N.K. Saini, Accountant Member - (1.) THIS is an appeal filed by the Department against the order of the CIT(A) dated 2-6-1992. The only ground of appeal raised by the Department is as under : That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals)-V, Calcutta erred in deleting the addition of Rs. 1,74,95,000 made by the Assessing Officer as per provision of Section 10(3) of the Income-tax Act.
(2.) The facts of the case as appearing from the orders of the authorities below are the following : 2.1 That the assessee filed the return declaring total income of Rs. 7,48,630 on 31-8-1990. In the return filed, the assessee, however, declared in Part IV of the return, to have received the following amounts which were claimed to be exempt from tax. (i) Amount received from the estate of late Shri S.B. Wardekar, the assessee's father - Rs. 2,09,184. (ii) Amount received as compensation for non--competition to the business of W.I.E.L. paid by U.B. Group companies - Rs. 175 lakhs. In the course of assessment proceedings the assessee also approached the D.C.I.T., Range-VIII, Calcutta seeking directions in terms of Section 144A of the I.T. Act. In response to that, the said DCIT vide his order dated 26-3-1992 gave the directions, in accordance with the said directions the ACIT completed the assessment of the assessee on a total income of Rs. 1,82,62,014 after including therein the said sum of Rs. 175 lakhs as the assessee's income under Section 10(3) of the I.T. Act. The brief history of the case is the following : 2.2 That the assessee promoted a partnership firm called M/s. Western India Erectors Pvt. Ltd. in 1963 for undertaking contracts for the execution of heavy electrical and mechanical construction work and the firm grew to a substantial size, later on another company known as Western India Erectors Pvt. Ltd. was promoted in 1970 and most of the contracts were taken over by this company, but the firm also continued. Later on, this company was converted into a limited company. Most of the shares of the company were held by the assessee and his close relatives. The company grew in size and stature and diversified its business by entering into manufacturing activities. It opened a cement division, a chemical division, real estate or property development business etc. The company M/s. W.I.E. Ltd. also made public issues of its equity shares which were listed at the Bombay Stock Exchange and the financial institute I.C.C.I, Unit Trust of India and General Insurance Corpn. held substantial equity shares and debentures issued by the company, but by September, 1988 the assessee and his associates most of whom were earlier connected with the partnership firm and the company from their respective inception held approximately 21.94% of the total equity share capital of W.I.E. Ltd. which stood at 48,12,504 equity shares of Rs. 10 each out of which the assessee and his associates held 10,56,627 equity shares of Rs. 10 each. The assessee through good offices of his friends negotiated the sale of all the shares to United Breweries Ltd. (U.B.L. in short) in terms of agreement dated 28th October, 1988. The agreement was between U.B.L. and the assessee acting for himself and his associates listed therein. The agreement also recited that the assessee was authorised to enter into the agreement on behalf of the other shareholders who were his relatives, friends and associates. The agreement was binding and enforceable against the assessee and all others whom he represented. The total purchase price of 10,56,627 shares of W.B.E.L. of Rs. 10 each had been agreed at Rs. 4,64,63,890, i.e. Rs. 43.97 per share. Those shares were at that relevant time quoted at Rs. 32 at Bombay Stock Exchange. The assessee agreed to get the shares transferred and registered in fcivour of U.B.L. and/or its assignees. There appeared also an agreement for reconstitution of W.I.E.L. and how after the sale of shares the affairs of W.I.E.L. would be managed. The agreement also provided that the assessee would continue on the Board of Directors as Chairman. The assessee also agreed to sign such documents and carry out acts and things as would be reasonably required to carry out and give full effect of the terms of that agreement. The U.B.L. thought it expedient to bind the assessee by written agreement refraining him from undertaking any business similar to the business of the said company as such business the assessee was carrying on before and could have carried on in future as in the past, once he was free from W.I.E.L. Therefore, the assessee and U.B.L. entered into another agreement and by that agreement the assessee undertook not to engage himself directly or indirectly for a period of five years from the date of the agreement in any activity, industrial, commercial or otherwise which in any manner competes or conflicts with the existing business and activity of W.I.E.L. In consideration of such undertaking the U.B.L. agreed to pay to the assessee a sum of Rs. 175 lakhs which was duly paid by U.B.L. and its associate companies. It was the background that the assessee had received the aforesaid sum of Rs. 175 lakhs. The Assessing Officer considered this amount of Rs. 175 lakhs as consideration for having arranged deal of transferring the control of W.I.E.L. to U.B.L. In his view this receipt was, therefore, purely casual and non-recurring in nature. The Assessing Officer observed in his order that there were following reasons for bringing the amount of Rs. 175 lakhs to tax treating that as casual and non-recurring receipts which are narrated as below : (i) The assessee was always free to pursue any business of his choice after he chose to retire from the company. It was this perceived threat of competition to the business of the company which prompted the investor, that is, U.B. Group to enter into a separate agreement