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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 ..... ed as capital gains under section 48, and the remaining amount is to be treated as income from salary under section 17 (3) (iii) of the Act?" 2. The essential facts which merit notice for the purposes of answering the question which stands posited are as follows. The assessee is an individual resident who was employed with Tek Travels Private Limited [TTPL] in the capacity of Chief Operating Officer during the period 01 December 2007 to 24 August 2010. In terms of his employment agreement, apart from yearly compensation, the assessee was also entitled to sweat equity in accordance with the stipulations of the said agreement. 3. It is the case of the assessee that till 31 March 2010, no shares were issued or allotted to him. This issue appears to have been raised with TTPL and which consequently increased its share capital by issuing 6,00,000 fresh equity shares in Financial Year [FY] 2010-11, taking its total issued share capital to 16,00,000. On 08 June 2010, TTPL issued 50,000 sweat equity shares in the name of the assessee and consequential share certificates were also handed over. Shortly thereafter, on 24 August 2010, TTPL terminated the assessee's employment. 4. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement Amount, the First Party: (i) hereby unconditionally and irrevocably relinquishes his claim to any right and entitlement to enforce registration of the Shares in his favour; (ii) shall immediately, upon payment of the Settlement Amount, hand over all share certificates in relation to the Shares, in original, to the Second Party; (iii) shall not seek to enforce any right, title or interest in the Shares or the share certificates; (iv) shall not seek to enforce any right, title or interest in the Second Party arising out of or with respect to his previous employment with the Second Party; and (v) shall withdraw the Company Petitions filed against the Second Party within 5 business days of receipt of payment of the Settlement Amount. 6. The First Party confirms that the Second Party shall be free to deal with the said Shares and the share certificates in any manner it deems fit and proper as per law. 7. The Parties further undertake not to initiate any other legal proceedings against each other, in future, regarding claims of ownership or registration of the Shares or in relation to the First Party's employment with the Second Party. 8. The Parties confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. TTPL. Subsequent to the appellant's petition to Company Law Board, TTPL agreed for a settlement and accordingly Rs. 3,03,75,000/- towards full and final settlement in lieu of unconditional and irrevocable relinquishment of his right and enforcing registration and handing over share certificate in original to TTPL. 5.3 From the impugned order, it is observed that the appellant's claim in respect of the compensation received from TTPL was treated as 'Income from Salary' on the basis of the provisions of the Act u/s 17 (1) (iv) and that TDS u/s 192 was deducted by TTPL thereon. However, as contended by the appellant and as per* the extant provisions of law, it is observed that in case of a capital asset u/s 2 (14) of the Act, even the right acquired falls under the ambit of Section 2 (14). Accordingly, the compensation received for foregoing rights towards equity shares is a transfer of capital assets, taxable as capital gain under the Act. Further, it is observed that capital gains arise on 'transfer' of a capital asset. Section 2 (47) of the Act defines 'transfer' in relation to a capital asset which includes the extinguishment of any rights therein [2 (47)(ii)]. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ender of a mere right to sue cannot possibly be viewed as transfer of a capital asset. Rather, the entire amount as received by the assessee in pursuance of the Settlement Agreement would constitute capital receipts, and thus not be chargeable to tax at all. 13. In support of the aforesaid contention, Mr. Kirpal firstly placed reliance upon the following passages from the decision of this Court in Commissioner of Income-Tax, Delhi (Central) vs. J. Dalmia 1984 SCC OnLine Del 365: "9. We do not find any exception under the I.T. Act, though the word "transfer" in relation to a capital asset has been defined in s. 2 (47) of the Act, which includes "sale, exchange or relinquishment of the asset or the extinguishment of any rights therein". The damages which were received by the assessee cannot be said to be on account of relinquishment of any of his assets or on account of extinguishment of his right of specific performance under the contract for sale. 10. Under s. 5 of the Transfer of Property Act, transfer of "property" means an act by which a person conveys property to another and "to transfer property" is to perform such act. A mere right to sue may or may not be property but i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gains. xxxx xxxx xxxx 10. It may not be out of place to mention here that Dr. Balasubramanian had strenuously argued that, as a result of the breach of the agreement, the assessee acquired another right, i.e., the right to receive damages and that the right originally acquired in 1945 did not really come to an end on the breach of contract but was converted into another right, i.e., the right to receive damages for breach of contract. When this right materialised and the amount of damages was specified in the consent decree of the court, the amount so received represented the consideration for the transfer of the original right. His contention, thus, was that the assessee's right to have the lease deed executed under the agreement of 1945 was, as a matter of fact, extinguished during the previous year only. We find it difficult to accept this argument of Dr. Balasubramanian for more than one reason. It is trite law that income can be held to accrue only when the assessee acquires a right to receive the income. Unlike compensation payable by the State when it acquires a citizen's land under the Acts such as the Land Acquisition Act where the right to receive compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decree of the learned single judge was challenged in appeal and the appeal was dismissed in the year 1965 only. Thus, even a mere right to sue for damages for breach of contract could not be