Budget 2018: BUSINESS RELATED COMPENSATION - proposed amendments.

Links and references:

Sections 2(13) – definition of business,

S 28- income from business.

In the Finance Bill 2018, the scope of business income is being increased by amendment of S 28 by insertion of a new clause ( e ) relating to compensations or other payment received in relation to business of assessee.

The new clause apply only to business related receipts of any person by whatever name called in certain circumstances – may be termination or modification of agreement related to his business.

 This will not apply to receipts related to profession. Therefore, a person who is engaged in a profession and his receipts are treated as from profession, then the new clause will not apply, however some other old clause may be attracted and that will have to be examined in view of facts and circumstances of any particular case.

Constitutional validity:

A compensation which is in nature of ‘capital receipt’ and is not of the nature of profit or gain or income, should not be and cannot be taxed as ‘income’ as per provisions of the Constitution of India. However, unfortunately many provisions are contrary to the provisions of the Constitution of India, but are being legislated and are in force. This can only be challenged by way of challenging validity of the provision. In case of regular proceedings right from assessment to appeal before the Supreme Court validity cannot be challenged because in such proceeding, decision or judgment will be based on the law as stands.

Only in case of challenge to validity of provision as unconstitutional a High Court or the Supreme Court can struck down and declare the provision as un-constitutional and invalid.

From THE FINANCE BILL, 2018 (with highlights added for analysis)

9. Amendment of section 28

In section 28 of the Income-tax Act, with effect from the 1st day of April, 2019,––

(I) in clause (ii), after sub-clause (d), the following sub-clause shall be inserted, namely:-

“(e) any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business;”;

From memorandum explaining proposals in FB:

Clause 9 of the Bill seeks to amend section 28 of the Income-tax Act relating to profits and gains of business or profession.

The said section, inter alia, provides that certain types of compensation receipts as set out in sub-clauses (a) to (d) of clause (ii) of the said section are taxable under the head 'Profits and gains of business or profession'.

It is proposed to insert a new sub-clause (e) in the said clause (ii) so as to provide that any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, as the case may be, of any contract relating to his business shall be chargeable to tax under the head 'Profits and gains of business or profession'.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.