2007 (12) TMI 314 - AT - Income Tax

Summary

Issues Involved:

1. Nature of the receipt of Rs. 16,45,604 received by the assessee from Standard Chartered Bank.
2. Applicability of section 17(1) and 17(3) of the Income-tax Act to the receipt.
3. Validity of the restrictive covenant in the employment contract.
4. Consideration of the receipt as capital or revenue in nature.

Issue-wise Detailed Analysis:

1. Nature of the receipt of Rs. 16,45,604 received by the assessee from Standard Chartered Bank:

The primary issue is whether the amount of Rs. 16,45,604 received by the assessee from Standard Chartered Bank at the end of his contract should be treated as ex gratia or bonus, which would be revenue in nature, or as a capital receipt. The assessee argued that this amount was capital in nature due to a restrictive covenant in the employment contract that prevented him from taking up employment with any foreign bank or foreign financial company post-termination.

2. Applicability of section 17(1) and 17(3) of the Income-tax Act to the receipt:

The court examined section 17 of the Income-tax Act, which defines "salary" and "profits in lieu of salary." Section 17(1) includes various forms of remuneration, while section 17(3) includes compensation received in connection with the termination of employment. The court noted that the definition of salary is broad and includes various forms of compensation, even those received after the termination of the employer-employee relationship.

3. Validity of the restrictive covenant in the employment contract:

The restrictive covenant in the employment contract (clause (e)) stated that the assessee would receive an end-of-contract payment subject to three conditions: consistent good performance, not taking up employment with any foreign bank or financial services company, and completion of the contract period. The court noted that these conditions were mutually dependent and essential for the receipt of the payment. The court also referenced the Supreme Court's decision in CIT v. Best & Co. (P.) Ltd., which held that compensation for the loss of an earning apparatus is capital in nature.

4. Consideration of the receipt as capital or revenue in nature:

The court concluded that the restrictive covenant limited the assessee's future employment opportunities, effectively extinguishing an apparatus for earning income. Therefore, the compensation received for this loss was capital in nature. The court rejected the Assessing Officer's arguments that the restrictive covenant was vague and not substantially affecting the assessee's employability. The court emphasized that the conditions in the contract were specific and enforceable, and the Assessing Officer had no right to deny the rights accrued to the assessee by virtue of the employment contract.

Conclusion:

The court allowed the appeal of the assessee, directing the Assessing Officer to treat the amount of Rs. 16,45,604 as capital in nature. The court's detailed analysis highlighted the importance of the restrictive covenant and the broad definition of salary under section 17 of the Income-tax Act.