Vildirect: IncomeTax-caselaws-2002-VIL-198-ITAT-MUM

2002-VIL-198-ITAT-MUM

Equivalent Citation: [2002] 83 ITD 495

Income Tax Appellate Tribunal MUMBAI

IT Appeal No. 1195 (Mum.) of 1993

Date: 17.01.2002

ASSISTANT COMMISSIONER OF INCOME-TAX

PRAKASH G. HEBLKAR

For the Appellant : A. V. Rao
For the Respondent : A. V. Sonde

BENCH

Satish Chandra (Accountant Member) And A. D. Jain (Judicial Member)

JUDGMENT

A. D. Jain (Judicial Member)

This is an appeal by the Revenue against the order dated 26-11-1992, passed by the learned CIT(A).

2. The lone ground raised before us is :

"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the amount of Rs. 5,50,000 received by the assessee from his former employer on Voluntary Retirement was a capital receipt and, therefore, not taxable, without appreciating the specific provisions of section 17(3)(i) of the Income-tax Act in this regard and without considering that the case cited by him in arriving at his decision apply to cases of "business" and not to "Salaried" professionals, in whose cases, the provisions of section 17(3)(i) are clearly attracted."

3. The assessee is a management and technical consultant. He is the proprietor of a firm, Profitech. His main activities are consultancy services in the areas of software, business strategies, human resources development and software exports, etc. Prior to starting his own business, the assessee was employed, since 2-4-1979, with M/s. Tata Unisys Ltd. (‘TUL’ for short) in a senior position, in its computer consultancy Division. His last assignment with TUL was as Senior Vice President of the New Business Unit, responsible for business strategy and implementation covering the company’s worldwide activities.

4. The assessee wanted to start his own consultancy business. To this end, he sought to resign from TUL. TUL accepted his resignation with effect from 31-3-1990.

5. The assessee and TUL had entered into an agreement dated 26-2-1990 as per this agreement, the assessee was, for a period of three years, starting from 1-4-1990, to refrain from the following activities :-

(a) Soliciting and/or rendering services to Unisys Corporation, U.S.A. or its subsidiaries and/or officiates worldwide (TUL is a Unisys Tata Joint Venture in India);

(b) Soliciting and/or rendering services to TUL’s customers; and

6. In consideration of the aforesaid covenants, TUL agreed to pay to the assessee, a sum of Rs. 5,50,000 on or before 30-4-1990.

7. The assessee received the said amount of Rs. 5,50,000 from TUL in the assessment year in question. He claimed this amount as not liable to tax in lieu of capital receipt.

8. Before the learned Assessing Officer, the assessee relied upon the decision of the Hon’ble Supreme Court in CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 and upon CIT v. Saraswathi Publicities [1981] 132 ITR 207 (Mad.).

9. The learned Assessing Officer did not accept such reliance, observing that these cases related to business income, whereas the assessee was a professional.

10. While rejecting the claim of the assessee, the learned Assessing Officer further observed that by virtue of the agreement dated 26-2-1990 between the assessee and TUL, the assessee was free to render professional services to, and earn income by way of fees from persons other than those stipulated therein, which the assessee did.

11. It was held that even otherwise, the amount in question was taxable under the head ‘Salaries’, in view of the provisions of section 17(3)(i ) of the Income-tax Act, which include profit in lieu of salary and the amount of any compensation received by an employee from his employers at or in connection with the termination of his employment.

12. On appeal, the Learned Commissioner of Income-tax (Appeals), while reversing the assessment order and allowing the assessee’s claim, observed that the receipt in question was in the nature of a restrictive covenant. The assessee was restrained from doing or taking up such activities or consultations which would hamper the interests of his earlier employer, TUL. TUL was also dealing in software and such other activities in which the assessee had gained a considerable knowledge and work-experience since 1979.

13. The learned Appellate Authority followed the decisions of the Hon’ble Supreme Court in Best and Co. (P.) Ltd.’s case (supra) and in Gillanders Aubuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283.

14. Before us, the appellant-Department has relied upon the following judicial pronouncements to aver that the amount in question is exigible to tax in lieu of capital receipt, under section 17(3)(i) of the Income-tax Act:-

G.N. Badami v. CIT [1999] 240 ITR 263 (Mad.), P. Arunachalam v. CIT [2000] 241 ITR 827 (Mad.).

