SHIV RAJ GUPTA versus COMMISSIONER OF INCOME-TAX, DELHI-IV on 22 July 2020

874

SUPREME COURT REPORTS

[2020] 5 S.C.R.

A

SHIV RAJ GUPTA

v.

COMMISSIONER OF INCOME-TAX, DELHI-IV

(Civil Appeal No. 12044 of 2016)

B

JULY 22, 2020

[R. F. NARIMAN, NAVIN SINHA AND B. R. GAVAI, JJ.]

Income Tax Act, 1961 – ss.28(ii)(a) and 260-A – Paymentmade as non-competition fee – Taxability of – Appellant was thechairman and Managing director of a Company-CDBL – A SWCCgroup entered into a MOU with the appellant and paid the entiresale consideration to the appellant for the said Company-CDBL –Consequent to which, appellant handed over physical possession,management and control of the said brewery and distillery of CDBL– By a deed of Covenant, Rs. 6.6 crores was paid by SWC to theDappellant as non-competition fee for not carrying on directly orindirectly any manufacturing or marketing activities relating toIndian Made Foreign Liquor for a period of 10 years – TheAssessing Officer held that the deed of covenant was a colourabledevice to evade tax payable u/s. 28(ii)(a) of the Income Tax Act,1961 – The appeals before the Commissioner of Income TaxE(appeals) were dismissed – However, the Income Tax AppellateTribunal allowed the appeals by majority of 2:1 – The revenuepreferred an appeal u/s.260-A of the 1961 Act – The High Courtheld that the said sum of Rs. 6.6 crores could not be brought to taxu/s. 28(ii)(a), but would have to be treated as a taxable capital gainFin the hands of the appellant, being part of the full value of the saleconsideration paid for transfer of shares – On appeal, held: Thesubstantial question of law raised by the High Court did not containany question as to whether the non-compete fee could be taxedunder any provision other than s.28(ii)(a) of the 1961 Act – Withoutrecording any reason and without framing any substantial questionGof law regarding the same, the High Court held that the amount ofRs. 6.6 crores was received as part of the full value of saleconsideration paid for transfer of shares and not for handing overmanagement and control of CDBL and is consequently not taxableu/s. 28(ii)(a) – Nor is it exempt as a capital receipt being non-compete H

fee, as it is taxable as a capital gain in the hands of assessee aspart of the full value of sale consideration paid for transfer ofshares – This finding is in teeth of s. 260-A(4), requiring the judgmentto be set aside on this score – Also, the reasons given by the AssessingOfficer and the minority judgment of the Appellate Tribunal are allreasons which transgress the lines by the Supreme Court Judgments,which state that the revenue has no business to second guesscommercial or business expediency of what parties at arms-lengthdecide for each other – Further, it was correctly held by the majorityjudgments of the Appellate Tribunal, inter alia, that the withholdingof Rs. 3 crores out of Rs. 6.6 crores for a period of two years byway of a public deposit with the SWC group for the purpose ofdeduction of any loss on account of any breach of MOU, was akinto a penalty clause, making it clear thereby that there was nocolourable device involved in having two separate agreements fortwo entirely separate and distinct purposes – Besides, the judgmentof the Supreme Court in Guffic Chem (P) Ltd. v. CIT was followed –Consequently, the impugned judgment of the High Court was setaside.

Allowing the appeal, the Court

HELD: 1.1 It can be seen that the substantial question oflaw that was raised by the High Court did not contain any questionas to whether the non-compete fee could be taxed under anyprovision other than Section 28(ii)(a) of the Income Tax Act, 1961.Without giving an opportunity to the parties followed by reasonsfor framing any other substantial question of law as to the taxabilityof such amount as a capital receipt in the hands of the assessee.[Para 14][888-B-C]

Conclusion

1.2 Without any recorded reasons and without framing anysubstantial question of law on whether the said amount could betaxed under any other provision of the Income Tax Act, the HighCourt went ahead and held that the amount of INR 6.6 croresreceived by the assessee was received as part of the full value ofsale consideration paid for transfer of shares – and not for handingover management and control of CDBL and is consequently nottaxable under Section 28(ii)(a) of the Income Tax Act. Nor is itexempt as a capital receipt being non-compete fee, as it is taxableas a capital gain in the hands of the respondent-assessee as part ABCD

EF

G

H

Aof 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. A catena ofjudgments has held that commercial expediency has to beadjudged from the point of view of the assessee and that theIncome Tax Department cannot enter into the thicket ofBreasonableness of amounts paid by the assessee. [Paras 14 and15][888-F-H; 889-D-E]2. This Court may only reiterate as correctly found by themajority judgments of the Appellate Tribunal, that:

C(i) A share of the face value of INR 10 and market value ofINR 3 was sold for INR 30 as a result of control premium havingto be paid.

(ii) It is important to note that each member of the familywas paid for his/her shares in the company, the lion’s share beingDpaid to the assessee’s son and wife as they held the most numberof shares within the said family.

