TMI Blog1995 (3) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... le structure of income-making apparatus of the assessee and there was deprivation of what in substance one of its sources of income and therefore the receipt was capital in nature not liable to tax. He ought to have also found that the payment was not related to any business done as an employee or recompense for services past or future so as to be considered as salary and he has also erred in treating the payments as profits in lieu of salary under, section 17(3)(ii). 2. The assessee has also taken a ground relating to levy of interest under section 216 but this ground was given up at the time of hearing. 3. The relevant facts are that the assessee was an employee of M/s. Larsen Toubro Ltd. As per agreement dated 28-11-1983, he was ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny till 28-12-1988 by virtue of the agreement dated 28-11-1983. It is before the expiry of the agreement period the assessee resigned. It was then the company agreed to provide the assessee with compensation. Such compensation receivable from former employer at or in connection with the termination of the employment was to be treated as 'profits in lieu of salary' within the meaning of section 17(3). Accordingly, he upheld the assessment of Rs. 1 lakh in view of the application of sub-clauses (i) and (ii) of section 17(3). 5. At the time of hearing the learned counsel for the assessee filed a paper compilation containing the agreements dated 28-11-1983 and 8-12-1986 and facts of the case. As per the agreement dated 28-11-1983, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of his employment with the Company, as strictly secret and confidential and shall not at any time disclose or impart such confidential information or knowledge to any other person nor use it for commercial or personal gain in any manner whatsoever ; (c) he shall not accept employment of any nature whether part-time or whole-time and/or act in advisory capacity or otherwise or be associated in any way directly or indirectly with any competitors of the Company and/or its subsidiary and associate companies or with persons carrying on business or businesses similar to the business or businesses of the Company and business or businesses of its subsidiary and associate companies for a period of three years commencing from 1st Dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd v. CIT [1964] 53 ITR 283 (SC) and P. H. Divecha v. CIT [1963] 48 ITR 222 (SC) in support of his proposition that the restrictive covenants contained in the agreement dated 8-12-1986 prevented source of income for the assessee and the profit-making structure was affected and any compensation paid not to carry on competitive business was capital receipt in nature and, therefore, it was not taxable. The learned departmental representative, on the other hand, duly supported the decision of the authorities. 6. We have duly considered the rival submissions, the impugned orders of the authorities and the paper compilation filed. The agreement dated 28-11-1983 appointing the assessee as the whole-time director, inter alia, provided as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration of the assessee undertaking all the covenants the company shall pay to him Rs. 2 lakhs, namely, Rs. 1 lakh on the execution of the agreement and another one lakh on the completion of the period of 3 years from the date of agreement. It is the first instalment received at the time of execution of the said agreement that is the bone of contention as to its taxability. The assessee claims, relying on several decisions of courts, that it is a compensation for loss of source of profit or employment and, therefore, it is capital receipt in nature and nontaxable. The revenue has held that it is taxable treating it as profits in lieu of salary. 7. It is therefore necessary to consider whether any compensation at all is payable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive covenants undertaken by the assessee or in other words for loss of profits from business or profession in which the assessee could have profitably engaged himself. The various case laws relied upon by the learned counsel for the assessee also support the conclusion that the compensation received by the assessee was nothing but a capital receipt for loss of profit-earning source of income, and not loss of profits as such. in view of these facts and circumstances, it is to be held that the CIT (Appeals) is not justified in holding that the compensation fell within the mischief of section 17(3)(i) or (ii) as profits in lieu of salary ignoring the vital facts and the statutory provisions of the Company Law in this regard. Consequently, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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