I sold my controlling stake and separately took a large non-compete fee. Can the department call the covenant a sham and tax the fee?
Not on these facts, and not for the year in question. The Supreme Court allowed the assessee's appeal and set aside the Delhi High Court's judgment. It held the High Court had gone outside the substantial question of law it framed, contrary to section 260A(4), by taxing the Rs 6.6 crore as capital gain when the only question framed was taxability under section 28(ii)(a). On the merits, the revenue has no business to second guess the commercial expediency of what parties at arm's length decide, and following Guffic Chem, a receipt under a negative covenant was a capital receipt not taxable before section 28(va) took effect on 1 April 2003.
Decided by the Supreme Court (Supreme Court of India - R.F. Nariman, Navin Sinha and B.R. Gavai JJ; judgment by R.F. Nariman J) on 2020-07-22, reported as AIR 2020 Supreme Court 3556; AIRONLINE 2020 SC 646; Civil Appeal No. 12044 of 2016. It bears on section 28(ii)(a), section 260A, section 28(va), section 45 of the Income Tax Act 1961, in Capital Gains and Appeals matters.
Two distinct uses. Procedurally, it is the clearest recent statement that a High Court in a tax appeal is confined to the substantial question of law it has formulated; if it wants to decide on another footing it must give notice, hear the parties, record reasons and frame the further question, and a judgment that skips that is set aside on that ground alone. Substantively, it restores the commercial expediency line - Walchand, J.K. Woollen, Panipat Woollen, Shahzada Nand, S.A. Builders and Hero Cycles - against the argument that a fee is too large or the payer's fear of competition too unrealistic to be genuine. The Court disposed of each of the Assessing Officer's points that way: whether a loss-making concern was a real threat, whether the sum had a rationale, whether the payer later prospered, are all matters of the parties' perception and not the department's. And it reaffirms the timing point: non-compete receipts became taxable only from 1 April 2003, section 28(va) being amendatory and not clarificatory.
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The appellant was Chairman and Managing Director of Central Distillery and Breweries Ltd, which made beer and Indian made foreign liquor at Meerut. He, his wife, son, daughter-in-law and two daughters held 1,86,109 shares, 57.29 per cent of the paid-up capital of the listed company. By a memorandum of understanding of 13 April 1994 with three companies of the Shaw Wallace group, that controlling block was sold at Rs 30 a share against a market price of Rs 3, for Rs 55,83,270 in all, the family having already handed over possession, management and control on 10 February 1994; the group's nominees were to take the board, and the appellant and his son were to resign as Chairman and Managing Director and Joint Managing Director. A deed of covenant of the same date recited that the appellant had acquired considerable knowledge, skill, expertise and specialisation in the liquor business, and that for a non-compete fee of Rs 6.6 crore he would not for ten years engage in or assist the manufacture, dealing, supply or marketing of Indian made foreign liquor or beer. The Assessing Officer held on 31 March 1998 that the deed was a colourable device, the appellant's own concern being a loss maker and no real competition being possible, that the son got no such fee though he too resigned, and that there was no penalty clause; he taxed the sum under section 28(ii)(a). The Commissioner (Appeals) agreed. In the Tribunal the Accountant Member and, on reference, a third Member decided for the assessee, the third Member noting that a letter of 2 April 1994 required Rs 3 crore to be kept on deposit with the group for two years to meet any loss from breach, so that the appeal succeeded 2:1. On the Revenue's appeal the Delhi High Court on 22 December 2014 framed a single question about section 28(ii)(a), held the deed of covenant could not be read separately and was not really a non-compete fee, but taxed the sum as capital gain, part of the sale consideration for the shares.
The appeal was allowed and the High Court's judgment set aside. The appeal succeeded first on the preliminary ground. Section 260A, modelled on section 100 of the Code of Civil Procedure, requires the High Court to formulate the substantial question of law and to hear the appeal only on the question so formulated, and it may hear the appeal on another question not formulated only for reasons to be recorded. The question framed here contained nothing about whether the sum could be taxed otherwise than under section 28(ii)(a); the High Court, without notice, without reasons and without framing a further question, held the Rs 6.6 crore taxable as capital gain. That finding was in the teeth of section 260A(4) and required the judgment to be set aside on that score. On the merits the Court held the High Court's reasoning about the size of the payment to fly in the face of settled law, restated the findings of the Tribunal's majority in the assessee's favour, and, respectfully following Guffic Chem, allowed the appeal for all the reasons given.
