Suzuki's non-compete payment to ex-MD ruled as capital receipt, not taxable income.

Case Name:

PR. COMMISSIONER OF INCOME TAX-11 vs. SATYA SHEEL KHOSLA (High Court of Delhi)

Key Takeaways:

- The court upheld the ITAT's decision, ruling that the non-compete payment was a capital receipt and not taxable income. - The court relied on the Supreme Court's decisions in Guffic Chem. P. Ltd. v. CIT and CIT v. Sapthagiri Distilleries Ltd., which treated such non-compete payments as capital receipts. - The court noted that the 2017 amendment to the Income Tax Act, which brought non-compete fees for professionals under the tax net, was not applicable in this case. **Issue:** Whether the amount of Rs. 1.32 crores received by Mr. Sheel from Suzuki Motorcycle India Pvt. Ltd. for not providing his expertise to any other two-wheeler company for two years was taxable as income or a capital receipt. **Facts:** - Mr. Sheel was the promoter and Managing Director of Integra Overseas Pvt. Ltd. (later renamed Suzuki Motorcycle India Pvt. Ltd.). - After Suzuki Motor Corporation became a major shareholder, Mr. Sheel stepped down as Managing Director. - Suzuki India agreed to pay Mr. Sheel Rs. 1.32 crores per annum for two years 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." - The Assessing Officer treated the amount as taxable income, but the ITAT held it to be a capital receipt, relying on the Supreme Court's decisions in Ram Pershad v. CIT and Guffic Chem. P. Ltd. v. CIT. **Arguments:** - Revenue's Argument: The amount received by Mr. Sheel was essentially a non-compete fee, which should be taxable as income under Section 28(va) of the Income Tax Act, even before the 2017 amendment. - Assessee's Argument: The ITAT correctly applied the law as it stood, relying on the Supreme Court's decision in Guffic Chem. P. Ltd., which treated such non-compete payments as capital receipts. **Key Legal Precedents:** - **Ram Pershad v. Commissioner of Income Tax (1972) 86 ITR 122:** Cited by the ITAT in support of treating the non-compete payment as a capital receipt. - **Guffic Chem. P. Ltd. v. Commissioner of Income Tax (2011) 332 ITR 602:** The Supreme Court observed that compensation attributable to a negative/restrictive covenant is a capital receipt. - **Commissioner of Income Tax v. Sapthagiri Distilleries Ltd. (2015) 53 Taxmann.com 218 (SC):** The Supreme Court held that compensation received towards loss of source of income and non-competition fee would be treated as capital receipts and not liable to tax. - **Commissioner of Income Tax v. Anjum G. Balakhia (2017) 393 ITR 320:** The Gujarat High Court analyzed the relevant provisions of Section 28 and subsequent amendments, and relied on the Supreme Court's decisions in Guffic Chem. P. Ltd. and Sapthagiri Distilleries Ltd. **Judgment:** The High Court dismissed the Revenue's appeal, upholding the ITAT's decision. The court held that the non-compete payment received by Mr. Sheel was a capital receipt and not taxable as income. The court relied on the Supreme Court's decisions in Guffic Chem. P. Ltd. and Sapthagiri Distilleries Ltd., which treated such non-compete payments as capital receipts. The court noted that the 2017 amendment to the Income Tax Act, which brought non-compete fees for professionals under the tax net, was not applicable in this case. **FAQs:** **Q1: What was the significance of the 2017 amendment to the Income Tax Act?** A1: The 2017 amendment brought non-compete fees received by professionals under the tax net by including them in the definition of "income" under Section 28(va) of the Income Tax Act. However, this amendment was not applicable in the present case, which pertained to the pre-amendment period. **Q2: Why did the court rely on the Supreme Court's decisions in Guffic Chem. P. Ltd. and Sapthagiri Distilleries Ltd.?** A2: The court relied on these decisions because they established the principle that compensation received towards non-competition or loss of source of income should be treated as capital receipts and not taxable income. **Q3: What was the court's reasoning for upholding the ITAT's decision?** A3: The court found the ITAT's view to be a plausible one, based on the legal precedents and the fact that the 2017 amendment was not applicable in this case. The court held that no question of law arose from the ITAT's decision. **Q4: What is the significance of this case for non-compete payments?** A4: This case reaffirms the principle that non-compete payments received before the 2017 amendment should be treated as capital receipts and not taxable income, based on the Supreme Court's decisions in Guffic Chem. P. Ltd. and Sapthagiri Distilleries Ltd. **Q5: Can this decision be applied to all non-compete payments received before the 2017 amendment?** A5: While this decision provides guidance, the court noted that the analysis of such receipts should be fact-dependent. The tax authorities should conduct a case-by-case analysis based on the specific facts and circumstances of each case.

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.”

4. Counsel for the Revenue urges that the ITAT fell into error in holding that the amounts essentially received as non-compete fee, were capital and not income. He expressly referred to Section 28(va) and submitted that even prior to this amendment through Finance Act of 2016 (effective from 01.04.2017), amounts received towards restraining the recipient for carrying on any business or commercial activity were covered. He highlighted that the amendment bringing to tax such amounts was made with effect from 2002 in view of the previous decisions of the Supreme Court.

It was contended that regardless of the insertion of the expression “profession”, to the Act in 2017, the object of the nature of activity carried on by the payer of the assessee was relevant. Learned senior counsel for the assessee submitted that this Court should not interfere with the findings of the ITAT. It was submitted that the law as it stood and it was interpreted by the Supreme Court in Guffic Chem. P. Ltd. (supra) was applied and there is no infirmity to the impugned order.

5. In the present case, it is apparent that the assessee received Rs.1.32 crores for only 2 years. Concededly, there can be two ways of looking at such receipts. In all such cases, there cannot be a straight jacket black and white formula; the analysis to be conducted by the tax authorities or administration has to be a fact dependent one. The assessee had a dual role – both as shareholder and as Managing Director. As Managing Director, he received only the non-compete amounts for two years. It is quite possible that he could have been given this amount as a capital receipt at one go for whatever reasons and that the amount be spread over two years. Undoubtedly, the Parliament has intervened and deemed that such amounts – so far as they relate to consideration for professionals should be treated as income by virtue of the amendment of 2017. However, with respect to the Revenue’s contention that regardless of that amendment even in the pre-existing law, this amount had to be treated as receipts and therefore taxable as income, cannot be accepted. Recently, the Gujarat High Court in Commissioner of Income Tax v. Anjum G. Balakhia (2017) 393 ITR 320 analyzed the relevant provisions of Section 28 – and also noticed any subsequent amendments. The Court took note of Guffic Chem. P. Ltd. (supra). It also noted Commissioner of Income Tax v. Sapthagiri Distilleries Ltd. (2015) 53 Taxmann.com 218 (SC), where the Supreme Court had held that compensation received towards loss of source of income and noncompetition fee would be treated only as capital receipts and not liable to tax. Having regard to these decisions and the fact that the view of the ITAT is a plausible one, no question of law arises. The appeal is, therefore, dismissed.

S. RAVINDRA BHAT, J

A. K. CHAWLA, J

JANUARY 29, 2018