2015 (11) TMI 1302 - AT - Income Tax

Tribunal rules payment from Suzuki India not taxable as salary; deemed capital receipt for expertise non-compete.

Satya Sheel Khosla Versus Income-tax Officer, Ward-24 (3), New Delhi

Satya Sheel Khosla Versus Income-tax Officer, Ward-24 (3), New Delhi - TMI Issues Involved:1. Whether the sum of Rs. 1,32,00,000 received by the appellant from Suzuki India is taxable as 'profits in lieu of salary' under section 17(3) of the Income-tax Act, 1961.2. Whether the said sum is taxable under section 28(va) of the Income-tax Act, 1961.3. Validity of the observations made by the learned CIT(A) regarding the Opinion of Shri Bhardwaj.Issue-wise Detailed Analysis:1. Taxability under Section 17(3) of the Income-tax Act, 1961:The primary issue is whether the sum of Rs. 1,32,00,000 received by the appellant from Suzuki India is taxable as 'profits in lieu of salary' under section 17(3) of the Income-tax Act. The appellant argued that he was not an employee of Suzuki India but a joint venture partner. The Agreement's WHEREAS clauses indicated that the appellant was appointed as managing director by virtue of his being the Indian joint venture partner and wished to step down as he was no longer a joint venture partner. The absence of a Service Agreement and the fact that the appellant did not receive any salary, perquisites, or benefits during his tenure further supported this claim. The tribunal held that the appellant was a joint venture partner and not an employee, thus the sum received could not be taxed as 'profits in lieu of salary.'2. Taxability under Section 28(va) of the Income-tax Act, 1961:The second issue is whether the amount received falls within the ambit of section 28(va) of the Income-tax Act, which taxes receipts in the nature of non-compete fees and exclusivity rights. The appellant contended that the payment was not for not competing with Suzuki India but for not providing his expertise to others. The tribunal agreed, noting that the payment was for prohibiting the appellant from providing his knowledge, skills, and expertise to others, not for non-compete purposes. Additionally, the tribunal referenced the Supreme Court's observation in Guffic Chem. P. Ltd. vs. Commissioner of Income-tax that compensation attributable to a restrictive covenant is a capital receipt. Therefore, the sum received did not fall within section 28(va) and was not taxable as it constituted a capital receipt.3. Observations by learned CIT(A) on the Opinion of Shri Bhardwaj:The tribunal addressed the criticism by the learned CIT(A) regarding the Opinion of Shri Bhardwaj, which suggested that the Opinion made incomplete references to the Agreement. The tribunal found that Shri Bhardwaj had accurately reproduced the relevant parts of the Agreement and provided valid reasons for his conclusions. The tribunal condemned the unwarranted observations made by the learned CIT(A) and emphasized that a more appropriate approach would have been to analyze and rebut the points made in the Opinion.Conclusion:The tribunal concluded that the sum of Rs. 1,32,00,000 received by the appellant from Suzuki India is not taxable under section 17(3) as 'profits in lieu of salary' nor under section 28(va) of the Income-tax Act. The amount is considered a capital receipt and is not taxable. The appeal was allowed, and the observations made by the learned CIT(A) were deemed without basis.