SHIV RAJ GUPTAversusCOMMISSIONER OF INCOME-TAX, DELHI-IV

874                    [2020]REPORTS
             SUPREME COURT    5 S.C.R. 874               [2020] 5 S.C.R.


A                            SHIV RAJ GUPTA
                                      v.
             COMMISSIONER OF INCOME-TAX, DELHI-IV
                      (Civil Appeal No. 12044 of 2016)
B                              JULY 22, 2020
       [R. F. NARIMAN, NAVIN SINHA AND B. R. GAVAI, JJ.]
         Income Tax Act, 1961 – ss.28(ii)(a) and 260-A – Payment
  made as non-competition fee – Taxability of – Appellant was the
C chairman and Managing director of a Company-CDBL – A SWC
  group entered into a MOU with the appellant and paid the entire
  sale consideration to the appellant for the said Company-CDBL –
  Consequent to which, appellant handed over physical possession,
  management and control of the said brewery and distillery of CDBL
  – By a deed of Covenant, Rs. 6.6 crores was paid by SWC to the
D appellant as non-competition fee for not carrying on directly or
  indirectly any manufacturing or marketing activities relating to
  Indian Made Foreign Liquor for a period of 10 years – The
  Assessing Officer held that the deed of covenant was a colourable
  device to evade tax payable u/s. 28(ii)(a) of the Income Tax Act,
E 1961 – The appeals before the Commissioner of Income Tax
  (appeals) were dismissed – However, the Income Tax Appellate
  Tribunal allowed the appeals by majority of 2:1 – The revenue
  preferred an appeal u/s.260-A of the 1961 Act – The High Court
  held that the said sum of Rs. 6.6 crores could not be brought to tax
  u/s. 28(ii)(a), but would have to be treated as a taxable capital gain
F in the hands of the appellant, being part of the full value of the sale
  consideration paid for transfer of shares – On appeal, held: The
  substantial question of law raised by the High Court did not contain
  any question as to whether the non-compete fee could be taxed
  under any provision other than s.28(ii)(a) of the 1961 Act – Without
  recording any reason and without framing any substantial question
G
  of law regarding the same, the High Court held that the amount of
  Rs. 6.6 crores was received as part of the 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
  u/s. 28(ii)(a) – Nor is it exempt as a capital receipt being non-compete
H
                                     874
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                           875
                       DELHI-IV

fee, as it is taxable as a capital gain in the hands of assessee as        A
part of the full value of sale consideration paid for transfer of
shares – This finding is in teeth of s. 260-A(4), requiring the judgment
to be set aside on this score – Also, the reasons given by the Assessing
Officer and the minority judgment of the Appellate Tribunal are all
reasons which transgress the lines by the Supreme Court Judgments,
                                                                           B
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 – Further, it was correctly held by the majority
judgments of the Appellate Tribunal, inter alia, that the withholding
of Rs. 3 crores out of Rs. 6.6 crores for a period of two years by
way of a public deposit with the SWC group for the purpose of              C
deduction of any loss on account of any breach of MOU, was akin
to a penalty clause, making it clear thereby that there was no
colourable device involved in having two separate agreements for
two entirely separate and distinct purposes – Besides, the judgment
of the Supreme Court in Guffic Chem (P) Ltd. v. CIT was followed –
                                                                           D
Consequently, the impugned judgment of the High Court was set
aside.
      Allowing the appeal, the Court
       HELD: 1.1 It can be seen that the substantial question of
law that was raised by the High Court did not contain any question         E
as to whether the non-compete fee could be taxed under any
provision other than Section 28(ii)(a) of the Income Tax Act, 1961.
Without giving an opportunity to the parties followed by reasons
for framing any other substantial question of law as to the taxability
of such amount as a capital receipt in the hands of the assessee.
[Para 14][888-B-C]                                                         F

       1.2 Without any recorded reasons and without framing any
substantial question of law on whether the said amount could be
taxed under any other provision of the Income Tax Act, the High
Court went ahead and held that the amount of INR 6.6 crores
received by the assessee was received as part of the full value of         G
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 the Income Tax Act. Nor is it
exempt as a capital receipt being non-compete fee, as it is taxable
as a capital gain in the hands of the respondent-assessee as part          H
876            SUPREME COURT REPORTS                      [2020] 5 S.C.R.


A     of the full value of sale consideration paid for transfer of shares.
      This finding would clearly be in the teeth of Section 260-A (4),
      requiring the judgment to be set aside on this score. A catena of
      judgments has held that commercial expediency has to be
      adjudged from the point of view of the assessee and that the
      Income Tax Department cannot enter into the thicket of
B
      reasonableness of amounts paid by the assessee. [Paras 14 and
      15][888-F-H; 889-D-E]
           2. This Court may only reiterate as correctly found by the
      majority judgments of the Appellate Tribunal, that:
C           (i) A share of the face value of INR 10 and market value of
      INR 3 was sold for INR 30 as a result of control premium having
      to be paid.
            (ii) It is important to note that each member of the family
      was paid for his/her shares in the company, the lion’s share being
D     paid to the assessee’s son and wife as they held the most number
      of shares within the said family.
            (iii) The non-compete fee of INR 6.6 crores was paid only
      to the assessee. This was for the reason stated in the Deed of
      Covenant, namely, that the appellant had acquired considerable
E     knowledge, skill, expertise and specialisation in the liquor
      business. There is no doubt that on facts he has been Chairman
      and Managing Director of CDBL for a period of about 35 years;
      that he also owned a concern, namely M/s Maltings Ltd., which
      manufactured and sold IMFL and beer and that he was the
      President of All India Distilleries Association and H.P. Distilleries
F     Association.
            (iv) It is further recorded in the judgment of the Accounting
      Member that the amount of INR 6.6 crores was arrived at as a
      result of negotiations between the SWC group and the appellant.
            (v) That the restrictive covenant for a period of 10 years
G
      resulted in the payment of INR 66 lakhs per year so that the
      appellant “…will not start or engage himself, directly or indirectly,
      or provide any service, assistance or support of any nature,
      whatsoever, to or in relation to the manufacturing, dealing and
      supplying or marketing of IMFL and/or Beer.” Given the personal
H
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                    877
                       DELHI-IV