(iii) The non-compete fee of INR 6.6 crores was paid onlyto the assessee. This was for the reason stated in the Deed ofCovenant, namely, that the appellant had acquired considerableEknowledge, skill, expertise and specialisation in the liquorbusiness. There is no doubt that on facts he has been Chairmanand Managing Director of CDBL for a period of about 35 years;that he also owned a concern, namely M/s Maltings Ltd., whichmanufactured and sold IMFL and beer and that he was thePresident of All India Distilleries Association and H.P. DistilleriesFAssociation.

(iv) It is further recorded in the judgment of the AccountingMember that the amount of INR 6.6 crores was arrived at as aresult of negotiations between the SWC group and the appellant.

(v) That the restrictive covenant for a period of 10 yearsGresulted in the payment of INR 66 lakhs per year so that theappellant “…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 andsupplying or marketing of IMFL and/or Beer.” Given the personalH

expertise of the assessee, the perception of the SWC group wasthat the appellant could either start a rival business or engagehimself in a rival business, which would include manufacturingand 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 INR6.6 crores for a period of two years by way of a public depositwith the SWC group for the purpose of deduction of any loss onaccount of any breach of the MoU, was akin to a penalty clause,making it clear thereby that there was no colourable deviceinvolved in having two separate agreements for two entirelyseparate and distinct purposes. [Para 17][892-H; 893-A-H]

3. The reasons given by the Assessing Officer and theminority judgment of the Appellate Tribunal are all reasons whichtransgress the lines drawn by the judgments cited, which statethat the revenue has no business to second guess commercial orbusiness expediency of what parties at arms-length decide foreach other. [Para 18][894-A]

Kshitish Chandra Purkait v. Santosh Kumar Purkait(1997) 5 SCC 438 : [1997] 1 Suppl. SCR 201;Biswanath Ghosh v. Gobinda Ghosh (2014) 11 SCC605 : [2014] 3 SCR 1097; CIT v. Walchand & Co.[1967] 3 SCR 214; J.K. Woollen Manufacturers v. CIT[1969] 1 SCR 525; CIT v. Panipat Woollen & GeneralMills Co. Ltd. (1976) 2 SCC 5 : [1976] 3 SCR 186;Shahzada Nand & Sons v. CIT (1977) 3 SCC 432 :[1977] 3 SCR 529; S.A. Builders Ltd. v. CIT (2007) 1SCC 781 : [2006] 10 Suppl. SCR 1077; Hero Cycles(P) Ltd. v. CIT (2015) 16 SCC 359; Guffic Chem (P)Ltd. v. CIT (2011) 4 SCC 254 : [2011] 3 SCR 899 –relied on.

McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230 : [1985]3 SCR 791;Vodafone International Holdings BV v.Union of India (2012) 6 SCC 613 : [2012] 1 SCR 573;Dnyanoba Bhaurao Shemade v. Maroti BhauraoMarnor (1999) 2 SCC 471 – referred to.

A

BC

D

E

F

G

H

A

From the Judgment and Order dated 22.12.2014 of the High CourtEof Delhi at New Delhi in Income Tax Appeal No. 41 of 2002.

Arvind Datar, Ajay Vohra, Sr. Advs., Ms. Kavita Jha, VaibhavKulkarni, Udit Naresh, Advs. for the Appellant.

Arijit Prasad, Sr. Adv., D. L. Chidanand, Mrs. Anil Katiyar, Advs.for the Respondent.F

The Judgment of the Court was delivered by

R. F. NARIMAN, J.

1. The present appeal relating to assessment year 1995-96 is byone Shri Shiv Raj Gupta, who was the Chairman and Managing DirectorGof M/s Central Distillery and Breweries Ltd. (hereinafter referred to as“CDBL”), which had a unit in Meerut manufacturing beer and IndianMade Foreign Liquor (hereinafter referred to as “IMFL”). The factsleading to an appreciation of the issues raised in this appeal are as follows.

2. By a Memorandum of Understanding (hereinafter referred toHas “MoU”) dated 13.04.1994, made between the appellant and three group companies of M/s Shaw Wallace Company Group (hereinafterreferred to as “SWC group”), the appellant, his wife, son, daughter-in-law and two daughters were the registered holders of 1,86,109 equityshares of INR 10 each constituting 57.29% of the paid-up equity sharecapital of CDBL listed in the Bombay and Delhi Stock Exchanges. Thebreak-up of the shares held by the family members of the appellant andthe appellant himself are as follows:

A

B

3. The said MoU recites that the company employed in its factory350 employees and around 25 staff and other officers in its other offices.The MoU then refers to a direction of the Supreme Court, which wasmade by an Order dated 11.03.1994, which made it clear that thecompany’s manufacturing activity at the plant at Meerut was suspendeduntil a secondary effluent treatment plant is installed and made operativeby 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 marketprice of the share was only INR 3 per share). It is stated in the saidMoU that the entire sale consideration of Rs.55,83,270/- has since beenpaid by the SWC group to Shri Gupta, as a result of which Shri Guptahas irrevocably handed over physical possession, management and controlof the said brewery and distillery of CDBL to a representative of theSWC 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 inthe saddle i.e. be made directors on or before 13.04.1994, so that theywill 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 E

F

G

H

Aresign as Chairman and Managing Director and as Joint ManagingDirector respectively of CDBL by 13.04.1994. Under Clause 7 of thesaid MoU, personal guarantees given by the appellant and his son toUCO Bank, IFCI, ICICI and IREDA for loans amounting to INR 8.44crores will be indemnified against all claims, actions, etc. in respectthereof.B

4. By a Deed of Covenant dated 13.04.1994, the MoU signed onthe same day was reiterated, and it was then stated in recitals 3 and 4 asfollows:

“(3) Over the past years, Mr. Shivraj Gupta has acquiredCconsiderable knowledge, skill, expertise and specialization in liquorbusiness.

