The District Court ruled that another indication of the lack of authenticity of the non-competition clause is expressed in the fact that the activity purchase agreement between Eisenberg and the acquiring company already included a non-compete clause, so it is doubtful whether there was a need for a non-compete agreement with Kahane. In this context, the court emphasized that the non-competition clause in the agreement with Eisenberg was broadly drafted so that it also includes competition through any other person, and hence Kahane was also not permitted to compete with the acquiring company. This was supported by the requirement in the activity purchase agreement that Kahane sign a personal guarantee to ensure the fulfillment of Eisenberg's obligations, including with regard to non-competition. Therefore, the court ruled that it is difficult to find a real purpose in obligating Kahane to a separate non-compete agreement other than the desire to reduce the tax burden.
In light of the above, the court ruled that the split of the consideration between Kahane and Eisenberg lacked a fundamental commercial reason and therefore "Artificial", as the Respondent's alternative claim, and therefore the Respondent was entitled to ignore the split of the consideration, accordingly To Article 86 30Income Tax Ordinance.
- At the same time, the court found it appropriate to address the fact that Kahane identified himself with the Eisenberg company throughout the proceeding, "as it were, he and the company are one and the same." In this regard, the court noted the separate legal personality of the Eisenberg company, and the fact that in addition to Kahane, the company had dozens of other employees, and that Kahane's status was that of an employee. Therefore, the court ruled that the business activity belonged to the Eisenberg company and not to Kahane, and therefore the income from the sale of its activity also belonged to the Eisenberg company and not to Kahane, so that he must pay tax on dividends in relation to the proceeds that were transferred directly to his pocket. In this context, the court emphasized that over the years, Kahane has developed a tax advantage from the production of business revenues through Eisenberg, and not directly by him, and that Kahane enjoys the advantages of the company's separate corporate personality.
- As to the respondent's argument that the consideration paid reflects, at least in part, compensation to Eisenberg for the cancellation of the agency agreement, and not for non-competition, the court noted that it is willing to assume, in favor of the appellants, that the consideration reflects a higher amount than this compensation. This is because the acquiring company was not only interested in terminating the agency agreement, but also in the acquisition of Eisenberg's activity and assets, in the relevant field of activity.
- The court concluded its decision on this matter by holding that "a large question mark hovers over the degree of authenticity of the non-competition clause to which the appellant was charged", for which there is no room to intervene in the respondent's assessment. However, the court added that even if it had assumed in favor of the appellants that the non-competition clause was authentic, it should be examined whether the receipt in respect of non-competition is capital or fruitful, and that this examination, in its view, leads to the conclusion that the receipt is fruitful, so that the result of the tax assessment will not change in any event.
- With regard to the classification of the receipt that Kahane received as a capital or fruitful receipt, the court noted that the essence of the "loophole" that the receipt was intended to fill must be traced, and that the fact that the receipt was received in connection with the sale of Eisenberg's activities and assets (in the activity purchase agreement) does not determine that its classification is capital. The court ruled that Kahane's obligation in the non-compete agreement is related to his status as a salaried manager at Eisenberg, and therefore the tendency is to view the receipt, at least in large part, as if it had been paid to him in his capacity as an employee of the Eisenberg company. The court ruled that therefore this receipt should be regarded as a fruitful receipt. In this context, the court noted that the fact that the payment was made to Kahane by the purchasing company and not by the Eisenberg company, which employed him, does not change this classification.
The court further noted that additional support for the classification of the receipts that Kahane received as a priest is found in the fact that the knowledge and connections that Kahane accumulated in the course of his work at Eisenberg are her property, and not his, and therefore were sold, by Eisenberg, to the acquiring company, as part of the activity purchase agreement.