1 IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL ORIGINAL ORIGINAL CIVIL JURISDICTION CIVIL JURISDICTION CIVIL JURISDICTION INCOME INCOME INCOME TAX TAX TAX APPEAL NO.64 OF 2005 APPEAL NO.64 OF 2005 APPEAL NO.64 OF 2005 The The The Commissioner Commissioner Commissioner of Income Tax of Income Tax of Income Tax Central Central Central III, Mumbai III, Mumbai III, Mumbai Appellant Appellant Appellant vs vs vs Narendra Narendra Narendra D.Desai D.Desai D.Desai ...... Respondent Respondent Respondent Mr.Pankaj Mr.Pankaj Mr.Pankaj Kapoor Kapoor Kapoor for Appellant for Appellant for Appellant CORAM CORAM CORAM : : : F.I.REBELLO AND F.I.REBELLO AND F.I.REBELLO AND R.S.MOHITE, R.S.MOHITE, R.S.MOHITE, JJ JJ JJ DATED DATED DATED : 4TH DECEMBER, 2007 : 4TH DECEMBER, 2007 : 4TH DECEMBER, 2007 P.C. P.C. P.C. 1.1.1. The revenue has preferred this appeal against The revenue has preferred this appeal against The revenue has preferred this appeal against the the the order dated 28th May, 2002 . The issue for order dated 28th May, 2002 . The issue for order dated 28th May, 2002 . The issue for consideration consideration consideration before the learned Tribunal was before the learned Tribunal was before the learned Tribunal was whether whether whether the receipt received by the assessee from the receipt received by the assessee from the receipt received by the assessee from the the the General Electric Company USA (GE) for agreeing General Electric Company USA (GE) for agreeing General Electric Company USA (GE) for agreeing toto to refrain from carrying on competing business refrain from carrying on competing business refrain from carrying on competing business under under under a restrictive covenant is income exigible to a restrictive covenant is income exigible to a restrictive covenant is income exigible to tax tax tax ? After going through the various facts the ? After going through the various facts the ? After going through the various facts the tribunal tribunal tribunal noted that the amount received is capital noted that the amount received is capital noted that the amount received is capital receipt receipt receipt and is not liable to tax. Before the and is not liable to tax. Before the and is not liable to tax. Before the tribunal, tribunal, tribunal, the contention of the revenue was that the contention of the revenue was that the contention of the revenue was that the the the amount in question cannot be considered to be amount in question cannot be considered to be amount in question cannot be considered to be capital capital capital receipt because existing income earning receipt because existing income earning receipt because existing income earning apparatus apparatus apparatus was not destroyed or impaired. In para was not destroyed or impaired. In para was not destroyed or impaired. In para 11 11 11 of the judgment, the learned tribunal has of the judgment, the learned tribunal has of the judgment, the learned tribunal has referred referred referred to the amendment of section 28 by Finance to the amendment of section 28 by Finance to the amendment of section 28 by Finance Act, Act, Act, 2002. Sub-clause (va) was introduced with 2002. Sub-clause (va) was introduced with 2002. Sub-clause (va) was introduced with effect effect effect from 1st April, 2003. The relevant portion from 1st April, 2003. The relevant portion from 1st April, 2003. The relevant portion reads reads reads as under : as under : as under : 2 . " (va) any sum whether received or " (va) any sum whether received or " (va) any sum whether received or receivable receivable receivable in in in cash or kind under a agreement cash or kind under a agreement cash or kind under a agreement for- for- for- (a) (a) (a) not carrying out any activity in not carrying out any activity in not carrying out any activity in relation relation relation to any business; or to any business; or to any business; or (b) (b) (b) ..............................." ..............................." ..............................." The The The learned learned learned tribunal considered the Memorandum tribunal considered the Memorandum tribunal considered the Memorandum explaining explaining explaining the Provision in the Finance Bill, 2002 the Provision in the Finance Bill, 2002 the Provision in the Finance Bill, 2002 and and and quoted the following :- quoted the following :- quoted the following :- " MEASURES TO CURB TAX AVOIDANCE MEASURES TO CURB TAX AVOIDANCE MEASURES TO CURB TAX AVOIDANCE New New New provisions provisions provisions for taxing the receipts in for taxing the receipts in for taxing the receipts in the the the nature of non-compete fees and nature of non-compete fees and nature of non-compete fees and exclusivity exclusivity exclusivity rights. rights. rights. The The The tribunal noted that this amendment propose tribunal noted that this amendment propose tribunal noted that this amendment propose toto to insert a new provision in the Income Tax Act, insert a new provision in the Income Tax Act, insert a new provision in the Income Tax Act, 1961 1961 1961 for charging to tax any sum received or for charging to tax any sum received or for charging to tax any sum received or receivable receivable receivable in cash or in kind under an agreement in cash or in kind under an agreement in cash or in kind under an agreement for for for not carrying out activity in relation to any not carrying out activity in relation to any not carrying out activity in relation to any business business business or not to share any know-how, patent, or not to share any know-how, patent, or not to share any know-how, patent, copyright,licence, copyright,licence, copyright,licence, franchise or any other business franchise or any other business franchise or any other business or or or commercial right of similar nature or commercial right of similar nature or commercial right of similar nature or information information information or technique