(4) In furtherance of the purchase of the said shares, SWC haverequested Mr. Shivraj Gupta to give a restrictive covenant to andin favour of SWC for not carrying ondirectly or indirectly anyDmanufacturing or marketing activities, whatsoever, relating to IndianMade ForeignLiquor (IMFL) or Beer for a period of 10 yearsfrom the date hereof which Mr. Gupta has agreed to give for theconsideration of a non-competition fee of Rs. 6,60,00,00 (RupeesSix crores and sixty lacs only) to be paid by SWC to Mr. Gupta.”

EThe 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 Sixcrores only) paid by SWC to Mr. Gupta as anadvance against theaforesaid non-competition fee of Rs.6,60,00,000 (the receiptwhereof, Mr. Gupta hereby admits and acknowledges), Mr. GuptaFhereby irrevocably agrees, covenants and undertakes that witheffect from the date of these presents, Mr. Gupta will not start orengage himself directly or indirectly or provide any service,assistance or support of any nature, whatsoever, to or inrelationto the manufacturing, dealing and supplying or marketing of IndianGMade Foreign Liquor (IMFL) and/orBeer. The balance amountof Rs. 60,00,000 (Rupeessixty lacs only) will be paid by SWC toMr. Gupta on 31[st]October, 1994.

2. This covenant shall remain in full force and effect for aperiodof 10 years from the date of these presents and this covenant willbe absolutely and irrevocably binding on Mr. Gupta.”

5. The bone of contention in this appeal is whether the said Deedof Covenant can be said to contain a restrictive covenant as a result ofwhich payment is made to the appellant, or whether it is in fact part of asham transaction which, in the guise of being a separate Deed ofCovenant, is really in the nature of payment received by the appellant ascompensation for terminating his management of CDBL, in which caseit 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 underthe head “Profits and gains of business or profession”, - xxx xxxxxx

(ii) any compensation or other payment due to or received by,- (a) any person, by whatever name called, managing the whole orsubstantially the whole of the affairs of an Indian company, at orin connection with the termination of his management or themodification of the terms and conditions relating thereto;”

6. By an order dated 31.03.1998, the Assessing Officer held thatdespite the fact that the appellant owned a concern, namely, one M/sMaltings Ltd., which also manufactured IMFL, being a loss makingconcern, no real competition could be envisaged between a giant, namely,the SWC group and this loss making dwarf, as a result of which thehuge amount paid under the Deed of Covenant cannot be said to be anamount 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 suchnon-compete fee or amount despite the fact that he also resigned fromhis position as Joint Managing Director. It was also held that this was alump sum payment with no reason as to why such a huge amount ofINR 6.6 crores was being paid. It was also found that there was nopenalty clause to enforce the performance of obligations under theaforesaid Deed of Covenant, as a result of which, applying the judgmentin McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, the Deed ofCovenant was held to be a colourable device to evade tax that is payable A

B

C

D

E

F

G

H

Aunder 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 learnedCommissioner of Income Tax (Appeals) was dismissed. When it camebefore the Income Tax Appellate Tribunal (hereinafter referred to asB“Appellate Tribunal”) the learned Accountant Member differed with thelearned Judicial Member. The learned Accountant Member held thatthe two deeds would have to be read separately and that revenue cannotchallenge the business perception of the assessee. Further, it was heldthat there was no colourable device involved, and that, as a result, non-compete fee payable under the Deed of Covenant was not taxable underCSection 28(ii)(a) or any other provision of the Income Tax Act, 1961.The learned Judicial Member on the other hand substantially agreedwith the Assessing Officer, as a result of which he decided in favour ofthe revenue. A reference was then made to a third Member, who wasalso a Judicial Member. The learned third Member emphasised the factDthat a share worth INR 3 was sold for INR 30 under the MoU as aresult of transfer of control of the CDBL. It cannot be said that theseshares have been undervalued, neither can it be said that there was anycollusion or other sham transaction, as a result of which the amount ofINR 6.6 crores has escaped income tax. He pointed out that by a letterdated 02.04.1994, a “penalty clause” was provided for in that, out of theEamount received by the assessee an amount of INR 3 crore was to bedeposited with the SWC group for two years under a public depositscheme, it being made clear that in case there is any breach of the termsof the MoU resulting in loss, the amount of such loss will be deductedfrom this deposit. The result, therefore, was that the appeal stood allowedFby a majority of 2:1 in the Appellate Tribunal.

8. The revenue preferred an appeal under Section 260-A of theIncome Tax Act, 1961 to the High Court. In its grounds of appeal, therevenue framed the substantial questions of law that arose in the matteras follows:G“A) Whether the ITAT has correctly interpreted theprovisions ofSection 28(ii) of the Income Tax Act,1961?

