The court also ruled that the fact that Kahane was not only a manager of Eisenberg but also a shareholder in the company did not change the classification of the receipts he received. This is because the non-competition clause was intended to prevent Kahane's competition not because he was the owner of Eisenberg, but because of the skills and experience he acquired as an employee of the company.
Subsequently, the court examined the non-competition clause accordingly, for example, "The tree and the fruit". I will note that this familiar metaphor is used to classify cultary or priestly income: while the income deriving from the use of the means of production is in the category of picking the fruit of the tree and should be classified as priesthood, the income deriving from the sale of the factors of production is within the scope of cutting down the tree and should be classified as priestly (see: Civil Appeal 9187/06 Magid 50' Petah Tikva Tax Assessor, paragraph 18 of the judge's judgment Y. Danziger (16.3.2009); עניין Barnea, paragraph 20 of the judge's judgment Y. Amit; See below in the paragraph. 42).
The court ruled that an examination of the characteristics of the non-competition clause leads to the conclusion that Kahane's undertaking not to engage in the field for three years does not amount to "Cutting down the tree". The court based this conclusion on the fact that Kahane's knowledge, experience and connections did not fade after the passage of the non-competition period. Thus, at the end of the non-competition period, Kahane could have benefited from both his abilities as an electronics engineer and his managerial abilities, as well as from the connections he acquired and the name he had acquired for himself in the field of electron microscopes. In relation to the aforesaid, the court noted that Kahane remained the owner of Eisenberg and its hired manager throughout the period of non-competition and even afterwards, and earned the same salary levels that he enjoyed prior to the sale of activity agreement and the non-compete agreement. The court considered the fact that Kahane continued to work and his income as an employee was not affected, as indicating that the non-compete clause was not impaired "Cut down the tree". Therefore, the court ruled that in accordance with the test set in the case Barnea The receipt should be classified as fruit income.
- The court also rejected Kahane's claim that after the agreements, he had no choice but to try to sell Eisenberg. This was because Kahane sold his shares in Eisenberg in 2019 for a substantial sum of about ILS 8 million (and Kahane testified that he expected the amount to eventually be even higher), and that during the period leading up to its sale, about 30 employees remained with the company, some of whom were paid significant salaries, so it cannot be said that there was no activity left in Eisenberg. Moreover, the court ruled that Kahane remained involved in the field of electron microscopes during the non-compete period, and maintained contact with the relevant parties in the field.
Another argument by Kahane, which was rejected by the court, is that "Acquisition Cycles" in the field. In accordance with this argument, due to the high costs of electron microscopes, customers in this market purchase new systems only once every few years. According to the claim, a customer who purchases a system depends on the supplier and his services for all those years until the system is replaced with a new system, and therefore any transaction for the purchase of electron microscopes, which is executed during the non-competition period, in fact fixes the market situation for a period of 7 to 12 years ahead. Thus, according to the appellants, the period of non-competition made it difficult for Kahane to reintegrate into the market even after the end of this period. The court ruled that this claim was not proven at all, and that it is inconsistent with the appellants' claim that the technology in the market is advancing rapidly, so that there is a need to replace the device every two and a half years.
- In light of the above, the court ruled that "it cannot be said that the revenue-generating tree has been cut down, and even with regard to the industry that grew the revenues in the field of MA [electronic microscopes - Y.20], it is not a matter of cutting it off so that it does not grow again." Therefore, the court ruled that therefore, even under the assumption that the receipt received by Kahane in respect of non-competition is authentic, it should be regarded as fruitful income. In this context, the court clarified that even if it is a receipt with mixed characteristics, in accordance with section 89(c) of the Income Tax Ordinance, it should be classified as a fruitful receipt.
- Before concluding, the court briefly addressed three additional issues.
The first - The court addressed the respondent's alternative argument that the receipt received by Kahane should be classified, at least in part, as income from an occupation according to Section 2(1) To the Ordinance Income Tax. The court noted that there is a basis for this claim in the evidence material. This is because Kahane was asked to carry out actions in his area of expertise in order to ensure the success of the branch established by the acquiring company in Israel. However, the court noted that no evidence was brought to quantify the amount, and in any event, in view of its determination above regarding the fact that the income is fruitful, there is no relevance to the alternative claim above.