Decided on February 29,2008



Pramod Kumar, A.M. - (1.) THE short issue that we are required to adjudicate in this appeal is whether or not the Commissioner (Appeals) was justified in upholding addition of Rs. 15 lakhs on account of non compete fees received from assessees employer., THE assessment year involved is 2000-01 and the impugned assessment order is framed under Section 143(3) of the Income Tax Act, 1961.
(2.) Briefly, the material facts are like this. In the course of the assessment proceedings, the assessing officer noticed that the assessee has received a sum of Rs. 15,00,000 from his former employer, i.e. Nestle India Ltd, and claimed the same to be exempt as a non compete fees. It was noticed that the term of the restrictive covenant was only twelve months. The assessees contention that non compete fees is a capital receipt not exigible to tax, was rejected. The assessing officer proceeded to tax this amount of Rs. 15,00,000 by observing as follows: I have gone through the assessees submissions mentioned above. The submission on this issue clearly indicate that the restriction on the assessee is merely for 12 months from 1-4-1998 as can be seen from point 8.1 mentioned above. The restriction imposed by the company for 12 months is too short a period for which the conditions are laid down. Apart from this, the assessee retired from the company in 1998 but continued on retainership basis for which, in the current accounting year, a sum of Rs, 45,62,529/- has been paid. This clearly indicate that the assessee continues his association with the company but in a different person. Had the company really felt a threat to its business from the assessee, the company would have put the restriction for a longer period. Here, on the contrary, the assessee continues his association with Nestle India Ltd. in a different position, as retainer, for which he has received substantial sum of Rs, 45.62 lacs. Considering the facts of the case, I am of the opinion that the amount of Rs. 15 lacs received by the assessee during the year from Nestle India Ltd. is revenue receipts as per the provisions of Sub-clause 1 of Section 17(3) of the Income Tax Act, 1961. The assessees contention rejected and the amount of Rs. 15 lacs is brought to tax. Aggrieved, assessee carried the matter in appeal before the Commissioner (Appeals) but without any success. The Commissioner (Appeals) confirmed the action of the assessing officer and observed as follows: I have considered the submissions of the appellant. The appellant was in employment with Nestle India Ltd. till 31.03.98 and he retired thereafter. During the year under consideration, he has received- pension-from Nestle India Ltd. of more than Rs. 32 lakhs. The appellant has submitted that he was approached by Nestle India Ltd in August 1998 which appointed him as a consultant in matters relating to sales distribution and marketing. The payments received for such services-by the appellant are however, right from the beginning of the year under consideration upto the end of the year. This implies that the appellant immediately after retirement continued to offer his services to Nestle India Ltd. Otherwise he would have not been paid the remuneration for the month of/April 1997 and thereafter till the terms and conditions were formulated in August 98. The amount received by the appellant for the services rendered to the company Nestle India Ltd. during the year is Rs. 37.70 lakhs besides Rs. 45.62 lakhs from the parent company Nestle SA. Over and above this amount the appellant was also given a sum of Rs. 15 lakhs during the year under consideration in the garb of compensation for non compete under the Restrictive Covenant for a period of 12 months. This amount of Rs. 15 lakhs is claimed to be exempt being capital in nature for which the appellant has relied on some High Court judgments and a decision of Mumbai ITAT. However, the facts of the case before the High Courts and the Mumbai ITAT were different. Before the ITAT Mumbai the issue was in respect of restrictive covenant for a period of 5 years. In the case under consideration ,the appellant not only received pension of substantial amount but even the retainership fees received by him from the company and the parent company were in excess of Rs. 80 Lakhs. It is not understood as to how the appellant was prevented from gainful employment by the restrictions placed in the agreement with. Nestle India Ltd. for which he was compensated by a consideration of Rs. 15 lakhs. Had the appellant not been gainfully employed during the year and had received the impugned amount under the terms of the Restrictive Covenant, then perhaps the appellant could have claimed that the receipt was in the nature of capital receipt. But not only the appellant enjoyed the pension of the company, on the contrary was more gainfully employed by the company itself, as is evident by the substantial earnings for the services rendered by the appellant. One need not be influenced by the form of agreement but what is important is to consider the substance of the agreement. The form of this Restrictive Covenant is nothing more than a facade created to avoid payment of taxes on the sum of Rs. 15 lakhs received from the company from which the appellant retired but continued to offer his services for substantial considerations. The restriction placed on the appellant for a period 12 months for which he was compensated by Rs. 15 lakhs was nothing extraordinary or exemplary in the context of the magnitude of earnings from the payee company. This sum of Rs. 15 lakhs would only be considered as part and parcel of the remuneration received by the appellant and no differential treatment is required to be given. Under the circumstances, it is held that the sum of Rs. 15 lakhs is the professional/business receipt of the appellant and is to be subjected to taxation Under Section 28(i) of the Income Tax Act. The ground of appeal raised by the appellant therefore does not succeed.
(3.) THE assessee is not satisfied and is in further appeal before us.;

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