B) Whether the Ld. ITAT was correct in holding thatreceipt ofRs.6.6 crores by the respondent/assesseeas non-competitive feewas a capital receipt u/s 28(iv)income tax act and not a revenueHreceipt as envisaged in Section 28(ii) of I.T. Act?

C) Whether the Ld. ITAT failed to distinguish betweennature ofcapital and nature of benefit in commercial sense in respect ofamount of Rs. 6.6 crores received in view of restrictive covenantof deed dated 13.04.1994?

D) Whether Ld. Judicial Member of ITAT was correct in recordinghis difference of opinion that receipt of Rs. 6.6 crores byrespondent/assessee was actually a colourable exercise to evadetax and same was held to be taxable under Section 28(ii) of theIncome Tax Act?”

9. By the impugned judgment of the Division Bench of the DelhiHigh Court dated 22.12.2014, the Division Bench framed the followingsubstantial question of law:

“Whether, on the facts and in the circumstances of thecase, theamount of Rs. 6.6 crores received by theassessee from SWC ison account of handing overmanagement and control of CDBL(which wereearlier under the management and control oftheassessee) to SWC as terminal benefit and is taxableu/s 28(ii)of the Income-tax Act or same is exempt as capital receipt beingnon-competition fee by executing deed of covenant”

After going through the MoU and the Deed of Covenant, bothdated 13.04.1994, and copiously referring to the order of the AssessingOfficer dated 31.03.1998, the High Court agreed with the AssessingOfficer and the first Judicial Member of the Appellate Tribunal, statingthat the Deed of Covenant could not be read as a separate documentand was not in its real avatar a non-compete fee at all. However, in itsultimate conclusion, disagreeing with the learned Assessing Officer andthe minority judgment of the Tribunal, the High Court went on to statethat the said sum of INR 6.6 crores could not be brought to tax underSection 28(ii)(a), but would have to be treated as a taxable capital gainin the hands of the appellant, being part of the full value of the saleconsideration paid for transfer of shares.

10. Shri Arvind Datar and Shri Ajay Vohra, learned senioradvocates appearing on behalf of the appellant, have taken us throughthe orders of the Income Tax Authorities, the Appellate Tribunal and theimpugned judgment of the High Court. They raised as a preliminarysubmission the fact that under Section 260-A, it is only the substantialquestion of law that is framed that can be answered and no other. If A

B

C

D

E

F

G

H

Asome other question is to be answered, the Court must first give noticeof the same to both sides, hear them, pronounce a reasoned order andthereafter frame another substantial question of law, which it may thenanswer. This procedure has not been followed in the present case as it isclear that the substantial question of law framed did not contain within itthe question as to whether the assessee can be taxed outside the provisionsBof Section 28(ii)(a). The entire judgment is, therefore, vitiated and mustbe set aside on this ground alone. They relied on several judgments tobuttress this contention. They then relied upon the judgment of the learnedAccountant Member and of the third Member in favour of the assesseeand the reasoning therein, which according to them is unexceptionableCand should have been followed by the High Court. They also citedjudgments to show that prior to 01.04.2003, i.e. before the introductionof Section 28(va) by Finance Act 20 of 2002 with effect from the aforesaiddate, any sum received under an agreement for not carrying out anyactivity in relation to any business was taxed, for the first time, underthis provision and the provision not being retrospective would not applyDto the facts of the present case.

11. Shri Arijit Prasad, learned senior advocate appearing on behalfof the revenue, read the order of the Assessing Officer and the order ofthe first learned Judicial Member and adopted the reasoning containedtherein. According to him, the High Court judgment correctly appliedEboth McDowell (supra) and Vodafone International Holdings BVv. Union of India (2012) 6 SCC 613 to arrive at the result which itarrived at as it was clear that the amount of INR 6.6 crores that wasreceived by the assessee was really in the nature of payment for thesale of shares. He also argued as an alternative that in any event itFwould fall under Section 28 (ii)(a) as was correctly held by the learnedAssessing Officer and the minority judgment of the Appellate Tribunal.

12. Having heard learned counsel for both parties, we are of theview that the appeal needs to succeed first on the preliminary groundraised by the learned counsel for the appellant. Section 260-A of theGIncome Tax Act, 1961 reads as follows:

“260-A. Appeal to High Court.

(1) An appeal shall lie to the High Court from every order passedin appeal by the Appellate Tribunal before the date of establishmentof the National Tax Tribunal, if the High Court is satisfied that theHcase involves a substantial question of law.

(2) The Principal Chief Commissioner or Chief Commissioner orthe Principal Commissioner or Commissioner or an assesseeaggrieved by any order passed by the Appellate Tribunal may filean appeal to the High Court and such appeal under this sub-sectionshall be—

(a) filed within one hundred and twenty days from the date onwhich the order appealed against is received by the assessee orthe Principal Chief Commissioner or Chief Commissioner orPrincipal Commissioner or Commissioner; (b) [***]

(c) in the form of a memorandum of appeal precisely stating thereinthe substantial question of law involved.

