed the substantial questions of law that arose in the matter as
follows:
“A) Whether the ITAT has correctly interpreted the
provisions of Section 28(ii) of the Income Tax Act,
1961?
B) Whether the Ld. ITAT was correct in holding that
receipt of Rs.6.6 crores by the respondent/assessee as
non-competitive fee was a capital receipt u/s 28(iv)
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income tax act and not a revenue receipt as envisaged
in Section 28(ii) of I.T. Act?
C) Whether the Ld. ITAT failed to distinguish between
nature of capital and nature of benefit in commercial
sense in respect of amount of Rs. 6.6 crores received
in view of restrictive covenant of deed dated
13.04.1994?
D) Whether Ld. Judicial Member of ITAT was correct in
recording his difference of opinion that receipt of Rs.
6.6 crores by respondent/assessee was actually a
colourable exercise to evade tax and same was held to
be taxable under Section 28(ii) of the Income Tax Act?”
9. By the impugned judgment of the Division Bench of the Delhi High Court
dated 22.12.2014, the Division Bench framed the following substantial
question of law:
“Whether, on the facts and in the circumstances of the
case, the amount of Rs. 6.6 crores received by the
assessee from SWC is on account of handing over
management and control of CDBL (which were earlier
under the management and control of the assessee) to
SWC as terminal benefit and is taxable u/s 28(ii) of the
Income-tax Act or same is exempt as capital receipt
being non-competition fee by executing deed of
covenant”
After going through the MoU and the Deed of Covenant, both dated
13.04.1994, and copiously referring to the order of the Assessing Officer
dated 31.03.1998, the High Court agreed with the Assessing Officer and
the first Judicial Member of the Appellate Tribunal, stating that the Deed
of Covenant could not be read as a separate document and was not in
its real avatar a non-compete fee at all. However, in its ultimate
conclusion, disagreeing with the learned Assessing Officer and the
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minority judgment of the Tribunal, the High Court went on to state that
the said sum of INR 6.6 crores could not be brought to tax under Section
28(ii)(a), but would have to be treated as a taxable capital gain in the
hands of the appellant, being part of the full value of the sale
consideration paid for transfer of shares.
10.Shri Arvind Datar and Shri Ajay Vohra, learned senior advocates
appearing on behalf of the appellant, have taken us through the orders
of the Income Tax Authorities, the Appellate Tribunal and the impugned
judgment of the High Court. They raised as a preliminary submission
the fact that under Section 260-A, it is only the substantial question of
law that is framed that can be answered and no other. If some other
question is to be answered, the Court must first give notice of the same
to both sides, hear them, pronounce a reasoned order and thereafter
frame another substantial question of law, which it may then answer.
This procedure has not been followed in the present case as it is clear
that the substantial question of law framed did not contain within it the
question as to whether the assessee can be taxed outside the
provisions of Section 28(ii)(a). The entire judgment is, therefore, vitiated
and must be set aside on this ground alone. They relied on several
judgments to buttress this contention. They then relied upon the
judgment of the learned Accountant Member and of the third Member in
favour of the assessee and the reasoning therein, which according to
10
them is unexceptionable and should have been followed by the High
Court. They also cited judgments to show that prior to 01.04.2003, i.e.
before the introduction of Section 28(va) by Finance Act 20 of 2002 with
effect from the aforesaid date, any sum received under an agreement
for not carrying out any activity in relation to any business was taxed,
for the first time, under this provision and the provision not being
retrospective would not apply to the facts of the present case.
11.Shri Arijit Prasad, learned senior advocate appearing on behalf of the
revenue, read the order of the Assessing Officer and the order of the
first learned Judicial Member and adopted the reasoning contained
therein. According to him, the High Court judgment correctly applied
both McDowell (supra) and Vodafone International Holdings BV v.
Union of India (2012) 6 SCC 613 to arrive at the result which it arrived
at as it was clear that the amount of INR 6.6 crores that was received
by the assessee was really in the nature of payment for the sale of
shares. He also argued as an alternative that in any event it would fall
under Section 28 (ii)(a) as was correctly held by the learned Assessing
Officer and the minority judgment of the Appellate Tribunal.
