-1- IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. Income Tax Appeal No.389 of 2000 The Commissioner of Income Tax Mumbai City XII, Mumbai ..Appellant vs. Shri Amol Narendra Dalal 501, Prashanti Devidas Road Borivli (W), Mumbai 400 013 ..Respondent Mr.N.A.Kazi for appellant Mr.Vipul B.Joshi for respondent. CORAM: Dr.S.RADHAKRISHNAN & CORAM: Dr.S.RADHAKRISHNAN & CORAM: Dr.S.RADHAKRISHNAN & S.J.KATHAWALLA JJ. S.J.KATHAWALLA JJ. S.J.KATHAWALLA JJ. 20th August, 2008 20th August, 2008 20th August, 2008 J U D G M E N T : (Per S.J.Kathawalla J.) J U D G M E N T : (Per S.J.Kathawalla J.) J U D G M E N T : (Per S.J.Kathawalla J.) 1. The above appeal was admitted on the following substantial question of law. "Whether the amount received by a cable operator for not competing with the purchaser in future is taxable?" 2. Relevant facts in the matter are briefly set out hereunder. a) One Amol Narendra Dalal was carrying on his sole proprietory business of Cable T.V.operations and was running cable T.V.network in Borivli (West) and in other -2- areas of Mumbai suburbs since January, 1989 in the name of M/s Home Video Services. The assessee sold/transferred his business as a going concern to M/s Aasia Industrial Technologies Pvt.Ltd., a company of Hinduja group vide agreement dated 25th November, 1994 for a consideration of Rs.12,50,000/- (first agreement). On the same day i.e. on 25th November, 1994 the assessee entered into another agreement with M/s Aasia Industrial Technologies Pvt.Ltd. (the purchasers) whereunder the assessee agreed not to carry on any business or activity in future in respect of Cable T.V.net work and not to compete with the purchaser within the territory of Mumbai Suburbs. (Second Agreement). Under the second agreement the assessee received an amount Rs.11,00,000/- from M/s Aasian Industrial Technologies Pvt.Ltd. (purchaser). b) The assessee in his return filed for the Assessment Year 1995-96 offered the amount of Rs.12,50,000/- as "Long Term Capital Gain". However, the second payment of Rs.11,00,000/- under the second agreement was not offered to tax and was claimed as capital receipt. The Assessing Officer by his order dated 27th January, 1998 passed under sec.143(3) rejected the assessee’s claim and treated the total amount received from the company as long term gain. -3- c) The assessee went in appeal before CIT(A) impugning the order of the Assessing Officer. However, CIT(A) by its order dated 16th July, 1998 upheld the order of the Assessing Officer dated 27th January, 1998. d) Being aggrieved by the said order passed by CIT(A) on 16th July, 1998, the assessee filed an appeal before the Tribunal. The Departmental Representative contended before the Tribunal that the assessee had already transferred his clientele to the said company under the first agreement dated 25th November, 1994 in terms of which he received Rs.12,50,000/- and, therefore, there was nothing left for the assessee to make any further transfer under the second agreement under which he received an amount of Rs.11,00,000/- It was contended that the said amount of Rs.11,00,000/- was, therefore, towards the transfer of the good will of the assessee. e) The Tribunal by its order dated 28th August, 1999 gave a categorical finding in favour of the assessee that there was no transfer of the good will under the second agreement whereunder the assessee received Rs.11,00,000/- from the said company. It was held that the said amount of Rs.11,00,000/- was received by the assessee in view of his having undertaken not to carry on any business in -4- competition with the said company i.e. M/s Aasia Industrial Technologies Pvt.Ltd. The said amount of Rs.11,00,000/- received by the assessee was, therefore, in view of such restriction and negative covenant namely not to compete with the said company. The Tribunal also held that the said issue was squarely covered in favour of the assessee by the decision of the Tribunal in the case of Income Tax Officer Vs. Shri Anilkumar Rudra decided by the Tribunal by its order dated 9th October, 1998 in ITA No.8975/Bom/90. The Tribunal also relied on the decision in the case of Bharat Forge Co.Ltd. reported in 205 ITR 339 and the decision of the Hon’ble Supreme Court of India in the case of Vanila Silk Mills Pvt.Ltd. reported in 191 ITR 647. f) The Tribunal, therefore, allowed the appeal of the assessee. g) Being aggrieved by the order of the Tribunal dated 28th August, 1999 the appellant (Revenue) filed the above appeal which was admitted on the substantial question of law set out in paragraph no.1 above. 3. Mr.Kazi, learned Counsel appearing for the revenue before us only reiterated the department’s argument -5- advanced before the Tribunal, namely, that since the assessee had already transferred his clientele to the said company under the first agreement dated 25th November, 1994 for a consideration of Rs.12,50,000/- there was nothing left for the assessee to transfer and, therefore,the amount of Rs.11,00,000/- received by the assessee under the second agreement dated 25th November, 1994 should not be treated as amount received for not competing in future with the purchaser, but should be treated as amount paid to the assessee for transfer of the goodwill of the assessee in favour of the purchaser. Mr.Kazi submitted that if the assessee has received the amount of Rs.11,00,000/- for not competing with the purchaser in future, the same is not taxable but if he has received the sum for transferring his goodwill in favour of the purchaser, the same is required to be taxed. After drawing attention of Mr.Kazi that the Tribunal has come to a categorical conclusion that there is no transfer of goodwill under the second agreement dated 25th November, 1994 and there is no evidence that the said agreement is sham and that the amount of Rs.11,00,000/- was received by the assessee for having undertaken not to carry on any business in future in competition with the said company in the territory of Mumbai suburbs, we called upon Mr.Kazi to explain the basis on which he was submitting that the said -6- second agreement pertains to transfer of goodwill and is not towards the agreement for not competing with the purchaser, Mr.Kazi except for saying that "this is the department’s view" could not submit any further. 4. After hearing Advocates of the parties and perusing the impugned order, we are of the view that the Tribunal has taken a correct view that the said amount of Rs.11,00,000/- has been received by the assessee for having undertaken not to carry on any business in future in competition with M/s Aasia Industrial Technologies Pvt.Ltd. (purchaser) within the territory of Mumbai suburbs. The finding of the Tribunal that there is no evidence that the said agreement is sham is accepted by the Revenue. The department’s argument before the Tribunal and before us that after having transferred his clientele by the first agreement dated 25th November, 1994 the assessee had nothing left with him to make any further transfer under the second agreement and, therefore, the second agreement was only for transfer of the goodwill for which the assessee received Rs.11,00,000/- and which ought to be taxed is untenable and baseless. It is very clear that under the first agreement the assessee transferred his entire clientele (business) to M/s Aasia Industrial Technologies Pvt.Ltd. (purchaser) for a consideration of -7- Rs.12,50,000/- and under the second agreement undertook not to compete with the said company in future in the suburbs for a consideration of Rs.11,00,000/- which amount admittedly cannot be made taxable under the heading "capital gain". 5. In view of the aforesaid we answer the above question of law in favour of the assessee and against the revenue. The appeal filed by the revenue is dismissed. There will, however, be no order as to costs. (S.J.KATHAWALLA J.) (S.J.KATHAWALLA J.) (S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.) (Dr.S.RADHAKRISHNAN J.) (Dr.S.RADHAKRISHNAN J.)