On the procedural point the Court set out section 260A and drew on Kshitish Chandra Purkait, Dnyanoba Bhaurao Shemade and Biswanath Ghosh: proceeding without formulating the question is an abdication of duty, and where a question is formulated later the opposite party must be put on notice and given a fair opportunity to meet it. On the merits, the High Court had reasoned that a non-compete fee ten times the share consideration could not be realistic. The Court answered with the commercial expediency line - Walchand, that reasonableness is judged from the businessman's point of view and not the Revenue's and that it is not the Tribunal's function to fix what should be paid; J.K. Woollen; Panipat Woollen; Shahzada Nand; S.A. Builders and Hero Cycles, that the Revenue cannot put itself in the armchair of the businessman. Applying that, the Assessing Officer's reasons all transgressed those lines: whether the appellant was a perceptible threat was the officer's perception and not the business reality as the payer saw it; the loss of the appellant's own concern in one year was neither here nor there, since it might turn around, and in any event it was his own expertise, built over 35 years as Chairman and Managing Director and as president of two distillers' associations, that the group was buying off; the growth of the group's turnover afterwards proved nothing; and the premise that there was no penalty clause was factually wrong given the deposit arrangement of 2 April 1994. The Court also recorded that each family member was paid for shares, the largest amounts going to the son and wife, while the covenant fee went to the appellant alone for the reason the deed gave, and that the figure was reached by negotiation and worked out at Rs 66 lakh a year over ten years. Finally it applied Guffic Chem: compensation for loss of agency is revenue, compensation attributable to a restrictive covenant is capital, and such receipts became taxable only by section 28(va) with effect from 1 April 2003, that provision being amendatory and not clarificatory.
the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other
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Handle my notice → Ask a CA on WhatsAppNot on these facts, and not for the year in question. The Supreme Court allowed the assessee's appeal and set aside the Delhi High Court's judgment. It held the High Court had gone outside the substantial question of law it framed, contrary to section 260A(4), by taxing the Rs 6.6 crore as capital gain when the only question framed was taxability under section 28(ii)(a). On the merits, the revenue has no business to second guess the commercial expediency of what parties at arm's length decide, and following Guffic Chem, a receipt under a negative covenant was a capital receipt not taxable before section 28(va) took effect on 1 April 2003. This was decided by the Supreme Court (Supreme Court of India - R.F. Nariman, Navin Sinha and B.R. Gavai JJ; judgment by R.F. Nariman J) and bears on section 28(ii)(a), section 260A, section 28(va), section 45 of the Income Tax Act 1961. It is reported as AIR 2020 Supreme Court 3556; AIRONLINE 2020 SC 646; Civil Appeal No. 12044 of 2016. Two distinct uses. Procedurally, it is the clearest recent statement that a High Court in a tax appeal is confined to the substantial question of law it has formulated; if it wants to decide on another footing it must give notice, hear the parties, record reasons and frame the further question, and a judgment that skips that is set aside on that ground alone. Substantively, it restores the commercial expediency line - Walchand, J.K. Woollen, Panipat Woollen, Shahzada Nand, S.A. Builders and Hero Cycles - against the argument that a fee is too large or the payer's fear of competition too unrealistic to be genuine. The Court disposed of each of the Assessing Officer's points that way: whether a loss-making concern was a real threat, whether the sum had a rationale, whether the payer later prospered, are all matters of the parties' perception and not the department's. And it reaffirms the timing point: non-compete receipts became taxable only from 1 April 2003, section 28(va) being amendatory and not clarificatory. If it applies to you, the first step is this: Check what substantial question of law was actually framed before you argue the appeal, and object at once if the Court is being invited to decide the case on a footing outside it.
