TaxTMI 
TaxTMI 
2024 (8) TMI 506
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....ares of Tek Travels Pvt. Ltd. Holding that part amount is to be treated as capital gains under section 48, and the remaining amount is to be treated as income from salary under section 17 (3) (iii) of the Act?" 2. The essential facts which merit notice for the purposes of answering the question which stands posited are as follows. The assessee is an individual resident who was employed with Tek Travels Private Limited [TTPL] in the capacity of Chief Operating Officer during the period 01 December 2007 to 24 August 2010. In terms of his employment agreement, apart from yearly compensation, the assessee was also entitled to sweat equity in accordance with the stipulations of the said agreement. 3. It is the case of the assessee that till 31 March 2010, no shares were issued or allotted to him. This issue appears to have been raised with TTPL and which consequently increased its share capital by issuing 6,00,000 fresh equity shares in Financial Year [FY] 2010-11, taking its total issued share capital to 16,00,000. On 08 June 2010, TTPL issued 50,000 sweat equity shares in the name of the assessee and consequential share certificates were also handed over. Shortly thereafter, on ....
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....ed and Forty). xxxx xxxx xxxx 5. In consideration for and subject to payment of the Settlement Amount, the First Party: (i) hereby unconditionally and irrevocably relinquishes his claim to any right and entitlement to enforce registration of the Shares in his favour; (ii) shall immediately, upon payment of the Settlement Amount, hand over all share certificates in relation to the Shares, in original, to the Second Party; (iii) shall not seek to enforce any right, title or interest in the Shares or the share certificates; (iv) shall not seek to enforce any right, title or interest in the Second Party arising out of or with respect to his previous employment with the Second Party; and (v) shall withdraw the Company Petitions filed against the Second Party within 5 business days of receipt of payment of the Settlement Amount. 6. The First Party confirms that the Second Party shall be free to deal with the said Shares and the share certificates in any manner it deems fit and proper as per law. 7. The Parties further undertake not to initiate any other legal proceedings against each other, in future, regard....
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.... of TTPL. However, due to severance of employment with TTPL, the appellant was refused recognition as a share holder thereby excluding his name in the statutory register of M/s. TTPL. Subsequent to the appellant's petition to Company Law Board, TTPL agreed for a settlement and accordingly Rs. 3,03,75,000/- towards full and final settlement in lieu of unconditional and irrevocable relinquishment of his right and enforcing registration and handing over share certificate in original to TTPL. 5.3 From the impugned order, it is observed that the appellant's claim in respect of the compensation received from TTPL was treated as 'Income from Salary' on the basis of the provisions of the Act u/s 17 (1) (iv) and that TDS u/s 192 was deducted by TTPL thereon. However, as contended by the appellant and as per* the extant provisions of law, it is observed that in case of a capital asset u/s 2 (14) of the Act, even the right acquired falls under the ambit of Section 2 (14). Accordingly, the compensation received for foregoing rights towards equity shares is a transfer of capital assets, taxable as capital gain under the Act. Further, it is observed that capital gains arise on '....
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.... a perusal of the Settlement Agreement itself, the amount of INR 3.03 crores, was essentially consideration for the surrender of a "right to sue". According to learned senior counsel, the surrender of a mere right to sue cannot possibly be viewed as transfer of a capital asset. Rather, the entire amount as received by the assessee in pursuance of the Settlement Agreement would constitute capital receipts, and thus not be chargeable to tax at all. 13. In support of the aforesaid contention, Mr. Kirpal firstly placed reliance upon the following passages from the decision of this Court in Commissioner of Income-Tax, Delhi (Central) vs. J. Dalmia 1984 SCC OnLine Del 365: "9. We do not find any exception under the I.T. Act, though the word "transfer" in relation to a capital asset has been defined in s. 2 (47) of the Act, which includes "sale, exchange or relinquishment of the asset or the extinguishment of any rights therein". The damages which were received by the assessee cannot be said to be on account of relinquishment of any of his assets or on account of extinguishment of his right of specific performance under the contract for sale. 10. Under s. 5 of the Tra....
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....m, in the present case, the assessee's right to get the deed of conveyance executed was extinguished. In lieu thereof, the amount of Rs. 2,52,000 was received as compensation. The amount was, therefore, taxable as capital gains. xxxx xxxx xxxx 10. It may not be out of place to mention here that Dr. Balasubramanian had strenuously argued that, as a result of the breach of the agreement, the assessee acquired another right, i.e., the right to receive damages and that the right originally acquired in 1945 did not really come to an end on the breach of contract but was converted into another right, i.e., the right to receive damages for breach of contract. When this right materialised and the amount of damages was specified in the consent decree of the court, the amount so received represented the consideration for the transfer of the original right. His contention, thus, was that the assessee's right to have the lease deed executed under the agreement of 1945 was, as a matter of fact, extinguished during the previous year only. We find it difficult to accept this argument of Dr. Balasubramanian for more than one reason. It is trite law that income can be held to accrue o....
