2024 (8) TMI 506 - HC - Income Tax

Receipts as lump sum after cessation of employment - addition as capital gains or salaries - bifurcation of composite settlement amount into capital gains and salaries - assessee held share certificates in evidence of the 50,000 shares which had been allotted to him and pointed out that the assessee was constrained to approach the CLB since TTPL was refusing to enter his name in the Register of Members and thus formally recognize the allotment of 50,000 shares. HELD THAT - We note that a bifurcation of the consideration amount between salary and capital gains was one which was never advocated by the respondents. It thus clearly appears to represent an exercise which the Tribunal undertook of its own volition. We bear in mind the undisputed fact that TTPL had never doubted the fact that the assessee did possess share certificates of the 50,000 sweat equity shares which had been allotted to it. This aspect is also liable to be viewed in light of the well settled position in law of a share certificate being prima facie evidence of valid title. The litigation before the CLB had ensued only because of a refusal on the part of TTPL to record the name of the assessee in the Register of Members. It was in the aforesaid context that the assessee had addressed a prayer for specific performance before the CLB. From a plain reading of the various clauses of the Settlement Agreement which have been extracted hereinbefore, it is manifest that the consideration was concerned with an unconditional and irrevocable relinquishment of the right of the assessee to seek and enforce the registration of the shares held by it. As it is apparent from a reading of Clause 5 of the Settlement Agreement, it was the relinquishment of the aforesaid right which formed the basis for the assessee being compensated by TTPL. This is further fortified by the fact that the assessee undertook not to take any steps to enforce any right, title or interest in the shares in question. The consideration thus appears to be undeniably connected with the relinquishment of all claims which could have been raised by the assessee in respect of sweat equity. Regard must be had to the fact that Section 17 of the Act, while seeking to define the expression salary , includes perquisites in terms of sub-section (2) and sweat equity being a constituent of perquisites by virtue of clause (vi) thereof. Sub-section (3) to Section 17, on the other hand, deals with profits in lieu of salary . In our considered opinion, the fundamental mistake which the Tribunal committed was failing to bear in mind the distinction between a perquisite and profits in lieu of salary and both of which are dealt with separately in Section 17. Profits in lieu of salary , which is spoken of in Section 17 (3), deals with compensation received by an assessee from his employer or former employer in connection with the termination of his employment or on a modification of terms and conditions of service. Tribunal has fundamentally erred in ignoring the indubitable position of the employment of the assessee having been brought to an end on 24 August 2010 itself and thus before the action came to be even laid or instituted before the CLB. Regard must also be had to the fact that in the petition, which was filed before the CLB, there was no relief which was sought with respect to the cessation of employment of the assessee or the validity of termination of employment. As noticed hereinabove, the principal relief sought by the assessee in those proceedings was for the registration of the 50,000 sweat equity shares in his name and thus essentially of specific performance. Viewed in light of the above, it becomes apparent that the Tribunal clearly erred in viewing the settlement consideration as being payment connected to the termination of the assessee s employment. We find that it is essential to note at this juncture that clause (iii) of Section 17 (3) is liable to be construed bearing in mind the subjects which are covered in the preceding parts of that sub-section. Consequently, the lump sum amount which is spoken of in clause (iii) would also have to draw colour and meaning from compensation received in connection with termination of employment or modification of terms and conditions of service and which are the principal subjects of profits in lieu of salary . The ultimate exercise undertaken by the Tribunal of segregating the consideration into two components is thus clearly rendered unsustainable considering the reasons recorded hereinabove. Since the respondents had failed to either doubt or question the entitlement of the assessee to the 50,000 shares, there existed no justification to enter that thicket. All that the Tribunal was called upon to examine was whether the settlement consideration was liable to be construed as capital gains or taxed as profits in lieu of salary . In light of what we have found above, the consideration could not have possibly or justifiably been placed in the category of profits in lieu of salary . We, consequently, allow the instant appeal and set aside the order of the Tribunal - The question of law shall stand answered in favour of the appellant-assessee.

Summary

Issues Involved:
1. Bifurcation of settlement amount into capital gains and income from salary.
2. Treatment of compensation received for relinquishment of rights in shares.
3. Applicability of Section 17 (3) (iii) of the Income Tax Act.
4. Validity of Tribunal's decision to bifurcate the settlement amount.

Detailed Analysis:

1. Bifurcation of Settlement Amount into Capital Gains and Income from Salary:
The appellant-assessee challenged the Income Tax Appellate Tribunal's decision to bifurcate the settlement amount of INR 3.03 crores into two parts: one part treated as capital gains under Section 48 and the other as income from salary under Section 17 (3) (iii) of the Income Tax Act. The Tribunal's approach was to classify 15,000 shares as eligible for capital gains and the remaining 35,000 shares as taxable under the head of salaries. This bifurcation was not advocated by the respondents and was an exercise undertaken by the Tribunal on its own volition.

2. Treatment of Compensation Received for Relinquishment of Rights in Shares:
The assessee, who was employed with Tek Travels Pvt. Ltd. (TTPL) and entitled to sweat equity, received 50,000 sweat equity shares. Upon termination of employment, TTPL refused to register these shares in the assessee's name, leading to litigation before the Company Law Board (CLB). A settlement agreement was reached, and the assessee received INR 3.03 crores for relinquishing all rights to the shares. The Assessing Officer (AO) initially treated this amount as income from salaries, but the Commissioner of Income Tax (Appeals) [CIT(A)] held it as capital gains. The Tribunal, however, partially reversed this, leading to the present appeal.

3. Applicability of Section 17 (3) (iii) of the Income Tax Act:
Section 17 (3) (iii) deals with 'profits in lieu of salary,' which includes compensation received in connection with the termination of employment. The Tribunal and AO's view that the settlement amount was connected to the employer-employee relationship and thus should be taxed under this section was challenged. The High Court noted that the employment had ended before the litigation and that the settlement was related to the shares, not employment termination.

4. Validity of Tribunal's Decision to Bifurcate the Settlement Amount:
The High Court found that the Tribunal's decision to bifurcate the settlement amount was unjustified. The settlement consideration was connected to the relinquishment of rights in the shares, not to the termination of employment. The Tribunal failed to recognize the distinction between 'perquisites' and 'profits in lieu of salary' under Section 17. The consideration received was for the unconditional and irrevocable relinquishment of rights to the shares, making it a capital asset transfer.

Conclusion:
The High Court concluded that the Tribunal erred in bifurcating the settlement amount and treating part of it as income from salary. The settlement consideration was to be recognized as capital gains. The appeal was allowed, and the Tribunal's order was set aside. The question of law was answered in favor of the appellant-assessee, confirming that the settlement consideration was liable to be recognized as capital gains.