with the assessee, whercunder they obtained an undertaking for the assessee to the effect that he would not set up and/or he would not get involved in any business or undertaking similar to one undertaken by the company for a period of five years from the date of agreement. The said period is reckoned as remaining working life of the assessee. According to the Assessing Officer, there had been no scope for apprehension on the part of the U.B. Group that the assessee would play folly games with them by disobeying or showing scant respect to the conditions of the agreement. If there were any such apprehension on the part of the U.B. Group, those remained still there as they could not come over such possibility simply by executing another agreement with the assessee, that time paying a fabulous amount, since payment of any amount whatever be its magnitude cannot prevent any ill-motivated person from doing the wrong. Thus, another amount was clearly a payment which was of casual and non-recurring in nature. The Assessing Officer also relied on the judgment pronounced by the Allahabad High Court in the case of CIT v. Gulab Chand[199l] 192 ITR 495. The relevant portion of the judgment was quoted by the Assessing Officer which is elaborated as under: It may be noted that Section 10 deals with exemption of particular types of income from being included in the total income of an assessee. Clause (3), in particular, uses the expression "any receipts". We shall, however, read the expression "receipts" as synonymous with "income" since that is the dominant theme and purpose of Section 10. It is agreed for the assessee that the receipt must first be income, i.e., it must be a revenue receipt and should not be a capital receipt. If it is a capital receipt, it will not be a receipt within the meaning of Clause (3), it is argued. We find it difficult to agree with learned counsel for the assessee that the expression "receipts" occurring in Clause (3) must necessarily be revenue receipts and not capital receipts. The word "receipt" must be understood as synonymous with "income". The expression "income" has been defined in Clause (24) of Section 2 to include capital gains. It is precisely for this reason that proviso (i) to Clause (3) of Section 10 expressly excludes "capital gains chargeable under the provisions of Section 45" from the ambit of the said clause. On the basis of the above judgment, the Assessing Officer observed that it was certainly a receipt of casual and non-recurring nature and it cannot be considered as capital gain. As per his view, it is not enough that it was a capital receipt but receipt must be chargeable under Section 45. He relied on the order of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 : 5 Taxman 1 wherein it was held that- where the cost of acquisition of an asset is nil, the capital gain is not chargeable to tax. On this reasoning the Assessing Officer mentioned in his order that even if the said receipt was a capital gain, that was not a capital gain chargeable under the provisions of Section 45 for the simple reason that there was no cost of acquisition. According to the Assessing Officer, every receipt will be synonymous with income unless specifically excluded in the Act and any capital receipt without a cost of acquisition is to be taken casual and non-recurring receipt. In this regard he relied on the judgment of the Allahabad High Court in Gulab Chand's case (supra) and accordingly, the Assessing Officer made the addition of Rs. 175 lakhs before giving exemption under Section 10(3) of Rs. 5,000. In the first appeal, the counsel of the assessee vehemently submitted before the CIT(A) that the authorities below were not correct in holding that the said receipt was casual and non-recurring receipt as the said sum of Rs. 175 lakhs was received by the assessee in consideration of restrictive covenant stipulated by that agreement dated 28th October'88 whereby the assessee agreed and undertook that he should not either directly or indirectly engage himself in any industrial or commercial or other activity which in any manner competes or conflicts with the existing business and activity of M/s. W.I.E.L. of which he was the Chairman and managing director at the relevant time. It was also submitted that the receipt of Rs. 175 lakhs did not fall under the inclusive definition of income appearing in Section 2(24) of the Act and was not synonymous with the term "income" and also the receipt was neither casual nor non-recurring and, therefore, was not covered by provisions of Section 10(3) of the Act. The counsel of the assessee also placed his reliance on Circular No. 108, F.No. 131(9)/7-ITL dated 20-3-1973 and also Circular No. 158 dated 17-12-1974. It was pointed out that accdrding to those circular receipts which were of casual or non-recurring nature were liable to income-tax if those could properly be characterised as income either in its general connotation or within the extended meaning given to the term by the Income-tax Act. According to the counsel of the assessee, the case relied on by the Assessing Officer was distinguishable because in that case the assessee received the compensation for surrendering the tenancy (admittedly a capital asset) of a godown occupied by him as a tenant and further submitted that in the instant case the assessee had not transferred any capital asset and the amount had been received by way of consideration for restrictive covenant contained in the agreement and the assessee never admitted the said receipt as of income nature and also the assessee had not claimed any exemption in respect of the said receipt under Section 10(3) of the I.T. Act and, therefore, the ratio of the case relied on by the Assessing Officer was not applicable in the case of the assessee. The counsel of the assessee further relied on the