By TIOL News Service

MUMBAI, FEB 11, 2016: THE issue is - Whether sum received by the assessee at the time of his retirement can be treated as 'non-compete fee' so as to be out of the purview of income tax, in case he has continued to serve his employer for nine months after his retirement and his age was about 83 years at the time of retirement. NO is the verdict.

Facts of the case

The assessee at the age of 81 years, retired from employment with M/s. Grasim Limited, after working for over 33 years. At the time of retirement, the assessee had received retirement benefits of more than Rs.95 lakhs from Grasim. In addition, a monthly pension of Rs.3 lakhs per month for life, reimbursement of medical expenses for life, and an amount of Rs.3,80,48,100/- which the assessee claimed was noncompete fees and in support, relied upon an agreement entered into by the assessee with Grasim. The amount of Rs.3,80,48,100/- was received by the assessee prior to execution of the agreement. Accordingly, in its return, the assessee claimed that amount of Rs.3,80,48,100/- received as noncompete fees to be not taxable. During assessment, the AO noted that Grasim had deducted TDS of Rs.1,16,42,719/- on the amount of Rs.3,80,48,100/- paid to the assessee and the assessee had continued as an Advisor with Grasim for period of nine months, on payment of Rs.3.53 lakhs per month. The AO also noted that amount of Rs.3,80,48,100/- claimed as noncompete fees was not a lumsum figure but an odd figure which was claimed to have been arrived after negotiations. As the assessee failed to furnish the details, the AO concluded that the payment of Rs.3,80,48,100/- claimed as noncompete fees was not in fact so. Further, he held that the agreement was a subterfuge to colour an amount received in lieu of salary as a noncompete fees so as not to pay tax on the same. In the circumstances, the payment of Rs,3,80,48,100/- was brought to tax under the head 'salary' and in particular, u/s 17(3)(ii).

Having heard the parties, the High Court held that,

++ there is no dispute that the amount received as Rs.3,80,48,100/- if held to be a noncompete fees, then the same is not chargeable to tax. Thus, the only issue before us is whether the amount of Rs.3,80,48,100/- paid in terms of the agreement can be said to be a payment made as noncompete fees. It is a settled position in law that where the Authorities under the Act have determined a question of fact on the basis of inferences drawn from evidence and material on record, then unless such inferences drawn are either arbitrary and/or perverse and/or such that no person trained in law could arrive at, the Court would not interfere in an appeal u/s 260A of the Act. In the present facts, the AO had held that the agreement is not believable and the whole amount shown as payment for noncompete fees with Grasim is only a camouflage. This is particularly so in view of the failure of assessee to explain the manner in which the compensation arrived at an odd figure of Rs.3,80,48,100/- even when it is the case of the assessee that it was a negotiated fees. Thus, if it was so, the assessee ought to have made available the breakup of the constituents of the odd figure of Rs.3,80,48,100/- as noncompete fees;

++ similarly, the contention that the amount of Rs.3,80,48,100/- was received by the assessee before the date of retirement and also before the execution of the noncompete agreement by itself would not determine the character of the payment. The fact that the character of payment does not undergo a change, depending upon timing of its receipt, cannot be disputed. However, in the normal course of business before any person agrees to pay such a large amount of Rs.3,80,48,100/- as noncompete fees, it would ensure that the nature of obligation a person would not undertake and if done, would fall within the meaning of competition. This would have to be first determined and the terms set out and accepted by the parties in writing before any payment is made. Consequently, this also an indication of the fact that the payment which was made in advance was for some other purpose and not for as noncompete fees as claimed. However, as an afterthought, the same has been shown as noncompete fees to reduce the tax implication. We find that the advance of Rs.2.00 Crore was an advance made not only against noncompete fees but also in respect of other fees namely exgratia, other fees etc., The assessee at no point of time, gave the breakup of Rs.2.00 Crore paid in advance and the amount thereof attributable to noncompete fees;

++ the next finding is that, the assessee had accepted the deduction of TDS without any protest. Further, since the assessee was 81 years of age at the time of retirement, it indirectly shows that he is unlikely to compete with his employer. Moreover, the impugned order records the fact that the assessee was reappointed on the very next date of his retirement as an adviser to the Grasim. On the above basis, the impugned order concludes that it is indicative of the fact that the assessee continues to serve Grasim and, therefore, he could not have competed with Grasim. It is a fact that in normal human conduct, where a person has worked with his employer for over 33 years and himself is over 80 years of age, has received a handsome retirement package, would not compete with his former employer. Thus, this conclusion of the Tribunal is a possible view and cannot be said to be perverse and/or arbitrary. Therefore, in the above facts, if one takes into account all factors listed out by the Tribunal in its impugned order, the view taken by the authorities in the impugned order of the Tribunal in confirming the orders of the lower authorities is a very possible and reasonable view in the facts of case. In the circumstances, there is no warrant to interfere with the finding of the Tribunal.

(See 2016-TIOL-245-HC-MUM-IT)