TMI Blog2008 (4) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of income-tax under section 17(3)(i) of the Income-tax Act ?" 2. The sum of Rs. 27,50,000 represents that payment to the assessee, Shyam Sundar Chhaparia, on October 21, 2000, as a "special compensation" for his agreement not to take up any competitive employment/assignment in future as per the undertaking signed by him with the Aditya Birla group wherefrom he superannuated on September 30, 2000. The whole question 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As an example, if I have worked in Viscose Filament Yarn and cement businesses of the group during the last five years of my employment with the group, I will not join any organization in any form, which is in direct and/or indirect competition with the group in these businesses, i.e., viscose filament yarn and cement. 5. I acknowledge and agree that if, for whatever reasons, I am unable to honour this understanding, the retirement benefits extended to me by the unit from where, I am retiring, will be withdrawn immediately. No further requests in this matter will be appreciated by the unit, once the benefits are withdrawn.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 emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group retiring at ripe age of 68 years and you in no way can on a business competitive to the business of your employer group company. (iii) You served in Co/Group for 46 years and retired at the ripe age of 68. (iv) The sum of Rs. 27.50 lakhs is part of the retirement benefits. (v) Although it has been called a special compensation for his agreement not to take up any competitive employment/ assignment in future for 2 years it seems to be merely a ploy to claim the sum 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 Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent obligation which came into operation only when the agency (service in the/present case) came to an end and that, therefore, that part of the compensation which was attributable to the restrictive covenant is a capital receipt and hence not taxable. As far as the Assessing Officer's view that the case falls under the provisions of section 17(3) (i) of the Act is concerned, it is clear that the restrictive covenant of excluding situation the present one from the purview of section 17(3)(i) 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 (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eakage clause (iii) was inserted under section 17(3) of the Act with effect from April 1, 2002. This clause reads as under '(iii) any amount due to or received, whether in lump sum of otherwise, by any, assessee from any person (A) before his joining any employment with that person; or (B) after cessation of his employment with that person'. 11. From the perusal of section 17(3) (iii), it is evident that this clause (iii) to section 17(3) was applicable for the assessment year 2002-03 and not for the assessment 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 upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service of his employer and the payment was solely a special compensation in token of his relinquishment, which was not, as submitted, in consideration of his past services but in reality was one towards compensation. It is submitted that the assessee had an enduring prospect because of the expertise he had but the same was abrogated because of the said restrictive covenant which neither was a device nor a camouflage to defeat the income-tax liability. It is urged that the contract of employment having come to an end with effect from September 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deprivation by his employer or some third party such as Legislature, have been entitled". 18. Their Lordships of the Supreme Court in the case of Sheppard, supra, further approved the following observations of Rowlatt J. in Chibbett v. Joseph Robinson [1924] 9 TC 48, 60 (KB) "As Sir Richard Henn Collins said, you must not look at the point of view of the person who pays and see whether he is compellable to pay or not; you have to look at the point of view of the person who receives, to see whether he receives it in respect of his services, if it is a question of an 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International P. Ltd. [2006] 283 ITR 484 (SC), CIT v. Saroj Kumar Poddar [2005] 279 ITR 573 (Cal). 22. In the case of CIT v. Varas International P. Ltd. [2006] 283 ITR 484 their lordships of the apex court were concerned with the issue that "for the amendment of a statute to be construed as being retrospective, should not the amended provision itself indicate either in terms or by necessary implication that it is to operate retrospectively? And having noted the issue having been conclusively determined affirmatively, refrained from resolving the issue. Which thus, leave no manner of doubt that the introduction of new provisions 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted its apportionment between the two matters. Difficulty in apportionment was not a ground for rejecting the claim either of the Revenue or of the assessee. Therefore, apportionment had to be made of the compensation in this case on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant. 24. In the case of A. S. Wardekar [2006] 283 ITR 432, the Division Bench of the Calcutta High Court was concerned with the money received by the assessee-firm which was refrained under the covenant to undertake any business similar to the business of the company which compensated. The Assessing Officer 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 liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for loss of employment', used in Explanation 2 to section 7 of the Indian Income-tax Act, refers to any payment made whether under a legal liability ô voluntarily to compensate or act as a solatium for loss of employment suffered by an employee. Consequently, if there is a compulsory cessation of a business, or of an employment, and in respect of that compulsory cessation any amount is paid, whether that amount is a compensation for which the employer is legally liable or whether it is a payment made ex gratia, it would still be compensation for the loss of employment within the meaning of section 7 and the amount paid would be a capital receipt and exempt from 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 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions noted above and to quote from H. C. Dhanda [1970] 76 ITR 404 (MP), clearly shows that "the distinction between one class of case, (where the payment of compensation is in lieu of abondonment of all contractual rights which the recipient had under the contract or as damages for its wrongful repudiation due to unilateral act of the employer) and another class of case, (where the payment of compensation is in terms of the contract of service as remuneration for past or a deferred payment in terms thereof), runs through". It is the distinction between the two is the decision lies as to on which side of line the given case would fall. 30. Regard, in this respect can be had for the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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