2018 (11) TMI 1005 - AT - Income Tax

Nature of income - Severance compensation received - AO held that the compensation in question is taxable as income - whether compensation in question can also be taxed as capital gains u/s 45 - contentions of the assessee rejected that the compensation in question is a capital receipt and hence cannot be regarded as income under the inclusive definition of the term income under the Act - whether the ITAT can examine the issue whether the receipt in question is taxable u/s 28(ii)(a) or alternatively u/s 45 or under any other section of the Act either considered or not considered by AO, when the AO has based his assessment ultimately on Section 56(2)(vii)? - Held that - AO in this case has examined various provisions of the Act under which he was of the opinion that the receipt in question is taxable. He sought to protect the interest of revenue and to assess the receipt in question under the head income from business as well as under the head income from capital gains . After holding that the receipt in question is taxable under those heads, he ultimately held that the receipt is taxable under the head income from other sources for the reasons as given in his order. The law, in our view, does not place limitations as to the manner in which the AO proposed to tax particular receipt. To protect the interest of revenue, in our view, it is open for the assessing officer to bring to tax receipt under various sections when he is in doubt. Alternative/Multiple reasoning by the assessing authority while arriving at a conclusion that the receipt in taxable is permissible. We are of the considered opinion that we have the power to examine the action of the Assessing Officer in holding that, the receipt in question can also be brought to tax u/s 28(ii)(a) of the Act and u/s 45 of the Act. There is no bar under the statute to the powers of the Tribunal to remand the matter back to the file of the Assessing Officer or to the file of the ld. CIT(A) with or without directions. It is not the case of the Assessing Officer that the assessee is managing the whole of the affairs of GI. Its his case that the assessee has a significant role which is of some substance or worth in the affairs of the company because of his special rights by virtue of the share holder agreement and hence it is a case where the assessee is managing substantially the whole of the affairs of the Indian company. This aspect has to be examined by the CIT(A). To come to an appropriate conclusion on the matter, further enquiries may have to be conducted with P&G Group as well as with the assessee, as to why the assessee was only paid the entire severance compensation of ₹ 200 Crores. The assessee submitted in the written arguments that he is exclusively paid this compensation and no other person in the group has any right for the compensation. The facts thrown up during the course of negotiations between the groups may throw light on this issue. It has also to be brought on record as to what were the existing rights and privileges of the assessee, as on the date of entering into the share holder agreement which were retained by him till the date of termination of these rights. CIT(A), as passed a cryptic order, we set aside this issue to the file CIT(A), for fresh adjudication, in accordance with law after giving the assessee adequate opportunity of being heard. While doing so, the CIT(A) may, if he thinks fir or necessary call for a remand report, so as to bring all the facts of the issue on record. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Taxability of severance compensation received by the assessee.
2. Applicability of Section 28(ii)(a) of the Income Tax Act, 1961.
3. Applicability of Section 45 of the Income Tax Act, 1961.
4. Power of ITAT to examine taxability under different sections.
5. Procedural aspects and compliance with ITAT orders.

Issue-wise Detailed Analysis:

1. Taxability of Severance Compensation:
The primary issue was whether the severance compensation of ?200 crore received by the assessee is chargeable to tax as income under the Income Tax Act, 1961. The Assessing Officer (AO) held that the compensation is taxable as income and discussed several alternatives to bring this amount to tax. The AO ultimately held that an amount of ?1,74,20,35,742/- was taxable under Section 56 of the Act. The AO also considered other sections like Section 28(ii)(a) and Section 45 of the Act but did not base his assessment on these sections. The CIT(A) upheld the AO's order without detailed reasoning.

2. Applicability of Section 28(ii)(a):
The assessee argued that Section 28(ii)(a) is not applicable as he was not managing the whole or substantially the whole of the affairs of the company. The assessee had certain rights under the Shareholders Agreement (SHA), but these did not amount to managing the company's affairs. The AO and CIT(A) did not provide sufficient evidence to justify that the assessee was managing the whole or substantially the whole of the company's affairs. The term "substantially" was not defined, and its interpretation required further examination.

3. Applicability of Section 45:
The AO alternatively held that the compensation could be taxed as capital gains under Section 45 of the Act. The assessee argued that the compensation was not related to the transfer of shares or any capital asset but was for relinquishing special rights under the SHA. The Special Counsel for the Revenue argued that the compensation was for the termination of management rights and could be taxed under Section 55(2)(a) as capital gains. The Tribunal found that this aspect required further examination by the CIT(A).

4. Power of ITAT to Examine Taxability:
The Tribunal held that it has the power to examine the taxability of the receipt under different sections of the Act, even if the AO ultimately based his assessment on Section 56(2)(vii). The Tribunal referred to case laws that support the power to remand the matter for further inquiry and to ensure that effective inquiry is carried out. The Tribunal emphasized that its power is not limited to the grounds raised before it and can pass orders on the subject matter of the appeal as it thinks fit.

5. Procedural Aspects and Compliance with ITAT Orders:
The Tribunal noted that the department had not complied with its interim orders regarding the refund to the assessee. The Special Counsel for the department explained the technical difficulties in processing the refund. The Tribunal also noted that the paper book filed by the department was not in accordance with the rules and required rectification.

Conclusion:
The Tribunal set aside the issue to the file of the CIT(A) for fresh adjudication, emphasizing the need for a detailed examination of the facts and applicable law. The CIT(A) was directed to conduct further inquiries if necessary and to adjudicate the matter de novo, uninfluenced by the observations made by the Tribunal. The appeal of the assessee was allowed for statistical purposes.