TaxTMI 
TaxTMI 
2025 (6) TMI 1329
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....is an Indian Citizen and a salaried employee of Flipkart Internet Private Limited (FIPL) which is an Indian Subsidiary of Flipkart Marketplace Private Limited (FMPL), a Company incorporated in Singapore which is further a wholly owned subsidiary of Flipkart Private Limited, Singapore (FPS). In addition to FMPL, FPS has many other subsidiaries including PhonePe which had a wholly owned subsidiary in India known as PhonePe India Private Limited. 2.1 In the year 2012, FPS introduced the Flipkart Stock Action Plan, 2012 (FSOP), pursuant to which the petitioner was granted 2232 stock options with a vesting schedule of four years from 01.01.2016 to 31.03.2023 amongst which 955 stock options were vested, 249 were cancelled and the unvested stock options were 1028, resulting in the total number of stock options held by the petitioner being 1983 as on 31.03.2023. Meanwhile, on 23.12.2022, FPS announced separation/divestment of PhonePe resulting in reduction and diminishing of the value of the stock options issued in favour of the petitioner. Under these circumstances, FPS announced a one time compensatory payment of USD 43.67 per option as compensation towards loss in value of FSOPs due ....
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.... the application filed by the petitioner under Section 197 of the I.T Act deserves to be allowed by issuing appropriate directions to the respondents to issue a 'Nil Tax Deduction Certificate' in favour of the petitioner at the earliest. In support of his submissions, learned Senior counsel placed reliance upon the judgment of the Delhi High Court in relation to compensation paid to one more identically situated employee of FIPL in respect of diminution/reduction of value of FSOPs issued by FPS in the case of Sanjay Baweja Vs. Deputy Commissioner of Income Tax - (2024) 163 taxmann.com 116 (Delhi), wherein an identical/similar impugned order was quashed and the petition was allowed in favour of the said employee. He would also place reliance upon the following judgments: (i) Padmaraje R. Kadambande vs. CIT - [1992] 195 ITR 877 (SC); (ii) CIT v. Shaw Wallace & Co. - AIR 1932 PC 138; (iii) Vijay Ship Breaking Corporation vs. CIT - [2009] 314 ITR 309 (SC); (iv) CIT v/s. Canara Bank - [2016] 386 ITR 229; (v) Commissioner of Wealth-tax vs. Ellis Bridge Gymkhana - [1997] 95 Taxmann 143 (SC); (vi) Kettlewell Bullen & Co.Ltd. vs. CIT - [....
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.... of this compensation should be identical to the tax treatment of the FSOPs themselves. It was also submitted that the payment received by the petitioner is part of the perquisites value due to the petitioner and taxable under Section 17(2) of the I.T Act which is deemed/implied allotment of shares as per Section 17(2) of the I.T Act and the allotted stocks are sweat equity shares under Section 17(2)(vi)(b) of the I.T Act and the compensation to be received by the petitioner is part of the fair market value that the petitioner is entitled to after the vesting period when he exercises the option. It was therefore submitted that in the light of the availability of the alternative remedy of revision under Section 264 of the I.T Act, the present petition was not maintainable and that the same is liable to be dismissed. In support of their submissions, learned counsel places reliance upon the judgment of the Madras High Court in the case of Nishithkumar Mukeshkumar Mehta Vs. Deputy Commissioner of Income Tax - W.P.No.26506/2023 and connected matters dated 31.07.2024. 6. I have given my anxious consideration to the rival contentions and perused the material on record. 7. In my cons....
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.... above. 33. It has already been seen that the marginal heading of Section 15 is "compensation". The fact that under clauses (i), (ii) and (iii) of Section 15(1) the compensation is paid as of right and in cases falling under clause (d) of the proviso, it is a discretionary payment, would not stamp the payment with a character of revenue. As to how a marginal heading has to be construed can be gathered from Chandroji Rao case [(1970) 2 SCC 23 : (1970) 77 ITR 743]. It is stated therein that the marginal heading to a section cannot control the interpretation of the words of the section particularly where the meaning of the section is clear and unambiguous. 34. For a moment, we are not interpreting the words of the section but we are only holding that even a payment under clause (d) is nothing but compensation because as the facts disclose the amount of Rs 10 lakhs out of a trust property in the Bank of Kolhapur was misappropriated. 35. There is no compulsion on the part of the Government to make the payment nor is the Government obliged to make the payment since it is purely discretionary. A case similar to the one on hand is H.H. Maharani Shri Vijaykuverba ....
