S. Ravindra Bhat, J. - (1.) The sole question of law urged by the Revenue in its appeal under Section 260A of the Income Tax Act, 1961 (hereafter referred to as "the Act") was whether the amount of Rs.1,32,00,000/- per annum received by the assessee/respondent for two years was more of a revenue character and was therefore taxable by virtue of Section 17(3) or under Section 28(va) of the Act.
(2.) The facts are that the assessee was promoter and Director of Integra Overseas Pvt. Ltd. (hereafter referred to as "Integra") established to manufacture two-wheelers in India. On account of shareholding transfer, he was appointed as Managing Director of Integra; M/s Suzuki Motor Corporation became a major shareholder in Integra and eventually that company's name was changed to M/s Suzuki Motorcycle India Pvt. Ltd. The assessee terminated his relationship as a joint venture partner in M/s Suzuki Motorcycle India Pvt. Ltd. and stepped down as Managing Director of that company. He entered into an agreement whereby Suzuki India agreed to pay Rs.1.32 crores to him for not providing "the benefit of his knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two wheeler segment for a period of two years from the date of the Agreeement". The assessee claimed that this amount received was exempt on the basis of an opinion by a lawyer. He also placed on record the agreement between himself and Suzuki India. The recitals of that agreement read as follows: "WHEREAS Suzuki Motor Corporation, Japan ("SMC") and Mr. Sheel have been joint venture partners in the Company; AND WHEREAS pursuant to a joint venture agreement between Mr. Sheel and SMC, Mr. Sheel was appointed as the managing director of the Company by virtue of his being the Indian joint venture partner; AND WHEREAS Mr. Sheel wishes to step down as managing director of the Company as he is no longer the joint venture partner of SMC:"
(3.) The AO was of the opinion that the amounts received were revenue in character and therefore brought them to tax. The CIT(A) rejected the contentions of the assessee and upheld the Revenue's arguments. The ITAT relied upon Ram Pershad v. Commissioner of Income Tax, 1972 86 ITR 122 and also Guffic Chem. P. Ltd. v. Commissioner of Income Tax, 2011 332 ITR 602. It thereafter held as follows: "We agree with Shri Aggarwal that as the sum of Rs. 1,32,00,000 was paid by Suzuki India to the appellant in consideration of not providing "the benefit of his knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two wheeler segment" it cannot be regarded as noncompetition fee because it has not been paid for not competing with the payer, but for not providing the benefit of his knowledge, expertise, skills etc. to any other person in the two wheeler segment. The views expressed by Shri Bhardwaj in his opinion and the contention by Shri Aggarwal that section 28(va) taxes a sum received for a restrictive covenant in relation to a business, but not a profession is also supported by the observations in paragraph 28 on page 692 of Kanga and Palkhivala's "Law and Practice of Income-tax" that clause (va) of section 28 of the Income-tax Act "taxes a sum received for a restrictive covenant in relation to a business, but not a profession"; and, therefore, does not fall within the ambit of section 28(va). We may add that in the case of Guffic Chem. P. Ltd. vs. Commissioner of Income-tax (ibid) at page 606 the Hon'ble Supreme Court of India has observed that compensation attributable to a negative/restrictive covenant is a capital receipt. Hence, as the sum received by the appellant does not fall within the ambit of section 28(va), it is not chargeable to tax as it constitutes a capital receipt.";