expertise of the assessee, the perception of the SWC group was      A
that the appellant could either start a rival business or engage
himself in a rival business, which would include manufacturing
and marketing of IMFL and Beer at which he was an old hand,
having experience of 35 years.
      (vi) As was correctly held by the second Judicial Member,     B
it was also clear that the withholding of INR 3 crores out of INR
6.6 crores for a period of two years by way of a public deposit
with the SWC group for the purpose of deduction of any loss on
account of any breach of the MoU, was akin to a penalty clause,
making it clear thereby that there was no colourable device
involved in having two separate agreements for two entirely         C
separate and distinct purposes. [Para 17][892-H; 893-A-H]
      3. The reasons given by the 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      D
business expediency of what parties at arms-length decide for
each other. [Para 18][894-A]
     Kshitish Chandra Purkait v. Santosh Kumar Purkait
     (1997) 5 SCC 438 : [1997] 1 Suppl. SCR 201;
     Biswanath Ghosh v. Gobinda Ghosh (2014) 11 SCC                 E
     605 : [2014] 3 SCR 1097; CIT v. Walchand & Co.
     [1967] 3 SCR 214; J.K. Woollen Manufacturers v. CIT
     [1969] 1 SCR 525; CIT v. Panipat Woollen & General
     Mills Co. Ltd. (1976) 2 SCC 5 : [1976] 3 SCR 186;
     Shahzada Nand & Sons v. CIT (1977) 3 SCC 432 :                 F
     [1977] 3 SCR 529; S.A. Builders Ltd. v. CIT (2007) 1
     SCC 781 : [2006] 10 Suppl. SCR 1077; Hero Cycles
     (P) Ltd. v. CIT (2015) 16 SCC 359; Guffic Chem (P)
     Ltd. v. CIT (2011) 4 SCC 254 : [2011] 3 SCR 899 –
     relied on.
                                                                    G
     McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230 : [1985]
     3 SCR 791;Vodafone International Holdings BV v.
     Union of India (2012) 6 SCC 613 : [2012] 1 SCR 573;
     Dnyanoba Bhaurao Shemade v. Maroti Bhaurao
     Marnor (1999) 2 SCC 471 – referred to.
                                                                    H
878             SUPREME COURT REPORTS                            [2020] 5 S.C.R.


A                                Case Law Reference
      [1985] 3 SCR 791                    referred to                Para 6
      [2012] 1 SCR 573                    referred to                Para 11
      [1997] 1 Suppl. SCR 201             relied on                  Para 13
B     (1999) 2 SCC 471                    referred to                Para 13
      [2014] 3 SCR 1097                   relied on                  Para 13
      [1967] 3 SCR 214                    relied on                  Para 15
      [1969] 1 SCR 525                    relied on                  Para 15
C
      [1976] 3 SCR 186                    relied on                  Para 15
      [1977] 3 SCR 529                    relied on                  Para 15
      [2006] 10 Suppl. SCR 1077           relied on                  Para 15
      (2015) 16 SCC 359                   relied on                  Para 15
D
      [2011] 3 SCR 899                    relied on                  Para 19
             CIVIL APPELLATE JURISDICTION: Civil Appeal No. 12044
      of 2016.
           From the Judgment and Order dated 22.12.2014 of the High Court
E     of Delhi at New Delhi in Income Tax Appeal No. 41 of 2002.
           Arvind Datar, Ajay Vohra, Sr. Advs., Ms. Kavita Jha, Vaibhav
      Kulkarni, Udit Naresh, Advs. for the Appellant.
             Arijit Prasad, Sr. Adv., D. L. Chidanand, Mrs. Anil Katiyar, Advs.
      for the Respondent.
F
             The Judgment of the Court was delivered by
             R. F. NARIMAN, J.
            1. The present appeal relating to assessment year 1995-96 is by
      one Shri Shiv Raj Gupta, who was the Chairman and Managing Director
G     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
H     as “MoU”) dated 13.04.1994, made between the appellant and three
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                              879
             DELHI-IV [R. F. NARIMAN, J.]

group companies of M/s Shaw Wallace Company Group (hereinafter                A
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
                                                                              B
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
                                                                              C
  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               D
                   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            E
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       F
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,           G
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
                                                                              H
880            SUPREME COURT REPORTS                           [2020] 5 S.C.R.


A     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.
B
            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
C           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 ondirectly or indirectly any
D           manufacturing or marketing activities, whatsoever, relating to Indian
            Made ForeignLiquor (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.”

E           The Deed of Covenant is a short document containing two clauses,
      which are set out as follows:
            “1.In consideration of the sum of Rs. 6,00,00,000 (Rupees Six
            crores only) paid by SWC to Mr. Gupta as anadvance against the
            aforesaid non-competition fee of Rs.6,60,00,000 (the receipt
F           whereof, Mr. Gupta hereby admits and acknowledges), Mr. Gupta
            hereby irrevocably agrees, covenants and undertakes that with
            effect from the date of these presents, Mr. Gupta will not start or
            engage himself directly or indirectly or provide any service,
            assistance or support of any nature, whatsoever, to or inrelation
            to the manufacturing, dealing and supplying or marketing of Indian
G           Made Foreign Liquor (IMFL) and/orBeer. The balance amount
            of Rs. 60,00,000 (Rupeessixty lacs only) will be paid by SWC to
            Mr. Gupta on 31stOctober, 1994.



