2012 (5) TMI 42 - HC - Income Tax

Profit in lieu of salary for services rendered outside India - ITAT deleted the addition made by the AO Held that - Payment in question was received towards retirement benefit/severance/vacation engagement from the erstwhile employer on termination of employment in November, 1999 - employer was based in USA and services were rendered to the erstwhile employer in USA - the said amount cannot be taxed in India as the status of the assessee during the year in question was that of not ordinary resident - said income did not accrue or arise in India in terms of Section 6 and Section 9(1) (ii) - in favour of the assessee.

Summary

Issues:
1. Interpretation of Section 17(3)(i) of the Income Tax Act regarding addition of income as profit in lieu of salary.
2. Applicability of proviso to Section 5(1) to exclude a specific amount from total income.

Issue 1 - Interpretation of Section 17(3)(i) regarding addition of income as profit in lieu of salary:
The case involved a dispute regarding the addition of Rs.37,44,026 as profit in lieu of salary under Section 17(3)(i) of the Income Tax Act. The Assessing Officer contended that the amount received by the assessee represented profit in lieu of salary and was taxable. However, the CIT(Appeals) and the Tribunal both found in favor of the assessee. The CIT(Appeals) noted that the amount was received for past services rendered outside India and was not taxable in India under Section 5(1)(c) read with Section 9(1)(ii) of the Act. The Tribunal further clarified that since the amount was received as retirement benefit for services rendered outside India, it did not accrue or arise in India, and therefore, was not taxable in India. The Tribunal upheld the decision of the CIT(Appeals) to delete the addition, concluding that the amount did not fall under the total income of the assessee.

Issue 2 - Applicability of proviso to Section 5(1) to exclude a specific amount from total income:
The second substantial question of law revolved around the applicability of the proviso to Section 5(1) to exclude the amount of Rs.37,44,026 from the total income of the assessee. The CIT(Appeals) and the Tribunal both analyzed the provisions of Section 5 of the Income Tax Act. They emphasized that since the assessee was not an ordinary resident during the relevant assessment year and the amount was received for services rendered outside India, it did not fall under the purview of taxable income in India. The Tribunal specifically highlighted that under the proviso to Section 5(1), income accruing or arising outside India would not be included in the total income of a non-ordinary resident unless derived from a business controlled or a profession set up in India. As the amount was received as retirement benefit for services outside India and the foreign employer did not operate in India, the proviso to Section 5(1) applied, excluding the amount from the assessee's total income.

In conclusion, the High Court upheld the decisions of the CIT(Appeals) and the Tribunal, ruling in favor of the assessee and dismissing the appeal by the Revenue. The judgment clarified the non-taxability of the amount received by the assessee as retirement benefits for services rendered outside India, emphasizing the provisions of Section 5(1) and Section 9(1)(ii) of the Income Tax Act.