|COURT:||Delhi High Court|
|CORAM:||S. Muralidhar J, Vibhu Bakhru J|
|COUNSEL:||M. P. Rastogi|
|DATE:||October 16, 2015 (Date of pronouncement)|
|DATE:||October 20, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 17(3)(iii): Amount received by prospective employee for loss of employment offer is a capital receipt and is neither taxable as "salary" or as "other sources"|
The assessee entered into an Employment Agreement with ACEE Enterprises (‘ACEE’) pursuant to which he was to be employed as Chief Executive Officer (‘CEO’) and the employment was to commence from 1st July, 2007. Either party at its option could terminate the employment by giving six months’ notice to the other party in writing. In case the notice period was less than six months, then compensation equivalent to the shortfall of the notice period was payable by the party concerned. ACEE wrote a letter to the Assessee informing him that there was a “sudden change in business plan of the Company vis-a-vis foraying into new financial ventures” and that “the company is extremely disappointed to convey that it shall not be able to take you on board from 1st July, 2007 as per employment contract.” ACEE promised to reconsider the Assessee’s services “as and when its operation starts”. The second letter was dated 15th May 2007 which was the Assessee’s response to ACEE that the news was a “big financial loss personally” since there were “many other opportunities available to me”. The Assessee stated that since he had opted for ACEE he did not consider “other lucrative opportunities available to me”. Since it was not clear when ACEE was going to start its new venture, the Assessee proposed that “your company must consider something for financial loss incurred by me not available other opportunities. I propose that you must give me at least one year compensation offered to me by your company to cover up the financial loss incurred by me”. On 25th August 2007, ACEE informed the Assessee that “as a mark of goodwill/gesture” it was pleased to announce a payment of Rs.1,95,00,000 to the Assessee subject to income tax compliances as “a one-time payment to you for non-commencement of employment as proposed.” The assessee claimed that the said sum was a capital receipt. However, the AO assessed it as salary under Section 17 (3) (iii) of the Act. This was reversed by the CIT(A) and the Tribunal. On appeal by the department to the High Court HELD dismissing the appeal:
(i) The Court is unable to accept the interpretation sought to be placed on the plain language of Section 17(3)(iii) of the Act by the Revenue. The words “from any person” occurring therein have to be read together with the following words in sub-clause (A): “before his joining any employment with that person”. In other words, Section 17(3)(iii)(A) pre-supposes the existence of an employment, i.e., a relationship of employee and employer between the Assessee and the person who makes the payment of “any amount” in terms of Section 17(3)(iii) of the Act. Likewise, Section 17(3)(iii)(B) also pre-supposes the existence of the relationship of employer and employee between the person who makes the payment of the amount and the Assessee. It envisages the amount being received by the Assessee “after cessation of his employment”. Therefore, the words in Section 17(3)(iii) cannot be read disjunctively to overlook the essential facet of the provision,
viz., the existence of ‘employment’ i.e. a relationship of employer and employee between the person who makes the payment of the amount and the Assessee. The Court accordingly concurs that this was a case where there was no commencement of the employment and that the offer by ACEE to the Assessee was withdrawn even prior to the commencement of such employment. The amount received by the Assessee was a capital receipt and could not be taxed under the head ‘profits in lieu of salary’.
(ii) The other plea of the Revenue that the said amount should be taxed under some other head of income, including ‘income from other sources’, is also unsustainable. The decision of this Court in CIT v. Rani Shankar Mishra (2010) 320 ITR 542 (Del) (supra) held in similar circumstances that where an amount was received by a prospective employee ‘as compensation for denial of employment,’ such amount was not in the nature of profits in lieu of salary. It was a capital receipt that could not be taxed as income under any other head.