Shiv Raj Gupta vs. Commissioner of Income-tax , CIVIL APPEAL NO. 12044 of 2016 for AY 1995-96 dated JULY 22, 2020

Shiv Raj Gupta vs. Commissioner of Income-tax CIVIL APPEAL NO. 12044 of 2016 for AY 1995-96 dated JULY 22, 2020

Issues for Consideration:-

Whether the Deed of Covenant can be said to contain a restrictive covenant as a result of which payment is made to the appellant, or whether it is in fact part of a sham transaction which, in the guise of being a separate Deed of Covenant, is really in the nature of payment received by the appellant as compensation for terminating his management of CDBL, in which case it would be taxable under Section 28(ii)(a) of the Income Tax Act, 1961.

Facts of the case:

  • By a MOU dated 13-4-1994, made between the appellant and Shaw Wallace Company Group (“SWC group”), it was made clear that nominees of the SWC group would be made directors on or before 13.04.1994, so that they will constitute an absolute majority on the board of the company. This led to the sale of this controlling block of shares, which was sold at the price of INR 30 per share (when the listed market price of the share was only INR 3 per share). Both Shri Shiv Raj Gupta and his son Shri Jayant Gupta (who, together with his wife, is the major shareholder of the family) will resign as Chairman and Managing Director and as Joint Managing Director respectively of CDBL by 13.04.1994.
  • It is stated in the said MoU that the entire sale consideration of Rs.55,83,270/- has since been paid by the SWC group to Shri Gupta, as a result of which Shri Gupta has irrevocably handed over physical possession, management and control of the said brewery and distillery of CDBL to a representative of the SWC group on 10.02.1994.
  • By a Deed of Covenant dated 13.04.1994, it was stated interalia that Mr. Shivraj Gupta has acquired considerable knowledge, skill, expertise and specialization in liquor business and in furtherance of the purchase of the said shares, SWC have 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 Indian Made Foreign Liquor (IMFL) or Beer for a period of 10 years from the date hereof which Mr. Gupta has agreed to give for the consideration of a non-competition fee of Rs. 6,60,00,00 (Rupees Six crores and sixty lacs only) to be paid by SWC to Mr. Gupta.

Case of the Revenue

The Assessing Officer held that despite the fact that the appellant owned a concern, namely, one M/s Maltings Ltd., which also manufactured IMFL, being a loss making concern, no real competition could be envisaged between a giant, namely, the SWC group and this loss making dwarf, as a result of which the 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. It was also found that there was no penalty clause to enforce the performance of obligations under the aforesaid Deed of Covenant, as a result of which, applying the judgment in McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, the Deed of Covenant was held to be a colourable device to evade tax that is payable under Section 28(ii)(a) of the Income Tax Act, 1961.

Proceedings before Hon’ble ITAT

Before ITAT, the learned AM differed with the learned JM. The learned AM held that the two deeds would have to be read separately and that revenue cannot challenge the business perception of the assessee. Further, it was held that there was no colourable device involved, and that, as a result, non-compete fee payable under the Deed of Covenant was not taxable under Section 28(ii)(a). The learned Judicial Member on the other hand substantially agreed with the Assessing Officer. The learned third Member emphasized the fact that a share worth INR 3 was sold for INR 30 under the MoU as a result of transfer of control of the CDBL. It cannot be said that these shares have been undervalued, neither can it be said that there was any collusion or other sham transaction, as a result of which the amount of INR 6.6 crores has escaped income tax. He pointed out that by a letter dated 02.04.1994, a “penalty clause” was provided for in that, out of the amount received by the assessee an amount of INR 3 crore was to be deposited with the SWC group for two years under a public deposit scheme, it being made clear that in case there is any breach of the terms of the MoU resulting in loss, the amount of such loss will be deducted from this deposit. The result, therefore, was that the appeal stood allowed by a majority of 2:1 in the Appellate Tribunal.