12.Having heard learned counsel for both parties, we are of the view that
the appeal needs to succeed first on the preliminary ground raised by
the learned counsel for the appellant. Section 260-A of the Income Tax
Act, 1961 reads as follows:
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“260-A. Appeal to High Court.
(1) An appeal shall lie to the High Court from every
order passed in appeal by the Appellate Tribunal
before the date of establishment of the National Tax
Tribunal, if the High Court is satisfied that the case
involves a substantial question of law.
(2) The Principal Chief Commissioner or Chief
Commissioner or the Principal Commissioner or
Commissioner or an assessee aggrieved by any order
passed by the Appellate Tribunal may file an appeal to
the High Court and such appeal under this sub-section
shall be—
(a) filed within one hundred and twenty days from the
date on which the order appealed against is received
by the assessee or the Principal Chief Commissioner
or Chief Commissioner or Principal Commissioner or
Commissioner;
(b) [***]
(c) in the form of a memorandum of appeal precisely
stating therein the substantial question of law involved.
(2A) The High Court may admit an appeal after the
expiry of the period of one hundred and twenty days
referred to in clause (a) of sub-section (2), if it is
satisfied that there was sufficient cause for not filing
the same within that period.
(3) Where the High Court is satisfied that a substantial
question of law is involved in any case, it shall
formulate that question.
(4) The appeal shall be heard only on the question so
formulated, and the respondents shall, at the hearing
of the appeal, be allowed to argue that the case does
not involve such question :
Provided that nothing in this sub-section shall be
deemed to take away or abridge the power of the court
to hear, for reasons to be recorded, the appeal on any
other substantial question of law not formulated by it,
if it is satisfied that the case involves such question.
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(5) The High Court shall decide the question of law so
formulated and deliver such judgment thereon
containing the grounds on which such decision is
founded and may award such cost as it deems fit.
(6) The High Court may determine any issue which—
(a) has not been determined by the Appellate Tribunal;
or
(b) has been wrongly determined by the Appellate
Tribunal, by reason of a decision on such question of
law as is referred to in sub-section (1).
(7) Save as otherwise provided in this Act, the
provisions of the Code of Civil Procedure, 1908 (5 of
1908), relating to appeals to the High Court shall, as
far as may be, apply in the case of appeals under this
section.”
This provision, being modelled on a similar provision that is contained
in Section 100 of the Code of Civil Procedure, makes it clear that the
High Court’s jurisdiction depends upon a substantial question of law
being involved in the appeal before it. First and foremost, it shall
formulate that question and on the question so formulated, the High
Court may then pronounce judgement, either by answering the question
in the affirmative or negative or by stating that the case at hand does
not involve any such question. If the High Court wishes to hear the
appeal on any other substantial question of law not formulated by it, it
may, for reasons to be recorded, formulate and hear such questions if it
is satisfied that the case involves such question – See section 260-A
(4). Under sub-section (6), the High Court may also determine any issue
which, though raised, has not been determined by the Appellate
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Tribunal or has been wrongly determined by the Appellate Tribunal by
reason of a decision on a substantial question of law raised.
13.In Kshitish Chandra Purkait v. Santosh Kumar Purkait (1997) 5 SCC
438, this Court referred to Section 100 of the Code of Civil Procedure
and then stated:
“10. We would only add that (a) it is the duty cast upon
the High Court to formulate the substantial question of
law involved in the case even at the initial stage; and (b)
that in (exceptional) cases, at a later point of time, when
the Court exercises its jurisdiction under the proviso to
sub-section (5) of Section 100 CPC in formulating the
substantial question of law, the opposite party should
be put on notice thereon and should be given a fair or
proper opportunity to meet the point. Proceeding to hear
the appeal without formulating the substantial question
of law involved in the appeal is illegal and is an
abnegation or abdication of the duty cast on court; and
even after the formulation of the substantial question of
law, if a fair or proper opportunity is not afforded to the
opposite side, it will amount to denial of natural justice.
