INCOME TAX ACT, 1961

Section 28(ii)(a) Section 4

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By virtue 'MoU', dated 13-4-1994, made between the assessee and three group companies of M/s. Shaw Wallace Company Group (hereinafter referred to as 'SWC group'), assedssee , his wife, son, daughter-in-law and two daughters were registered holders of 1,86,109 equity shares of INR 10 each constituting 57.29% of paid-up equity share capital of CDBL. The said MoU recited that company employed in its factory 350 employees and around 25 staff and other officers in its other offices. The MoU then referred to a direction of the Supreme Court, which was made by an Order, dated 11-3-1994, which made it clear that company's manufacturing activity at Meerut Plant was suspended until a secondary effluent treatment plant was installed and made operative by the company. This led to sale of this controlling block of shares, which was sold at the price of INR 30 per share (when listed market price of the share was only INR 3 per share). It was stated in said MoU that entire sale consideration of Rs. 55,83,270 had since been paid by the SWC group to Shri Gupta, as a result of which Shri Gupta had irrevocably handed over physical possession, management and control of the said brewery and distillery of CDBL to a representative of SWC group on 10-2-1994. Among the things to be done under MoU, it was made clear that nominees of the SWC group would be put in the saddle i.e. be made directors on or before 13-4-1994, so that they would constitute an absolute majority on board of the company. Importantly, both assessee and his son who, together with his wife, was the major shareholder would resign as Chairman and Managing Director and as Joint Managing Director respectively of CDBL by 13-4-1994. Under Clause 7 of said MoU, personal guarantees given by assessee and his son to UCO Bank, IFCI, ICICI and IREDA for loans amounting to INR 8.44 crores would be indemnified against all claims, actions, etc. in respect thereof. By a Deed of Covenant, dated 13-4-1994, MoU signed on the same day was reiterated, and it was then stated that Over the past years, assessee had acquired considerable knowledge, skill, expertise and specialization in liquor business and in furtherance of the purchase of said shares, SWC had requested Mr. Shivraj Gupta to give a restrictive covenant to and in favour of SWC for not carrying on directly or indirectly any manufacturing or marketing activities, whatsoever, relating to concerned product for a period of 10 years and which assessee agreed to give for consideration of a non-competition fee of Rs. 6 crores, AO held that payment made to assessee as a result of deed of covenant was in fact part of a sham transaction which, in the guise of being a separate Deed of Covenant, was really in the nature of payment received by assessee as compensation for terminating his management of CDBL. As despite the fact that assessee owned a concern, namely, M/s. Maltings Ltd., which also manufactured IMFL, being a loss making concern, no real competition could be envisaged between a giant, namely, SWC group and the loss making dwarf, owned by assessee as a result of which huge amount paid under the Deed of Covenant cannot be said to be an amount paid in respect of a restrictive covenant as to non-competition and same was taxable under section 28(ii)(a). Matter reached ina ppeal before High Court and High Court upheld taxation under section 28(ii)(a). Assessee approached Supreme Court.Held: Merely stating that there was no rationale behind payment of INR 6 crores and that assessee was not a probable or perceptible threat or competitor to the SWC group was the perception of AO, which could not take the place of business reality from the point of view of assessee. The fact that M/s. Maltings Ltd. had incurred loss in proceeding year was again neither here nor there. It might in future be a direct threat to SWC group and might turn around and make profits in future years. Besides, M/s. Maltings Ltd. was only one concern of assessee-it was the assessee's expertise in this field on all counts that was threat perception of SWC group which could not be second guessed by revenue. Equally the fact was that there was no penalty clause for violation of Deed of Covenant. The fact that assessee had stated that SWC group had gained substantial commercial advantage by purchase of shares in CDBL as turnover increased from INR 9 crores in the accounting period ending 31-3-1991 to INR 45 crores in the accounting period ending 31-3-1997 was again neither here nor there. As a matter of fact, the SWC group, due to its own advertisement and marketing efforts, might well have reached this figure after a period of six years. Accordingly, payment received under negative covenant was in the nature of capital receipt and not as a revenue receipt under section 28(ii)(a).

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