The appellant was Chairman and Managing Director of Central Distillery and Breweries Ltd, which made beer and Indian made foreign liquor at Meerut. He, his wife, son, daughter-in-law and two daughters held 1,86,109 shares, 57.29 per cent of the paid-up capital of the listed company. By a memorandum of understanding of 13 April 1994 with three companies of the Shaw Wallace group, that controlling block was sold at Rs 30 a share against a market price of Rs 3, for Rs 55,83,270 in all, the family having already handed over possession, management and control on 10 February 1994; the group's nominees were to take the board, and the appellant and his son were to resign as Chairman and Managing Director and Joint Managing Director. A deed of covenant of the same date recited that the appellant had acquired considerable knowledge, skill, expertise and specialisation in the liquor business, and that for a non-compete fee of Rs 6.6 crore he would not for ten years engage in or assist the manufacture, dealing, supply or marketing of Indian made foreign liquor or beer. The Assessing Officer held on 31 March 1998 that the deed was a colourable device, the appellant's own concern being a loss maker and no real competition being possible, that the son got no such fee though he too resigned, and that there was no penalty clause; he taxed the sum under section 28(ii)(a). The Commissioner (Appeals) agreed. In the Tribunal the Accountant Member and, on reference, a third Member decided for the assessee, the third Member noting that a letter of 2 April 1994 required Rs 3 crore to be kept on deposit with the group for two years to meet any loss from breach, so that the appeal succeeded 2:1. On the Revenue's appeal the Delhi High Court on 22 December 2014 framed a single question about section 28(ii)(a), held the deed of covenant could not be read separately and was not really a non-compete fee, but taxed the sum as capital gain, part of the sale consideration for the shares. The matter was decided on 2020-07-22 by the Supreme Court (Supreme Court of India - R.F. Nariman, Navin Sinha and B.R. Gavai JJ; judgment by R.F. Nariman J). On those facts the Supreme Court held as follows. The appeal was allowed and the High Court's judgment set aside. The appeal succeeded first on the preliminary ground. Section 260A, modelled on section 100 of the Code of Civil Procedure, requires the High Court to formulate the substantial question of law and to hear the appeal only on the question so formulated, and it may hear the appeal on another question not formulated only for reasons to be recorded. The question framed here contained nothing about whether the sum could be taxed otherwise than under section 28(ii)(a); the High Court, without notice, without reasons and without framing a further question, held the Rs 6.6 crore taxable as capital gain. That finding was in the teeth of section 260A(4) and required the judgment to be set aside on that score. On the merits the Court held the High Court's reasoning about the size of the payment to fly in the face of settled law, restated the findings of the Tribunal's majority in the assessee's favour, and, respectfully following Guffic Chem, allowed the appeal for all the reasons given.
On the procedural point the Court set out section 260A and drew on Kshitish Chandra Purkait, Dnyanoba Bhaurao Shemade and Biswanath Ghosh: proceeding without formulating the question is an abdication of duty, and where a question is formulated later the opposite party must be put on notice and given a fair opportunity to meet it. On the merits, the High Court had reasoned that a non-compete fee ten times the share consideration could not be realistic. The Court answered with the commercial expediency line - Walchand, that reasonableness is judged from the businessman's point of view and not the Revenue's and that it is not the Tribunal's function to fix what should be paid; J.K. Woollen; Panipat Woollen; Shahzada Nand; S.A. Builders and Hero Cycles, that the Revenue cannot put itself in the armchair of the businessman. Applying that, the Assessing Officer's reasons all transgressed those lines: whether the appellant was a perceptible threat was the officer's perception and not the business reality as the payer saw it; the loss of the appellant's own concern in one year was neither here nor there, since it might turn around, and in any event it was his own expertise, built over 35 years as Chairman and Managing Director and as president of two distillers' associations, that the group was buying off; the growth of the group's turnover afterwards proved nothing; and the premise that there was no penalty clause was factually wrong given the deposit arrangement of 2 April 1994. The Court also recorded that each family member was paid for shares, the largest amounts going to the son and wife, while the covenant fee went to the appellant alone for the reason the deed gave, and that the figure was reached by negotiation and worked out at Rs 66 lakh a year over ten years. Finally it applied Guffic Chem: compensation for loss of agency is revenue, compensation attributable to a restrictive covenant is capital, and such receipts became taxable only by section 28(va) with effect from 1 April 2003, that provision being amendatory and not clarificatory. In the words reproduced by the source cited on this page: "the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other"
