Summary
For assessment year 1995–96, the Rs.6.6 crore payment was genuine consideration for a ten-year non-compete covenant and a non-taxable capital receipt under the then law. The Revenue could not replace the parties’ commercial assessment with its own view of an appropriate amount. The High Court also exceeded the formulated substantial question by taxing it as share-sale capital gains without following Section 260A(4). Its judgment was set aside; the later Section 28(va) charge did not operate retrospectively.
Issues
- Whether the High Court could tax the receipt on a basis outside its formulated substantial question.
- Whether the non-compete covenant was genuine or a device disguising taxable consideration.
- Whether the later statutory charge applied to assessment year 1995–96.
Provisions considered
- Section 260A, Income-tax Act, 1961Confined decision to formulated substantial questions, with reasons and fair opportunity required for an additional question. (¶¶ 12, 13, 14)
- Section 28(ii)(a), Income-tax Act, 1961The receipt was not compensation for termination of management under this provision, but consideration for the separate restrictive covenant. (¶¶ 5, 17, 18, 19, 20)
Held
- Section 260A required formulation of the substantial question and, for any further substantial question, recorded reasons and an opportunity to meet it. The High Court’s share-sale capital-gains basis was outside the formulated question concerning Section 28(ii)(a) and was adopted without those safeguards. (¶¶ 12, 13, 14)
- The Tribunal majority correctly distinguished the share-sale consideration, already reflecting a control premium, from the personally negotiated non-compete fee. The appellant’s extensive industry expertise justified the purchaser’s concern about competition, and retention of part of the payment secured against breach. The record did not support a colourable-device finding. (¶¶ 15, 16, 17, 18)
- Commercial expediency had to be judged from the business perspective. The Revenue’s view that the purchaser was too large to face a threat, or that the fee was excessive relative to the shares, could not substitute for the parties’ commercial assessment on the established facts. (¶¶ 15, 17, 18)
- Following Guffic Chem, consideration attributable to a negative or restrictive covenant was a capital receipt under the law applicable to assessment year 1995–96. Section 28(va), introduced with effect from 1 April 2003, created the later tax charge and was amendatory rather than retrospective clarification. (¶¶ 19, 20)
Result
Appeal allowed; High Court judgment set aside. Pending applications disposed of in terms of the judgment.