IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT:
THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU FRIDAY, THE 13TH DAY OF OCTOBER 2017/21ST ASWINA, 1939
ITA.No. 47 of 2012
------------------AGAINST THE ORDER IN ITA 1309/2004 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 29-07-2011
APPELLANT/APPELLANT:
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THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM
BY ADV. SRI.P.K.R.MENON, SC FOR INCOME TAX
RESPONDENT/APPELLANT:
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SHRI.CHANDRASEKHAR BALAGOPAL, TC-IX/1323 SREEPOORNAM, SASTHAMANGALAM, THIRUVANANTHAPURAM-695 010.
R BY ADV. SRI.ABRAHAM GEORGE JACOB R BY ADV. SRI.VIKRAM RAMAKRISHNAN R BY ADV.SRI.D.ANAND
THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 13-10-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:
I.T.A.47 OF 2012
## APPENDIX
## PETITIONER'S ANNEXURES:
ANNEXURE A: TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER 143(3) DATED 15.3.2004.
ANNEXURE B: TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 6.12.2004.
ANNEXURE C: TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL DATED 28.4.2006.
ANNEXURE D: TRUE COPY OF JUDGMENT OF THE HON'BLE HIGH COURT DATED 2.4.2009.
ANNEXURE D1: TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL DATED 29.7.2011.
ANNEXURE E: TRUE COPY OF THE AGREEMENT BETWEEN M/S PENINSULA POLYMERS LIMITED AND TERUMO CORPORATION, JAPAN.
**==> picture [97 x 8] intentionally omitted <==**
P.S. TO JUDGE
## **ANTONY DOMINIC, J. & DAMA SESHADRI NAIDU, J.**
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## **I.T.A.No.47 of 2012**
**- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 13[th] day of October, 2017**
## **JUDGMENT**
## _**Antony Dominic, J.**_
This appeal filed by the Revenue is against the order passed by the Income Tax Appellate Tribunal, Cochin Bench, in ITA 1309/04 concerning the assessment year 2000-2001. The said appeal was filed by the respondent assessee calling in question the order of assessment passed against it, which was confirmed by the
1[st] Appellate Authority whereby the amounts received by him pursuant to Annexure E, non-competition agreement, was held to be a revenue receipt, was set aside by the Tribunal on the conclusion that it is a capital receipt.
2. The facts of the case, in brief, are that the assessee along with another person were the promoters of M/S Peninsula Polymers Limited, Thiruvananthapuram. He was also the Managing Director of the company. Subsequently, the shares of the
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assessee and the other person were acquired by M/S Terumo Corporation of Japan. As part of the process, a non-competition agreement was entered into between the parties on 21[st] June 1999. In terms of that agreement, for the commitments made by the assessee and the other person (the promoters group), they were paid a one time payment of Rs.5.2 crores. Out of Rs.5.2 crores, the assessee has received Rs.3.9 crores. It was this Rs.3.9 crores that was held to be a revenue receipt by the Assessing Officer, overruling the objection of the assessee that it was a capital receipt in consideration of his non-competition agreement. This assessment was confirmed by the 1[st] Appellate Authority and was set aside by the Tribunal holding it to be a capital receipt. It is in this background, the appeal is filed by the Revenue raising the following questions of law for the consideration of this court:
_“1. Whether on the facts and in the circumstances of the case and also in view of the fact that the payment was made not on or for termination of employment but in modification of or pursuant to modification of the terms and conditions thereto, is not the amount_
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_received by the assessee under a compromise agreement styled as non-compete agreement assessable:-_
- _(a) as compensation or other payment due to or received under Section 28(ii)(a) of the Income Tax Act?_
_(b) as revenue receipt/income?”_
3. We heard the Senior Counsel for the Revenue and
Sri.D.Anand, counsel for the assessee.
4. While the learned Senior Counsel for the Revenue contended that the payment received by the assessee pursuant to the non competition agreement dated 21[st] June 1999 is a revenue receipt, with liability to be taxed, the same was contradicted by the learned counsel appearing for the assessee contending it to be a capital receipt.
