IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.995 OF 2008 The Commissioner of Income-tax ) Central-III, M.K.Road, ) Ayakar Bhavan, Mumbai-400 020 )..Appellant Versus M/s.Lyka Laboratories Ltd., ) 101, Shiv Shakti Industrial ) Estate, Andheri Kurla Road, ) Andheri (E), Mumbai-400 059. )..Respondents ---- Mr.Suresh Kumar with Mr.P.S.Sahadevan for the appellant. Mr.K.Gopal with Mr.Jitendra Singh for the respondents. ---- Coram : F.I.Rebello & R.S.Mohite,JJ Date : 30.03.2009. P.C. 1. The substantial questions of law as framed in this appeal are as follows :- (a) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in setting aside the order of the CIT(A) by holding that the consideration attributable to the non-compete covenant amounts to capital receipt not chargeable to tax since there was a loss of source of income to the assessee for a period of five years (b) Whether on the facts and in the circumstances of the case and in law, the facts of the case of Gillandrs Arbuthnat & Co. (53 ITR 283) (SC) relied upon by the ITAT are distinguishable from those of the assessee ? (c) Whether on the facts and in the circumstances of the case and in law, in the assessee’s case, the : 2 : non-compete clause was for a limited period of five years and the same has no effect on the assessee’s business, trading structure, earning capacity and also, there is no loss of an enduring trading asset (d) Whether on the facts and in the circumstances of the case and in law, what the assessee has been compensated for is not for loss of source of income but the profit which the assessee would have earned for a period of five years ? (e) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT has erred in dismissing the departmental appeal on the issue of disallowance of interest of Rs.8,10,000/-, being interest @ 18% on deposit of Rs.45,00,000/- kept with the managing director of the assessee company for the purpose of providing him rent-free accomodation as per the terms of his appointment ? (f) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in applying the rule of Estoppel to the facts of the case, and thereby in ignoring the judgment of the Hon.Supreme Court in the case of M.M.Ipoh V/s. CIT (1968) 67 ITR 106, wherein it was held that each year is a self-contained separate period and the decision given in an assessment for an earlier year is not binding in subsequent years ? (g) Whether on the facts and in the circumstances of the case and in law, the resolution passed by the board of directors and the consequent lease agreement entered into with the managing director in respect of the said interest free deposit were intended to benefit Shri N.I.Gandhi, the managing director of the company, who was also the owner of the property in respect of which the security deposit was given and hence, the agreement was at arms length and was not for adequate consideration ? 2. Questions (a), (b), (c) & (d) pertain to the same issue, whereas questions (e), (f) & (g) pertain to another single issue. 3. The brief relevant facts of the case relevant to deciding questions (a), (b), (c) & (d) are as under :- : 3 : (a) That by an agreement dated 20.1.1998 the assessee company agreed to supply and provide to another company US Vitamins Ltd., clinical data, scientific details, report on clinical trials and certain other valuable market information set out in the schedule to the agreement, for a sum of Rs.6 crores and subject to the condition as mentioned in the agreement. Clause-8 of this agreement provided that for a period of 5 years from the date of the agreement, the assessee company would not compete with US Vitamins Ltd., directly or indirectly or through its affiliates in promoting, distributing and selling of formulations made from bulk drug nitroglycerine. (b) No separate consideration was made out in the agreement regarding this non competing clause. The agreement was therefore, a composite agreement for transferring certain know-how and for not competing with US Vitamins Ltd., for a composite consideration of Rs.6 crores. For the assessment year 1998-99 the assessee filed a return contending that the entire consideration paid was a capital asset not chargeable to capital gain tax. The assessing officer held that the amount of Rs.6 crores received by assessee company was not capital expenditure but was revenue expenditure. : 4 : 4. The matter was carried in appeal by the assessee. The CIT(A) while allowing the appeal partly, on certain other grounds, was pleased to dismiss the assessee’s appeal in so far as the aforesaid ground pertaining to the receipt of Rs.6 crores under the aforesaid agreement was concerned. The assessee then carried the matter to ITAT and the ITAT held that the payment of Rs.6 crores was received as consideration for two separate reasons which were as follows :- (i) For transfer of marketing information as set out in the agreement ; (ii) For agreeing not to compete with US Vitamins Ltd., for a period of five years. . As regards the former the ITAT