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TMI Blog2024 (8) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... certificate being prima facie evidence of valid title. The litigation before the CLB had ensued only because of a refusal on the part of TTPL to record the name of the assessee in the Register of Members. It was in the aforesaid context that the assessee had addressed a prayer for specific performance before the CLB. From a plain reading of the various clauses of the Settlement Agreement which have been extracted hereinbefore, it is manifest that the consideration was concerned with an unconditional and irrevocable relinquishment of the right of the assessee to seek and enforce the registration of the shares held by it. As it is apparent from a reading of Clause 5 of the Settlement Agreement, it was the relinquishment of the aforesaid right which formed the basis for the assessee being compensated by TTPL. This is further fortified by the fact that the assessee undertook not to take any steps to enforce any right, title or interest in the shares in question. The consideration thus appears to be undeniably connected with the relinquishment of all claims which could have been raised by the assessee in respect of sweat equity. Regard must be had to the fact that Section 17 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entitlement of the assessee to the 50,000 shares, there existed no justification to enter that thicket. All that the Tribunal was called upon to examine was whether the settlement consideration was liable to be construed as capital gains or taxed as profits in lieu of salary . In light of what we have found above, the consideration could not have possibly or justifiably been placed in the category of profits in lieu of salary . We, consequently, allow the instant appeal and set aside the order of the Tribunal - The question of law shall stand answered in favour of the appellant-assessee. - HON'BLE MR. JUSTICE YASHWANT VARMA HON'BLE MR. JUSTICE RAVINDER DUDEJA For the Appellant Through: Mr. Saurabh Kirpal, Sr. Adv. with Mr. Aniket D. Agarwal, Ms. Adya Luthra and Mr. Samarth Chaudhari, Advs. For the Respondent Through: Mr. Shlok Chandra, Sr. Standing Counsel with Ms. Madhavi Shukla, JSC and Ms. Priya Sarkar, JSC with Mr. Sudarshan Roy and Ms. Kavita Rani, Advs. JUDGMENT YASHWANT VARMA, J. 1. The appellant-assessee impugns the order of the Income Tax Appellate Tribunal [Tribunal] dated 15 December 2022. We had by our order of 11 May 2023 admitted this appeal on the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 towards full and final settlement of all disputes and differences with TTPL. The Settlement Agreement also records the assessee agreeing to unconditionally and irrevocably relinquishing all his rights and entitlement in respect of registration of the 50,000 shares and to consequently hand over the share certificates in original to TTPL. The assessee, further and in terms of the stipulations contained in the Settlement Agreement, gave up all rights to seek enforcement of any title or interest in the said shares. 6. The relevant clauses of the Settlement Agreement are reproduced hereinbelow: 1. The Second Party shall pay to the First Party, an amount of Rs. 3,03,75,000 (Rupees Three Crores Three Lacs Seventy Five Thousand only) ( Settlement Amount ), in full and final settlement of all disputes and differences between the Parties. 2. The Parties further agree that it shall be the First Party who shall deposit the applicable taxes on the said amount of Rs. 3,03,75,000 (Rupees Three Crores Three Lacs Seventy Five Thousand only). The Second Party represents that it shall deduct tax at source on the aforesaid Settlement Amount, at the maximum rate of 30%, and the net amount payable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. 8. According to the AO, the settlement amount was not liable to be treated as capital gains since TTPL had deducted tax thereon under Section 192. It further took the view that the surrender of the claim or a right to sue emanated essentially from the employer-employee relationship which had existed between the parties. It also took into consideration the fact that the shares were not registered in the name of the assessee and thus ultimately came to hold that the settlement amount essentially represented profits in lieu of salary , received in lump sum after cessation of employment. 9. Aggrieved by the aforesaid, the assessee approached the Commissioner of Income Tax (Appeals) [CIT(A)] . The CIT(A) in terms of its order dated 21 February 2018 deleted the sole addition made by the AO and held that the amount of INR 3.03 crores was chargeable to tax as capital gains and not under the head of salaries . We deem it apposite to extract the following passages from the decision of the CIT(A) hereinbelow: 5.2 It is gathered from the appellant's submission that the appellant was employed earlier by M/s. Tek Travels Pvt. Ltd. (TTPL) and entitled to yearly compensation plus 3% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the 15,000 eligible shares alone should be treated as taxable under the head capital gains while the balance 35,000 shares should be taxed in accordance with the provisions of Section 17 (3) (iii). It is aggrieved by the aforesaid decision of the Tribunal that the assessee has approached this Court. 