(2A) The High Court may admit an appeal after the expiry of theperiod of one hundred and twenty days referred to in clause (a)of sub-section (2), if it is satisfied that there was sufficient causefor not filing the same within that period.

(3) Where the High Court is satisfied that a substantial questionof 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 allowedto argue that the case does not involve such question :

Provided that nothing in this sub-section shall be deemed to takeaway or abridge the power of the court to hear, for reasons to berecorded, the appeal on any other substantial question of law notformulated by it, if it is satisfied that the case involves such question.

(5) The High Court shall decide the question of law so formulatedand deliver such judgment thereon containing the grounds on whichsuch 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, byreason of a decision on such question of law as is referred to insub-section (1).

(7) Save as otherwise provided in this Act, the provisions of theCode of Civil Procedure, 1908 (5 of 1908), relating to appeals to A

B

C

D

E

F

G

H

[2020] 5 S.C.R.

Athe High Court shall, as far as may be, apply in the case of appealsunder this section.”

This provision, being modelled on a similar provision that is containedin Section 100 of the Code of Civil Procedure, makes it clear that theHigh Court’s jurisdiction depends upon a substantial question of law beingBinvolved in the appeal before it. First and foremost, it shall formulate thatquestion and on the question so formulated, the High Court may thenpronounce judgement, either by answering the question in the affirmativeor negative or by stating that the case at hand does not involve any suchquestion. If the High Court wishes to hear the appeal on any othersubstantial question of law not formulated by it, it may, for reasons to beCrecorded, formulate and hear such questions if it is satisfied that thecase 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 Tribunal or has been wronglydetermined by the Appellate Tribunal by reason of a decision on aDsubstantial 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 ofCivil Procedure and then stated:

“10. We would only add that (a) it is the duty cast upon the HighECourt to formulate the substantial question of law involved in thecase even at the initial stage; and (b) that in (exceptional) cases,at a later point of time, when the Court exercises its jurisdictionunder the proviso to sub-section (5) of Section 100 CPC informulating the substantial question of law, the opposite party shouldFbe put on notice thereon and should be given a fair or properopportunity to meet the point. Proceeding to hear the appeal withoutformulating the substantial question of law involved in the appealis illegal and is an abnegation or abdication of the duty cast oncourt; and even after the formulation of the substantial questionof law, if a fair or proper opportunity is not afforded to the oppositeGside, it will amount to denial of natural justice. The above parameterswithin which the High Court has to exercise its jurisdiction underSection 100 CPC should always be borne in mind. We are sorryto state that the above aspects are seldom borne in mind in manycases and second appeals are entertained and/or disposed of,Hwithout conforming to the above discipline.”

This statement of the law was followed in Dnyanoba BhauraoShemade v. Maroti Bhaurao Marnor(1999) 2 SCC 471 (Seeparagraph 10). A recent decision of this Court in Biswanath Ghosh v.Gobinda Ghosh (2014) 11 SCC 605 has reiterated these principles inparagraph 16 as follows:

“16. Section 100 of the Code lays down the provision with regardto the second appeal which reads as under:

“100.Second appeal.—(1) Save as otherwise expressly providedin the body of this Code or by any other law for the time being inforce, an appeal shall lie to the High Court from every decreepassed in appeal by any court subordinate to the High Court, ifthe High Court is satisfied that the case involves a substantialquestion of law.

(2) An appeal may lie under this section from an appellate decreepassed ex parte.

(3) In an appeal under this section, the memorandum of appealshall precisely state the substantial question of law involved in theappeal.

(4) Where the High Court is satisfied that a substantial questionof law is involved in any case, it shall formulate that question.

(5) The appeal shall be heard on the question so formulated andthe respondent shall, at the hearing of the appeal, be allowed toargue that the case does not involve such question:

Provided that nothing in this sub-section shall be deemed to takeaway or abridge the power of the Court to hear, for reasons to berecorded, the appeal on any other substantial question of law, notformulated by it, if it is satisfied that the case involves suchquestion.”

From a bare reading of the aforesaid provision it is manifestlyclear that an appeal shall lie to the High Court from an appellatedecree only if the High Court is satisfied that the case involves asubstantial question of law. It further mandates that thememorandum of appeal precisely states the substantial questionof law involved in the appeal. If such an appeal is filed, the HighCourt while admitting or entertaining the appeal must record itssatisfaction and formulate the substantial question of law involved A

B

C

D

E

F

G

H

Ain the appeal. The appeal shall then be heard on the questions soformulated and the respondent shall be allowed to argue only onthose substantial questions of law. However, proviso to this sectionempowers the court to hear on any substantial question of law notformulated after recording reasons”

Issues

B14. It can be seen that the substantial question of law that wasraised by the High Court did not contain any question as to whether thenon-compete fee could be taxed under any provision other than Section28(ii)(a) of the Income Tax Act, 1961. Without giving an opportunity tothe parties followed by reasons for framing any other substantial questionof law as to the taxability of such amount as a capital receipt in theChands of the assessee, the High Court answered the substantial questionof law raised as follows:

“63. In view of the aforesaid discussion, we deem it appropriateand proper to treat Rs. 6.60 crores as consideration paid for saleof shares, rather than a payment under Section 28(ii)(a) of theDAct.

xxx xxxxxx

65. The substantial question of law is accordingly answered infavour of the appellant-Revenue and against the respondent-Eassessee but holding that Rs.6.60 crores was taxable as capitalgains in the hands of the respondent-assessee being a part of thefull value sale consideration paid for transfer of shares. Theappellant-Revenue will be entitled to costs as per the Delhi HighCourt Rules.”