H
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                             881
             DELHI-IV [R. F. NARIMAN, J.]

      2.This covenant shall remain in full force and effect for aperiod      A
      of 10 years from the date of these presents and this covenant will
      be absolutely and irrevocably binding on Mr. Gupta.”
      5. The 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   B
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.
Section 28(ii)(a) reads as follows:
                                                                             C
      “28. Profits and gains of business or profession.
      The following income shall be chargeable to income-tax under
      the head “Profits and gains of business or profession”, -
      xxx xxxxxx
                                                                             D
      (ii) any compensation or other payment due to or received by,-
      (a) any person, by whatever name called, managing the whole or
      substantially the whole of the affairs of an Indian company, at or
      in connection with the termination of his management or the
      modification of the terms and conditions relating thereto;”
                                                                             E
       6. By an order dated 31.03.1998, the Assessing Officer held that
despite the fact that the appellant owned a concern, namely, one M/s
Maltings Ltd., which also manufactured IMFL, being a loss making
concern, no real competition could be envisaged between a giant, namely,
the SWC group and this loss making dwarf, as a result of which the
                                                                             F
huge amount paid under the Deed of Covenant cannot be said to be an
amount paid in respect of a restrictive covenant as to non-competition.
It was further held that the son of the appellant was not paid any such
non-compete fee or amount despite the fact that he also resigned from
his position as Joint Managing Director. It was also held that this was a
lump sum payment with no reason as to why such a huge amount of              G
INR 6.6 crores was being paid. It was also found that there was no
penalty clause to enforce the performance of obligations under the
aforesaid Deed of Covenant, as a result of which, applying the judgment
in McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, the Deed of
Covenant was held to be a colourable device to evade tax that is payable
                                                                             H
882            SUPREME COURT REPORTS                           [2020] 5 S.C.R.


A     under Section 28(ii)(a) of the Income Tax Act, 1961. As a result thereof,
      this amount was then brought to tax under the aforesaid provision.
             7. An appeal from the Assessing Officer to the learned
      Commissioner of Income Tax (Appeals) was dismissed. When it came
      before the Income Tax Appellate Tribunal (hereinafter referred to as
B     “Appellate Tribunal”) the learned Accountant Member differed with the
      learned Judicial Member. The learned Accountant Member held that
      the two deeds would have to be read separately and that revenue cannot
      challenge the business perception of the assessee. Further, it was held
      that there was no colourable device involved, and that, as a result, non-
      compete fee payable under the Deed of Covenant was not taxable under
C     Section 28(ii)(a) or any other provision of the Income Tax Act, 1961.
      The learned Judicial Member on the other hand substantially agreed
      with the Assessing Officer, as a result of which he decided in favour of
      the revenue. A reference was then made to a third Member, who was
      also a Judicial Member. The learned third Member emphasised the fact
D     that a share worth INR 3 was sold for INR 30 under the MoU as a
      result of transfer of control of the CDBL. It cannot be said that these
      shares have been undervalued, neither can it be said that there was any
      collusion or other sham transaction, as a result of which the amount of
      INR 6.6 crores has escaped income tax. He pointed out that by a letter
      dated 02.04.1994, a “penalty clause” was provided for in that, out of the
E     amount received by the assessee an amount of INR 3 crore was to be
      deposited with the SWC group for two years under a public deposit
      scheme, it being made clear that in case there is any breach of the terms
      of the MoU resulting in loss, the amount of such loss will be deducted
      from this deposit. The result, therefore, was that the appeal stood allowed
F     by a majority of 2:1 in the Appellate Tribunal.
             8. The revenue preferred an appeal under Section 260-A of the
      Income Tax Act, 1961 to the High Court. In its grounds of appeal, the
      revenue framed the substantial questions of law that arose in the matter
      as follows:
G           “A) Whether the ITAT has correctly interpreted theprovisions of
            Section 28(ii) of the Income Tax Act,1961?
            B) Whether the Ld. ITAT was correct in holding thatreceipt of
            Rs.6.6 crores by the respondent/assesseeas non-competitive fee
            was a capital receipt u/s 28(iv)income tax act and not a revenue
H           receipt as envisaged in Section 28(ii) of I.T. Act?
  SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                       883
            DELHI-IV [R. F. NARIMAN, J.]

      C) Whether the Ld. ITAT failed to distinguish betweennature of A
      capital and nature of benefit in commercial sense in respect of
      amount of Rs. 6.6 crores received in view of restrictive covenant
      of deed dated 13.04.1994?
      D) Whether Ld. Judicial Member of ITAT was correct in recording
      his difference of opinion that receipt of Rs. 6.6 crores by B
      respondent/assessee was actually a colourable exercise to evade
      tax and same was held to be taxable under Section 28(ii) of the
      Income Tax Act?”
      9. By the impugned judgment of the Division Bench of the Delhi
High Court dated 22.12.2014, the Division Bench framed the following C
substantial question of law:
      “Whether, on the facts and in the circumstances of thecase, the
      amount of Rs. 6.6 crores received by theassessee from SWC is
      on account of handing overmanagement and control of CDBL
      (which wereearlier under the management and control of D
      theassessee) to SWC as terminal benefit and is taxableu/s 28(ii)
      of the Income-tax Act or same is exempt as capital receipt being
      non-competition fee by executing deed of covenant”
       After going through the MoU and the Deed of Covenant, both
dated 13.04.1994, and copiously referring to the order of the Assessing E
Officer dated 31.03.1998, the High Court agreed with the Assessing
Officer and the first Judicial Member of the Appellate Tribunal, stating
that the Deed of Covenant could not be read as a separate document
and was not in its real avatar a non-compete fee at all. However, in its
ultimate conclusion, disagreeing with the learned Assessing Officer and
the minority judgment of the Tribunal, the High Court went on to state F
that the said sum of INR 6.6 crores could not be brought to tax under
Section 28(ii)(a), but would have to be treated as a taxable capital gain
in the hands of the appellant, being part of the full value of the sale
consideration paid for transfer of shares.
       10. Shri Arvind Datar and Shri Ajay Vohra, learned senior G
advocates appearing on behalf of the appellant, have taken us through
the orders of the Income Tax Authorities, the Appellate Tribunal and the
impugned judgment of the High Court. They raised as a preliminary
submission the fact that under Section 260-A, it is only the substantial
question of law that is framed that can be answered and no other. If H
884            SUPREME COURT REPORTS                           [2020] 5 S.C.R.


