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SUPREME COURT OF INDIA
R. F. Nariman, Navin Sinha, B.R. Gavai, JJ.
SHIV RAJ GUPTA – Appellant
Versus
COMMISSIONER OF INCOME-TAX, DELHI-IV – Respondent
Civil Appeal No. 12044 of 2016
Decided on : 22-07-2020
(A) Income Tax Act, 1961 – Section 260-A – Civil Procedure Code, 1908 – Section 100 – Appeal to High Court – High Court’s jurisdiction depends upon a substantial question of law being involved in appeal before it – First and foremost, it shall formulate that question and on the question so formulated, High Court may then pronounce judgement, either by answering the question in affirmative or negative or by stating that case at hand does not involve any such question – If High Court wishes to hear 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 case involves such question. (Para 12)
(B) Income Tax Act, 1961 – Section 28(ii)(a) – Taxation of non-compete fee – Without any recorded reasons and without framing any substantial question of law on whether said amount could be taxed under any other provision of Income Tax Act, High Court went ahead and held that amount of INR 6.6 Crores received by assessee was received as part of full value of sale consideration paid for transfer of shares and not for handing over management and control of CDBL and is consequently not taxable under Section 28(ii)(a) of Income Tax Act – Nor is it exempt as a capital receipt being non-compete fee, as it is taxable as a capital gain in hands of respondent-assessee as part of full value of sale consideration paid for transfer of shares – This finding would clearly be in teeth of Section 260-A (4), requiring judgment to be set aside on this score – Commercial expediency has to be adjudged from point of view of assessee and Income Tax Department cannot enter into thicket of reasonableness of amounts paid by assessee – Impugned judgment set aside. (Paras 14, 15 and 20)
Facts of the case:
Bone of contention in this appeal is whether the said 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.
Findings of Court:
The reasons given by 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.
Result : Appeal allowed.
JUDGMENT
R.F. Nariman, J.
The present appeal relating to assessment year 1995-96 is by one Shri Shiv Raj Gupta, who was the Chairman and Managing Director of M/s Central Distillery and Breweries Ltd. (hereinafter referred to as "CDBL"), which had a unit in Meerut manufacturing beer and Indian Made Foreign Liquor (hereinafter referred to as "IMFL"). The facts leading to an appreciation of the issues raised in this appeal are as follows.
2. By a Memorandum of Understanding (hereinafter referred to as "MoU") dated 13.04.1994, made between the appellant and three group companies of M/s Shaw Wallace Company Group (hereinafter referred to as "SWC group"), the appellant, his wife, son, daughter-in-law and two daughters were the registered holders of 1,86,109 equity shares of INR 10 each constituting 57.29% of the paid-up equity share capital of CDBL listed in the Bombay and Delhi Stock Exchanges. The break-up of the shares held by the family members of the appellant and the appellant himself are as follows:
| Name of the Shareholder | Number of Shares held in CDBL |
| Shiv Raj Gupta (Appellant) | 38,999 |
| Jayant Gupta (Appellant's Son) | 44,658 |
| Roopa Gupta (Appellant's Daughter-in-law) | 53,911 |
| Pushpa Gupta (Appellant's Wife) | 3,303 |
| Avanti Pandit (Appellant's Daughter) | 5,541 |
| Arti Kirloskar (Appellant's Daughter) | 2,760 |
| Total | 1,86,109 |
3. The said MoU recites that the company employed in its factory 350 employees and around 25 staff and other officers in its other offices. The MoU then refers to a direction of the Supreme Court, which was made by an Order dated 11.03.1994, which made it clear that the company's manufacturing activity at the plant at Meerut was suspended until a secondary effluent treatment plant is installed and made operative by 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). 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. Among the things to be done under the MoU, it was made clear that the nominees of the SWC group would be put in the saddle i.e. be made directors on or before 13.04.1994, so that they will constitute an absolute majority on the board of the company. Importantly, 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. Under Clause 7 of the said MoU, personal guarantees given by the appellant and his son to UCO Bank, IFCI, ICICI and IREDA for loans amounting to INR 8.44 crores will be indemnified against all claims, actions, etc. in respect thereof.
4. By a Deed of Covenant dated 13.04.1994, the MoU signed on the same day was reiterated, and it was then stated in recitals 3 and 4 as follows:
"(3) Over the past years, Mr. Shivraj Gupta has acquired considerable knowledge, skill, expertise and specialization in liquor business.
(4) 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."
The Deed of Covenant is a short document con
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