said to have accrued to the assessee until then. The dismissal of the appeal does not certainly improve the mere right to sue qualitatively. At best, the position that the Commissioner was to take accounts for determining the amount of compensation payable by way of damages for the breach of contract, if any, revived thereby. This only meant that the Commissioner would then go into all the relevant questions and recommend damages if he is satisfied that the assessee is entitled to the damages. It is true that, in the year 1968, the Commissioner submitted his report whereby he recommended damages to the extent of Rs. 10,92,000. However, as stated earlier, both the parties filed their objections to the report and but for the compromise reached between the parties, there would have been prolonged litigation between the parties and it is difficult to say with any amount of certainty as to what would have been the fate of the litigation. In our judgment, the only reasonable conclusion is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Assistant Commissioner of Income-Tax (2010) 2 SCC 525: "8. For the purposes of Section 48 of the Act, one must keep in mind an important principle, namely, that chargeability and computation has to go hand in hand. In other words, computation is an integral part of chargeability under the Act. It is for this reason that we have opined that the right to subscribe for additional offer of shares/debentures comes into existence only when the company decides to come out with the rights offer. It is only when that event takes place, that diminution in the value of the original shares held by the assessee takes place. One has to give weightage to the diminution in the value of the original shares which takes place when the company decides to come out with the rights offer. For determining whether the gain/loss of renunciation of right to subscribe is a short-term or long-term gain/loss, the crucial date is the date on which such right to subscribe for additional shares/debentures comes into existence and the date of renunciation (transfer) of such right. 9. Our view is based on the judgement of this Court in Dhun Dadabhoy Kapadia v. CIT [(1967) 63 ITR 651 (SC)] which has taken the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right. Looked at in this manner also, it is clear that the net capital gain by her would be represented by the amount realised by her on transferring the right to receive new shares, after deducting therefrom the amount of depreciation in the value of her original shares, being the loss incurred by her in her capital asset in the transaction in which she acquired the right for which she realised the cash. This method of looking at the transaction also leads to the same conclusion which we have indicated in the preceding paragraph." (emphasis supplied) 11. Section 48 deals with mode of computation of income chargeable under the head "Capital gains". Under that section, such income is required to be computed by deducting from the full value of the consideration received as a result of the transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. This much is clear from the following observations of the court: xxxx xxxx xxxx 14. This Court is in agreement with the above reasoning. That apart, in the present case, the Petitioner had acquired right to a specific plot; furthermore, the interest was in the nature of an actionable claim, which could be asserted in a legal proceeding. The tax authorities had issued a no objection certificate in respect of the transaction. In these circumstances, the reporting of the amount received as capital gains was correct. Moreover, Calcutta Discount Ltd. v. ITO, 1961 (41) ITR 191 (SC) is an authority for the proposition that as long as the assessee makes a full and true disclosure of the income, the fact that it might claim that as falling under one head which is ultimately not accepted, would not make it a wrong disclosure, or suppression. The question as to the proper assessability of any amount, to income tax falls within the domain of the tax adjudicator. 15. In view of the above discussion, the writ petition is entitled to succeed; the reassessment proceedings are hereby quashed. The petition and accompanying application consequently are allowed, without any order as to costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Tribunal, the principal argument of the assessee had proceeded on capital gains. We, consequently, find no justification to test the correctness of the view expressed by the Tribunal based on the argument of relinquishment of a right to sue. 26. That then takes us to the principal question of whether the Tribunal was justified in bifurcating the settlement consideration between salary and capital gains. We note that a bifurcation of the consideration amount between salary and capital gains was one which was never advocated by the respondents. It thus clearly appears to represent an exercise which the Tribunal undertook of its own volition. 27. We bear in mind the undisputed fact that TTPL had never doubted the fact that the assessee did possess share certificates of the 50,000 sweat equity shares which had been allotted to it. This aspect is also liable to be viewed in light of the well settled position in law of a share 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally of specific performance. Viewed in light of the above, it becomes apparent that the Tribunal clearly erred in viewing the settlement consideration as being payment connected to the termination of the assessee's employment. 31. We find that it is essential to note at this juncture that clause (iii) of Section 17 (3) is liable to be construed bearing in mind the subjects which are covered in the preceding parts of that sub-section. Consequently, the lump sum amount which is spoken of in clause (iii) would also have to draw colour and meaning from compensation received in connection with termination of employment or modification of terms and conditions of service and which are the principal subjects of 'profits in lieu of salary'. 32. The ultimate exercise undertaken by the Tribunal of segregating the consideration into two components is thus clearly rendered unsustainable considering the reasons recorded hereinabove. Since the respondents had failed to either doubt or question 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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