A     some other question is to be answered, the Court must first give notice
      of the same to both sides, hear them, pronounce a reasoned order and
      thereafter frame another substantial question of law, which it may then
      answer. This procedure has not been followed in the present case as it is
      clear that the substantial question of law framed did not contain within it
      the question as to whether the assessee can be taxed outside the provisions
B
      of Section 28(ii)(a). The entire judgment is, therefore, vitiated and must
      be set aside on this ground alone. They relied on several judgments to
      buttress this contention. They then relied upon the judgment of the learned
      Accountant Member and of the third Member in favour of the assessee
      and the reasoning therein, which according to them is unexceptionable
C     and should have been followed by the High Court. They also cited
      judgments to show that prior to 01.04.2003, i.e. before the introduction
      of Section 28(va) by Finance Act 20 of 2002 with effect from the aforesaid
      date, any sum received under an agreement for not carrying out any
      activity in relation to any business was taxed, for the first time, under
      this provision and the provision not being retrospective would not apply
D
      to the facts of the present case.
             11. Shri Arijit Prasad, learned senior advocate appearing on behalf
      of the revenue, read the order of the Assessing Officer and the order of
      the first learned Judicial Member and adopted the reasoning contained
      therein. According to him, the High Court judgment correctly applied
E
      both McDowell (supra) and Vodafone International Holdings BV
      v. Union of India (2012) 6 SCC 613 to arrive at the result which it
      arrived at as it was clear that the amount of INR 6.6 crores that was
      received by the assessee was really in the nature of payment for the
      sale of shares. He also argued as an alternative that in any event it
F     would fall under Section 28 (ii)(a) as was correctly held by the learned
      Assessing Officer and the minority judgment of the Appellate Tribunal.
            12. Having heard learned counsel for both parties, we are of the
      view that the appeal needs to succeed first on the preliminary ground
      raised by the learned counsel for the appellant. Section 260-A of the
G     Income Tax Act, 1961 reads as follows:
            “260-A. Appeal to High Court.
            (1) An appeal shall lie to the High Court from every order passed
            in appeal by the Appellate Tribunal before the date of establishment
            of the National Tax Tribunal, if the High Court is satisfied that the
H           case involves a substantial question of law.
SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                                  885
          DELHI-IV [R. F. NARIMAN, J.]

  (2) The Principal Chief Commissioner or Chief Commissioner or                A
  the Principal Commissioner or Commissioner or an assessee
  aggrieved by any order passed by the Appellate Tribunal may file
  an appeal to the High Court and such appeal under this sub-section
  shall be—
  (a) filed within one hundred and twenty days from the date on                B
  which the order appealed against is received by the assessee or
  the Principal Chief Commissioner or Chief Commissioner or
  Principal Commissioner or Commissioner;
  (b) [***]
  (c) in the form of a memorandum of appeal precisely stating therein          C
  the substantial question of law involved.
  (2A) The High Court may admit an appeal after the expiry of the
  period of one hundred and twenty days referred to in clause (a)
  of sub-section (2), if it is satisfied that there was sufficient cause
  for not filing the same within that period.                                  D

  (3) Where the High Court is satisfied that a substantial question
  of law is involved in any case, it shall formulate that question.
  (4) The appeal shall be heard only on the question so formulated,
  and the respondents shall, at the hearing of the appeal, be allowed          E
  to argue that the case does not involve such question :
  Provided that nothing in this sub-section shall be deemed to take
  away or abridge the power of the court to hear, for reasons to be
  recorded, the appeal on any other substantial question of law not
  formulated by it, if it is satisfied that the case involves such question.
                                                                               F
  (5) The High Court shall decide the question of law so formulated
  and deliver such judgment thereon containing the grounds on which
  such decision is founded and may award such cost as it deems fit.
  (6) The High Court may determine any issue which—
  (a) has not been determined by the Appellate Tribunal; or                    G

  (b) has been wrongly determined by the Appellate Tribunal, by
  reason of a decision on such question of law as is referred to in
  sub-section (1).
  (7) Save as otherwise provided in this Act, the provisions of the            H
  Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to
886             SUPREME COURT REPORTS                            [2020] 5 S.C.R.


