Finance Bill 2018 - COMPENSATION – CAPITAL RECEIPT, IS ALSO PROPOSED TO BE TAXABLE INCOME

[CA DEV KUMAR KOTHARI]

Finance Bill 2018.

COMPENSATION –CAPITAL RECEIPT, IS ALSO PROPOSED TO BE TAXABLE INCOME-

FM sir, please make valid law. Follow man-ki-baat of PM.

In the Finance Bill compensations in relation to business as well as employment have been proposed to be included in income to be made taxable from AY 2019-20. In an earlier article, compensation relating to business were discussed by author. In this article compensation on termination of or variation in terms and conditions of employment is being considered.

From the memorandum explaining the proposals we find that even if compensation is on capital account and is a capital receipt, it will be taxable, knowing fully that it is not income but ‘capital’..

The question is whether, a compensation which is of capital nature can be taxed as income, when we find that the constitution of India permit imposition of tax on income being  in nature of profit or gains or revenue or earnings etc.

It appears that the provision to tax compensation which is of capital nature will not be valid and will be unconstitutional.

It appears that though PM Narendra Modi, and his ministers shows full respect to the Constitution of India, however, many actions taken by NAMO Sarkar and many provisions  legislated and proposed appears to be  not within the limited powers of the Central Government as conferred by the Constitution of India.

In man-ki-baat PM has said “Citizens and the administration must work in accordance with the Constitution ….”

    “ equality and sensitivity towards all was the unique characteristic of our Constitution. “It guarantees fundamental rights to each and every citizen…it protects their fundamental rights and safeguards their interests. It is our duty that we abide by our Constitution in letter and spirit. Citizens and administrators alike must move ahead in accordance with the spirit of our Constitution. The message that our Constitution conveys is that no one should be harmed in any way,” he said.

The proposals in the Finance Bill regarding compensation, even if of capital nature to be included in income to impose tax are, such provisions which cannot be considered constitutionally valid.

 When the Explanatory Memorandum itself admit such capital  nature ,then we can only say that NAMO SARKAR MANMAANI PE HAI – and approach appears to be ‘who care for the Constitution of India ‘. This may also be approach of the FM that let tax be imposed, who is going to challenge it?

And we will see if challenged and held invalid by Court.

From THE FINANCE BILL, 2018 (with highlights added)

21. Amendment of section 56

In section 56 of the Income-tax Act, in sub-section (2),––

(B) after clause (x), the following clause shall be inserted with effect from the 1st day of April, 2019, namely:-

“(xi) any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto.”.

 Notes on clause:

Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.

This amendment will take effect from 1st April, 2018.

It is also proposed to insert a new clause (xi) in sub-section (2) of the said section so as to provide that any compensation or other payment due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to income-tax under the head "Income from other sources".

This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years. (Clause 21)

From Memorandum explaining proposals:

Taxability of compensation in connection to business or employment

Under the existing provisions of the Act, certain types of compensation receipts are taxable as business income under section 28. However, the existing provisions of clause (ii) of section 28 is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation receipts in connection with business and employment is out of the purview of taxation leading to base erosion and revenue loss.

Therefore, it is proposed to amend section 28 of the Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be taxable as business income. It is further proposed that any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year 2019-20 and subsequent assessment years. [Clause 3, 9 & 21]