decision of the Madras High Court in the case of CIT v. G.R. Karthikeyan [1980] 124 ITR 85 : 4 Taxman 49 wherein it was held that the provision of Section 10(3) which is an exemption provision cannot be applied to fasten liability to tax. Various other co-decisions were also referred to by the counsel of the assessee before the authorities below. A few of them are following : (i) Gillanders Arbuthnot & Co. Ltd. v. CIT [1962] 46 ITR 847 wherein the Hon'ble jurisdictional High Court, Calcutta held as follows : There is no dispute in this case and in view of the authorities, there is little room for it that if compensation is paid to an agent on consideration of an undertaking not to engage any rival business, the same would be treated as capital receipt not liable to income-tax. In the aforesaid case which has also gone to the Supreme Court and the decision was Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 wherein it was held that- Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of terminated agency is prima facie of the nature of a capital receipt. (ii) CIT v. Rao Raja Kalyansingh [1974] 97 ITR 690 (Raj.) wherein it was held that- Where compensation is received for the sterilisation or destruction of a revenue yielding asset the character of such receipt cannot be anything but capital. (iii) CIT v. Saraswathi Publicities [1981] 132 ITR 207. On a reference wherein the Hon'ble Madras High Court held that- As a receipt was referable to the restrictive covenant, it was a capital receipt not liable to income-tax. A special leave petition against this judgment by the CIT, Tamil Nadu was dismissed by the Apex Court as [1983] 142 ITR Statute, page 6. The CIT(A) observed in his impugned order that admittedly the assessee has received the aforesaid sum of Rs. 175 lakhs for entering into a restrictive covenant in terms of the agreement dated 28th October, 1988 and the assessee's personality and status were well-recognised in the field in which the company WIEL was mainly engaged and from which it earned substantial profits and the UBL bound the assessee by such restrictive covenant and agreed to pay and paid to the assessee the aforesaid sum of Rs. 175 lakhs and the working life of the assessee was reckoned as a period of five years commencing from the date of the agreement. Thus, the restrictive covenant existed and was to be remained in force during the rest of the working life of the assessee. According to the CIT(A), it was a co-termination with the assessee's working life that the said sum of Rs. 175 lakhs was, therefore, paid to him for restraining him from undertaking any activity, economic, industrial or otherwise which in any way competes or conflicts with the activities of the WIEL. The said receipt was, therefore, clearly a capital receipt. The CIT(A) also relied on various case laws like Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758 wherein the Hon'ble Bombay High Court held that- All receipts by an assessee cannot necessarily be deemed to be its income for the purpose of income-tax and the question whether any particular receipt is income or not depends on the nature of the receipt and the true scope and effect of the relevant taxing provision. Under the Income-tax Act only those receipts amounting to income are assessable. According to the CIT(A), in the instant case the amount of Rs. 175 lakhs received by the assessee did not fall within the inclusive definition of income appearing in Section 2(24) of the Act. There was no provision under the Income-tax Act which deemed such receipts as of income nature. Such receipts could also hot be considered as income under the general law and accordingly, the CIT (A) held the amount as capital receipt not falling within the definition of income and as such was not liable to tax. The CIT(A) further observed in his impugned order that the Assessing Officer invoked the provisions of Section 10(3) of the Act and held that the said receipt was casual and nori-recurring receipt and so was includible in the total income subjec to exemption of Rs. 5,000 under Section 10(3) of the I.T. Act. The CIT(A) further mentioned in his order that the C.B.D.T. vide its Circular No. 158 dated 27-12-1974 has clarified that the amended provisions of Section 10(3) will apply only where the receipts of casual and non-recurring nature can properly be characterised as income either in its general connotation or within the extended meaning given to the term by the Income-tax Act. The term "casual" has not been defined in the Act and as held in CIT v. Moti Chand Khajanchi[1988] 171 ITR 280 (Raj.) the word "casual" is defined as meaning (i) subject to or produced by chance fortuitous; (ii) coming at uncertain times not to be calculated on, unsettled. A receipt of interest which is foreseen and anticipated cannot be regarded as casual even if it is not likely to recur again. According to the CIT(A), unless the receipt specifies the dual test of being of a casual and non-recurring nature it will not fall within the provisions of Section 10(3) of the Act. The test of casualness of a receipt is not merely that it must be a non-recurring nature but it must be casual. The CIT(A) further observed in his impugned order that every non -revenue receipt cannot be casual or non-recurring. Every receipt of capital nature is not taxable under Section 45. According to the CIT(A), "the receipt of Rs. 175 lakhs has its origin in the agreement dated 20th October, 1988 and the receipt arose out of the agreement which had been arrived at between the assessee and the UBL. Apparently, after a considerable negotiation, deliberations and thought, even as per the terms of the agreement, the receipt by the assessee of the aforesaid sum of Rs. 175 lakhs cannot be on account of any chance so as to term it as a casual receipt. The CIT(A) also observed in his