A            the High Court shall, as far as may be, apply in the case of appeals
             under this section.”
             This provision, being modelled on a similar provision that is contained
      in Section 100 of the Code of Civil Procedure, makes it clear that the
      High Court’s jurisdiction depends upon a substantial question of law being
B     involved in the appeal before it. First and foremost, it shall formulate that
      question and on the question so formulated, the High Court may then
      pronounce judgement, either by answering the question in the affirmative
      or negative or by stating that the case at hand does not involve any such
      question. If the High Court wishes to hear the appeal on any other
      substantial question of law not formulated by it, it may, for reasons to be
C     recorded, formulate and hear such questions if it is satisfied that the
      case involves such question – See section 260-A (4). Under sub-section
      (6), the High Court may also determine any issue which, though raised,
      has not been determined by the Appellate Tribunal or has been wrongly
      determined by the Appellate Tribunal by reason of a decision on a
D     substantial question of law raised.
             13. In Kshitish Chandra Purkait v. Santosh Kumar Purkait
      (1997) 5 SCC 438, this Court referred to Section 100 of the Code of
      Civil Procedure and then stated:
             “10. We would only add that (a) it is the duty cast upon the High
E            Court to formulate the substantial question of law involved in the
             case even at the initial stage; and (b) that in (exceptional) cases,
             at a later point of time, when the Court exercises its jurisdiction
             under the proviso to sub-section (5) of Section 100 CPC in
             formulating the substantial question of law, the opposite party should
F            be put on notice thereon and should be given a fair or proper
             opportunity to meet the point. Proceeding to hear the appeal without
             formulating the substantial question of law involved in the appeal
             is illegal and is an abnegation or abdication of the duty cast on
             court; and even after the formulation of the substantial question
             of law, if a fair or proper opportunity is not afforded to the opposite
G            side, it will amount to denial of natural justice. The above parameters
             within which the High Court has to exercise its jurisdiction under
             Section 100 CPC should always be borne in mind. We are sorry
             to state that the above aspects are seldom borne in mind in many
             cases and second appeals are entertained and/or disposed of,
H            without conforming to the above discipline.”
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                              887
             DELHI-IV [R. F. NARIMAN, J.]

      This statement of the law was followed in Dnyanoba Bhaurao              A
Shemade v. Maroti Bhaurao Marnor(1999) 2 SCC 471 (See
paragraph 10). A recent decision of this Court in Biswanath Ghosh v.
Gobinda Ghosh (2014) 11 SCC 605 has reiterated these principles in
paragraph 16 as follows:
      “16. Section 100 of the Code lays down the provision with regard        B
      to the second appeal which reads as under:
      “100.Second appeal.—(1) Save as otherwise expressly provided
      in the body of this Code or by any other law for the time being in
      force, an appeal shall lie to the High Court from every decree
      passed in appeal by any court subordinate to the High Court, if         C
      the High Court is satisfied that the case involves a substantial
      question of law.
      (2) An appeal may lie under this section from an appellate decree
      passed ex parte.
      (3) In an appeal under this section, the memorandum of appeal           D
      shall precisely state the substantial question of law involved in the
      appeal.
      (4) Where the High Court is satisfied that a substantial question
      of law is involved in any case, it shall formulate that question.
                                                                              E
      (5) The appeal shall be heard on the question so formulated and
      the respondent shall, at the hearing of the appeal, be allowed to
      argue that the case does not involve such question:
      Provided that nothing in this sub-section shall be deemed to take
      away or abridge the power of the Court to hear, for reasons to be
                                                                              F
      recorded, the appeal on any other substantial question of law, not
      formulated by it, if it is satisfied that the case involves such
      question.”
      From a bare reading of the aforesaid provision it is manifestly
      clear that an appeal shall lie to the High Court from an appellate
      decree only if the High Court is satisfied that the case involves a     G
      substantial question of law. It further mandates that the
      memorandum of appeal precisely states the substantial question
      of law involved in the appeal. If such an appeal is filed, the High
      Court while admitting or entertaining the appeal must record its
      satisfaction and formulate the substantial question of law involved     H
888             SUPREME COURT REPORTS                            [2020] 5 S.C.R.


A            in the appeal. The appeal shall then be heard on the questions so
             formulated and the respondent shall be allowed to argue only on
             those substantial questions of law. However, proviso to this section
             empowers the court to hear on any substantial question of law not
             formulated after recording reasons”
B            14. It can be seen that the substantial question of law that was
      raised by the High Court did not contain any question as to whether the
      non-compete fee could be taxed under any provision other than Section
      28(ii)(a) of the Income Tax Act, 1961. Without giving an opportunity to
      the parties followed by reasons for framing any other substantial question
      of law as to the taxability of such amount as a capital receipt in the
C     hands of the assessee, the High Court answered the substantial question
      of law raised as follows:
             “63. In view of the aforesaid discussion, we deem it appropriate
             and proper to treat Rs. 6.60 crores as consideration paid for sale
             of shares, rather than a payment under Section 28(ii)(a) of the
D            Act.
             xxx xxxxxx
             65. The substantial question of law is accordingly answered in
             favour of the appellant-Revenue and against the respondent-
E            assessee but holding that Rs.6.60 crores was taxable as capital
             gains in the hands of the respondent-assessee being a part of the
             full value sale consideration paid for transfer of shares. The
             appellant-Revenue will be entitled to costs as per the Delhi High
             Court Rules.”

F            Clearly, without any recorded reasons and without framing any
      substantial question of law on whether the said amount could be taxed
      under any other provision of the Income Tax Act, the High Court went
      ahead and held that the amount of INR 6.6 crores received by the
      assessee was received as part of the full value of sale consideration
      paid for transfer of shares – and not for handing over management and
G     control of CDBL and is consequently not taxable under Section 28(ii)(a)
      of the Income Tax Act. Nor is it exempt as a capital receipt being non-
      compete fee, as it is taxable as a capital gain in the hands of the
      respondent-assessee as part of the full value of sale consideration paid
      for transfer of shares. This finding would clearly be in the teeth of Section
      260-A (4), requiring the judgment to be set aside on this score.
H
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                               889
             DELHI-IV [R. F. NARIMAN, J.]

