Law: Income Tax Act, 1961

Section: 4,17

Section 4, read with section 17, of the Income-tax Act, 1961 - Income - Chargeable as (Non-compete fee) - Assessment year 1996-97 - Assessee was an engineer, who was experienced in field of industrial drives - He along with another person started a company namely 'RSM' for manufacture of industrial drives - 'CT-PLC', a UK based company and world leader in industrial drives entered into a joint venture agreement with RSM, and a new company CTIL was formed - Assessee became director of CTIL - Subsequently, there was change in shareholding pattern as a result of which shareholding of RSM in CTIL was substantially reduced and shareholding of CT-PLC was increased to 85 per cent - Since assessee had knowledge, experience and capacity in field of industrial drives, to safeguard interests of joint venture company, in which stake of CT-PLC company was increased from 51 per cent to 85 per cent, CT-PLC entered into 'Non-competance Agreement' with assessee in terms of which certain compensation was paid by CT-PLC to assessee - Authorities below brought said amount to tax as salary income - Whether since there was no employer-employee relationship between CT-PLC and assessee there was no question of taking non-compete fee as 'salary' in hands of assessee- Held, yes - Whether on facts, amount in question was to be regarded as capital receipt not liable to tax - Held, yes [Para 51] [In favour of assessee] FACTS â–  The assessee was an engineer, who was experienced in the field of industrial drives. â–  Based on his experience, the assessee, along with another colleague started a company in the name of 'RSM' for manufacture of industrial drives, battery charges and UPS systems with reasonable success. â–  Subsequently, CT-PLC, a UK based company and world leader in Europe in industrial drives and RSM formed a joint venture company, namely, 'CTIL', with 51 per cent shares held by CT-PLC and 49 per cent shares held by RSM. â–  In terms of joint venture agreement, an employment contract was also signed by assessee and he became the director of CTIL. â–  Subsequently, there was a change in shareholding pattern as per which share of 'CT-PLC' in joint…