1996 (12) TMI 94 - AT - Income Tax

Summary

Issues Involved:

1. Nature of the payment received by the assessee.
2. Taxability of the payment as capital receipt or revenue receipt.
3. Applicability of Section 17(3) of the Income Tax Act.

Detailed Analysis:

Nature of the Payment Received by the Assessee:

The assessee, a renowned architect and the Managing Director of M/s. Chandavarkar & Thacker (India) Pvt. Ltd., entered into an agreement with the company on 1-9-1985. The agreement stipulated that the company would pay the assessee Rs. 7,500 per month as compensation for not practicing independently as an architect. The assessee argued that this payment should be considered a capital receipt since it was compensation for refraining from competing with the company, thus not arising from any particular source of income.

Taxability of the Payment as Capital Receipt or Revenue Receipt:

The Assessing Officer (AO) disagreed with the assessee's contention, viewing the payment as additional remuneration for the services rendered by the assessee to the company. The AO noted that the assessee was the only architect in the company and that the payment was commensurate with the benefits the company reaped from his expertise. The AO also observed that the amount was claimed as a revenue expenditure by the company and concluded that it represented additional remuneration disguised as a non-compete payment.

The CIT (A) upheld the AO's view, leading the assessee to appeal further. The assessee's counsel argued that the payment was for refraining from independent practice and should be considered a capital receipt, citing various judgments. However, the tribunal found that the facts of these cases were distinguishable from the present case. In particular, the tribunal noted that the assessee had never practiced independently and continued to serve as the Managing Director of the company, making it unlikely that he could engage in a competing business.

Applicability of Section 17(3) of the Income Tax Act:

The tribunal considered the provisions of Section 17(3) of the Income Tax Act, which includes "profits in lieu of salary" as compensation due to or received by an assessee from his employer. The tribunal agreed with the AO and CIT (A) that the payment was additional remuneration for the services rendered by the assessee to the company. The tribunal concluded that the payment, although framed as compensation for refraining from competition, was effectively additional salary and thus taxable as revenue income.

Conclusion:

The tribunal dismissed the appeal, agreeing with the lower authorities that the amount received by the assessee should be assessed as salary or additional salary, making it taxable in the hands of the assessee.