      15. Coming to the merits, the High Court found:                          A
      “22. …No doubt, market price of each share was only Rs.3/- per
      share and the purchase price under the MOU was Rs.30/-, but
      the total consideration received was merely about Rs.56 lacs.
      What was allegedly paid as non-compete fee was ten times more,
      i.e. Rs.6.60 crores. The figure per se does not appear to be a           B
      realistic payment made on account of non-compete fee, dehors
      and without reference to sale of shares, loss of management and
      control of CDBL. The assessee had attributed an astronomical
      sum as payment toward non-compete fee, unconnected with the
      sale of shares and hence not taxable. Noticeably, the price received
      for sale of shares, it is accepted was taxable as capital gain. The      C
      contention that quoted price of each share was mere Rs. 3 only,
      viz. price as declared of Rs. 30/- is fallacious and off beam. The
      argument of the assessee suffers from a basic and fundamental
      flaw which is conspicuous and evident.”
       This finding flies in the face of settled law. A catena of judgments    D
has held that commercial expediency has to be adjudged from the point
of view of the assessee and that the Income Tax Department cannot
enter into the thicket of reasonableness of amounts paid by the assessee.
This Court in CIT v. Walchand & Co. (1967) 3 SCR 214 stated as
follows:                                                                       E
      “It is open to the Tribunal to come to a conclusion either that the
      alleged payment is not real or that it is not incurred by the assessee
      in the character of a trader or that it is not laid out wholly and
      exclusively for the purpose of the business of the assessee and to
      disallow it. But it is not the function of the Tribunal to determine     F
      the remuneration which in their view should be paid to in employee
      of the assessee. When a claim for allowance under Section
      10(2)(xv) of the Income Tax Act is made, the Income Tax
      Authorities have to decide whether the expenditure claimed as an
      allowance was incurred voluntarily and on grounds of commercial
      expediency. In applying the test of commercial expediency for            G
      determining whether the expenditure was wholly and exclusively
      laid out for the purpose of the business, reasonableness of the
      expenditure has to be adjudged from the point of view of the
      businessman and not of the Revenue.” [at page 217]
                                                                               H
890           SUPREME COURT REPORTS                             [2020] 5 S.C.R.


A           The aforesaid judgment was followed by this Court in J.K.
      Woollen Manufacturers v. CIT (1969) 1 SCR 525 where the Court
      held:
           “As pointed out by this Court in CIT v. Walchand& Co. Private
           Ltd. [(1967) 65 ITR 381 : (AIR 1967 SC 1435)] in applying the
B          test of commercial expediency for determining whether an
           expenditure was wholly and exclusively laid out for the purpose
           of the business, reasonableness of the expenditure has to be
           adjudged from the point of view of the businessman and not of
           the Income Tax Department. It is, of course, open to the Appellate
           Tribunal to come to a conclusion either that the alleged payment
C          is not real or that it is not incurred by the assessee in the character
           of a trader or it is not laid out wholly and exclusively for the purpose
           of the business of the assessee and to disallow it. But it is not the
           function of the Tribunal to determine the remuneration which in
           their view should be paid to an employee of the assessee.” [at
D          page 529-530]
            This Court in CIT v. Panipat Woollen & General Mills Co.
      Ltd. (1976) 2 SCC 5 stated as follows:
           “6. Before coming to the facts it may be necessary to mention
           that there can be no dispute with respect to the two important
E          propositions:
           “(1) that in order to fall within Section 10(2)(xv) of the Act the
           deduction claimed must amount to an expenditure which was laid
           out or expended wholly and exclusively for the purpose of the
           business, profession or vocation. This will naturally depend upon
F          the facts of each case,
           (2) that in order to determine the question of reasonableness of
           the expenditure, the test of commercial expediency would have
           to be adjudged from the point of view of the businessman and not
           of the Income tax Department.”
G
           Further, this Court in Shahzada Nand & Sons v. CIT (1977) 3
      SCC 432 reiterated this principle as follows:
           “4. …But it is well settled that these factors are to be considered
           from the point of view of a normal, prudent businessman. The
           reasonableness of the payment with reference to these factors
H          has to be judged not on any subjective standard of the assessing
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                             891
             DELHI-IV [R. F. NARIMAN, J.]

      authority but from the point of view of commercial expediency…         A
      …What is the requirement of commercial expediency must be
      judged not in the light of the 19th Century laissez-faire doctrine
      which regarded man as an economic being concerned only to
      protect and advance his self-interest but in the context of current
      socio-economic thinking which places the general interest of the
                                                                             B
      community above the personal interest of the individual and believes
      that a business or undertaking is the product of the combined
      efforts of the employer and the employees and where there is
      sufficiently large profit, after providing for the salary or
      remuneration of the employer and the employees and other prior
      charges such as interest on capital, depreciation, reserves etc., a    C
      part of it should in all fairness go to the employees.”
       Also, this Court in S.A. Builders Ltd. v. CIT (2007) 1 SCC 781
held as follows:
      “36. We agree with the view taken by the Delhi High Court in
      CIT v. Dalmia Cement (B) Ltd. [(2002) 254 ITR 377 (Del)] that          D
      once it is established that there was nexus between the expenditure
      and the purpose of the business (which need not necessarily be
      the business of the assessee itself), the Revenue cannot justifiably
      claim to put itself in the armchair of the businessman or in the
      position of the Board of Directors and assume the role to decide       E
      how much is reasonable expenditure having regard to the
      circumstances of the case. No businessman can be compelled to
      maximise its profit. The Income Tax Authorities must put
      themselves in the shoes of the assessee and see how a prudent
      businessman would act. The authorities must not look at the matter
      from their own viewpoint but that of a prudent businessman. As         F
      already stated above, we have to see the transfer of the borrowed
      funds to a sister concern from the point of view of commercial
      expediency and not from the point of view whether the amount
      was advanced for earning profits.”
     The same principle has also been cited with approval by a recent        G
judgment of this Court in Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC
359 where the Court held as follows:
      “11. Insofar as loans to the sister concern/subsidiary company
      are concerned, the law in this behalf is recapitulated by this Court
      in S.A. Builders Ltd. v. CIT [S.A. Builders Ltd. v. CIT, (2007) 1      H
892              SUPREME COURT REPORTS                       [2020] 5 S.C.R.