11. Mr. Kirpal, learned senior counsel appearing in support of the appeal, at the outset submitted that the bifurcation of the 50,000 shares received by the assessee which was undertaken by the Tribunal is wholly untenable since no such contention was either raised by the respondents nor was such a submission embodied in the various grounds of appeal which were filed before it. According to Mr. Kirpal, the respondents had at no stage either questioned the issuance of 50,000 shares to the assessee or the fact that the assessee held share certificates in evidence thereof. Bearing in mind the unequivocal stipulations contained in the Settlement Agreement, Mr. Kirpal asserted that the Tribunal was clearly unjustified in taking the view that the assessee was only entitled to 15,000 shares as sweat equity. The Tribunal, in that sense, according to Mr. Kripal has constructed a case whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... makes it unnecessary to go into this question. 11. Accordingly, we answer the question in the negative and in favour of the assessee. We leave the parties to bear their own costs. 14. Mr. Kirpal also sought to draw sustenance from the following pertinent observations as rendered by the Bombay High Court in Commissioner of Income-Tax vs. Abbasbhoy A. Dehgamwalla 1991 SCC OnLine Bom 644: 6. Placing reliance on the decisions of our High Court in the cases of CIT v. Tata Services Ltd., [1980] 122 ITR 594 and CIT v. Vijay Flexible Containers, [1990] 186 ITR 693, Dr. Balasubramanian, learned counsel for the Revenue, submitted that the assessee's right to get the deed of conveyance executed under the 1945 contract constituted a capital asset and when the amount of compensation was received by the assessee in lieu of that right, the amount so received was taxable as income under the head Capital gains . Dr. Balasubramanian referred to sections 45, 48 and 2 (47) of the Income-tax Act, 1961, to show that capital gains was chargeable on the transfer of a capital asset and that the word transfer as defined in section 2 (47) included within it not only sale or exchange but also relinquishm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty of any kind . The question of the assessee's right under the agreement of 1945 being converted or substituted by another right which can be said to be a capital asset does not, therefore, arise. In the next place, the right to sue for damages for breach of contract no doubt is capable of maturing into a right to receive damages for breach of contract. But that happens only when the damages claimed for breach of contract are either admitted or decreed and not before. For this purpose, the first stage is a finding as to the breach of contract. The second stage will be a finding that the party claiming damages for breach of contract has established that it suffered loss as a result of breach of contract by the other party and is required to be compensated by way of damages for breach of that contract. The last stage is that the amount of loss established to have been suffered by the assessee is either agreed to by the other party or decreed by the court. In the present case, the learned single judge did not even pass a decree for damages. What he decreed was only this that the Commissioner was directed to take accounts and to determine the compensation payable, if any, by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the amount of INR 3.03 crores even if assumed to be exigible to tax could have, at best, been viewed as capital gains. It was his submission that the Tribunal has committed a manifest illegality while artificially bifurcating a composite settlement amount into capital gains and salaries . According to learned senior counsel, the Tribunal has clearly failed to bear in mind the undisputed fact that the assessee held share certificates in evidence of the 50,000 shares which had been allotted to him and pointed out that the assessee was constrained to approach the CLB since TTPL was refusing to enter his name in the Register of Members and thus formally recognize the allotment of 50,000 shares. 16. Learned senior counsel laid emphasis on the CLB having been petitioned essentially for the purposes of enforcing specific performance and for TTPL being required to give effect to the issue and allotment of shares. According to Mr. Kirpal, the amount of INR 3.03 crores was thus indelibly connected to the claim of the assessee to the 50,000 shares as opposed to any employment condition or the termination of his employment. 