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TMI Blog2016 (7) TMI 971X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit in lieu of Salary and not u/s. 28[va] of the Act as done by the learned A 0, under the facts and in the circumstances of the appellant's case . 2.2 The learned CIT[A] ought to have appreciated that the so-called non- compete agreement is invalid in terms of Section 19[1] [g] of the Constitution and Section 27 of the Contract Act is un-enforceable as being invalid and void in restraint of trade and therefore, invocation of Section 28[va] of the Act and sec. 17[3][iii] of the Act both are misconceived and he ought to have deleted the addition even on the alternate view taken by him by considering the same under provisions of Sec. 17[3][iii] not invoked by the learned A at all. 2.3 Without prejudice to the above, the provisions of Sec. 17[3][iii] is not applicable at all as the entitlement and the payment was made after the cessation of the employment and is not pursuant to and part of any valid contract of employment earlier to be considered as profit in lieu of salary for applying the provisions of Sec. 17[1][iii]. 2.4 Without prejudice to the above, the learned CIT[A] having held that the sum is not liable to tax under 28(1)(ii) could not and was not justified in sus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said agreement is unenforceable as being invalid and void in restrain of trade. The CIT (Appeals) held that this payment is covered under the provisions of section 17(3)(iii) of the Act as profit in lieu of salary. Thus the CIT (Appeals) rejected the contention of the assessee by giving a different reasoning and holding that the said amount is assessed to tax as salary or payment as profit in lieu of salary under section 17(3)(iii) instead of income from "Business or Profession" under Section 28(va) of the Act held by the Assessing Officer. 4. Before us, the learned Authorised Representative of the assessee has submitted that the assessee is an individual and is carrying on profession of C.A. and had never carried any business in the past to derive any business income. In March, 2005, the assessee was employed as an Executive by DAL vide Agreement dt.1.3.2005. During the year under consideration the assessee was working as Director (Finance) when the assessee resigned on 24.1.2007 which was accepted by DAL vide Board Resolution dt.25.1.2007. The learned Authorised Representative has referred to the terms and conditions of the employment agreement as well as the terms of the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore the payment is on account of cessation of the employment. He has relied upon the order of the CIT (Appeals). 6. We have considered the rival submissions as well as the relevant material on record. Before proceeding to examine and analyse the facts as well as the rival contentions of the parties we make it clear that the Assessing Officer assessed the amount of Rs. 2.5 Crores received by the assessee under non-compete fees agreement as business income under Section 28(va) of the Act however, the CIT (Appeals) held that the said amount is taxable under Section 17(3)(iii) and not 28(va) of the Act in para 3.11 and 3.12 as under : "3.11 However, in my opinion, the Act covers such payments as profit in lieu of salary and to make it only abundant clear and to plug possible leakage of revenue clause (iii) was inserted under Section 17(3) of the Act with effect from 1.4.2002, which reads as under : "[(iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person (A) Before his joining any employment with that person; or (B) After cessation of his employment with that person.]" 3.12 From a perusal of section 17(3)(iii), it is eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation") to any third person unless such Confidential Information has been previously disclosed to the public by the Company or is in the public domain [other than by reason or Executive's breach of this section 6(b)]" Therefore during the course of employment the interest of the company was protected by this clause of employment agreement. However post cesassion of employment this clause cannot be invoked being not unforceable after termination of employment. Therefore in order to protect the interest of DAL the parties entered into an agreement dt.1.2.2007 called Non-compete Agreement. Clauses 2 & 3 of the said agreement dt.1.2.2007 reads as under : "2. That for consideration stated herein, the Retiring Officer hereby agree and consent that for a period of next three years from the date hereof : (a) Shall not accept any employment on fulltime or part time basis relating to Airline Business. (b) Shall not accept holding of any office in the Board of Directors of any body corporate engaged in or propose to engage in the Airline Business; (c) Shall not provide any consultancy, advisory services or retainership to any person engaged or proposed to be engaged in the Airline Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Agreement is further evident from the fact that ACEE stated in its letter dated 25th August 2007 that it was making the payment of Rs. 1.95 crores as "a one-time payment to you for non-commencement of employment as proposed." 14. The Court is unable to accept the interpretation sought to be placed on the plain language of Section 17 (3) (iii) of the Act by the Revenue. The words "from any person" occurring therein have to be read together with the following words in sub-clause (A): "before his joining any employment with that person". In other words, Section 17 (3) (iii) (A) pre-supposes the existence of an employment, i.e., a relationship of employee and employer between the Assessee and the person who makes the payment of "any amount" in terms of Section 17 (3) (iii) of the Act. Likewise, Section 17 (3) (iii) (B) also pre-supposes the existence of the relationship of employer and employee between the person who makes the payment of the amount and the Assessee. It envisages the amount being received by the Assessee "after cessation of his employment". Therefore, the words in Section 17 (3) (iii) cannot be read disjunctively to overlook the essential facet of the provision, v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first and the principal issue is whether the sum of Rs. 1,32,00,000 received by the appellant from Suzuki India is taxable as "profits in lieu of salary" under section 17(3) of the Act. The second issue is that, if the answer to the first issue is in the negative, whether the said sum is taxable under section 28(va) of the Act. The question whether the sum of Rs. 1,32,00,000 is taxable as "profits in lieu of salary" hinges on the status of the appellant. Was the appellant an employee of Suzuki India or not? We hold that the appellant was a joint venture partner in that company, and not an employee of the company. 16. In Ram Prashad v. Commissioner of Income-tax, New Delhi (1972) 86 ITR 122, the Supreme Court has observed at page 126 that: "A servant acts under the direct control and supervision of his master. An agent, on the other hand, in the exercise of his work, is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time to time by his principal." In the course of the assessment proceedings, the Assessing Officer had asked Suzuki I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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