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TMI Blog2008 (4) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... n here is, whether the money which the assessee so received after his retirement under a restrictive covenant as a special compensation, in respect of which he was assessed for the year 2001-02, part of his income for the year in question as contended by the Revenue or is it of a capital nature as held by the Tribunal. 3. Omitting what is contentious the following facts which are material to decide the issue involved have been taken from the facts before the Tribunal. The assessee was in the employment of Grasim Industries Ltd. and at the time of retirement he was holding the position of executive president in Vikram Cement, Mumbai, of Grasim Industries Ltd. He started his career in the Grasim Industries Ltd. on October 5, 1954, and served for 46 years and during this period he held key positions as chief executive, senior vice president and executive president and retired on September 30, 2000. That during the tenure of service the assessee was assigned the core responsibility of erection and commencement of cement plant of 1.8 million tons capacity per annum at Raipur. As executive president and other assignments in Grasim Industries the assess attained considerable knowledge an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits extended to me by the unit from where, I am retiring, will be withdrawn immediately. No further requests in this matter will be appreciated by the unit, once the benefits are withdrawn. If any breach of my undertaking occurs, the management besides stopping the benefits may also recover the paid benefits from the date of such breach. 6. The determination by the management whether I am in 'employment with competitors' or is engaged in 'competitive employment' shall be final and binding." 5. The assessee showed the receipt of Rs. 27,50,000 in his return filed on March 31, 2002, for the assessment year 2001-02 and claimed before the Income-tax Officer as a non-taxable receipt being the compensation for not taking up any competitive employment under a restrictive covenant considering it as a capital receipt. The case was picked up for scrutiny and notice under section 143(2) of the Act was issued to the assessee on October 29, 2002. On January 30, 2003, the assessee was asked to submit a copy of the covenant dated October 21, 2000, and was asked to explain why this covenant be treated as capital receipt. In compliance with the said query the assessee filed a copy of letter dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital receipt. In the light of the above fact, please state and show cause as to why the receipt of Rs. 27.5 lakhs should not be treated as income as was rightly taxed by your employer-company. Please furnish the reply on March 24, 2003, as the case is being fixed on that day on request of your counsel Shri S. K. Saboo FCA, learned counsel." 7. The assessee filed his reply on March 24, 2003, reiterating that the amount of Rs. 27,50,000 received by him is a capital receipts arising out of restrictive covenants, therefore, not liable to be taxed. The assessee relied upon various judgments of the Income-tax Appellate Tribunal, High Courts and the apex court rendered on the issue. 8. The Assessing Officer, while discarding the submissions put forth by the assessee, held that the amount of Rs. 27,50,000 to be taxable and an order under section 143(3) was passed on March 28, 2003. Being aggrieved of the order of assessment, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). Whereupon the appellate authority upholding the challenge, held by his order dated July 2, 2003, as under: "I have gone through the records of the case, the written submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is evident from the latest amendment in the Act which has introduced section 17(3) (iii) with effect from year 2002-03. In view of this discussion, I am of the strong opinion that the arguments of the learned authorised representative should be accepted. In ASPY B Talati v ITO [2002] 75 TTJ (Mumbai) 106 the assessee received Rs. 1 lakh each from the company for the two relevant assessment years in appreciation of personal attributes and qualities, which were over and above his legal dues and claimed the amount for the two assessment years as exempt from tax. The Assessing Officer did not agree with the claim of the assessee. In first appeal, the Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. Giving the decision in second appeal, the Income-tax Appellate Tribunal, Mumbai "A" Bench held that the payment received by the assessee from the loyalty and sincerity towards the company at the time of resignation was not taxable under section 17(3) as provided in lieu of salary; such receipt was a capital receipt. In that case, there was not even a restrictive covenant. In spite of that the Tribunal has held the amount received as capital receipt and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year under appeal. The learned authorised representative had rightly placed reliance on the case of CIT v. Varas International P. Ltd. [2006] 283 ITR 484 (SC). In this case, it was held that for an amendment of a statute to be construed as being retrospective, the amended provisions itself should indicate either in terms or by necessary implication that it is to operate retrospectively. Thus, we find no infirmity in the order of the learned Commissioner of Income-tax (Appeals) which is sustained for the reasons given therein. In the result, the appeal of the Revenue is dismissed." 10. The present appeal is against the aforesaid order. 11. Relying upon the statutory provisions, i.e., section 17(3)(i) of the Act of 61 which stipulates that "(3) 'Profit in lieu of salary' includes— (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto." 12. It is urged by Shri R. D. Jain, learned senior counsel appearing for the Commissioner of Income-tax; that the restrictive covenant dated October 21, 2000, is merely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptember 30, 2000, when the assessee stood retired on attaining the age of superannuation, the payment subsequent to the said superannuation to honour the restrictive covenant was not under the service agreement. The finding of the Commissioner of Income-tax (Appeals) and that of the Tribunal that the payment was received by the assessee solely as compensation for not to take up any competitive employment/assignment being the finding of fact cannot be interfered in an appeal under section 260A of the Act of 1961. 