Clearly, without any recorded reasons and without framing anyFsubstantial question of law on whether the said amount could be taxedunder any other provision of the Income Tax Act, the High Court wentahead and held that the amount of INR 6.6 crores received by theassessee was received as part of the full value of sale considerationpaid for transfer of shares – and not for handing over management andGcontrol 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 non-compete fee, as it is taxable as a capital gain in the hands of therespondent-assessee as part of the full value of sale consideration paidfor transfer of shares. This finding would clearly be in the teeth of Section260-A (4), requiring the judgment to be set aside on this score.H

15. Coming to the merits, the High Court found:

“22. …No doubt, market price of each share was only Rs.3/- pershare and the purchase price under the MOU was Rs.30/-, butthe 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 arealistic payment made on account of non-compete fee, dehorsand without reference to sale of shares, loss of management andcontrol of CDBL. The assessee had attributed an astronomicalsum as payment toward non-compete fee, unconnected with thesale of shares and hence not taxable. Noticeably, the price receivedfor sale of shares, it is accepted was taxable as capital gain. Thecontention that quoted price of each share was mere Rs. 3 only,viz. price as declared of Rs. 30/- is fallacious and off beam. Theargument of the assessee suffers from a basic and fundamentalflaw which is conspicuous and evident.”

This finding flies in the face of settled law. A catena of judgmentshas held that commercial expediency has to be adjudged from the pointof view of the assessee and that the Income Tax Department cannotenter into the thicket of reasonableness of amounts paid by the assessee.This Court in CIT v. Walchand & Co. (1967) 3 SCR 214 stated asfollows:

“It is open to the Tribunal to come to a conclusion either that thealleged payment is not real or that it is not incurred by the assesseein the character of a trader or that it is not laid out wholly andexclusively for the purpose of the business of the assessee and todisallow it. But it is not the function of the Tribunal to determinethe remuneration which in their view should be paid to in employeeof the assessee. When a claim for allowance under Section10(2)(xv) of the Income Tax Act is made, the Income TaxAuthorities have to decide whether the expenditure claimed as anallowance was incurred voluntarily and on grounds of commercialexpediency. In applying the test of commercial expediency fordetermining whether the expenditure was wholly and exclusivelylaid out for the purpose of the business, reasonableness of theexpenditure has to be adjudged from the point of view of thebusinessman and not of the Revenue.” [at page 217]

A

B

C

D

E

F

G

H

AThe aforesaid judgment was followed by this Court in J.K.Woollen Manufacturers v. CIT (1969) 1 SCR 525 where the Courtheld:

“As pointed out by this Court in CIT v. Walchand& Co. PrivateLtd. [(1967) 65 ITR 381 : (AIR 1967 SC 1435)] in applying theBtest of commercial expediency for determining whether anexpenditure was wholly and exclusively laid out for the purposeof the business, reasonableness of the expenditure has to beadjudged from the point of view of the businessman and not ofthe Income Tax Department. It is, of course, open to the AppellateTribunal to come to a conclusion either that the alleged paymentCis not real or that it is not incurred by the assessee in the characterof a trader or it is not laid out wholly and exclusively for the purposeof the business of the assessee and to disallow it. But it is not thefunction of the Tribunal to determine the remuneration which intheir view should be paid to an employee of the assessee.” [atDpage 529-530]

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 mentionthat there can be no dispute with respect to the two importantEpropositions:

“(1) that in order to fall within Section 10(2)(xv) of the Act thededuction claimed must amount to an expenditure which was laidout or expended wholly and exclusively for the purpose of thebusiness, profession or vocation. This will naturally depend uponFthe facts of each case,

(2) that in order to determine the question of reasonableness ofthe expenditure, the test of commercial expediency would haveto be adjudged from the point of view of the businessman and notof the Income tax Department.”GFurther, this Court in Shahzada Nand & Sons v. CIT (1977) 3SCC 432 reiterated this principle as follows:

“4. …But it is well settled that these factors are to be consideredfrom the point of view of a normal, prudent businessman. Thereasonableness of the payment with reference to these factorsHhas 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 bejudged not in the light of the 19th Century laissez-faire doctrinewhich regarded man as an economic being concerned only toprotect and advance his self-interest but in the context of currentsocio-economic thinking which places the general interest of thecommunity above the personal interest of the individual and believesthat a business or undertaking is the product of the combinedefforts of the employer and the employees and where there issufficiently large profit, after providing for the salary orremuneration of the employer and the employees and other priorcharges such as interest on capital, depreciation, reserves etc., apart of it should in all fairness go to the employees.”

