2024 (5) TMI 389 - AT - Income Tax

Nature of receipt - Taxability u/s 17(3)(iii) - compensation received under Non-Competition Agreement on termination of job (employment) - payment under the profits in lieu of salary or capital receipt - Payment by erstwhile employer of the assessee on termination of service - DR submitted that after cessation of employment, assessee entered into an agreement Deed full and complete release and agreement of trade secrets and confidentiality and received the sum - Assessee claimed that amount as not taxable as it was a capital receipt given to him as ex-gratia by Coca Cola India Inc. on executing a non-disclosure and release agreement after cessation of his services. HELD THAT - As per ratio of judgment in Guffic Chem Private Limited 2011 (3) TMI 6 - SUPREME COURT it is well settled that compensation attributable to a negative/restrictive covenant is capital receipt. According to judgment of Mrs. Tara Sinha 2017 (8) TMI 731 - DELHI HIGH COURT a non compete fee under Non-Competition Agreement is not chargeable to income tax. In view of above said material fact especially assessee employee having received sum as per Deed of full and complete release and agreement on trade secrets and confidentiality containing non compete clause as per above said well settled principles of law being capital receipt is not taxable - Assesse appeal allowed.

Summary

Issues involved:
The appeal concerns the order of the Learned Commissioner of Income Tax upholding the enhancement of payment under the head "profits in lieu of salary" by the Assessing Officer. The primary issue is whether the payment of Rs. 45,00,000/- received by the assessee from the erstwhile employer should be considered as profits in lieu of salary or as a capital receipt.

Assessment Proceedings:
The assessee declared an income of Rs. 65,68,113/- for the assessment year 2007-08. The case was taken up for scrutiny, and notices under section 143(2) and 142(1) were issued. The Assessing Officer passed an order on 31.12.2009 enhancing the income by Rs. 45,00,000/- and imposed interest and penalty under relevant sections of the Income Tax Act, 1961.

Appellant's Arguments:
The appellant contended that the payment received was not in lieu of salary but was a capital receipt based on an agreement with the employer. Reference was made to Section 17(3)(i) and Section 28(va) of the Income Tax Act to support the argument. Case laws such as Guffic Chem Private Limited vs. CIT and CIT vs. Pritam Das Narang were cited to emphasize the distinction between capital and revenue receipts.

Department's Response:
The Department argued that the amount received by the assessee after cessation of employment was taxable as per the amended Section 17(3) of the Income Tax Act. It was asserted that the payment should be considered as profits in lieu of salary and taxed accordingly.

Judgment:
After considering the submissions, the Tribunal found that the payment of Rs. 45,00,000/- was received by the assessee post-employment termination as part of an agreement. Relying on established legal principles, the Tribunal held that such receipts, being capital in nature, are not taxable. Citing precedents like Guffic Chem Private Limited vs. CIT and Commissioner of Income Tax vs. Mrs. Tara Sinha, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Income Tax, ruling in favor of the appellant.

Conclusion:
The appeal was allowed, and the impugned orders were set aside, emphasizing the non-taxability of the payment received by the assessee as a capital receipt.