2005 (9) TMI 242 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of ex gratia payment received by the assessee.
2. Classification of the payment as capital receipt or revenue receipt.
3. Applicability of Section 17(3) of the Income-tax Act.

Detailed Analysis:

1. Taxability of Ex Gratia Payment Received by the Assessee:

The primary issue in this case was whether the ex gratia payment of Rs. 32 lakhs received by the assessee from Bausch & Lomb Ltd. (B&L Ltd.) was taxable. The Assessing Officer (AO) considered this amount as compensation for loss of employment and for not disclosing trade secrets, thus taxable under Section 17(3) as profit in lieu of salary. However, the assessee argued that the amount was received as compensation for agreeing not to engage in competitive activities and not to divulge confidential information, making it a capital receipt.

2. Classification of the Payment as Capital Receipt or Revenue Receipt:

The CIT(A) and the Tribunal both focused on the nature of the payment. The CIT(A) observed that the assessee had only worked for B&L Ltd. for two years, earning a salary of Rs. 3.60 lakhs. Given the short tenure and the nature of the agreement, the CIT(A) concluded that Rs. 31 lakhs of the Rs. 32 lakhs was a capital receipt, as it was paid to prevent the assessee from engaging in competitive activities and divulging trade secrets. The Tribunal upheld this view, citing various precedents, including the Supreme Court judgment in *Gillanders Arbuthonot & Co. Ltd. v. CIT* which held that compensation for agreeing to refrain from competitive business is a capital receipt.

3. Applicability of Section 17(3) of the Income-tax Act:

The AO argued that the payment should be taxable under Section 17(3)(i) as profit in lieu of salary. However, the Tribunal noted that the payment was not for services rendered but for agreeing to a restrictive covenant. The Tribunal cited several cases, including *A.S. Wardekar v. Asstt. CIT* and *M.N. Karani v. Asstt. CIT*, where similar payments were treated as capital receipts. The Tribunal distinguished the cases cited by the DR, such as *CIT v. D.R. Sondhi* and *CIT v. Dr. P.L. Meyyappan*, as those involved different facts and were not applicable to the present case.

Conclusion:

The Tribunal concluded that the ex gratia payment received by the assessee was a capital receipt and not taxable as profit in lieu of salary under Section 17(3). The appeal of the department was dismissed, and the order of the CIT(A) treating the compensation as a capital receipt was upheld.