2023 (2) TMI 306 - AT - Income Tax

Salary income - Deduction of refunded amount of salary - reduction in the salary income disclosed in the revised return filed - Only real income can be taxed - Non-acceptance of Revised return - Non-observation of section 4 of Income-tax Act, 1961 - Assessee has been reduced amount in the revised return filed as disclosed in the original return, which is found to be attributable to reduction in the salary income disclosed originally - HELD THAT - Admittedly, when the assessee had received the entire compensation package of Rs. 2.01 crores from Vedanta, he had shown that in in his original return of income. Thereafter, due to the dispute, the assessee had paid back Rs. 80.5 lakhs back to the employer out of the said total amount. This has been duly reflected again in the revised return of income. Before us also, the evidence has been placed by which the event of refunding the money of Rs. 80.5 lakhs to Vedanta Ltd. is established. When a particular amount is actually not retained by an assessee, then there does not arise any question of tax for that amount. If the event of transaction is for A.Y. 2017-18 then also, the department should have given effect to the amount which is actually not part of the total income of the assessee. The amount which has already been refunded back cannot be brought within purview of tax since the chargeability to tax of such refunded amount does not arise. The assessee had made a refund of Rs. 80.5 lakhs on account of provisions contained in the confidentiality and noncompete agreement read with MOU between the assessee and Vedanta Ltd. and therefore, such refund cannot be construed as salary for the purpose of charging to tax. Such amount therefore, is not assessable as income. In view thereof, we set aside the order of the ld. CIT(A) and allow the grounds of appeal.

Summary

Issues Involved:
1. Not allowing the deduction of refunded amount Rs. 80,50,000/-.
2. Only real income can be taxed.
3. Non-acceptance of revised return.
4. Non-observation of section 4 of the Income-tax Act, 1961.

Detailed Analysis:

1. Not allowing the deduction of refunded amount Rs. 80,50,000/-:
The assessee had initially declared a total income of Rs. 4,63,15,860/- for AY 2016-17. Subsequently, a revised return was filed reducing the total income to Rs. 3,82,65,860/-, attributing this reduction to a refund of Rs. 80,50,000/- to his previous employer, Vedanta Ltd. The refund was due to a breach of a Non-Compete Agreement, resulting in a dispute and a subsequent Memorandum of Understanding (MoU) requiring the assessee to pay the specified amount. However, the Assessing Officer (A.O.) found this deduction untenable as the refund occurred in FY 2016-17, not in the year under consideration.

2. Only real income can be taxed:
The Tribunal emphasized that the amount refunded by the assessee should not be taxed as it was not retained by him. The Tribunal referenced the case of CIT Vs. Raghunath Murti, where it was held that refunded amounts, due to statutory or contractual obligations, should not be considered as income for taxation purposes. The Tribunal concluded that since the refund was made due to the terms of the Non-Compete Agreement and MoU, it should not be taxed.

3. Non-acceptance of revised return:
The A.O. and CIT(A) did not accept the revised return filed by the assessee, which accounted for the refund of Rs. 80,50,000/-. The Tribunal, however, found that the revised return correctly reflected the actual income, excluding the refunded amount, and should be accepted. The Tribunal emphasized that each assessment year is a separate unit, and income or loss should be recognized in the year it is received or incurred.

4. Non-observation of section 4 of the Income-tax Act, 1961:
The Tribunal found that the A.O. and CIT(A) did not correctly apply section 4 of the Income-tax Act, which pertains to the chargeability of income. The Tribunal held that the refunded amount should not be considered as income for the year under consideration, as it was not retained by the assessee and was refunded in compliance with contractual obligations.

Conclusion:
The Tribunal set aside the order of the CIT(A) and allowed the grounds of appeal, concluding that the refunded amount of Rs. 80,50,000/- should not be taxed as it was not part of the assessee's real income. The appeal of the assessee was allowed, and the revised return reflecting the actual income was accepted. The Tribunal emphasized the principle that only real income should be taxed, and any refunded amount due to contractual obligations should not be considered as income for taxation purposes.