held that the same amounted to a revenue receipt and the order of CIT(A) on this aspect of the issue was upheld. On the issue relating to payment relatable to the non compete with US Vitamins, the ITAT relied upon the judgment of the Supreme Court in the case of Gillandrs Arbuthnat & Co. Vs. CIT reported in (1964) (053 ITR 0283) and held that monies received on account of the agreement not to compete amounted to a capital receipt. With the aforesaid findings the matter was remitted back to the assessing officer for an adjudication on the issue of : 5 : violation of non compete fees and thereafter calculating the balance amount relatable to transfer of information and taxing the same. 5. It was contended by Counsel appearing for the revenue that once it was held that the part of the consideration relating to transfer of marketing information was a revenue receipt then it must necessarilly follow that the balance amount relatable to the other part of the agreement whereby the assessee agreed not to compete must also automatically amount to a revenue receipt. It was contended that the judgment of the Supreme Court in Gillandrs (supra) did not deal with this aspect of the matter. We are unable to accept this contention. In our view, the payment for parting with information is not in any way connected with the non compete clause. The two obligations undertaken by the assessee under the agreement were separate and mutually exclusive. It was possible for the assessee to have agreed only to the transfer of marketing information without further agreeing to refrain from competetion. Similarly it was also possible for the assessee who have agreed not to compete without effecting the transfer of its marketing knowledge. We see no connection between these two obligations. In the circumstances, we feel that there is no flaw in the reasoning given by : 6 : the ITAT. The questions of law raised as (a) (b) & (c) therefore, do not arise. 6. As regards questions (e) (f) & (g) the facts are that the assessee company engaged one Mr.N.I.Gandhi as its managing director and under the terms of his appointment, was obliged to provide him with housing accomodation. The said Mr.N.I.Gandhi had his personal accomodation at Malbar Hill and this accomodation was let out by him to the company on a monthly rent of Rs.5000/- per month and interest free deposit of Rs.75 lakhs. This amount of Rs.75 lakhs was paid out of interest bearing loan taken by the assessee company. Later the assessee company resolved to allot this premises to its managing director for the purpose of his residence in order to fulfill its obligation to provide him with accomodation. For the assessment year 1998-99 the pro rata interest paid on the amount of Rs.75 lakhs was claimed as a deduction on a ground that it was expenses incurred for the purpose of business and covered by section 36(1) (iii). The assessing officer found that the interest component of 18% on Rs.75 lakhs worked out Rs.13,50,000/-. He opined that assessee had done a personal favour by giving interest free deposit of Rs.75 lakhs. He therefore, disallowed the entire interest of Rs.13,50,000/- incurred by the company. The CIT(A) found that issue was covered by the appellate order for the : 7 : assessment year 1997-98 where the CIT(A) had partly allowed the claim of the appellant by holding that out of the amount of security deposit of Rs.75 lakhs, the sum to the extent of Rs.30 lakhs was reasonable. He allowed notional interest @ 13% on this amount of Rs.30 lakhs being Rs.5,40,000/- as a deduction and disallowed interest on the balance of Rs.45 lakhs amounting to Rs.8,10,000/-. CIT(A) therefore, made the same bifurcation and allowance/disallowance for the assessment year 1998-99. 7. The assessee filed a further appeal before the ITAT and the ITAT by its impugned judgment and order dated 23.11.2007 held that the issue was covered by the decision of the Tribunal in the assessee’s own case in the assessment year 1997-98. The issue was therefore, decided in favour of the assessee and the deduction was granted in respect of the entire interest expenditure of Rs.13,50,000/-. 8. On perusing the reasoning given by the ITAT in the earlier years, we find that the ITAT has concluded that even if assessee had taken a flat off any third person in order to meet its obligations to provide accomodation to Mr.N.I.Gandhi it would have to pay Rs.75 lakhs as a security deposit. Since it was not disputed that this amount was actually paid, it was held to be a business expense. We find no : 8 : fault with the reasoning and logic of the ITAT. It may be that each year is a self contained separate period but even if the present assessment year is separately considered, the logic and reasoning upon which the deduction was permitted for the earlier years would remain the same for the assessment year in question. In the circumstances, in our view, the questions (e) (f) & (g) also do not arise. Consequently, the appeal is dismissed in limine. (R.S.Mohite,J) (F.I.Rebello,J)