Also, this Court in S.A. Builders Ltd. v. CIT (2007) 1 SCC 781held as follows:

“36. We agree with the view taken by the Delhi High Court inCIT v. Dalmia Cement (B) Ltd. [(2002) 254 ITR 377 (Del)] thatonce it is established that there was nexus between the expenditureand the purpose of the business (which need not necessarily bethe business of the assessee itself), the Revenue cannot justifiablyclaim to put itself in the armchair of the businessman or in theposition of the Board of Directors and assume the role to decidehow much is reasonable expenditure having regard to thecircumstances of the case. No businessman can be compelled tomaximise its profit. The Income Tax Authorities must putthemselves in the shoes of the assessee and see how a prudentbusinessman would act. The authorities must not look at the matterfrom their own viewpoint but that of a prudent businessman. Asalready stated above, we have to see the transfer of the borrowedfunds to a sister concern from the point of view of commercialexpediency and not from the point of view whether the amountwas advanced for earning profits.”

The same principle has also been cited with approval by a recentjudgment of this Court in Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC359 where the Court held as follows:

“11. Insofar as loans to the sister concern/subsidiary companyare concerned, the law in this behalf is recapitulated by this Courtin S.A. Builders Ltd. v. CIT [S.A. Builders Ltd. v. CIT, (2007) 1

AB

C

DE

F

G

H

A

SCC 781]. After taking note of and discussing on the scope ofcommercial expediency, the Court summed up the legal positionin the following manner: (SCC pp. 787-88, paras 27-31)

xxx xxxxxx

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. MalayalamPlantation Ltd. [CIT v. Malayalam Plantation Ltd., (1964) 53ITR 140 (SC)] , CIT v. Birla Cotton Spg. &Wvg. Mills Ltd.[CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., (1971) 3 SCC344] , etc.”

B

C

12. In the process, the Court also agreed that the view taken bythe 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 OnLineDel para 8) once it is established that there is nexus between theDexpenditure and the purpose of business (which need notnecessarily be the business of the assessee itself), the Revenuecannot justifiably claim to put itself in the arm-chair of thebusinessman or in the position of the Board of Directors andassume the role to decide how much is reasonable expenditurehaving regard to the circumstances of the case. It further heldEthat no businessman can be compelled to maximise his profit andthat the Income Tax Authorities must put themselves in the shoesof the assessee and see how a prudent businessman would act.The authorities must not look at the matter from their own viewpointbut that of a prudent businessman.”F16. The High Court’s next finding based on the judgment inVodafone (supra) is as follows:

“56. In view of the aforesaid discussion and our findings on thetrue and real nature of the transaction camouflaged as ‘non-compete fee‘, we have no hesitation and reservation that theGrespondent-assessee had indulged in abusive tax avoidance.”

17. We may only reiterate as correctly found by the majorityjudgments of the Appellate Tribunal, that:

(i) A share of the face value of INR 10 and market value ofINR 3 was sold for INR 30 as a result of control premiumHhaving to be paid.

(ii) It is important to note that each member of the family waspaid for his/her shares in the company, the lion’s share beingpaid to the assessee’s son and wife as they held the mostnumber of shares within the said family.

A

(iii) The non-compete fee of INR 6.6 crores was paid onlyto theassessee. This was for the reason stated in the Deed ofCovenant, namely, that Shri Shiv Raj Gupta had acquiredconsiderable knowledge, skill, expertise and specialisation inthe liquor business. There is no doubt that on facts he hasbeen Chairman and Managing Director of CDBL for a periodof about 35 years; that he also owned a concern, namelyM/s Maltings Ltd., which manufactured and sold IMFL andbeer and that he was the President of All India DistilleriesAssociation and H.P. Distilleries Association.

B

C

(iv) It is further recorded in the judgment of the AccountingMember that the amount of INR 6.6 crores was arrived atDas a result of negotiations between the SWC group and theappellant.(v)That the restrictive covenant for a period of 10 years resultedin the payment of INR 66 lakhs per year so that the appellant“…will not start or engage himself, directly or indirectly, orE

(v) That the restrictive covenant for a period of 10 years resultedin the payment of INR 66 lakhs per year so that the appellant“…will not start or engage himself, directly or indirectly, orprovide any service, assistance or support of any nature,whatsoever, to or in relation to the manufacturing, dealingand supplying or marketing of IMFL and/or Beer.” Giventhe personal expertise of the assessee, the perception of theSWC group was that Shri Gupta could either start a rivalbusiness or engage himself in a rival business, which wouldinclude manufacturing and marketing of IMFL and Beer atwhich he was an old hand, having experience of 35 years.

F

F

(vi) As was correctly held by the second Judicial Member, itwas also clear that the withholding of INR 3 crores out ofINR 6.6 crores for a period of two years by way of a publicdeposit with the SWC group for the purpose of deduction ofany loss on account of any breach of the MoU, was akin toa penalty clause, making it clear thereby that there was nocolourable device involved in having two separate agreementsfor two entirely separate and distinct purposes.

