2007 (2) TMI 350 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received by directors under restrictive covenant agreements.
2. Nature of the compensation received (capital receipt vs. revenue receipt).
3. Applicability of specific sections of the Income Tax Act (section 2(24)(iv), section 15(b), section 17(3)(i), section 28(ii), and section 56).

Summary:

Issue 1: Taxability of Compensation Received by Directors Under Restrictive Covenant Agreements
The appeals concern three directors of Diners Club India Ltd. (now DBS Financial Services Pvt. Ltd.) who received compensation from Citi Bank under restrictive covenant agreements. The compensation was Rs. 15 lakhs for Mrs. P.S. Aggarwal, Rs. 10 lakhs for Mrs. Vanita Bhandari, and Rs. 5 lakhs for Mr. Vikram S. Agarwal. The Revenue's appeals challenge the deletion of additions by CIT(A) for Mrs. Vanita Bhandari and Mr. Vikram S. Agarwal, while Mrs. P.S. Aggarwal's appeal challenges the upholding of the addition by CIT(A).

Issue 2: Nature of the Compensation Received (Capital Receipt vs. Revenue Receipt)
In the case of Mrs. P.S. Aggarwal, CIT(A) held that the compensation was related to a specific source of income and chargeable to tax as income u/s 2(24)(iv) read with section 15(b) of the IT Act, or alternatively as income from profession/business or u/s 56. Conversely, CIT(A) in the cases of Mrs. Vanita Bhandari and Mr. Vikram S. Agarwal held that the compensation was a capital receipt not liable to tax, referencing decisions from the Mumbai and Madras Benches of the Tribunal and the Hon'ble Apex Court in Oberoi Hotels (P.) Ltd. v. CIT.

Issue 3: Applicability of Specific Sections of the Income Tax Act
The Revenue argued that the compensation should be taxed as salary u/s 17(3)(i) or as business income u/s 28(ii), citing judgments from the Hon'ble Madras High Court. The Tribunal, however, found that the compensation was received from Citi Bank for restrictive covenants and not from DBS, making it a capital receipt not liable to tax. The Tribunal noted that section 28(va), which taxes such receipts as business income, was introduced w.e.f. 1-4-2003 and was not applicable for the assessment year 1993-94.

Conclusion:
The Tribunal held that the compensation received by the directors was a capital receipt not chargeable to tax, reversing the CIT(A)'s decision in the case of Mrs. P.S. Aggarwal and upholding the CIT(A)'s decisions in the cases of Mrs. Vanita Bhandari and Mr. Vikram S. Agarwal. The appeals of the Revenue were dismissed, and the appeal of Mrs. P.S. Aggarwal was allowed.