A          SCC 781]. After taking note of and discussing on the scope of
           commercial expediency, the Court summed up the legal position
           in the following manner: (SCC pp. 787-88, paras 27-31)
           xxx xxxxxx
           31. It has been repeatedly held by this Court that the expression
B          ‘for the purpose of business’ is wider in scope than the expression
           ‘for the purpose of earning profits’ vide CIT v. Malayalam
           Plantation Ltd. [CIT v. Malayalam Plantation Ltd., (1964) 53
           ITR 140 (SC)] , CIT v. Birla Cotton Spg. &Wvg. Mills Ltd.
           [CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., (1971) 3 SCC
C          344] , etc.”
           12. In the process, the Court also agreed that the view taken by
           the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [CIT v.
           Dalmia Cement (B.) Ltd., 2001 SCC OnLine Del 1447 : (2002)
           254 ITR 377] wherein the High Court had held that (SCC OnLine
           Del para 8) once it is established that there is nexus between the
D          expenditure and the purpose of business (which need not
           necessarily be the business of the assessee itself), the Revenue
           cannot justifiably claim to put itself in the arm-chair of the
           businessman or in the position of the Board of Directors and
           assume the role to decide how much is reasonable expenditure
E          having regard to the circumstances of the case. It further held
           that no businessman can be compelled to maximise his profit and
           that the Income Tax Authorities must put themselves in the shoes
           of the assessee and see how a prudent businessman would act.
           The authorities must not look at the matter from their own viewpoint
           but that of a prudent businessman.”
F          16. The High Court’s next finding based on the judgment in
      Vodafone (supra) is as follows:
           “56. In view of the aforesaid discussion and our findings on the
           true and real nature of the transaction camouflaged as ‘non-
           compete fee‘, we have no hesitation and reservation that the
G          respondent-assessee had indulged in abusive tax avoidance.”
           17. We may only reiterate as correctly found by the majority
      judgments of the Appellate Tribunal, that:
           (i)    A share of the face value of INR 10 and market value of
                  INR 3 was sold for INR 30 as a result of control premium
H                 having to be paid.
SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                            893
          DELHI-IV [R. F. NARIMAN, J.]

  (ii) It is important to note that each member of the family was        A
       paid for his/her shares in the company, the lion’s share being
       paid to the assessee’s son and wife as they held the most
       number of shares within the said family.
  (iii) The non-compete fee of INR 6.6 crores was paid only to the
        assessee. This was for the reason stated in the Deed of          B
        Covenant, namely, that Shri Shiv Raj Gupta had acquired
        considerable knowledge, skill, expertise and specialisation in
        the liquor business. There is no doubt that on facts he has
        been Chairman and Managing Director of CDBL for a period
        of about 35 years; that he also owned a concern, namely
        M/s Maltings Ltd., which manufactured and sold IMFL and          C
        beer and that he was the President of All India Distilleries
        Association and H.P. Distilleries Association.
  (iv) It is further recorded in the judgment of the Accounting
       Member that the amount of INR 6.6 crores was arrived at
       as a result of negotiations between the SWC group and the         D
       appellant.
  (v) That the restrictive covenant for a period of 10 years resulted
      in the payment of INR 66 lakhs per year so that the appellant
      “…will not start or engage himself, directly or indirectly, or
      provide any service, assistance or support of any nature,          E
      whatsoever, to or in relation to the manufacturing, dealing
      and supplying or marketing of IMFL and/or Beer.” Given
      the personal expertise of the assessee, the perception of the
      SWC group was that Shri Gupta could either start a rival
      business or engage himself in a rival business, which would        F
      include manufacturing and marketing of IMFL and Beer at
      which he was an old hand, having experience of 35 years.
  (vi) As was correctly held by the second Judicial Member, it
       was also clear that the withholding of INR 3 crores out of
       INR 6.6 crores for a period of two years by way of a public       G
       deposit with the SWC group for the purpose of deduction of
       any loss on account of any breach of the MoU, was akin to
       a penalty clause, making it clear thereby that there was no
       colourable device involved in having two separate agreements
       for two entirely separate and distinct purposes.
                                                                         H
894            SUPREME COURT REPORTS                           [2020] 5 S.C.R.