14. In the matter relating to revenue as was held by the Division Bench of this court in the case of CIT v. Captain H. C. Dhanda [1970] 76 ITR 404; AIR 1970 MP 205 that the court must regard what is called "the substance of the matter" to bring the subject within the charge to a tax. And, therefore, the outward form of a transaction might be disregarded. This observation is based on the following statement of Lord Macmillan in the case of Hunter (H. M. Inspector of Taxes) v. Dewhurst [1932] 16 TC 635, 652 (CA). "The circumstance that a payment is described as 'compensation for the loss of office' is to my mind immaterial if the payment be in truth made as part of the bar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office, and in respect of his trade, if it is a question of a trade, and so on. You have to look at his point of view to see whether he receives it in respect of those considerations. That is perfectly true. But when you look at that question from what is described as the point of view of the recipient, that sends you back again, looking, for that purpose, to the point of view of the payer; not from the point of view of compellability or liability, but from the point of view of a person inquiring what is this payment for; and you have to see whether the maker of the payment makes it for the services and the receiver receives it for the services." 19. The Division Bench of this court in the case of Captain H. C. Dhanda [1970] 76 ITR 404, on relying upon 20 Haisbury's Laws of England, Simonds' edition, pages 14, 150-1 and 324-5 ; Simon's Income Tax, Replacement 1964-65, Vol. III, pages 109-13, Income-Tax Law and Practice, Plunket and Newport, 29th edition, pages 152-3; Principles of Income Taxation by Hannan, page 271 et seq. and The Meaning of Income in the Law of Income Tax, by F. E. La Brie, 1953, edition pages 205-15, stated that (page 427) "The rule that income-tax does not ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions in the form of section 17(3) (iii) introduced with effect form April 1, 2002, will not have any bearing upon the construction/interpretation of section 17(3) (i) and its applicability to the transactions which took place prior to April 1, 2002. 23. In the case of Best and Co. P. Ltd. [1966] 60 ITR 11, the Supreme Court while dealing with the case of the assessee-respondent, a company carrying on business in innumerable lines, acquired, in the course of its business, selling agencies from manufacturers both in and outside India. One of them was from Imperial Chemical Industries (Exports) Ltd., Glasgow, for distribution of their explosives in certain centres. This agency came into existence in 1900 and, although terminable at will, continued up to1947, in which year Imperial Chemical Industries (Exports) Ltd. decided that at all its agencies in India and Ceylon should be taken over by the Imperial Chemical Industries (India) Ltd. ; and gave notice to the respondent terminating the agency from April 1, 1948. Towards compensation for the transfer of the agency, the respondent was paid during the three successive years after the termination of the agency, certain amounts calc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer held that the receipt was of casual and non-recurring nature subject to the exemption prescribed under section 10(3). The Commissioner (Appeals) and the Tribunal held that the sum was not assessable. On appeal the High Court held: (i) that no material had been brought on record to show that the restrictive covenant was a sham agreement. The sum of Rs. 175 lakhs received by the assessee for entering into a restrictive covenant of not entering into a restrictive business was a receipt by the assessee of a capital nature and thus not liable to tax. (ii) That since the sum of Rs. 175 lakhs was a "capital receipt" having no cost of acquisition or he cost of acquisition could not be calculated, the sum was not taxable under section 45. (iii) That where the income cannot be charged under section 45 because of the inapplicability of the computation provided under section 48, it could not be taxed as a casual or non-recurring receipt under section 10(3) read with section 56 of the Act. The Tribunal was justified in aw in deleting the addition of Rs. 1,74,95,000, made by the Assessing Officer under the provision of section 10(3) of the Income-tax Act, 1961. 25. In the case of CIT v. Sar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom tax." 27. One more class of cases receiving "compensation for loss of employment" was noted by a Division Bench of this court in the case H. C. Dhanda [1970] 76 ITR 404, in paragraph 29 that where the contract itself ceases altogether and the sum becomes payable in consideration of the total abandonment or abrogation of all contractual rights which the recipient had under the contract. The sum received would not be assessable except to the extent provided. 28. Similarly, in paragraph 30 it was stated (page 430) "30. There is yet another class of case, as indicated by the Court of Appeal in Henley v. Murray (H. M. Inspector of Taxes) [1950] 31 TC 351, 363, 367, viz., where the payment is as damages for the repudiation of the service agreement due to the abrupt and unilateral act of the employer. In dealing with that class of case, Evershed, M. R. stated 'But there is another class of case where the bargain is, as it seems to me, of an essentially different character, for in the second class of case the contract itself goes altogether and some sum becomes payable for the consideration of the total abandonment of all the contractual rights which the other party had under the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of V. D. Talwar v. CIT [1963] 49 ITR (SC) 122; AIR 1963 SC 1582, wherein, their Lordships of the apex court, while dealing with the case of an employee who has received the amount of Rs. 25,200 towards notice pay, affirmed the view of the Patna High Court, that the assessee was liable for tax. The High Court on its turn had relied upon the judgment in Henry v. Arthur Foster [1932] 16 TC 605. It was observed by their Lordships in the case of V. D. Talwar [1963] 49 ITR (SC) 122, in paragraph 5 "This was a feature which distinguished Hunter (H. M, Inspector of Taxes) v. Dewhurst [1932]16 TC 605, 635 from the two Foster cases (supra) and it brought into relief the distinction between the two classes of cases, one in which there is deprivation of rights under the agreement and this would fall under compensation and the other in which there is no such deprivation. Perhaps Sir Raymond Evershed M. R (as he then was) had this distinction in mind when in Henley v. Murray (H. M. Inspector of Taxes) [1950] 31 TC 351 (CA) he said that there were two kinds of cases which fell for consideration under this head: one in which the right of one party to call upon the other for performan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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