Question of Law framed by the High Court:

“Whether, on the facts and in the circumstances of the case, the amount of Rs. 6.6 crores received by the assessee from SWC is on account of handing over management and control of CDBL (which were earlier under the management and control of the assessee) to SWC as terminal benefit and is taxable u/s 28(ii) of the Income-tax Act or same is exempt as capital receipt being non-competition fee by executing deed of covenant”

Findings of the Hon’ble High Court

The High Court agreed with the Assessing Officer and the first Judicial Member of the Appellate Tribunal, stating that the Deed of Covenant could not be read as a separate document and was not in its real avatar a non-compete fee at all. However, the High Court went on to state that the said sum of INR 6.6 crores could not be brought to tax under section 28(ii)(a), but would have to be treated as a taxable capital gain in the hands of the appellant, being part of the full value of the sale consideration paid for transfer of shares.

Findings of Hon’ble Apex Court

  1. The provision of section 260A, being modelled on a similar provision that is contained in Section 100 of the Code of Civil Procedure, makes it clear that the High Court’s jurisdiction depends upon a substantial question of law being involved in the appeal before it. First and foremost, it shall formulate that question and on the question so formulated, the High Court may then pronounce judgement, either by answering the question in the affirmative or negative or by stating that the case at hand does not involve any such question. If the High Court wishes to hear the appeal on any other substantial question of law not formulated by it, it may, for reasons to be recorded, formulate and hear such questions if it is satisfied that the case involves such question. Clearly, without any recorded reasons and without framing any substantial question of law on whether the said amount could be taxed under any other provision of the Income Tax Act and therefore this finding would clearly be in the teeth of Section 260-A (4), requiring the judgment to be set aside on this score.

Reliance was placed on:

  • Kshitish Chandra Purkait v. Santosh Kumar Purkait [1997] 5 SCC 438,
  • Dnyanoba Bhaurao Shemade v. Maroti Bhaurao Marnor [1999] 2 SCC 471
  • Biswanath Ghosh v. Gobinda Ghosh [2014] 11 SCC 605


  1. A catena of judgments has held that commercial expediency has to be adjudged from the point of view of the assessee and that the Income-tax Department cannot enter into the thicket of reasonableness of amounts paid by the assessee. The reasons given by the learned Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines drawn by the judgments cited, which state that the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other.

Reliance was placed on:

  • CIT v. Walchand & Co. [1967] 3 SCR 214
  • K. Woollen Manufacturers v. CIT [1969] 1 SCR 525
  • CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 2 SCC 5
  • Shahzada Nand & Sons v. CIT [1977] 3 SCC 432
  • A. Builders Ltd. v. CIT [2007] 1 SCC 781
  • Hero Cycles (P.) Ltd. v. CIT [2015] 16 SCC 359
  • CIT v. Malayalam Plantation Ltd., [1964] 53 ITR 140 (SC)
  • CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., [1971] 3 SCC 344
  • CIT v. Dalmia Cement (B.) Ltd., 2001 SCC OnLine Del 1447 : (2002) 254 ITR 377
  1. Hon’ble Apex Court found the majority judgments of the Appellate Tribunal as correct and further observed that M/s Maltings Ltd. is only one concern of the assessee – it is the assessee’s expertise in this field on all counts that was the threat perception of the SWC group which cannot be second guessed by the revenue. It was further observed that there was penalty clause for violation of the Deed of Covenant.

Key Notes:-

  1. The said amendment u/s 28 which inserted clause (va) to Section 28 of income Tax Act, 1961 made the amount received as non-competing fees taxable in the hands of the recipient but that too only on or after 01.04.2003 and reliance was placed on Guffic Chem (P) Ltd. v. CIT (2011) 4 SCC 254 (SC).
  2. The Apex court also adjudged the powers of the Honorable High Court by stating that Section 260A of the Income-tax Act, 1961 : Procedure of Appeal to High Court – that the High court shall formulate question and may then pronounce judgment either by answering question in affirmative or negative or by stating that case at hand does not involve any such question and further if the High Court wishes to hear appeal on any other substantial question of law not so formulated by it, it may, for reasons to be recorded, formulate and hear such questions if it is satisfied that case involves such question.
  3. Business & commercial expediency cannot be questioned by the Revenue and it has to be seen from the point of view of the assessee.