It was decided by the Supreme Court on 2020-07-22 and is reported as AIR 2020 Supreme Court 3556; AIRONLINE 2020 SC 646; Civil Appeal No. 12044 of 2016. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 28(ii)(a), section 260A, section 28(va), section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed and the High Court's judgment set aside. The appeal succeeded first on the preliminary ground. Section 260A, modelled on section 100 of the Code of Civil Procedure, requires the High Court to formulate the substantial question of law and to hear the appeal only on the question so formulated, and it may hear the appeal on another question not formulated only for reasons to be recorded. The question framed here contained nothing about whether the sum could be taxed otherwise than under section 28(ii)(a); the High Court, without notice, without reasons and without framing a further question, held the Rs 6.6 crore taxable as capital gain. That finding was in the teeth of section 260A(4) and required the judgment to be set aside on that score. On the merits the Court held the High Court's reasoning about the size of the payment to fly in the face of settled law, restated the findings of the Tribunal's majority in the assessee's favour, and, respectfully following Guffic Chem, allowed the appeal for all the reasons given. It arises in Capital Gains and Appeals matters, on section 28(ii)(a), section 260A, section 28(va), section 45 of the Income Tax Act 1961, and was decided by Supreme Court of India - R.F. Nariman, Navin Sinha and B.R. Gavai JJ; judgment by R.F. Nariman J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the commercial record for a restrictive covenant: the recipient's years in the trade, the specific expertise the payer was buying off, the term of the covenant, the negotiation, and anything working as a penalty for breach - all of which weighed here. Do not let the size of the payment relative to the share consideration be treated as decisive; the answer is that reasonableness is judged from the businessman's point of view, not the department's. For years before 1 April 2003, take the Guffic Chem point that the receipt is capital and untaxed; for later years work within section 28(va) instead.
Still good law. A reportable three judge judgment of July 2020; the harvested page records it as cited in 8 later decisions, which I have not read. The substantive conclusion turns on the law before section 28(va) took effect on 1 April 2003, so for later years the statutory position, not this result, governs; the procedural holding on section 260A and the commercial expediency principle are of general application. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment relates to assessment year 1995-96. Because the receipt fell before section 28(va) came into force, the case does not decide how a non-compete fee is treated under that provision, and it should not be cited for a current year on that point. The Court set aside the High Court's conclusion that the sum was taxable as capital gain on the ground that no such question had been framed; it did not decide, as a matter of substance, whether a payment of this kind could ever form part of the consideration for shares. The batch line listed sections 4 and 2(24), which are not the provisions the Court construed. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed and the High Court's judgment set aside. The appeal succeeded first on the preliminary ground. Section 260A, modelled on section 100 of the Code of Civil Procedure, requires the High Court to formulate the substantial question of law and to hear the appeal only on the question so formulated, and it may hear the appeal on another question not formulated only for reasons to be recorded. The question framed here contained nothing about whether the sum could be taxed otherwise than under section 28(ii)(a); the High Court, without notice, without reasons and without framing a further question, held the Rs 6.6 crore taxable as capital gain. That finding was in the teeth of section 260A(4) and required the judgment to be set aside on that score. On the merits the Court held the High Court's reasoning about the size of the payment to fly in the face of settled law, restated the findings of the Tribunal's majority in the assessee's favour, and, respectfully following Guffic Chem, allowed the appeal for all the reasons given.
TaxSphere, “Shiv Raj Gupta v CIT”, https://taxnotice.vittsphere.com/caselaw/case/shiv-raj-gupta-v-cit/ (validity last checked 2026-08-29)
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I was paid to stay out of the business. Is the non-compete money capital or income?
I pay a consultant, I pay an engineering firm for technical work, and I pay my company's non-executive director a sitting fee. Do I deduct two per cent or ten per cent on each, and does the fifty thousand rupee limit apply to all three?
My client held shares of the amalgamating company as stock-in-trade and received shares of the amalgamated company under the court-sanctioned scheme. Is there business income at that point, or only when those shares are sold?
A court order delayed my sale deed. Does my s.54 exemption run from the agreement to sell?