5. Having considered the rival submissions made by both sides, we feel that the answer to the two questions framed for consideration of this court would depend upon our conclusion as to whether the receipt of Rs.3.9 crores by the assessee is a revenue receipt as contended by the Revenue or a capital receipt as
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contended by the assessee. That if Rs.3.2 crores received by the assessee is as non- competition fee, as contended by him, it is a capital receipt is the law settled by the Apex Court in _**Gillanders Arbuthnot and Co. Ltd. v. CIT (1964) 53 ITR 283 (SC) and Guffic Chem Pvt. Ltd. v. Commissioner of Income Tax (2011) (4) SCC 254.**_ Therefore,we shall examine the question whether the payment received by the assessee is a non-competition fee, as contended by him.
6. Agreement dated 21[st] June 1999 is the document, on the basis of which the payment has been received by the assessee. Clause 4 providing _for payments by Terumo Corporation_ reads thus:
_“_ _**4. Payments by Terumo Corporation:**_
_4.01 In consideration of the commitments of the Promoter Group hereunder Terumo Corporation agrees to pay Rupees fifty two million (Rs.52,000,000) on the Effective Date in a manner as agreed between the parties hereto._
_4.02 If so required by the laws of India or Japan, Terumo Corporation shall deduct applicable income tax at source and pay the net amount to the Promoter_
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_Group. Terumo Corporation shall promptly issue and deliver requisite certificates and other documents evidencing the deduction of tax at source and payment thereof.”_
7. Reading of clause 4.01, makes it amply clear that the payment of Rs.5.2 million rupees was made to the Promoters Group consisting of the assessee and the other person was in consideration of the commitments of the Promoter Group. The commitments made by the Promoter Group have been defined in clause 3 of the agreement which read thus:
## _“3. Commitments by the Promoter Group_
_3.01 The Promoter Group shall endeavour to further the objectives of the joint venture as envisaged in the Joint Venture Agreement dated June 21, 1999 and shall always act in the best interest of the Company._
_3.02 Notwithstanding the provision of the Joint Venture Agreement to be entered into between Terumo MH and the Promoter Group, neither member of the Promoter Group, whether by himself or relatives or through any kind of body corporate controlled by them, shall, directly or indirectly, carry on or be engaged in, be employed or concerned with or interested in or advise or become affiliated with_
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_or permit his name to be used by, any person or persons, firms, associations, syndicate company or corporation carrying on, engaged in, concerned with or interested in marketing or manufacturing in any manner whatsoever any trade or business similar to or competing with the business of the Company in India or any other country in the world._
_3.03 The Promoter Group agrees that all restrictions contained in this Agreement are reasonable and valid and not unduly burdensome to him. If any provision of this Agreement is found to be invalid, the parties shall revise such provision in order to reach the same purpose and intent of such provision as closely as possible and so that it shall conform to legal requirements and the remainder of this Agreement and that provision as so amended shall continue in full force and effect.”_
8. Reading of clause 3.02, makes it clear beyond any doubt that the members of the Promoter Group consisting of the assessee and Sri.C.Padmakumar in or are prohibited from engaging interested in marketing or manufacturing in any manner whatsoever any trade or business similar to or competing with the business of the Terumo Corporation in India or any other country in the world. A combined reading of clauses 3 and 4 of the
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agreement, therefore, shows that payment of Rs.5.2 million was made by Terumo Corporation for the commitments of the Promoter Group and that the commitments of the Promoter Group as contained in clause 3, is the non-competition agreement as incorporated therein. Evidently, therefore, the payment received by the assessee is towards the non competition fee. However, learned Senior counsel for the assessee had referred to the preamble portion of the agreement and contended that the agreement has been in consideration of the commitments of the Promoter Group, which included their continuance of the management of the company also. True, there is such a recital, but, however, when it comes to the agreement part as incorporated in the document the commitments are there contained in clause 3 of the agreement, in consideration of which, payment in question was made.
9. We may, in this context also state that there is separate employment agreement between Peninsula Polymers and the assessee entered into on 21.7.1999, dealing with the terms and
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continuation of the continued employment of the assessee as the Managing Director of the company. It was taking note of the provisions of the non-competition agreement dated 21.6.1999 and the employment agreement dated 21.7.1999 that the Tribunal has held that the payment received by the assessee is in consideration towards the non-competition fee, and that, therefore, it is a capital receipt. Such a conclusion arrived at by the Tribunal does not suffer from any legal infirmity for this court to interfere. We, therefore, answer the questions of law in favour of the assessee and against the Revenue.
The appeal is accordingly disposed of.
_SD/-_ **ANTONY DOMINIC JUDGE**
_SD/-_ **DAMA SESHADRI NAIDU JUDGE**
_jes_
