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Facts
The assessee received Rs. 45,00,000/- from his erstwhile employer, Coca-Cola India Inc., after termination of employment, under a "Deed of full and complete release and agreement on trade secrets and confidentiality" which included a non-compete clause. The Assessing Officer and CIT(A) treated this amount as "profits in lieu of salary" under Section 17(3)(iii) of the Income Tax Act, 1961, and enhanced the assessee's income for Assessment Year 2007-08, also levying interest and penalty. The assessee contended that this payment was a capital receipt and therefore not taxable.
Held
The Tribunal held that compensation received for a negative/restrictive covenant, such as a non-compete clause, is a capital receipt and not taxable, citing precedents from the Supreme Court and Delhi High Court. The Tribunal concluded that the payment of Rs. 45,00,000/- to the assessee was a capital receipt. Therefore, the Assessing Officer and CIT(A) erred in treating it as taxable income under the head 'profits in lieu of salary'.
Key Issues
Whether compensation received for a non-compete clause post-cessation of employment constitutes a capital receipt or 'profits in lieu of salary' taxable under Section 17(3)(iii) of the Income Tax Act, 1961.
Sections Cited
143(2), 142(1), 234A, 234B, 234C, 271(1)(c), 17(3)(i), 17(3)(iii), 28(va)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “F”: NEW DELHI
Before: SHRI S RIFAUR RAHMAN & SHRI VIMAL KUMAR
PER VIMAL KUMAR, JM
Appeal against order dated 1.7.2014 of the Learned Commissioner of Income Tax, Faridabad upholding order dated 31.12.2009 of the Asstt. Commissioner of Income, Tax Gurgaon (Assessing Officer) enhancing payment of Rs. 45,00,000/- under the profits in lieu of salary.
Brief facts of case are that assessee declared an income of Rs. 65,68,113/- by filing return for the assessment year 2007-08 on 31.07.2007. The case of assessee was picked up under
scrutiny. Notice under section 143(2) was issued to the assessee on 01.09.2008 asking the assessee’s appearance on 16.09.2008. Shri S.K. Virmani assessee’s representative appeared on behalf of assessee on 16.09.2008. Notice under section 142(1) along with questionnaire was issued on 20.08.2009 asking the assessee to appear on 3.09.2009. Shri S.K. Virmani advocate and assessee’s Representative appeared and filed submissions. Assessing Officer passed order dated 31.12.2009 and enhanced income of assessee by Rs. 45,00,000/- charge interest under section 234 ‘A’, ‘B’ ‘C’ and penalty under section 271(1)(c) of the Income Tax Act, 1961. 3. Assessee preferred appeal before Learned Commissioner of Income Tax which was dismissed vide order dated 01.07.2014. 4. Being aggrieved appellant assessee preferred present appeal. 5. Appellant/assessee submitted that Learned Assessing Officer and Learned Commissioner of Income Tax (Appeals) failed to appreciate that assessee had served notice of termination to its employer i.e. Coca-Cola India Inc. on 31.07.2006 and period expired on 31.10.2006. Assessee had entered into an agreement “Deed of full and complete release and agreement on trade secrets and confidentiality” with employer of assessee and other companies with their subsidiaries affiliates joint ventures and joint venture partners etc. The agreement provided for payment of five instalments from 30.11.2006 to 31.03.2007. None of the payments were amounts paid in lieu of salary of the assessee. Learned Assessing Officer and Learned CIT(A) erred in including payment of Rs. 45,00,000/- by erstwhile employer of the assessee
under the head “profits in lieu of salary”. In fact payments were capital receipts and could not have been included as payment in lieu of salary. Section 17(3)(i) would reveal that the same is applicable to receipts from any person after cessation of his employment with that person. However, in the present case the assessee was not employed with the companies qua whom the payments were made to them. Section 17(3)(iii) of the Income Tax Act reads as under:- “With effect from Assessment year 2002-03 the definition of profits in lieu of salary, in section 17(3) has been extended by insertion of sub-clause (iii) to include any amount due to or received whether in lumpsum or otherwise by an assessee from any person before joining any employment with that person or after cessation of such employment with that person.”
