2015 (3) TMI 407 - HC - Income Tax

Salary income or not - amount received by the appellant under the non-competition agreement - AO, CIT(A) and ITAT confirmed the taxability udner the head salary income - assessee had rich experience in design, development and commissioning of Industrial Drives, power electronic equipments, such as High Power Battery Chargers and UPS Systems - Held that - In the present case, this Court finds that the employment contract is between the joint venture Indian company, viz., CTIL and the assessee and the terms and conditions of the employment is restricted only in relation to three items, which we have already referred to in the earlier part of this order and there is nothing to show that it has any relation with the industrial drives in question and, therefore, the foreign collaborator was justified in entering into a non-competition agreement, i.e., only after 26.9.95 when the Government of India, Ministry of Industries, granted approval to increase the shareholding of the foreign company in the joint venture Indian company. There are clear indications as to why the foreign company entered into the non-competition agreement after this approval given by the Government of India, Ministry of Industries, Department of Industrial Policy and Promotion, Foreign Collaboration-II Section. The Tribunal erred in holding that the amount paid by the foreign company to the assessee/appellant is by the employer to the employee, which conclusion, on the face of it, is not correct, as there is no relationship of employer and employee between the foreign company and appellant/assessee and this conclusion arrived at by the Tribunal is a misreading of the agreement. On a plain interpretation of Section 15 read with Section 17 of the Act, we are unable to subscribe to the view of the respondent/Revenue as has been confirmed by the CIT (Appeals) and the Tribunal, that the payment received in this case is in the nature of salary. The principles, as laid down by the Supreme Court in Guffic s case (2011 (3) TMI 6 - Supreme Court) is squarely applicable to the facts of the present case. In view of the aforesaid reasoning and findings, this Court holds that the payment in this case, received by the appellant/assessee, is not in the nature of a salary and it is only a capital receipt. - Decided in favour of the appellant/assessee.

Summary

Issues Involved:
1. Whether the amount received under the non-competition agreement should be taxed as salary income.
2. The nature of the amount received under the non-competition agreement - whether it is a capital receipt or revenue receipt.
3. The applicability of Sections 15 and 17 of the Income Tax Act in determining the nature of the payment.
4. The relevance of the relationship between the payer (CT-PLC) and the recipient (appellant/assessee) in determining the taxability of the amount.

Issue-wise Detailed Analysis:

1. Whether the amount received under the non-competition agreement should be taxed as salary income:
The appellant received 18,000 Pound Sterling under a non-competition agreement with CT-PLC. The Assessing Officer (AO) treated this amount as salary, arguing that the appellant was an employee of CTIL (a joint venture between CT-PLC and RSM) and that the payment was related to his employment. The AO's reasoning was based on the fact that the appellant was prevented from competing with CTIL and was receiving a salary from CTIL. However, the appellant contended that the payment was a capital receipt for agreeing not to compete in the business of industrial drives, and thus, it should not be taxed as salary.

2. The nature of the amount received under the non-competition agreement - whether it is a capital receipt or revenue receipt:
The appellant argued that the amount received was a capital receipt, as it was compensation for agreeing not to compete in the business of industrial drives for five years. The AO, CIT (Appeals), and Tribunal, however, treated the amount as salary, stating that the payment was related to the appellant's employment and services rendered. The Tribunal held that if it was a non-competition fee, it should have been paid to RSM, not the appellant. The Tribunal also noted that RSM continued its business even after the joint venture was formed, questioning the necessity of the non-competition fee.

3. The applicability of Sections 15 and 17 of the Income Tax Act in determining the nature of the payment:
Sections 15 and 17 of the Income Tax Act deal with income chargeable under the head 'Salaries' and define what constitutes 'salary'. The AO and Tribunal concluded that the payment fell under 'salary' as defined in Section 17, which includes fees, commissions, perquisites, or profits in lieu of or in addition to any salary or wages. However, the High Court analyzed these sections and concluded that for a payment to be considered 'salary', it must be due from an employer or former employer. In this case, CT-PLC was neither the employer nor the former employer of the appellant, and thus, the payment could not be taxed as salary.

4. The relevance of the relationship between the payer (CT-PLC) and the recipient (appellant/assessee) in determining the taxability of the amount:
The High Court examined the relationship between CT-PLC and the appellant. It found that the non-competition agreement was between CT-PLC (a foreign company) and the appellant, and CT-PLC had no employment relationship with the appellant. The payment was made to prevent the appellant from competing in the business of industrial drives, which could jeopardize CT-PLC's interests in the joint venture. The Court noted that the payment was made by CT-PLC, not by the joint venture company (CTIL), and thus, it could not be considered as salary.

Conclusion:
The High Court concluded that the payment received by the appellant under the non-competition agreement was a capital receipt and not salary. It held that the payment was made by CT-PLC to prevent competition and safeguard its interests in the joint venture, and there was no employer-employee relationship between CT-PLC and the appellant. Therefore, the amount could not be taxed as salary under Sections 15 and 17 of the Income Tax Act. The appeal was allowed, and the order of the Tribunal was set aside.