The appellants further argued that the court's determination regarding the invalidity of the non-compete agreement undermines the principle of the company's separate legal personality. Thus, when examining the authenticity of the non-compete agreement with Kahane, the court ruled that there was no need for this agreement since a non-compete clause was included in the activity purchase agreement entered into by Eisenberg, which is capable of preventing Kahane from competing with the acquiring company. According to the appellants, this determination ignores the principle of separate legal personality and obligates the shareholder to fulfill the company's obligations. According to the appellants, without the non-compete agreement with Kahane, Kahane could have resigned from Eisenberg, sold its shares, and competed with the acquiring company.
According to the appellants, the trial court "Bend the facts to get a result" (I will refer further to the wording chosen by the appellants with respect to the trial court and its judgment below). Thus, according to the claim, the court ignored the introductory clauses to the activity purchase agreement, which determine that Kahane's engagement in a non-compete agreement is a condition for the entire transaction. In addition, the court ignored the clauses in the non-compete agreement that indicate that Kahane's undertaking is independent and is not dependent on other agreements, and that the payment to Kahane is compensation for the limitations he has taken upon himself.
Another argument made by the appellants is that the judgment of the District Court is inconsistent with the statements of the court itself during the hearing before it. Thus, it appears from the minutes of the hearing that the court confronted the respondent with the possibility that the non-compete agreement with Kahane was authentic, since without him Kahane could have established a company and competed with the acquiring company, despite the stipulation in the agreement to purchase the activity between the acquiring company and the Eisenberg company. According to the appellants, despite the aforesaid, in its judgment the court ignored this possibility.
- At the same time, and in addition to the above arguments, the appellants also argued against the District Court's determination that the receipt received by Kahane should be classified as fruitful income. Thus, according to the appellants, the significance of the District Court's judgment is that income from a non-compete agreement with the owners of a company will always be classified as income. This is despite the fact that this is income due to the cessation of the entire source of income and is therefore clearly capital income.
In this context, the appellants argued that the court's rulings were coerced and were intended in order to "Fit" The circumstances of the judgment inCivil Appeal 8294/14 Gangina N' Petah Tikva Tax Assessor (20.3.2018) (Below: The Gangina Affair), in which the possibility of viewing the income in respect of the non-compete stipulation as fruitful income was recognized, even though it is not an employee-employer relationship, but rather a payment to the shareholders who managed the company. Thus, the court ruled that the non-competition clause relates to Kahane's abilities as a manager at Eisenberg and not as an engineer in the field of electron microscopy. This is despite the fact that the non-competition agreement indicates, according to the appellants, that the agreement is intended to neutralize competition on the part of Kahane in his professional cap and not in his managerial hat. Therefore, according to the appellants, the significance of the judgment is that even when there is evidence that the non-competition clause is intended to terminate the taxpayer's professional occupation, the receipt will be attributed to his managerial position and will always be classified as fruitful receipt.