impugned order that the assessee did not hold any capital asset as defined in Section 2(14) of the Act. The amount of Rs. 175 lakhs was not received by the assessee by way of consideration for transfer of a capital asset as defined in Section 2(47) of the Act. The amount received did not fall within the extended meaning of income or under general law. The same, therefore, cannot be considered as synonymous with income. The receipt in question was, therefore, not casual. Hence, there was no question of invoking the provisions of Section 10(3) of the Act as held by the Madras High Court in the case oiG.R. Karthikeyan (supra). According to the CIT(A), the amount of Rs. 175 lakhs was paid to the assessee by UBL specifically for the restrictive covenant and for no other consideration and the same was capital receipt and was not synonymous with his income and the same was not casual in nature and it was held that the said sum of Rs. 175 lakhs or any portion thereof was not taxable as income of the assessee and was not also covered by the provisions of Section 10(3) of the I.T. Act. In this manner the CIT(A) deleted the addition made by the Assessing Officer.
(3.) BEING aggrieved, the department is in appeal before us and the Ld. D.R. submitted that the Assessing Officer rightly held receipt as casual in nature by following the decision of the Allahabad High Court in the case of Gulab Chand (supra). He also argued that the CIT(A) has not given any reason why the amount of Rs. 175 lakhs received by the assessee does not fall in the definition of income appearing in Section 2(24) of the I.T. Act although in the department's view the said receipt of Rs. 175 lakhs by the assessee has all the qualities of income. Therefore, it should not be treated as capital receipt but as revenue receipt. The Ld. D.R. further drew our attention towards the definition of income under Section 2(24)(f) and accordingly he emphasised that income includes profits and gains, but the expression is more a matter of words; than of substance. The word "income" is an expression of elastic ambit and courts when describing income have almost always qualified their description by saying that it is not exhaustive. He further submitted that the income is a more general term than "profits" or "gains". The word "income" is not limited by the words "profits" and "gains". A receipt may be taxable as income although it may contain no element of profit and gain. The Act describes sources of income and prescribes methods of computing income but what constitutes income discreetly refrains from saying, the definition of income in the interpretation clause [section 2(24)] is inclusive and not exhaustive. It adds artificial categories (including capital gain) to the natural connotation of income without throwing any light on the general concept of the word. Income includes not only those things which the interpretation clause declares that it shall include, but such things as the word signifies according to its natural import. The Ld. D.R. relied on the definition of income given in the case of CIT v. Shaw Wallace 59 IA 206 wherein the definition of income is as per following : Income...in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive but it must be one whose obj ect is the production of a definite return, excluding anything in the nature of mere windfall. Thus, income has been likened pictorially to the fruit of a tree or the crop of a field. But it is clear that such picturesque similes cannot be used to limit the true character of income. The Ld. D.R. relied on the decision in the case of S.N.D.P. Yogam v. CIT [1985] 154 ITR 624 : [1987] 32 Taxman 389 (Ker.) wherein it was held that- In fact, it may never recur at all the source may never yield a periodic return. An isolated adventure may constitute business. He also relied on the case of Janab A. Syed Jalal Sahib v. CIT [1960] 39 ITR 660 (Mad.) wherein it was held that- It was held that even the casual and non-recurring receipt may be income though it is partly exempt from taxation in certain circumstances under Section 10(3). The Ld. D.R. submitted that in the instant case assessee's income-earning apparatus, i.e. his knowledge and skill in the business of construction and fabrication job has not been destroyed or diminished. In other words, his knowledge, experience and skill have remained in-tact with him. Therefore, the impugned receipt of Rs. 175 lakhs cannot partake the character of capital receipt rather it is in the nature of revenue receipt, as it only puts some restriction in the assessee's income-earning apparatus but not total destruction/sterilisation of his asset i.e. his skill and knowledge in the business and the receipt is not a casual or windfall income to the assessee because this has close link with his past knowledge and experience, only because of his experience and knowledge which the present company i.e. WIEL wants to utilise for earning its profit, assessee is getting the impugned sum of Rs. 175 lakhs and he cannot escape by saying that it was his windfall income. The Ld. D.R. further submitted that the CIT has also concluded that such receipts cannot be considered as income under general law, it is wondered as to how the Ld. CIT(A) can bring in concept of general law while deciding the nature of receipt under the Income-tax Act when the Income-tax Act alone is sufficient to decide the nature of the receipt. Therefore, it appears that the CIT(A)'s reference to general law is unwarranted and redundant and no reason of whatsoever nature has been given by the CIT(A) in treating the receipts as capital receipts. The Ld. D.R. prayed that considering the facts and circumstances, the impugned receipt of Rs. 175 lakhs may be treated as revenue in nature and it should be brought to tax and finally, he relied on the order of the Assessing Officer.;