Therefore, I am of the opinion that Kahane has not been able to show that the non-compete clause led to"Cutting down the tree" Nor to the interruption of the "A single dominant industry"Therefore, I agree with the trial court that ruled that the receipt that Kahane received should be classified as fruitful income.
- Towards the end of the discussion on the issue of the classification of the receipt in respect of the non-compete clause, it seems to me that there is room to reiterate that one should not be deceived by the possibility of describing the transaction in capital terms, but rather that the true nature of the transaction should be traced and decided whether the receipt is intended to compensate for the harm to the fruits of the income or to the source of income itself. Justice Y. Amit described it well in the Barnea case:
"The attempt to dress up any such payment as a capital payment given for a 'waiver of a right' is, in my view, an artificial attempt, which seeks - to a certain degree of sophistication - to throw sand in the eyes of the beholder. After all, from a conceptual point of view, any engagement between the owner of a 'capital asset' and a second party who wishes to make 'use' of the capital asset can be described as a transaction that deals with a 'waiver of a right'.
[...]
The possibility of shaping a transaction in terms of 'relinquishing a right' or 'selling a right' does not turn it into a capital transaction and does not negate its fruitful nature.
[...]
Both of these must be examined according to the nature of the breach - i.e., whether the payment is intended to compensate for the expected harm to the fruits of the income, or perhaps to the source of income itself" (paragraph 45 of the judgment of Justice Y. Amit; and see also the Nissim case , paragraph 7 of the judgment of Justice E. Hayut).
In our case, despite the appellants' attempt to give the non-compete agreement the character of a capital transaction, I am of the opinion that in fact the receipt that Kahane received was intended to compensate for the breach concerning the possible harm to the fruits of his human capital and not for the interruption of the source of income itself, and unfortunately the appellants were not able to prove otherwise.
- Finally, in the margins of the discussion on this point, I will note that I do not find any substance in the appellants' argument that the significance of the District Court's judgment is that income from a non-compete agreement with the owner of a corporation will always be classified as prostitute. The judgment follows the criteria outlined in the Barnea case: as a rule, a non-compete clause will not amount to "cutting down the tree", and the income therein will be classified as fruitful income, but there may be cases, which are indeed rare and exceptional, in which the non-competition clause will amount to "cutting down the tree" and the income in respect of it will be classified as tenure, and that the question of whether the non-competition clause amounts to the felling of the tree, "is a question of fact that depends on the circumstances of each and every case(Barnea case, paragraph 55 of the judgment of Justice Amit). Contrary to the appellants' argument, the judgment of the District Court did not close the door to the possibility that in certain factual circumstances (exceptional and rare) the income from a non-compete agreement would be classified as tenure.
- In summary: I am of the opinion that the receipt that Kahane received should be classified as fruitful income and taxed accordingly.
- III. Section 89(c) of the Income Tax Ordinance: "My fruit and my capital - my fruit is preferable"
- As noted above, section 89(c) of the Income Tax Ordinance establishes a mechanism, which has been referred to in case law as a "tie-breaker" mechanism, whereby when we are dealing with a profit with mixed capital and fruitful characteristics, the said profit should be regarded as fruitful income: "fruity and capital - fruitful is preferable" (Barnea case, paragraphs 22,27,62, and 66 of the judgment of Justice Amit; The Katz case, paragraphs 32-33 of the judgment of Justice A. Stein). It should be noted that as Justice Y. Amit noted in the Barnea case, in contrast to the presumption in the matter of receipts received in the framework of an employee-employer relationship, the "geometric location" of which is at the beginning of the income classification process, the "geometric location" of the rule set forth in section 89(c) of the Income Tax Ordinance is at the end of the classification process, to the extent that the scales are tilted (see Barnea case, paragraph 27 of the judgment of Justice Y. Amit).
Therefore, in our case, even if I were of the opinion that there are no conclusive indications in the material before us of the classification of the receipt that Kahane received as fruit income, in accordance with the said rule the receipt should be classified as fruit income. This is because in accordance with the said rule, when the scales are tilted, the fruitful classification should be preferred. Therefore, in order to prefer the capital classification, the appellants had to be persuaded that the receipt could not be classified as fruit income. In my view, the appellants did not meet this threshold, and therefore, in my view, the receipt received by Kahane as fruit income is the law, as determined by the District Court.