Appellant submitted that Section 28(va) provides “The new provision has been introduced to override the Court Judgements, which held that sum received for restrictive covenant is a capital receipt. However, there is no corresponding amendment to provide that the payee would get deduction as revenue expenditure...” 7. Appellant submitted that the distinction between section 17(3)(iii) and section 28(va) have been wrongly ignored by Learned Assessing Officer and Learned CIT(A). Hon’ble Supreme Court in the case of Guffic Chem Private Limited vs CIT (2011) 4 Supreme Court cases 254 has held that for the assessment year 1997-98 held that compensation attributable is capital receipt while compensation received for loss of agency is revenue receipt. Compensation received as non-competition fee was not taxable
upto assessment year 2003-04 and held that if a contract is entered into in ordinary course of business any compensation received for its termination (loss of agency) is revenue receipt. 8. Appellant submitted that Hon’ble High Court of Delhi in the case of CIT vs. Pritam Das Narang has held the orders of Learned CIT(A) provided that Clause (iii) of Section 17(3) had been brought in to account for joining bonus received from the prospective employer as profit in lieu of salary liable to be included as part of taxable income under the head ‘salary’ or also the amount paid to an employee. Such payment could not be taxed under section 17(3)(iii) of the Act. Hon’ble ITAT Delhi Bench in the case of Mrs. Nalini Mahajan vs ACIT (ITA No. 3130/Del/2018) decided on 6.04.2023 set aside the order of Learned Assessing Officer and Ld. CIT(A) wherein non-compete fee related to profession is made taxable only w.e.f. AY 2017-18 and non-compete fee in relation to profession for period prior to AY 2017-18 would be treated as capital receipt. 9. Appellant submitted that the appeal may be accepted. 10. Learned Departmental Representative submitted that after cessation of employment, assessee entered into an agreement “Deed full and complete release and agreement of trade secrets and confidentiality” and received Rs. 45,00,000/-. The assessee did not offer the amount of Rs. 45,00,000/- to tax as taxable claiming it to be a capital receipt. After amendment of section 17(3) of Income Tax Act, 1961 amount of Rs. 45,00,000/- received by assessee from his erstwhile employer was taxable. So appeal may be rejected.
From examination of record in light of the aforesaid rival contention it is crystal clear that assessee had given notice of termination to his employer Coca-Cola India Private Limited on 31.07.2006 and the notice period and period expired on 31.10.2006. An agreement “Deed of full and complete release and agreement on trade secrets and confidentiality” was between assessee and Coca-Cola Company, Coca-Cola India Inc., Coca- Cola Holdings India Inc., Coca-Cola India Private Limited and all their respective subsidiaries, affiliates, joint ventures, joint venture partners and benefit plans (collectively the “Company”). As per agreement, assessee received Rs. 45,00,000/- in five instalments from 30.11.2006 to 31.03.2007. The assessee had filed return for the assessment year 2007-08 as Rs. 65,68,113/-. On scrutiny notices under section 143(2) dated 1.09.2008 was issued. Assessee claimed that amount of Rs. 45,00,000/- was not taxable as it was a capital receipt given to him as ex-gratia by Coca Cola India Inc. on executing a non-disclosure and release agreement ‘after’ cessation of his services. Learned Assessing Officer by relying on amendment to section 17(3)(iii) of Income Tax Act held that the amount of Rs. 45,00,000/- was taxable resulting in the inclusion of the amount in the income of the appellant. 12. As per ratio of judgment in Guffic Chem Private Limited vs. CIT’s case (supra) it is well settled that compensation attributable to a negative/restrictive covenant is capital receipt. According to judgment dated 11.08.2017 of Hon’ble High Court of Delhi in ITA No. 154 of 2005 in case titled as Commissioner of Income Tax vs.
Mrs. Tara Sinha a non compete fee under Non-Competition Agreement is not chargeable to income tax.
In view of above said material fact especially assessee employee having received Rs. 45,00,000/- as per “Deed of full and complete release and agreement on trade secrets and confidentiality” containing non compete clause as per above said well settled principles of law being capital receipt is not taxable. Resultantly, impugned orders are not just, fair, reasonable and legal. Both the impugned orders deserve to be set aside.
No other point was argued.
In the result appeal is allowed. Both the impugned orders are set aside. Order pronounced in the open court on 6th May, 2024.
sd/- sd/- (S RIFAUR RAHMAN) (VIMAL KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 06/05/2024 Veena Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS
Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order