17. Mr. Kirpal submitted that it is well settled in law that a ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because of her ownership of the old 710 ordinary shares, and when the Board of Directors of the company passed a resolution for issue of new shares, this right of the appellant matured to the extent that she became entitled to receive 710 new shares. This right could be exercised by her by actually purchasing those shares at the prescribed rate, or by renouncing those shares in favour of another person and obtaining monetary gain in that transaction. At the time, therefore, when the appellant renounced her right to take these new shares, the capital asset which she actually possessed consisted of her old 710 shares plus [Ed.: The word plus is emphasised in original also.] this right to take 710 new shares. *** In the alternative, the case can be examined in another aspect. At the time of the issue of new shares, the appellant possessed 710 old shares and she also got the right to obtain 710 new shares. When she sold this right to obtain 710 new shares and realised the sum of Rs 45,262.50p., she capitalised that right and converted it into money. The value of the right may be measured by setting off against the appreciation in the face value of the new shares the depreciation in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is correct and the computation of income made by the Department is erroneous. 17. Accordingly, the civil appeals filed by the assessees stand allowed with no order as to costs. 18. It was his submission that viewed in the aforesaid light, it would be manifest that the right to the sweat equity issued to the assessee, including the right to enforce the same, would constitute a capital asset as understood in terms of Section 2 (14) of the Act and the surrender or relinquishment of the capital asset qualifying as a transfer under Section 2 (47). 19. Mr. Kirpal further submitted that High Courts across the country have consistently recognized the right of subscription to shares as being a capital asset as would be evident from the decisions in Hari Brothers Pvt. Ltd. vs. Income Tax Officer 1963 SCC OnLine Punj 398 and Chittharanjan A. Dasannacharya vs. Commissioner of Income-Tax Anr. 2020 SCC OnLine Kar 3442. 20. Mr. Kirpal lastly relied upon the following passages from the decision of the Court in M/s Simka Hotels Resorts vs. Deputy Commissioner of Income-Tax 2013 SCC OnLine Del 244: 13. The decision in J.K. Kashyap (supra) is an authority for the proposition that even when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration would thus clearly fall within the residuary clause comprised in Section 17 (3) (iii), since the same clearly amounted to a lump sum amount received after cessation of employment. 23. It was also Mr. Chandra s submission that the Revenue rightly took into consideration the admitted fact that the name of the assessee was not entered in the Register of Members and thus the Tribunal was justified in ultimately bifurcating and restricting the compensation amount between the sweat equity which could have been allotted to the assessee in terms of his employment contract and the balance being liable to be taxed as capital gains. 24. Having noticed the rival submissions, we at the outset note that while Mr. Kirpal did contend that the consideration received should be placed in the genre of monies received for giving up a right to sue, the record would reflect that the assessee had consistently taken the position that the settlement consideration was liable to be viewed as capital gains. Even before us, the argument resting on principles of the right to sue and the consequences recognizable in law in relation to the relinquishment of that right was addressed in the alternative. 25. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion salary , includes perquisites in terms of sub-section (2) and sweat equity being a constituent of perquisites by virtue of clause (vi) thereof. Sub-section (3) to Section 17, on the other hand, deals with profits in lieu of salary . In our considered opinion, the fundamental mistake which the Tribunal committed was failing to bear in mind the distinction between a perquisite and profits in lieu of salary and both of which are dealt with separately in Section 17. Profits in lieu of salary , which is spoken of in Section 17 (3), deals with compensation received by an assessee from his employer or former employer in connection with the termination of his employment or on a modification of terms and conditions of service. However, the Tribunal has fundamentally erred in ignoring the indubitable position of the employment of the assessee having been brought to an end on 24 August 2010 itself and thus before the action came to be even laid or instituted before the CLB. 30. Regard must also be had to the fact that in the petition, which was filed before the CLB, there was no relief which was sought with respect to the cessation of employment of the assessee or the validity of termina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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