The above parameters within which the High Court has
to exercise its jurisdiction under Section 100 CPC
should always be borne in mind. We are sorry to state
that the above aspects are seldom borne in mind in
many cases and second appeals are entertained and/or
disposed of, without conforming to the above
discipline.”
This statement of the law was followed in Dnyanoba Bhaurao
Shemade v. Maroti Bhaurao Marnor (1999) 2 SCC 471 (See
paragraph 10). A recent decision of this Court in Biswanath Ghosh v.
Gobinda Ghosh (2014) 11 SCC 605 has reiterated these principles in
paragraph 16 as follows:
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“16. Section 100 of the Code lays down the provision
with regard to the second appeal which reads as under:
“100.Second appeal.—(1) Save as otherwise expressly
provided in the body of this Code or by any other law for
the time being in force, an appeal shall lie to the High
Court from every decree passed in appeal by any court
subordinate to the High Court, if the High Court is
satisfied that the case involves a substantial question of
law.
(2) An appeal may lie under this section from an
appellate decree passed ex parte.
(3) In an appeal under this section, the memorandum of
appeal shall precisely state the substantial question of
law involved in the appeal.
(4) Where the High Court is satisfied that a substantial
question of law is involved in any case, it shall formulate
that question.
(5) The appeal shall be heard on the question so
formulated and the respondent shall, at the hearing of
the appeal, be allowed to argue that the case does not
involve such question:
Provided that nothing in this sub-section shall be
deemed to take away or abridge the power of the Court
to hear, for reasons to be recorded, the appeal on any
other substantial question of law, not formulated by it, if
it is satisfied that the case involves such question.”
From a bare reading of the aforesaid provision it is
manifestly clear that an appeal shall lie to the High
Court from an appellate decree only if the High Court is
satisfied that the case involves a substantial question of
law. It further mandates that the memorandum of
appeal precisely states the substantial question of law
involved in the appeal. If such an appeal is filed, the
High Court while admitting or entertaining the appeal
must record its satisfaction and formulate the
substantial question of law involved in the appeal. The
appeal shall then be heard on the questions so
formulated and the respondent shall be allowed to
argue only on those substantial questions of law.
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However, proviso to this section empowers the court to
hear on any substantial question of law not formulated
after recording reasons”
14.It can be seen that the substantial question of law that was raised by the
High Court did not contain any question as to whether the non-compete
fee could be taxed under any provision other than Section 28(ii)(a) of
the Income Tax Act, 1961. Without giving an opportunity to the parties
followed by reasons for framing any other substantial question of law as
to the taxability of such amount as a capital receipt in the hands of the
assessee, the High Court answered the substantial question of law
raised as follows:
“63. In view of the aforesaid discussion, we deem it
appropriate and proper to treat Rs. 6.60 crores as
consideration paid for sale of shares, rather than a
payment under Section 28(ii)(a) of the Act.
xxx xxx xxx
65. The substantial question of law is accordingly
answered in favour of the appellant-Revenue and
against the respondent-assessee but holding that
Rs.6.60 crores was taxable as capital gains in the
hands of the respondent-assessee being a part of the
full value sale consideration paid for transfer of shares.
The appellant-Revenue will be entitled to costs as per
the Delhi High Court Rules.”
Clearly, without any recorded reasons and without framing any
substantial question of law on whether the said amount could be taxed
under any other provision of the Income Tax Act, the High Court went
ahead and held that the amount of INR 6.6 crores received by the
assessee was received as part of the full value of sale consideration
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paid for transfer of shares – and not for handing over management and
control of CDBL and is consequently not taxable under Section 28(ii)(a)
of the Income Tax Act. Nor is it exempt as a capital receipt being noncompete fee, as it is taxable as a capital gain in the hands of the
respondent-assessee as part of the full value of sale consideration paid
for transfer of shares. This finding would clearly be in the teeth of
Section 260-A (4), requiring the judgment to be set aside on this score.
