2010 (4) TMI 130 - HC - Income Tax

Profit in lieu of salary Section 17(3) scope of Section 17(3) - exhaustive definition or only illustrative - After his retirement, assessee took up the profession of consultancy - The assessee filed a return of income of Rs.32,13,540/- and also claimed exemption of Rs.22,00,000/- being non-compete fee of a capital nature. assessee stated that the amount of Rs.22,00,000/- received from his former employer was exempted and the same was not taxable. Held that it is held that the payment of Rs.27,50,000 received by the assessee being solely as compensation for his agreement not to take up any competitive employment/assignment in future, the same, as rightly held by the Commissioner of Income-tax (Appeals) and the Tribunal, cannot be added for the purpose of Income tax for the year 2001-2002 - 17(3)(ii), which was inserted by the Finance Act, 2002 is only prospective in nature and not retrospective - Whenever enlarging the scope of existing provision and also including the particular transaction as income, the provision always comes into effect prospectively unless specifically stated that it operates retrospectively - if the object of the payment is unrelated to the relation between the employer and employee, it would not fall within the expression profit in lieu of salary under Section 17(3)(i) of the Act. - As stated above, unless a benefit/receipt is made taxable, it cannot be regarded as income . This is an important principle of taxation under the 1961 Act. Applying the above principle to the insertion of sub-clause (iiia) in section 17(2) one finds that for the first time with effect from April 1, 2000, the word cost stood explained to mean the amount actually paid for acquiring specified securities and where no money had been paid, the cost was required to be taken as nil. TDS deducted by the payer can not make non taxable income as taxable income - The argument does not hold good on the ground that the employer of the assessee had deducted the tax at source only on the advice of the tax consultant and also on abundant caution. The assesee also paid advance tax only at the instance of his counsel. Concession or consent certainly does not confer any jurisdiction on revenue to assess it. Therefore, the said factors do not help the revenue. In these circumstances, we are of the view that the amount received by the assessee is only a capital receipt and the same is not taxable

Issues Involved:
1. Taxability of Rs.22 lakhs received by the assessee as profits in lieu of salary.
2. Applicability of Section 17(3)(i) of the Income Tax Act to the Rs.22 lakhs received.
3. Nature of the definition of profits in lieu of salary under Section 17(3).
4. Retrospective effect of Section 17(3)(iii).
5. Taxability of lump sum amounts received from the employer post cessation of employment.
6. Legitimacy of the assessment officer's estimation of Rs.2 lakhs as monthly income of the assessee.
7. Validity of income estimation by the assessing officer in the absence of books of accounts.

Detailed Analysis:

1. Taxability of Rs.22 lakhs as profits in lieu of salary:
The Tribunal held that the Rs.22 lakhs received by the assessee was a non-compete fee and not profits in lieu of salary. The amount was paid to the assessee for agreeing not to engage in competitive employment for one year post-retirement. The Tribunal found that the payment was for restraining the assessee from taking up any employment and not for any future service.

2. Applicability of Section 17(3)(i):
Section 17(3)(i) pertains to compensation received in connection with the termination of employment or modification of employment terms. The Tribunal observed that the Rs.22 lakhs was not related to the termination of employment or modification of terms but was a non-compete fee. Hence, it did not fall under Section 17(3)(i).

3. Definition of profits in lieu of salary under Section 17(3):
The Tribunal clarified that the definition under Section 17(3) is inclusive and not exhaustive. It includes any compensation due to or received by an assessee from an employer or former employer. However, the Rs.22 lakhs received by the assessee was not compensation related to employment termination or modification but a non-compete fee.

4. Retrospective effect of Section 17(3)(iii):
Section 17(3)(iii) was introduced by the Finance Act, 2001, effective from April 1, 2002. The Tribunal held that this amendment is prospective and not retrospective. It cannot be applied to the assessment year 2001-2002, which is prior to its enactment.

5. Taxability of lump sum amounts post cessation of employment:
The Tribunal concluded that the Rs.22 lakhs received by the assessee was a capital receipt for agreeing not to engage in competitive employment and not taxable as salary. The Tribunal supported this with various case laws, including the Supreme Court's decision in Commissioner of Income Tax V. Best & Company (Pvt.) Ltd.

6. Legitimacy of the assessment officer's estimation of Rs.2 lakhs as monthly income:
The Tribunal found that the assessing officer's estimation of Rs.2 lakhs per month as professional income lacked basis. The assessee had provided a detailed account of professional income received through cheques, which was duly reflected in the bank statements. The Tribunal held that the estimation was unjustified.

7. Validity of income estimation in the absence of books of accounts:
The Tribunal noted that the assessee had maintained proper records of professional income received through bank transactions. The absence of traditional books of accounts did not justify the assessing officer's estimation. The Tribunal deleted the addition of Rs.4 lakhs made by the assessing officer, concluding that the estimation was without merit.

Conclusion:
The High Court upheld the Tribunal's decision, confirming that the Rs.22 lakhs received by the assessee was a non-compete fee and not taxable as salary. The Court also agreed that the estimation of professional income by the assessing officer was without basis. The appeal by the revenue was dismissed, and the Tribunal's order was confirmed.

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