2015 (9) TMI 851 - HC - Income Tax

Income as profits in lieu of salary - whether ITAT fall into error in holding that the sum recived was compensation in the hands of the Assessee and could not be treated as income as profits in lieu of salary and allowing the credit of TDS? - Held that - The Court is unable to accept the interpretation sought to be placed on the plain language of Section 17 (3) (iii) of the Act by the Revenue. The words from any person occurring therein have to be read together with the following words in sub-clause (A) before his joining any employment with that person . Section 17 (3) (iii) (B) also pre-supposes the existence of the relationship of employer and employee between the person who makes the payment of the amount and the Assessee. It envisages the amount being received by the Assessee after cessation of his employment . Therefore, the words in Section 17 (3) (iii) cannot be read disjunctively to overlook the essential facet of the provision, viz., the existence of employment i.e. a relationship of employer and employee between the person who makes the payment of the amount and the Assessee. The Court accordingly concurs with the concurrent view of the CIT (A) and the ITAT that this was a case where there was no commencement of the employment and that the offer by ACEE to the Assessee was withdrawn even prior to the commencement of such employment. The amount received by the Assessee was a capital receipt and could not be taxed under the head profits in lieu of salary . Other plea of the Revenue that the said amount should be taxed under some other head of income, including income from other sources , is also unsustainable. The decision of this Court in Rani Shankar Mishra (2008 (12) TMI 14 - DELHI HIGH COURT) held in similar circumstances that where an amount was received by a prospective employee as compensation for denial of employment, such amount was not in the nature of profits in lieu of salary. It was a capital receipt that could not be taxed as income under any other head. - Decided in favour of the Assessee Also the order of the CIT (A), as concurred with by the ITAT, that the Assessee is entitled to the refund of the TDS paid on ₹ 1,95,00,000/- and that the refund of TDS may be adjusted against tax demand if any arising on appeal effect being given to the said order of the CIT (A) is upheld. - Decided in favour of the Assessee

Summary

Issues involved:
1. Interpretation of Section 17(3)(iii) of the Income Tax Act, 1961 regarding taxation of compensation received by the Assessee.
2. Allowance of credit for TDS on the compensation amount of Rs. 1,95,00,000/- to the Assessee.

Analysis:

Issue 1: Interpretation of Section 17(3)(iii) of the Income Tax Act
The case involved a dispute over the taxability of a compensation amount of Rs. 1,95,00,000/- received by the Assessee from a prospective employer, ACEE. The Assessee claimed that the amount was not taxable as profits in lieu of salary. The Assessing Officer (AO) contended that the amount was taxable under Section 17(3)(iii) as it was received prior to the Assessee joining ACEE. However, the Commissioner of Income Tax (Appeals) [CIT(A)] held in favor of the Assessee, stating that the payment was compensation for breach of promise and not for services rendered. The CIT(A) concluded that the amount was a capital receipt and not taxable under any head. The Income Tax Appellate Tribunal (ITAT) also upheld this decision, stating that the amount was not in lieu of salary but a capital receipt for denial of employment opportunity.

Issue 2: Allowance of TDS Credit
The second issue revolved around the allowance of credit for TDS of Rs. 22,09,350 on the compensation amount of Rs. 1,95,00,000/- to the Assessee. The CIT(A) had allowed the credit and ordered a refund of TDS to the Assessee. The ITAT concurred with this decision, stating that the amount was taxable as a capital receipt and not under the head of profits in lieu of salary. The High Court upheld the decisions of the CIT(A) and ITAT, ruling in favor of the Assessee and against the Revenue. The Court held that the compensation amount was not taxable under Section 17(3)(iii) and could not be taxed under any other head of income.

In conclusion, the High Court dismissed the appeal filed by the Revenue, upholding the decisions of the lower authorities regarding the taxability of the compensation amount and the allowance of TDS credit to the Assessee. The Court ruled in favor of the Assessee on both issues, emphasizing that the amount received was a capital receipt and not taxable as profits in lieu of salary.