15.Coming to the merits, the High Court found:
“22. …No doubt, market price of each share was only
Rs.3/- per share and the purchase price under the
MOU was Rs.30/-, but the total consideration received
was merely about Rs.56 lacs. What was allegedly paid
as non-compete fee was ten times more, i.e. Rs.6.60
crores. The figure per se does not appear to be a
realistic payment made on account of non-compete
fee, dehors and without reference to sale of shares,
loss of management and control of CDBL. The
assessee had attributed an astronomical sum as
payment toward non-compete fee, unconnected with
the sale of shares and hence not taxable. Noticeably,
the price received for sale of shares, it is accepted was
taxable as capital gain. The contention that quoted
price of each share was mere Rs. 3 only, viz. price as
declared of Rs. 30/- is fallacious and off beam. The
argument of the assessee suffers from a basic and
fundamental flaw which is conspicuous and evident.”
This finding flies in the face of settled law. A catena of judgments has
held that commercial expediency has to be adjudged from the point of
view of the assessee and that the Income Tax Department cannot enter
into the thicket of reasonableness of amounts paid by the assessee.
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This Court in CIT v. Walchand & Co. (1967) 3 SCR 214 stated as
follows:
“It is open to the Tribunal to come to a conclusion either
that the alleged payment is not real or that it is not
incurred by the assessee in the character of a trader or
that it is not laid out wholly and exclusively for the
purpose of the business of the assessee and to disallow
it. But it is not the function of the Tribunal to determine
the remuneration which in their view should be paid to
in employee of the assessee. When a claim for
allowance under Section 10(2)(xv) of the Income Tax
Act is made, the Income Tax Authorities have to decide
whether the expenditure claimed as an allowance was
incurred voluntarily and on grounds of commercial
expediency. In applying the test of commercial
expediency for determining whether the expenditure
was wholly and exclusively laid out for the purpose of
the business, reasonableness of the expenditure has to
be adjudged from the point of view of the businessman
and not of the Revenue.” [at page 217]
The aforesaid judgment was followed by this Court in J.K. Woollen
Manufacturers v. CIT (1969) 1 SCR 525 where the Court held:
“As pointed out by this Court in CIT v. Walchand & Co.
Private Ltd. [(1967) 65 ITR 381 : (AIR 1967 SC 1435)]
in applying the test of commercial expediency for
determining whether an expenditure was wholly and
exclusively laid out for the purpose of the business,
reasonableness of the expenditure has to be adjudged
from the point of view of the businessman and not of the
Income Tax Department. It is, of course, open to the
Appellate Tribunal to come to a conclusion either that
the alleged payment is not real or that it is not incurred
by the assessee in the character of a trader or it is not
laid out wholly and exclusively for the purpose of the
business of the assessee and to disallow it. But it is not
the function of the Tribunal to determine the
remuneration which in their view should be paid to an
employee of the assessee.” [at page 529-530]
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This Court in CIT v. Panipat Woollen & General Mills Co. Ltd. (1976)
2 SCC 5 stated as follows:
“6. Before coming to the facts it may be necessary to
mention that there can be no dispute with respect to the
two important propositions:
“(1) that in order to fall within Section 10(2)(xv) of the
Act the deduction claimed must amount to an
expenditure which was laid out or expended wholly and
exclusively for the purpose of the business, profession
or vocation. This will naturally depend upon the facts of
each case,
(2) that in order to determine the question of
reasonableness of the expenditure, the test of
commercial expediency would have to be adjudged
from the point of view of the businessman and not of the
Income tax Department.”