likely to assist in the or technique likely to assist in the or technique likely to assist in the manufacture manufacture manufacture or or or proceesing of goods or provision for proceesing of goods or provision for proceesing of goods or provision for service service service under the head profit and gains of business under the head profit and gains of business under the head profit and gains of business of of of profession. profession. profession. The The The amendment has come into force from 1st amendment has come into force from 1st amendment has come into force from 1st April, April, April, 2003 and accordingly will apply in relation 2003 and accordingly will apply in relation 2003 and accordingly will apply in relation toto to the assessment year 2003-2004 and subsequent the assessment year 2003-2004 and subsequent the assessment year 2003-2004 and subsequent years. years. years. 2.2.2. After considering these aspects, the tribunal After considering these aspects, the tribunal After considering these aspects, the tribunal 3 held held held that this amendment is operative from 1st that this amendment is operative from 1st that this amendment is operative from 1st April, April, April, 2003. It was not made retrospective. As 2003. It was not made retrospective. As 2003. It was not made retrospective. As such such such it can be said that in the year under it can be said that in the year under it can be said that in the year under consideration consideration consideration the amount received under an the amount received under an the amount received under an agreement agreement agreement for not carrying out any activity in for not carrying out any activity in for not carrying out any activity in relation relation relation to business was not exigible to tax. to business was not exigible to tax. to business was not exigible to tax. 3.3.3. As to whether it will attract capital gains, As to whether it will attract capital gains, As to whether it will attract capital gains, reliance reliance reliance was placed on Instruction No. 1964 dated was placed on Instruction No. 1964 dated was placed on Instruction No. 1964 dated 17.3.1999 17.3.1999 17.3.1999 issued issued issued by CBDT. It was stipulated in the by CBDT. It was stipulated in the by CBDT. It was stipulated in the said said said Instruction that where the capital asset Instruction that where the capital asset Instruction that where the capital asset transferred transferred transferred is in the nature of a right to is in the nature of a right to is in the nature of a right to manufacture manufacture manufacture produce produce produce or process an article or thing or process an article or thing or process an article or thing, recourse recourse recourse to section 55 (2) can be made only from to section 55 (2) can be made only from to section 55 (2) can be made only from assessment assessment assessment year 1998-99 in respect of any year 1998-99 in respect of any year 1998-99 in respect of any consideration consideration consideration received for the transfer thereof received for the transfer thereof received for the transfer thereof which which which includes extinguishments or curtailment of includes extinguishments or curtailment of includes extinguishments or curtailment of such such such right. Section 55 (2) (a) was amended with right. Section 55 (2) (a) was amended with right. Section 55 (2) (a) was amended with effect effect effect from from from 1.4.1998. Considering that it was held 1.4.1998. Considering that it was held 1.4.1998. Considering that it was held inin in the year under consideration, it would not be the year under consideration, it would not be the year under consideration, it would not be applicable applicable applicable and since the cost of acquisition was and since the cost of acquisition was and since the cost of acquisition was nil nil nil it was not exigible to capital gains tax. In it was not exigible to capital gains tax. In it was not exigible to capital gains tax. In the the the light of that, the issue was decided in favour light of that, the issue was decided in favour light of that, the issue was decided in favour of of of assessee and against the revenue. assessee and against the revenue. assessee and against the revenue. 4.4.4. In our opinion, in so far as the issue In our opinion, in so far as the issue In our opinion, in so far as the issue pertaining pertaining pertaining to prospective and restrospective to prospective and restrospective to prospective and restrospective covenants, covenants, covenants, we do not find that there is any error we do not find that there is any error we do not find that there is any error committed committed committed by the tribunal in arriving at the by the tribunal in arriving at the by the tribunal in arriving at the conclusion. conclusion. conclusion. The amendment was prospective and The amendment was prospective and The amendment was prospective and consequently consequently consequently would not apply in relation to the would not apply in relation to the would not apply in relation to the assessment assessment assessment year under consideration. year under consideration. year under consideration. 4 5.5.5. Similarly, considering the finding in so far as Similarly, considering the finding in so far as Similarly, considering the finding in so far as capital capital capital gains gains gains is concerned, we also find that there is concerned, we also find that there is concerned, we also find that there isisis no error of law and consequently the questions no error of law and consequently the questions no error of law and consequently the questions of of of law as framed would not arise. Appeal is law as framed would not arise. Appeal is law as framed would not arise. Appeal is accordingly accordingly accordingly dismissed. dismissed. dismissed. (F.I.Rebello, (F.I.Rebello, (F.I.Rebello, J) J) J) (R.S.Mohite, (R.S.Mohite, (R.S.Mohite, J) J) J) 5 ‘