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2024 (2) TMI 106 - AT - Income TaxCharacterization of receipt - Compensation receipt on termination of contract - Addition under Section 28(ii)(e) - as per AO compensation is not reflected in the profit and loss account submitted for the year under consideration, thus said compensation is taxable u/s 28(ii)(e) read with the Board Circular No. 8/2018 dated 26.12.2018 - as per assessee its a capital receipt - HELD THAT - Compensation received by any person on termination or modification of the terms and conditions of any contract relating to his business is taxable under the head Profits and gains of business or profession . The question that needs to be addressed now is whether reference to business includes profession . In our considered opinion, wherever the Legislature thought of referring to both Business and Profession , it has used both the words in the enactment which means that wherever the word only Business is used, it does not include Profession . The phrase or profession has been inserted by the Finance Act, 2016 w.e.f 01.04.2017 which makes the intent of the Legislature absolutely clear that the Legislature wanted the insertion of the word Profession alongwith Business . Hon'ble Supreme Court in the case of G.K. Choksi Co 2007 (11) TMI 7 - SUPREME COURT made it clear that the word business occurring in clause (iv) of section 32(1) of the Act, by no stretch of imagination, can be said to include profession as well. By the same analogy, reference to business in section 32(ii)(e) of the Act would not amount to reference to profession. Applicability of provisions of section 28(ii)(e) - Impugned compensation whether received on termination or modification of terms and conditions of any contract - The word termination is used in reference to any on-going contract whereas the case of the assessee is non renewal of contract. In our humble opinion, non renewal does not mean termination. The assessee is a freelance journalist. She is not under employment of Spiegel Verlag. Therefore, there is no employer-employee relationship. The relevant clauses of the agreement mentioned elsewhere refer to renewal of the agreement which, if not renewed by 31.01.2000, will end on 30.04.2000. Since the contract was not renewed, it came to an end. Compensation received by the assessee is by way of mutual agreement between Spiegel Verlag and the assessee. When the dispute was sub judice before the Hon'ble High Court of Delhi, and the Division Bench disposed the appeal on finding that a settlement has taken place between Spiegel Verlag and the assessee on a payment of agreed sum. Thus, it can be seen from the above that non renewal of any contract does not amount to retrenchment. Considering the facts of the case in totality, we are of the considered view that provisions of section 28(ii)(e) do not apply on the given facts and therefore, the orders of the lower authorities are erroneous in law. Applicability of the provisions of section 56(xi) - Here also reference is termination of employment. For our detailed reasons given in herein above, we are of the opinion that this section is also not applicable on the given facts. Considering the facts of the case from all possible angles, we do not find any merit in the impugned addition. Therefore, the Assessing Officer is directed to delete the same. Thus as the assessee has never shown the compensation of Rs. 3 crores in her profit and loss account and only out of abundant precaution and to avoid future levy of interest, the assessee has paid self assessment tax. But the assessee has never taken a stand that the said compensation is taxable in her return of income. She has been consistently claiming that the said compensation, being a capital receipt, is not taxable. Assessee appeal allowed.
Issues Involved:
1. Applicability of Section 28(ii)(e) of the Income Tax Act. 2. Applicability of Section 56(2)(xi) of the Income Tax Act. 3. Nature of the compensation received by the assessee. Summary: 1. Applicability of Section 28(ii)(e) of the Income Tax Act: The primary issue was whether the compensation of Rs. 3 crores received by the assessee from M/s Spiegel Verlag is taxable under Section 28(ii)(e) of the Income Tax Act. The Assessing Officer believed that the compensation is taxable under this section, which applies to any compensation received in connection with the termination or modification of the terms and conditions of any contract relating to business. The Tribunal, however, clarified that the term "business" does not include "profession" unless explicitly stated by the legislature. The Tribunal referred to the Supreme Court's decision in G.K. Choksi & Co., which held that "business" and "profession" are distinct terms and cannot be used interchangeably. Therefore, Section 28(ii)(e) does not apply to the compensation received by the assessee, who is a freelance journalist. 2. Applicability of Section 56(2)(xi) of the Income Tax Act: The second issue was whether the compensation is taxable under Section 56(2)(xi), which pertains to any compensation received in connection with the termination of employment or modification of terms and conditions relating thereto. The Tribunal noted that the compensation was received due to non-renewal of the contract, which does not equate to termination. The Tribunal further stated that non-renewal of the contract does not amount to retrenchment as per Section 2(zh) of the Industrial Relations Code, 2020. Thus, Section 56(2)(xi) is also not applicable. 3. Nature of the Compensation Received: The assessee contended that the compensation received is a capital receipt and not taxable. The Tribunal observed that the compensation was received as part of an amicable settlement between the parties and not due to termination of employment. The Tribunal concluded that the compensation is not taxable under the provisions of the Income Tax Act. Conclusion: The Tribunal directed the Assessing Officer to delete the addition of Rs. 3 crores, as the compensation received by the assessee is not taxable under either Section 28(ii)(e) or Section 56(2)(xi) of the Income Tax Act. The appeal of the assessee was allowed.
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