Further, this Court in Shahzada Nand & Sons v. CIT (1977) 3 SCC 432
reiterated this principle as follows:
“4. …But it is well settled that these factors are to be
considered from the point of view of a normal, prudent
businessman. The reasonableness of the payment with
reference to these factors has to be judged not on any
subjective standard of the assessing authority but from
the point of view of commercial expediency… …What
is the requirement of commercial expediency must be
judged not in the light of the 19th Century laissezfaire doctrine which regarded man as an economic
being concerned only to protect and advance his selfinterest but in the context of current socio-economic
thinking which places the general interest of the
community above the personal interest of the individual
and believes that a business or undertaking is the
product of the combined efforts of the employer and the
employees and where there is sufficiently large profit,
after providing for the salary or remuneration of the
employer and the employees and other prior charges
19
such as interest on capital, depreciation, reserves etc.,
a part of it should in all fairness go to the employees.”
Also, this Court in S.A. Builders Ltd. v. CIT (2007) 1 SCC 781 held as
follows:
“36. We agree with the view taken by the Delhi High
Court in CIT v. Dalmia Cement (B) Ltd. [(2002) 254 ITR
377 (Del)] that once it is established that there was
nexus between the expenditure and the purpose of the
business (which need not necessarily be the business
of the assessee itself), the Revenue cannot justifiably
claim to put itself in the armchair of the businessman or
in the position of the Board of Directors and assume the
role to decide how much is reasonable expenditure
having regard to the circumstances of the case. No
businessman can be compelled to maximise its profit.
The Income Tax Authorities must put themselves in the
shoes of the assessee and see how a prudent
businessman would act. The authorities must not look
at the matter from their own viewpoint but that of a
prudent businessman. As already stated above, we
have to see the transfer of the borrowed funds to a
sister concern from the point of view of commercial
expediency and not from the point of view whether the
amount was advanced for earning profits.”
The same principle has also been cited with approval by a recent
judgment of this Court in Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC
359 where the Court held as follows:
“11. Insofar as loans to the sister concern/subsidiary
company are concerned, the law in this behalf is
recapitulated by this Court in S.A. Builders
Ltd. v. CIT [S.A. Builders Ltd. v. CIT, (2007) 1 SCC
781]. After taking note of and discussing on the scope
of commercial expediency, the Court summed up the
legal position in the following manner: (SCC pp. 787-88,
paras 27-31)
20
xxx xxx xxx
31. It has been repeatedly held by this Court that the
expression ‘for the purpose of business’ is wider in
scope than the expression ‘for the purpose of earning
profits’ vide CIT v. Malayalam Plantation
Ltd. [CIT v. Malayalam Plantation Ltd., (1964) 53 ITR
140 (SC)] , CIT v. Birla Cotton Spg. & Wvg. Mills
Ltd. [CIT v. Birla Cotton Spg. & Wvg. Mills Ltd.,
(1971) 3 SCC 344] , etc.”
12. In the process, the Court also agreed that the view
taken by the Delhi High Court in CIT v. Dalmia Cement
(B.) Ltd. [CIT v. Dalmia Cement (B.) Ltd., 2001 SCC
OnLine Del 1447 : (2002) 254 ITR 377] wherein the
High Court had held that (SCC OnLine Del para 8) once
it is established that there is nexus between the
expenditure and the purpose of business (which need
not necessarily be the business of the assessee itself),
the Revenue cannot justifiably claim to put itself in the
arm-chair of the businessman or in the position of the
Board of Directors and assume the role to decide how
much is reasonable expenditure having regard to the
circumstances of the case. It further held that no
businessman can be compelled to maximise his profit
and that the Income Tax Authorities must put
themselves in the shoes of the assessee and see how
a prudent businessman would act. The authorities must
not look at the matter from their own viewpoint but that
of a prudent businessman.”
16.The High Court’s next finding based on the judgment in Vodafone
(supra) is as follows:
“56. In view of the aforesaid discussion and our
findings on the true and real nature of the transaction
camouflaged as ‘non-compete fee‘, we have no
hesitation and reservation that the respondentassessee had indulged in abusive tax avoidance.”
17. We may only reiterate as correctly found by the majority judgments of
the Appellate Tribunal, that:
21
(i) A share of the face value of INR 10 and market value of INR
3 was sold for INR 30 as a result of control premium having to
be paid.
