According to the respondent, there is no basis for the appellants' argument that due to the principle of separate legal personality, the non-compete clause in the operators' purchase agreement does not bind Kahane. This is because such an argument was rejected in the judgment of this court in the matter Gangina In which it was determined that the shareholders could not hide behind the separate legal personality of the company, and that competition on the part of the shareholders would have amounted to a breach of the agreement with the company and a breach of the duty of good faith in its execution.
In addition, according to the respondent, when the appellants did not provide a convincing explanation for the split of the consideration, the respondent contacted the purchasing company, which replied that the demand for the split was Kahane's and not hers.
In this context, the respondent argued that the appellants' argument that the parties who answered the above answer had no idea how the consideration was determined, since these are elements of the company that acquired the acquiring company, and therefore it should be assumed that they have all the relevant information. In addition, according to the respondent, Ms. Baran, who testified on behalf of the appellants, did not contradict what was said.
With regard to the appellants' claim that the trial court relied on the email correspondence"In contrast to the laws of evidence, the respondent argued that the tax assessor, as an administrative authority, is entitled to rely on administrative evidence, and that according to the law in an income tax appeal, the court is not bound by the usual rules of evidence and can accept any evidence on which the respondent based his assessment. The respondent further argued that the burden of contradicting the evidence that established the assessment rests with the taxpayer, and in the circumstances at hand - about the appellants.
In addition, the respondent argued that there was no substance to the appellants' claim that the court ignored in its judgment the possibility that it itself raised in the hearing, according to which there was a real need for a non-compete agreement with Kahane. This is because in its judgment the court clarified why, in its view, this possibility should not be accepted. In this context, the respondent argued that in any event, questions and statements made by the court during the hearing were intended solely for the purpose of clarifying the dispute.
- The respondent further argued that the splitting of the transaction and the consideration paid under it into two agreements is not an authentic split, since the appellants did not prove that there was an economic basis for the distribution of the consideration. In this context, the respondent noted that the appellants did not summon to testify the parties who were responsible for conducting the negotiations and determining the consideration in each of the agreements. In addition, although the appellants claim that there were various calculations behind the consideration, they did not present these calculations. In addition, according to the respondent, the acquiring company insisted that in the non-compete agreement it should be clarified that the payment constitutes part of the consideration for the purchase of Eisenberg's activity, and this proves that the distribution of the consideration is artificial. In addition, according to the respondent, the appellants' arguments contradict each other, since, on the one hand, the appellants claim that there was an economic basis for splitting the consideration between the agreements, and on the other hand, they claim that there is no relevance to the manner in which the considerations that were split are calculated.
- In addition, with regard to the authenticity of the non-compete agreement, the respondent argued that the question of the true classification of the receipt is not unique to non-compete agreements, but rather is a basic principle in tax law according to which a transaction should be taxed according to its economic nature, and not necessarily according to the manner in which the parties presented the transaction.
- In view of all of the above, the respondent argued that the non-compete agreement with Kahane was not authentic, and that this was sufficient to dismiss the appeal and classify the income as fruitful income.
- Alternatively, and to the extent that it is determined that the non-compete agreement is authentic, according to the respondent, the case at hand does not fall within the narrow opening set out in the Barnea Rule with regard to the classification of receipt in respect of a non-compete clause as capital receipt. The Respondent argued that in the Barnea Rule it was determined that in most cases a receipt in respect of a non-compete clause is considered as income of fruitful labor, and that only in exceptional and rare cases will there be room to classify a non-compete clause as one that deprives the source of income, and therefore the receipt thereof will be classified as capital receipt. In our view, according to the Respondent, Kahane continued to manage the Eisenberg Company during the period of non-competition, and even afterwards, until 2019, and Kahane's salary did not decrease during or after the non-competition period. In addition, according to the Respondent, Eisenberg had additional areas of activity and its revenues remained the same as they were prior to the agreement to purchase the activity. In these circumstances, according to the Respondent, the non-competition clause, which prohibited Kahane from operating in a certain field of activity for a period of three years, does not amount to "cutting down the tree".
As to the appellants' argument that the court did not examine Kahane's abilities as an engineer in the field of electron microscopy, but rather his abilities as a salaried manager, the respondent noted that Kahane's skills enabled him to continue to generate income in the same manner that he generated his income prior to the non-compete agreement, regardless of the distinction between his managerial hat and his professional hat. According to the respondent, the receipt in respect of the non-compete clause reflects compensation for the potential decline in Kahane's expected earnings due to the need to move to another field of activity, but in our case Kahane's earnings were not harmed at all.