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....he amount received by the company towards salami and compensation of acquisition of its lands was a capital receipt in the hands of the company and when the sum was distributed amongst its shareholders each of the shareholders took a share of the capital asset to which they were beneficially entitled. The receipt of Rs 8,829 was a capital receipt in the hands of the assessee. The fact that the sum was distributed as 'dividend' did not change the true nature of the receipt; a receipt was what it was and not what it was called. Trustees of the Will of H.K. Brodie v. IRC [(1933) 17 Tax Cases 432 (KB)] applied Held also, that that part of the dividend received by the assessee attributable to land acquisition compensation received by the company after March 31, 1948, was not receipt of 'dividend' within the meaning of Section 2(6-A) of the Income Tax Act, 1922. CIT v. Nalin Behari Lall Singha [(1969) 2 SCC 310 : (1969) 74 ITR 849], followed It is now well settled that in order to find out whether a receipt is a capital receipt or a revenue receipt one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. In other words, the nature of t....
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....tted deductions) is chargeable to tax under s. 6 (iv) of the Indian Income-tax Act, 1922, under the head "business." The agencies in respect of which the compensation was paid were part only of the respondents' business, and their business as merchants and agents continued after the payment; the compensation was a profit of the business in the year of account. There was no transfer of goodwill or any other dealing with the capital assets. As both the Commissioner and the High Court found that the compensation arose out of the business, it was chargeable to tax unless the assessees showed that it came within the exemptions in s. 10 or that it was a capital receipt not chargeable to tax. The Indian Act does not make the clear distinction between capital and income which there is under the English statutes; that is shown by s. 4, sub-s. 3(v). The judgment of the High Court is not consistent with its judgment in Turner Morrison & Co. It was based upon Glenboig Union FireclayCo. v. Commissioner of Inland Revenue and Chibbett v. Joseph Robinson & Sons, both of which are distinguishable. The former was decided upon the ground that there had been a sterilization of a capital asset. In ....
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....it was exempt under s. 4, sub-s. 3 (vii). It is submitted that the judgment in that case was incorrect in distinguishing between "arising from business" and "profits of business." Dunne K. C. in reply. The appellant relies upon the reasoning of the concluding part of the judgment last mentioned. Further, if the compensation was not income it was a "gain" within the meaning of s. 6 of the Act. March 14. The judgment of their Lordships was delivered by Sir George Lowndes. This is an appeal from a judgment of the High Court at Calcutta delivered on a reference made to it under s. 66 of the Indian Income-tax Act XI. of 1922. The reference arose out of an assessment to income-tax upon the respondents for the year 1929- 30, in respect of an item of Rs. 9,83,361, part of a larger sum of Rs. 15,25,000 received by them in 1928 as compensation for the termination of certain agencies. The respondents carry on business in Calcutta as merchants and agents of various companies, and have branch offices in different parts of India. For a number of years prior to 1928 they acted as distributing agents in India of the Burma Oil Company and the Anglo-Persian Oil Company, bu....
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.... alternative, was not the payment of Rs. 9,83,361/- an ex gratia payment in the nature of a present from the oil companies in question, and was it not therefore exempt under s. 4, sub-s. 3 (vii), of the Act? The reference was heard by the Chief Justice sitting with C.C. Ghose and Buckland JJ. The judgment of the High Court was delivered by the Chief Justice, his colleagues concurring. The learned judges appear to have returned a formal answer only to question (a), which the Chief Justice stated to be "the real question in the case." He thought that if the respondents could not escape by reason of the contention raised by this question they must fail. The other questions, he thought, fell within a recent decision of the Court in the case of In re Turner Morrison & Co; he had nothing to add to what was then said on these points. Their Lordships agree that the real matter for decision falls under (a), but they think that this question is not happily worded, as it seems to suggest that it was only if the sum there referred to was "in the nature of a capital receipt" that it would be exempt from assessment, whereas the more correct proposition would seem to be....