(ii) It is important to note that each member of the family was paid
for his/her shares in the company, the lion’s share being paid
to the assessee’s son and wife as they held the most number
of shares within the said family.
(iii) The non-compete fee of INR 6.6 crores was paid only to the
assessee. This was for the reason stated in the Deed of
Covenant, namely, that Shri Shiv Raj Gupta had acquired
considerable knowledge, skill, expertise and specialisation in
the liquor business. There is no doubt that on facts he has
been Chairman and Managing Director of CDBL for a period
of about 35 years; that he also owned a concern, namely M/s
Maltings Ltd., which manufactured and sold IMFL and beer
and that he was the President of All India Distilleries
Association and H.P. Distilleries Association.
(iv) It is further recorded in the judgment of the Accounting
Member that the amount of INR 6.6 crores was arrived at as
a result of negotiations between the SWC group and the
appellant.
22
(v) That the restrictive covenant for a period of 10 years resulted
in the payment of INR 66 lakhs per year so that the appellant
“…will not start or engage himself, directly or indirectly, or
provide any service, assistance or support of any nature,
whatsoever, to or in relation to the manufacturing, dealing and
supplying or marketing of IMFL and/or Beer.” Given the
personal expertise of the assessee, the perception of the
SWC group was that Shri Gupta could either start a rival
business or engage himself in a rival business, which would
include manufacturing and marketing of IMFL and Beer at
which he was an old hand, having experience of 35 years.
(vi) As was correctly held by the second Judicial Member, it was
also clear that the withholding of INR 3 crores out of INR 6.6
crores for a period of two years by way of a public deposit with
the SWC group for the purpose of deduction of any loss on
account of any breach of the MoU, was akin to a penalty
clause, making it clear thereby that there was no colourable
device involved in having two separate agreements for two
entirely separate and distinct purposes.
18.The reasons given by the learned Assessing Officer and the minority
judgment of the Appellate Tribunal are all reasons which transgress the
23
lines drawn by the judgments cited, which state that the revenue has no
business to second guess commercial or business expediency of what
parties at arms-length decide for each other. For example, stating that
there was no rationale behind the payment of INR 6.6 crores and that
the assessee was not a probable or perceptible threat or competitor to
the SWC group is the perception of the Assessing Officer, which cannot
take the place of business reality from the point of view of the assessee,
as has been pointed out by us hereinabove. The fact that M/s Maltings
Ltd. had incurred a loss in the previous year is again neither here nor
there. It may in future be a direct threat to the SWC group and may turn
around and make profits in future years. Besides, M/s Maltings Ltd. is
only one concern of the assessee – it is the assessee’s expertise in this
field on all counts that was the threat perception of the SWC group which
cannot be second guessed by the revenue. Equally the fact that there
was no penalty clause for violation of the Deed of Covenant, has been
found by us to be incorrect given the letter dated 02.04.1994. The fact
that the respondent-assessee in his letter dated 26.03.1998 in reply to
the show cause notice had stated that the SWC group had gained
substantial commercial advantage by the purchase of shares in CDBL
as the turnover increased from INR 9.79 crores in the accounting period
ending 31.03.1991 to INR 45.17 crores in the accounting period ending
31.03.1997 is again neither here nor there. As a matter of fact, the SWC
24
group, due to its own advertisement and marketing efforts, may well
have reached this figure after a period of six years (the date 30.09.1995
is wrongly recorded by the High Court in paragraph 19 – the correct date
as per the letter dated 26.03.1998 is 31.03.1991, as has been pointed
out by us hereinabove).
19.It only remains for us to point out the judgment in Guffic Chem (P) Ltd.
v. CIT (2011) 4 SCC 254. In this case, the question set out by the Court
is as follows:
“Whether a payment under an agreement not to
compete (negative covenant agreement) is a capital
receipt or a revenue receipt is the question which arises
for determination in this case?”
