2005 (7) TMI 40 - HC - Income Tax

Cessation of the employer and employee relationship - 1. Whether, the sum of Rs. 96,000 is liable to be taxed in accordance with the provisions of section 17(3)(i) read with section 17(1)(iv) of the Act for the assessment year 1980-81? - it appears that M/s. Sandvik Asia Ltd. had offered additional amount of Rs. 96,000 to the assessee on his agreeing not to accept similar job in any other competing organisation for a minimum period of two years - This payment of Rs. 96,000, thus, can hardly be linked up with the salary, or perquisites and profits. The receipt of this amount is after cessation of the employer and employee relationship. This receipt of amount, thus, can only be capital receipt. The Tribunal was, thus, not justified in treating it as part of the salary for the assessment year 1980-81. In view of our finding, the question is answered in the negative, i.e., in favour of the assessee and against the Revenue

Summary

Issues:
Interpretation of tax liability on a sum received post-employment termination.

Analysis:
The case involved a reference under section 256 of the Income-tax Act, 1961, where the Income-tax Appellate Tribunal referred a question of law regarding the tax liability of a sum of Rs. 96,000 received by the assessee post-employment termination for the assessment year 1980-81. The assessee was in service with a company as an industrial officer and resigned, with the resignation becoming effective on a specific date. The employer offered an additional amount to prevent the assessee from accepting offers from competitors, with the condition not to work with competitors for a specified period and not to disclose confidential information. The court analyzed the nature of the payment and concluded that it was a capital receipt, not linked to salary or profits, as it was received after the termination of the employer-employee relationship. Therefore, the court held that the sum of Rs. 96,000 was not liable to be taxed as part of the salary for the assessment year 1980-81. The judgment favored the assessee and went against the Revenue. The court disposed of the reference accordingly, with no order as to costs.