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08-04-2019, Shekhar K. Shah, Section 28, Tribunal Mumbai

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5 days 21 hours ago #9154 by amit
Section - 28
Order Date - 08-04-2019
Favouring - Assessee
Court - Tribunal Mumbai
Appellant - ACIT
Respondent - Shekhar K. Shah
Citation - 419Taxpundit189
Appeal No. - ITA No. 5342/MUM/2012
Asstt. Year - 2007-08



This is an appeal filed by the Revenue. The relevant assessment year is 2007-08. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-7, Mumbai [in short ‘CIT(A)’] and arises out of completed assessment u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).

2. The 1st ground of appeal

On the facts and circumstances of the cast and in law, the Ld.CIT (A) erred in deleting theaddition of Rs.5,00,000/- towards non-compete fees without appreciating the fact that the supplementary non-compete agreement dated 14.01.2002 was an afterthought and the taxable income for future years AYs
2003-04 to 2008-09 was declared as non-taxable income in AY2002-03 by entering into the agreement dated 14.01.2002 with a view to evade tax on the non-compete fees and hence the addition made by the AO,was justified.

3. Briefly stated, the facts are that the assessee, a Director of Vossloh-Schwabe India Pvt. Ltd. (‘VSIN’) entered into a series of agreements culminating into a Joint Venture (JV) with Vossloh Group that took effect from 31.03.1998. Thereafter, VSIN and the assessee entered into another agreement i.e. NonCompetition Agreement dated 14.07.1994. As per Article 3 of the said Agreement, the assessee was to receive compensation. As per clause 3.2 and 3 3 of the said Agreement, the Parties had agreed that out of the initial deposit of Rs.50,00,000/- paid to the assessee, a sum of Rs 5,00,000/- would be adjusted per annum beginning from 01.04.1998 for a period of 10 years. Also, in January 2002, the assessee and VSIN entered into a Supplementary Agreement to the Non-Competition Agreement, in which the assessee and VSIN revised the agreement. Further, the JV itself was re-negotiated in August 2003 under which the shareholding pattern in VSIN was modified along with several terms and conditions. Under the said renegotiated agreement, all the agreements entered in 1998 were terminated including the Non-Competition Agreement dated 31.03.1998. The Non-Competition amount due to the assessee translated as under:

“Under Agreement dated July 14, 1998, the appellant received a sum of Rs.50,00,000/- as a deposit to be adjusted over a period of 10 years @ Rs.5,00,000/- subject to understanding that the arrangement can be terminated with a written notice at the end of each year. Under Supplementary Agreement dated January 14, 2002, the Appellant and Vossloh agreed that the condition for annual option to terminate was removed with the result the amount lying in deposit of Rs.35,00,000/- at the time became fully due to the Appellant.

The Joint Venture itself was re-negotiated with effect from August 8, 2003 under which the Non-Competition Agreement along with all other documents were terminated and fresh arrangements were put in place. However, under the new agreement, the Parties did not negotiate a separate non-compete fee for the Appellant.”

In the return of income, the assessee had offered the income from non-compete fees as under:

“During the Assessment years 1999-00 to 2001-02, the appellant disclosed non-compete fee of Rs.5,00,000/- each and claimed that the said sums were capital receipts. Th s position was examined and duly accepted in the scrutiny assessment of the Appellant for Assessment year 1999-00. In the Return of Income of Assessment year 2002-03, the Appellant disclosed the balance sum of Rs.35,00,000/- as capital receipt.” During the course of assessment proceedings, the AO observed that (i) in the first three years, the assessee itself treated only an amount of Rs.5,00,000/- as income for the year, (ii) it was only in the AY 2002- 03 that the balance amount of advance was treated as income, (iii) this was a tool to evade taxes because non-compete fees was made taxable by virtue of insertion of sub-clause (va) to section 28 by the Finance Act, 2002 w.e.f. 01.04.2003, (iv) the assessee cannot claim taxable income of future years as income (whether taxable or not taxable) of current year, because there is not provision in the Act in this regard.

With the above observations, the AO concluded that the income accrued to the assessee for the year under consideration is Rs.5,00,000/- and as per the provisions of section 28(va), the same is taxable under the head ‘business and profession’.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld.CIT(A). In the order dated 26.04.2012 the Ld. CIT(A) observed that “the reason for entering into a supplementary noncompetition agreement on 14.01.2002 has also been explained by the appellant as on account of the takeover of Vossloh, Germany by Matsuhita, Japan, which is a plausible reason. That a supplementary non-competition agreement was executed on 14.01.2002 is also borne out by the fact that in the minutes of the meeting of the Board of Directors of Vossloh Schwabe India Pvt. Ltd. held on 27.02.2002, the said supplementary non-competition agreement was approved.” Referring to clause 5 of the said agreement, the Ld. CIT(A) observed that all the balance amount remaining with the assessee on the date of execution of the agreement was to be the lumpsum consideration towards the non-compete covenants for the remaining period of the non-compete fees. Consequently, the balance amount of Rs.35,00,000/- ceased to retain the character of deposit in the hands of the assessee and thus became consideration for the previous year relevant to the AY 2002-03. Holding that the assessee has rightfully disclosed the said amount in the return of income for AY 2002-03,

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