Here, the Court was dealing with an amount of INR 50 lakhs received
by the appellant-assessee from Ranbaxy as a non-compete fee under
an agreement dated 31.03.1997. This Court in negating the application
of Section 28(ii)(a) to such receipt, held as follows:
“Decision
4. The position in law is clear and well settled. There
is a dichotomy between receipt of compensation by an
assessee for the loss of agency and receipt of
compensation attributable to the negative/restrictive
covenant. The compensation received for the loss of
agency is a revenue receipt whereas the
compensation attributable to a negative/restrictive
covenant is a capital receipt.
5. The above dichotomy is clearly spelt out in the
judgment of this Court in Gillanders case [(1964) 53
ITR 283 (SC)] , in which the facts were as follows: the
25
assessee in that case carried on business in diverse
fields besides acting as managing agents, shipping
agents, purchasing agents and secretaries. The
assessee also acted as importers and distributors on
behalf of foreign principals and bought and sold on its
own account. Under an agreement which was
terminable at will the assessee acted as a sole agent
of explosives manufactured by Imperial Chemical
Industries (Export) Ltd. That agency was terminated
and by way of compensation Imperial Chemical
Industries (Export) Ltd. paid for first three years after
the termination of the agency two-fifths of the
commission accrued on its sales in the territory of the
agency of the appellant and in addition in the third year
full commission was paid for the sales in that year.
Imperial Chemical Industries (Export) Ltd. took a
formal undertaking from the assessee to refrain from
selling or accepting any agency for explosives.
6. Two questions arose for determination in Gillanders
case [(1964) 53 ITR 283 (SC)] , namely, whether the
amounts received by the appellant for loss of agency
was in normal course of business and therefore
whether they constituted revenue receipt? The second
question which arose before this Court was whether
the amount received by the assessee (compensation)
on the condition not to carry on a competitive business
was in the nature of capital receipt? It was held that
the compensation received by the assessee for loss of
agency was a revenue receipt whereas compensation
received for refraining from carrying on competitive
business was a capital receipt.
7. This dichotomy has not been appreciated by the
High Court in its impugned judgment. The High Court
has misinterpreted the judgment of this Court
in Gillanders case [(1964) 53 ITR 283 (SC)] . In the
present case, the Department has not impugned the
genuineness of the transaction. In the present case,
we are of the view that the High Court has erred in
interfering with the concurrent findings of fact recorded
by CIT (A) and the Tribunal.
26
8. One more aspect needs to be highlighted. The
payment received as non-competition fee under a
negative covenant was always treated as a capital
receipt till Assessment Year 2003-2004. It is only vide
the Finance Act, 2002 with effect from 1-4-2003 that
the said capital receipt is now made taxable [see
Section 28(v-a)]. The Finance Act, 2002 itself indicates
that during the relevant assessment year
compensation received by the assessee under noncompetition agreement was a capital receipt, not
taxable under the 1961 Act. It became taxable only
with effect from 1-4-2003. 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(v-a) and that too with effect
from 1-4-2003. Hence, the said Section 28(v-a) is
amendatory and not clarificatory.
9. Lastly, in CIT v. Rai Bahadur Jairam Valji [(1959) 35
ITR 148 (SC)] it was held by this Court that if a contract
is entered into in the ordinary course of business, any
compensation received for its termination (loss of
agency) would be a revenue receipt. In the present
case, both CIT(A) as well as the Tribunal, came to the
conclusion that the agreement entered into by the
assessee with Ranbaxy led to loss of source of
business; that payment was received under the
negative covenant and therefore the receipt of Rs. 50
lakhs by the assessee from Ranbaxy was in the nature
of capital receipt. In fact, in order to put an end to the
litigation, Parliament stepped in to specifically tax such
receipts under the non-competition agreement with
effect from 1-4-2003.”
27
20.Respectfully following the aforesaid decision, we allow the appeal and
set aside the impugned judgment for all the reasons given by us above.
All pending applications, if any, stand disposed of in terms of the
judgment.
…………………..………………J.
(R. F. Nariman)
……………..……………………J.
(Navin Sinha)
……………..……………………J.
(B.R. Gavai)
New Delhi
22nd July, 2020.