15. It has been submitted on behalf of the assessee that section 17(3)(iii)(B) of the Income-tax Act, which is effective with effect from 1-4-2002, covers and brings to tax payments like the one in question herein.

16. The Memorandum explaining the provisions in the Finance Bill, 2001, issued by the Government of India has been relied upon on behalf of the assessee. The paragraph ‘Modification in respect of the provisions relating to salaries and perquisites’ states, inter alia that the Finance Bill, 2001 also proposes to provide that ‘profits in lieu of salary’ include amounts received in lump sum or otherwise, prior to employment or after cessation of employment for the purposes of taxation. Our attention has been drawn to the last sentence of this paragraph. This sentence reads: ‘The proposed amendment shall come into affect from 1st April, 2002 and shall, accordingly, apply to assessment year 2002-2003 and subsequent years’.

17. The assessee relies on :

(i) M.N. Karani v. Asstt. CIT [1998] 64 ITD 119 (Mum.);

(ii) K.S.S. Mani v. ITO [1995] 54 ITD 76 (Mad.);

(iii) ITO v. Anilkumar Rudra [1999] 71 ITD 96 (Mum.);

(iv) Sarojkumar Poddar v. CIT [2001] 77 ITD 326 (Cal.);

(v) M.R. Muchhala v. Fourth ITO [1996] 56 TTJ (Mum.) 504;

(vi) CIT v. J. Visalakshi [1994] 206 ITR 531 1 (Mad.);

(vii) Best and Co. (P.) Ltd.’s ( supra); and

(viii) R.N. Agarwala v. CIT [1960] 38 ITR 67 (Bom.).

18. It would be apt to reproduce here, the provisions of section 17(3)(i) of the Income-tax Act. If this provision, so says the Revenue, which covers the case at hand. Section 17(3)(i) :-

17(3) "Profits in lieu of salary" includes :-

(i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto.

19. A plain reading of the above section shows that it unambiguously deals with the cases of termination of employment. The expression ‘termination of employment’ applies to a termination in the natural course of events, the term of employment having run out and the period of retirement having arrived. It would also apply to a case of premature termination of employment, there being a break in the stipulated tenure. However, it could not, and does not, by any stretch of imagination, include a case of voluntary retirement or resignation, as is the one at hand. It would be downright erroneous, wrong and bad construction to read into the provision that which its plain language does not state. The intention of the Legislature in not including the present situation within the ambit of the section is explicitly manifest in the syntax chosen.

20. The legislative intent of excluding situations like the present one from the purview of section 17(3)(i) is further evident from the latest amendment of section 17. It runs as under :

17(3) "profits in lieu of salary" includes-

(iii)any amount due to or received, whether in lump sum or otherwise, by any assessee from any person-

(B)after cessation of his employment with that person.

21. It is precisely because such a situation was neither envisaged nor covered by any provision of the Act, that the need arose for making provision therefore, by way of the above-quoted amendment.

22. This amendment is prospective in nature (w.e.f. 1-4-2002, as discussed in para 16 supra), and, therefore, is not attracted to this case.

23. The case law cited by the Department fails to further their cause. As rightly pointed out by the learned Representative of the assessee, those were cases of payment of compensation. What is under consideration here, is a restrictive covenant, which pertains to the future. The payment involved had a contingency attached to it-the restraint agreed to between the assessee and TUL. The assessee was to refrain from soliciting and/or engaging TUL’s employees, as stipulated by the covenant, for a period of three years starting 1-4-1990, id est, one day after acceptance of his resignation. The agreement itself is dated 26-2-1990.

24. The law quoted by the assessee is squarely applicable the conclusive pronouncement of the Hon’ble Apex Court in Best & Co. (P.) Ltd.’s case (supra) clinches the issue in favour of the assessee. It was, inter alia, held therein that a restrictive covenant was an independent obligation which came into operation only when the agency (service in the present case) came to an end and that part of the compensation which was attributable to the restrictive covenant was a capital receipt and hence, not taxable.

25. In view of what has been stated hereinabove, finding no infirmity with the order under appeal, the same is hereby upheld.

26. The appeal, consequently, stands dismissed.

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