A            18. The reasons given by the learned 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. For
      example, stating that there was no rationale behind the payment of INR
B
      6.6 crores and that the assessee was not a probable or perceptible threat
      or competitor to the SWC group is the perception of the Assessing Officer,
      which cannot take the place of business reality from the point of view of
      the assessee, as has been pointed out by us hereinabove. The fact that
      M/s Maltings Ltd. had incurred a loss in the previous year is again neither
C     here nor there. It may in future be a direct threat to the SWC group and
      may turn around and make profits in future years. Besides, M/s Maltings
      Ltd. is only one concern of the assessee – it is the assessee’s expertise
      in this field on all counts that was the threat perception of the SWC
      group which cannot be second guessed by the revenue. Equally the fact
      that there was no penalty clause for violation of the Deed of Covenant,
D
      has been found by us to be incorrect given the letter dated 02.04.1994.
      The fact that the respondent-assessee in his letter dated 26.03.1998 in
      reply to the show cause notice had stated that the SWC group had gained
      substantial commercial advantage by the purchase of shares in CDBL
      as the turnover increased from INR 9.79 crores in the accounting period
E     ending 31.03.1991 to INR 45.17 crores in the accounting period ending
      31.03.1997 is again neither here nor there. As a matter of fact, the SWC
      group, due to its own advertisement and marketing efforts, may well
      have reached this figure after a period of six years (the date 30.09.1995
      is wrongly recorded by the High Court in paragraph 19 – the correct
      date as per the letter dated 26.03.1998 is 31.03.1991, as has been pointed
F
      out by us hereinabove).
            19. It only remains for us to point out the judgment in Guffic
      Chem (P) Ltd. v. CIT (2011) 4 SCC 254. In this case, the question set
      out by the Court is as follows:
G           “Whether a payment under an agreement not to compete (negative
            covenant agreement) is a capital receipt or a revenue receipt is
            the question which arises for determination in this case?”
            Here, the Court was dealing with an amount of INR 50 lakhs
      received by the appellant-assessee from Ranbaxy as a non-compete
H
   SHIV RAJ GUPTA v. COMMISSIONER OF INCOME-TAX,                               895
             DELHI-IV [R. F. NARIMAN, J.]

fee under an agreement dated 31.03.1997. This Court in negating the            A
application of Section 28(ii)(a) to such receipt, held as follows:
      “Decision
      4. The position in law is clear and well settled. There is a dichotomy
      between receipt of compensation by an assessee for the loss of
      agency and receipt of compensation attributable to the negative/         B
      restrictive covenant. The compensation received for the loss of
      agency is a revenue receipt whereas the compensation attributable
      to a negative/restrictive covenant is a capital receipt.
      5. The above dichotomy is clearly spelt out in the judgment of this
      Court in Gillanders case [(1964) 53 ITR 283 (SC)] , in which the         C
      facts were as follows: the assessee in that case carried on business
      in diverse fields besides acting as managing agents, shipping
      agents, purchasing agents and secretaries. The assessee also acted
      as importers and distributors on behalf of foreign principals and
      bought and sold on its own account. Under an agreement which             D
      was terminable at will the assessee acted as a sole agent of
      explosives manufactured by Imperial Chemical Industries (Export)
      Ltd. That agency was terminated and by way of compensation
      Imperial Chemical Industries (Export) Ltd. paid for first three
      years after the termination of the agency two-fifths of the
      commission accrued on its sales in the territory of the agency of        E
      the appellant and in addition in the third year full commission was
      paid for the sales in that year. Imperial Chemical Industries (Export)
      Ltd. took a formal undertaking from the assessee to refrain from
      selling or accepting any agency for explosives.
      6. Two questions arose for determination in Gillanders case              F
      [(1964) 53 ITR 283 (SC)] , namely, whether the amounts received
      by the appellant for loss of agency was in normal course of business
      and therefore whether they constituted revenue receipt? The
      second question which arose before this Court was whether the
      amount received by the assessee (compensation) on the condition          G
      not to carry on a competitive business was in the nature of capital
      receipt? It was held that the compensation received by the assessee
      for loss of agency was a revenue receipt whereas compensation
      received for refraining from carrying on competitive business was
      a capital receipt.
                                                                               H
896                SUPREME COURT REPORTS                         [2020] 5 S.C.R.


A            7. This dichotomy has not been appreciated by the High Court in
             its impugned judgment. The High Court has misinterpreted the
             judgment of this Court in Gillanders case [(1964) 53 ITR 283
             (SC)] . In the present case, the Department has not impugned the
             genuineness of the transaction. In the present case, we are of the
             view that the High Court has erred in interfering with the concurrent
B            findings of fact recorded by CIT (A) and the Tribunal.
             8. One more aspect needs to be highlighted. The payment received
             as non-competition fee under a negative covenant was always
             treated as a capital receipt till Assessment Year 2003-2004. It is
             only vide the Finance Act, 2002 with effect from 1-4-2003
C            that the said capital receipt is now made taxable [see Section
             28(v-a)]. The Finance Act, 2002 itself indicates that during the
             relevant assessment year compensation received by the assessee
             under non-competition agreement was a capital receipt, not taxable
             under the 1961 Act. It became taxable only with effect from 1-4-
             2003. It is well settled that a liability cannot be created
D            retrospectively. In the present case, compensation received under
             the non-competition agreement became taxable as a capital receipt
             and not as a revenue receipt by specific legislative mandate vide
             Section 28(v-a) and that too with effect from 1-4-2003. Hence,
             the said Section 28(v-a) is amendatory and not clarificatory.
             9. Lastly, in CIT v. Rai Bahadur Jairam Valji [(1959) 35 ITR
E
             148 (SC)] it was held by this Court that if a contract is entered
             into in the ordinary course of business, any compensation received
             for its termination (loss of agency) would be a revenue receipt. In
             the present case, both CIT(A) as well as the Tribunal, came to
             the conclusion that the agreement entered into by the assessee
F            with Ranbaxy led to loss of source of business; that payment was
             received under the negative covenant and therefore the receipt
             of Rs. 50 lakhs by the assessee from Ranbaxy was in the nature
             of capital receipt. In fact, in order to put an end to the litigation,
             Parliament stepped in to specifically tax such receipts under the
             non-competition agreement with effect from 1-4-2003.”
G            20. Respectfully following the aforesaid decision, we allow the
      appeal and set aside the impugned judgment for all the reasons given by
      us above. All pending applications, if any, stand disposed of in terms of
      the judgment.

H     Ankit Gyan                                                     Appeal allowed.