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November 3, 2023

The payment made for not conducting business for ten years was essentially a capital receipt

The payment made for not conducting business for ten years was essentially a capital receipt

Fact and issue of the case

These appeals concern Assessment Year (AY) 1999-2000.

The appellant/ revenue and the respondent/assessee seek to assail, albeit for different reasons, the order dated 16.12.2004, passed by the Income Tax Appellate Tribunal [in short, “Tribunal”].

The above-captioned cross-appeals were admitted by the court via an order dated 10.03.2006.

The court framed the following questions of law for consideration:

“(i) Whether the ITAT was correct in law in holding that the proceedings u/s 147 read with Section 148 of the Income Tax Act, 1961 had not been validly initiated against the assessee?

(ii) Whether the ITAT was correct in law in holding that an amount of Rs.8 crores received by the assessee, in the facts and circumstances of the case, was capital receipt, hence not taxable?”

Insofar as the first question of law is concerned, it concerns the appeal filed by the respondent/assessee which is ITA No.1200/2005, while the second question of law, as framed, has been raised by the appellant/revenue in ITA No.399/2005.

Mr Ajay Vohra, learned senior counsel, who appears on behalf of the respondent/assessee, says that if the court were to rule in favour of the assessee insofar as the second question of law is concerned, then it would not be necessary to press the first question of law as it would be rendered academic.

The statement of Mr Vohra is taken on record.

Therefore, we propose to deal with the second question of law as framed by the court via an order dated 10.03.2006.

The broad facts in the backdrop of which this question of law arises for consideration are as follows:

The assessee at the relevant point in time was the Joint Managing Director of an entity going by the name Geep Industrial Syndicate Ltd. [hereafter referred to as “GISL”].

Observation of the court

We may note that what the Tribunal, in brief, is seeking to convey is that because the assessee had executed a non-compete agreement with WSIL, the conversation the CIT(A) had with the assessee could not be used to vary, add or subtract from the obligations contained in the said agreement.

As noticed above by us, the assessee had been restrained both directly and indirectly from undertaking any business which would compete with the business of WSIL.

Clearly, for the period in which the non-compete agreement was to operate, which in this case was 10 years, the assessee’s source of income had been clamped and, therefore, compensation received by him could only be treated as capital receipt.

Thus, we have no difficulty in holding that the conclusion arrived at by the Tribunal was correct.

Accordingly, the second question of law which is framed in the above-captioned appeals is answered against the revenue and in favour of the assessee.

As recorded above, given the fact that on merits, we have sustained the impugned order passed by the Tribunal, the other question which concerns the jurisdiction of the AO to trigger proceedings under Sections 147/148 of the Act has become academic, and is not pressed on behalf of the assessee.

The above-captioned appeals are disposed of in the aforesaid terms.

Parties will act based on the digitally signed copy of the judgment.

Read the full order from here


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