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Shiv Raj Gupta v. Commissioner of Income-Tax, Delhi-IV

Civil Appeal · 2020 INSC 461Decided 22 Jul 2020
Civil Appeal No. 12044 of 2016
Justice Rohinton Fali Nariman · Justice Navin Sinha · Justice B.R. Gavai

Background

The appellant, former Chairman and Managing Director of Central Distillery and Breweries Ltd. (CDBL), sold his family's controlling shareholding to the Shaw Wallace Company group in 1994 and separately signed a 10-year non-compete agreement (Deed of Covenant) restraining him from the liquor business, for which he received Rs. 6.6 crore. The tax department treated this Rs. 6.6 crore as taxable compensation for "termination of management" under Section 28(ii)(a) of the Income Tax Act, a position upheld by the Assessing Officer and a Tribunal member, while other Tribunal members and ultimately the Delhi High Court held it was not taxable under that provision, but the High Court went further and held it was taxable anyway, as part of the sale consideration for the shares (a question nobody had actually asked the High Court to decide).

Decision Breakdown

The Supreme Court first held that the High Court's judgment was procedurally invalid because Section 260-A of the Income Tax Act required it to decide only the specific "substantial question of law" it had formulated (whether the amount was taxable under Section 28(ii)(a)): it could not, without notice to the parties, decide an entirely different question of whether the amount was a taxable capital gain. On the merits, the Court held that the Income Tax Department cannot second-guess legitimate commercial/business decisions between parties dealing at arm's length, and that a genuine non-compete payment (for restraining an expert for 10 years from re-entering a business he had run for 35 years) is a capital receipt, not taxable income, for the pre-2003 assessment year in question (non-compete fees only became taxable from 1 April 2003 under a new provision). The Court allowed the appeal and set aside the High Court's judgment.

Lesson Learnt

Tax authorities cannot override a taxpayer's own commercial judgment about the value or purpose of a payment, and courts hearing tax appeals are legally confined to deciding only the specific legal question that was properly framed, not a different question introduced later without giving the parties a chance to respond.

Official source (sci.gov.in)View Judgment (PDF)

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