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....int of time, no right to receive damages as such for breach of contract accrued or can be said to have accrued to the assessee, much less at the point of time when there was breach of contract. 11. Besides, the judgment and decree of the learned single judge was challenged in appeal and the appeal was dismissed in the year 1965 only. Thus, even a mere right to sue for damages for breach of contract could not be said to have accrued to the assessee until then. The dismissal of the appeal does not certainly improve the mere right to sue qualitatively. At best, the position that the Commissioner was to take accounts for determining the amount of compensation payable by way of damages for the breach of contract, if any, revived thereby. This only meant that the Commissioner would then go into all the relevant questions and recommend damages if he is satisfied that the assessee is entitled to the damages. It is true that, in the year 1968, the Commissioner submitted his report whereby he recommended damages to the extent of Rs. 10,92,000. However, as stated earlier, both the parties filed their objections to the report and but for the compromise reached between the parties, there wou....
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....and any consideration received as a consequence of relinquishment of such a right would be assessable as capital gains. Mr. Kirpal drew our attention to the following observations as rendered by the Supreme Court in Navin Jindal vs. Assistant Commissioner of Income-Tax (2010) 2 SCC 525: "8. For the purposes of Section 48 of the Act, one must keep in mind an important principle, namely, that chargeability and computation has to go hand in hand. In other words, computation is an integral part of chargeability under the Act. It is for this reason that we have opined that the right to subscribe for additional offer of shares/debentures comes into existence only when the company decides to come out with the rights offer. It is only when that event takes place, that diminution in the value of the original shares held by the assessee takes place. One has to give weightage to the diminution in the value of the original shares which takes place when the company decides to come out with the rights offer. For determining whether the gain/loss of renunciation of right to subscribe is a short-term or long-term gain/loss, the crucial date is the date on which such right to subscribe for....
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....reciation in the old shares and, consequently, to the extent of the depreciation in the value of her original shares, she must be deemed to have invested money in acquisition of this new right. A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right. Looked at in this manner also, it is clear that the net capital gain by her would be represented by the amount realised by her on transferring the right to receive new shares, after deducting therefrom the amount of depreciation in the value of her original shares, being the loss incurred by her in her capital asset in the transaction in which she acquired the right for which she realised the cash. This method of looking at the transaction also leads to the same conclusion which we have indicated in the preceding paragraph....
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.... "13. The decision in J.K. Kashyap (supra) is an authority for the proposition that even when an assessee becomes entitled to an undefined and undivided share in a property, through an agreement, which he later relinquishes, the gain has to be assessed as income from capital gain, and not as income from other sources. This much is clear from the following observations of the court: xxxx xxxx xxxx 14. This Court is in agreement with the above reasoning. That apart, in the present case, the Petitioner had acquired right to a specific plot; furthermore, the interest was in the nature of an actionable claim, which could be asserted in a legal proceeding. The tax authorities had issued a no objection certificate in respect of the transaction. In these circumstances, the reporting of the amount received as capital gains was correct. Moreover, Calcutta Discount Ltd. v. ITO, 1961 (41) ITR 191 (SC) is an authority for the proposition that as long as the assessee makes a full and true disclosure of the income, the fact that it might claim that as falling under one head which is ultimately not accepted, would not make it a wrong disclosure, or suppression. The question as ....
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....t to sue and the consequences recognizable in law in relation to the relinquishment of that right was addressed in the alternative. 25. However, we find no justification to tread down this path since the Tribunal was essentially called upon to examine the challenge raised by the Revenue in the appeal which had come to be laid before it and even before the Tribunal, the principal argument of the assessee had proceeded on capital gains. We, consequently, find no justification to test the correctness of the view expressed by the Tribunal based on the argument of relinquishment of a right to sue. 26. That then takes us to the principal question of whether the Tribunal was justified in bifurcating the settlement consideration between salary and capital gains. We note that a bifurcation of the consideration amount between salary and capital gains was one which was never advocated by the respondents. It thus clearly appears to represent an exercise which the Tribunal undertook of its own volition. 27. We bear in mind the undisputed fact that TTPL had never doubted the fact that the assessee did possess share certificates of the 50,000 sweat equity shares which had been allotted t....