G

H

A18. The reasons given by the learned Assessing Officer and theminority judgment of the Appellate Tribunal are all reasons whichtransgress the lines drawn by the judgments cited, which state that therevenue has no business to second guess commercial or businessexpediency of what parties at arms-length decide for each other. Forexample, stating that there was no rationale behind the payment of INRB6.6 crores and that the assessee was not a probable or perceptible threator 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 ofthe assessee, as has been pointed out by us hereinabove. The fact thatM/s Maltings Ltd. had incurred a loss in the previous year is again neitherChere nor there. It may in future be a direct threat to the SWC group andmay turn around and make profits in future years. Besides, M/s MaltingsLtd. is only one concern of the assessee – it is the assessee’s expertisein this field on all counts that was the threat perception of the SWCgroup which cannot be second guessed by the revenue. Equally the factthat there was no penalty clause for violation of the Deed of Covenant,Dhas 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 inreply to the show cause notice had stated that the SWC group had gainedsubstantial commercial advantage by the purchase of shares in CDBLas the turnover increased from INR 9.79 crores in the accounting periodEending 31.03.1991 to INR 45.17 crores in the accounting period ending31.03.1997 is again neither here nor there. As a matter of fact, the SWCgroup, due to its own advertisement and marketing efforts, may wellhave reached this figure after a period of six years (the date 30.09.1995is wrongly recorded by the High Court in paragraph 19 – the correctdate as per the letter dated 26.03.1998 is 31.03.1991, as has been pointedFout by us hereinabove).

19. It only remains for us to point out the judgment in GufficChem (P) Ltd. v. CIT (2011) 4 SCC 254. In this case, the question setout by the Court is as follows:

G“Whether a payment under an agreement not to compete (negativecovenant agreement) is a capital receipt or a revenue receipt isthe question which arises for determination in this case?”

Here, the Court was dealing with an amount of INR 50 lakhsreceived by the appellant-assessee from Ranbaxy as a non-compete H

fee under an agreement dated 31.03.1997. This Court in negating theapplication 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 dichotomybetween receipt of compensation by an assessee for the loss ofagency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss ofagency is a revenue receipt whereas the compensation attributableto a negative/restrictive covenant is a capital receipt.

5. The above dichotomy is clearly spelt out in the judgment of thisCourt in Gillanders case [(1964) 53 ITR 283 (SC)] , in which thefacts were as follows: the assessee in that case carried on businessin diverse fields besides acting as managing agents, shippingagents, purchasing agents and secretaries. The assessee also actedas importers and distributors on behalf of foreign principals andbought and sold on its own account. Under an agreement whichwas terminable at will the assessee acted as a sole agent ofexplosives manufactured by Imperial Chemical Industries (Export)Ltd. That agency was terminated and by way of compensationImperial Chemical Industries (Export) Ltd. paid for first threeyears after the termination of the agency two-fifths of thecommission accrued on its sales in the territory of the agency ofthe appellant and in addition in the third year full commission waspaid for the sales in that year. Imperial Chemical Industries (Export)Ltd. took a formal undertaking from the assessee to refrain fromselling or accepting any agency for explosives.

6. Two questions arose for determination in Gillanders case[(1964) 53 ITR 283 (SC)] , namely, whether the amounts receivedby the appellant for loss of agency was in normal course of businessand therefore whether they constituted revenue receipt? Thesecond question which arose before this Court was whether theamount received by the assessee (compensation) on the conditionnot to carry on a competitive business was in the nature of capitalreceipt? It was held that the compensation received by the assesseefor loss of agency was a revenue receipt whereas compensationreceived for refraining from carrying on competitive business wasa capital receipt.

A

B

C

DE

F

G

H

A7. This dichotomy has not been appreciated by the High Court inits impugned judgment. The High Court has misinterpreted thejudgment of this Court in Gillanders case [(1964) 53 ITR 283(SC)] . In the present case, the Department has not impugned thegenuineness of the transaction. In the present case, we are of theview that the High Court has erred in interfering with the concurrentBfindings of fact recorded by CIT (A) and the Tribunal.

A

8. One more aspect needs to be highlighted. The payment receivedas non-competition fee under a negative covenant was alwaystreated as a capital receipt till Assessment Year 2003-2004. It isonly vide the Finance Act, 2002 with effect from 1-4-2003Cthat the said capital receipt is now made taxable [see Section28(v-a)]. The Finance Act, 2002 itself indicates that during therelevant assessment year compensation received by the assesseeunder non-competition agreement was a capital receipt, not taxableunder the 1961 Act. It became taxable only with effect from 1-4-2003. It is well settled that a liability cannot be createdDretrospectively. In the present case, compensation received underthe non-competition agreement became taxable as a capital receiptand not as a revenue receipt by specific legislative mandate videSection 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 ITRE148 (SC)] it was held by this Court that if a contract is enteredinto in the ordinary course of business, any compensation receivedfor its termination (loss of agency) would be a revenue receipt. Inthe present case, both CIT(A) as well as the Tribunal, came tothe conclusion that the agreement entered into by the assesseeFwith Ranbaxy led to loss of source of business; that payment wasreceived under the negative covenant and therefore the receiptof Rs. 50 lakhs by the assessee from Ranbaxy was in the natureof capital receipt. In fact, in order to put an end to the litigation,Parliament stepped in to specifically tax such receipts under thenon-competition agreement with effect from 1-4-2003.”G20. Respectfully following the aforesaid decision, we allow theappeal and set aside the impugned judgment for all the reasons given byus above. All pending applications, if any, stand disposed of in terms ofthe judgment.

HAnkit Gyan