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....sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as "capital." But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production. The sources from which the taxable income under the Act are to be derived are enumerated in s. 6, which runs as follows: "Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely:- (i) Salaries. (ii) Interest on securities. (iii) Property. (iv) Business. (v) Professional earnings. (vi) Other sources." The claim of the taxing authorities is that the sum in question is chargeable under head (iv) bus....
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....this business, but as some sort of solatium for its compulsory cessation, the answer seems fairly plain. If the business had been sold-even if that somewhat indeterminate asset known as the "goodwill" had been assigned to the employing companies, as the High Court seems to have thought it had-it is conceded that the price paid would not have been taxable. But why? Plainly because it could not be regarded as profit or gain from carrying on the business, and their Lordships think that the same reasoning must apply when the sum received is in the nature of a solatium for cessation. It is contended for the appellant that the "business" of the respondents did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the respondents' other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field. For the reasons given t....
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....226 (SC), where it has been held as under (page 230): "Be that as it may, the Circular No. 275/201/95-IT(B), dated January 29, 1997, issued by the Central Board of Direct Taxes, in our considered opinion, should put an end to the controversy. The circular declares 'no demand visualized under section 201(1) of the Income-tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under section 271C of the Income-tax Act'." (ii) The material on record discloses that the subject compensation received by the petitioner does not constitute income and is not chargeable to tax and rather it is a capital receipt being one time voluntary compensation received by the petitioner which does not satisfy taxability in accordance with the charging section; the said subject one time voluntary compensatory payment is against the fall in value of stock options allotted to petitioner which is the profit making st....
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....1.2 Instances had come to the notice of the Government where certain assessees had resorted to the creation of a large number of associations of persons without specifically defining the shares of the members therein with a view to avoiding proper tax liability. Under the existing provisions, only the value of the interest of the member in the association which is ascertainable is includible in his net wealth. Accordingly, to the extent the value of the interest of the member in the association cannot be ascertained or is unknown, no wealth tax is payable by such member in respect thereof. 21.3 In order to counter such attempts at tax avoidance through the medium of multiple associations of persons without defining the shares of the members, the Finance Act has inserted a new Section 21-AA in the Wealth Tax Act to provide for assessment in the case of associations of persons which do not define the shares of the members in the assets thereof. Sub-section (1) provides that where assets chargeable to wealth tax are held by an association of persons (other than a company or a cooperative society) and the individual shares of the members of the said association in income or th....
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.... as managing agent until they ceased to hold shares in the capital of the Company of the aggregate nominal value of Rs 1,00,000 and were on that account removed by a special resolution of the Company passed at an Extraordinary meeting of the Company, or until the managing agent's tenure was determined by the winding up of the Company. In the event of termination of agency in the contingencies specified the managing agent was to receive such reasonable compensation for deprivation of office, as may be agreed upon between the managing agent and the Company and in case of dispute, as may be determined by two arbitrators. By clause 8, the managing agent was at liberty at any time to resign the office of managing agent by leaving at the registered office of the Company previous notice in writing of its intention in that behalf. The agreement did not specify any period for which the managing agency was to enure. Since the successors of the appellant were also to continue as agents, unless they resigned or became disqualified, the duration was in a sense unlimited. But by virtue of Section 37-A(2) of the India Companies Act, 1913, the appointment of the appellant as managing agent wou....
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.... necessary to obtain a loan secured by debentures charged on the Company's property; that large sums were required for renewals and replacements of machinery and it was not possible to obtain additional bank accommodation; that the appellant had made large advances to the Company exceeding Rs 12,50,000 and, having regard to its other commitments, it was doubtful if it would be able to make available to the Company additional finance that the arrangement with M/s Mugneeram Bangur and Co., by acceptance of the terms offered by them, was the most satisfactory method of solving the Company's difficulties; that it was in the best interest of the shareholders to terminate the appointment of the appellant which in the normal course would not fall due for renewal until January 14, 1957; that M/s Mugneeram Bangur and Co., had agreed to procure that Fort William Jute Co., Ltd. will pay to the appellant Rs 3,50,000 and that M/s Mugneeram Bangur and Co., will reimburse the Company for the payment, it being anticipated that they will in due course be appointed managing agents of the Company. 3. The arrangement with M/s Mugneeram Bangur and Co. was carried out. The appellant ten....
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....test : its solution must depend on a correct appraisal in their true perspective of all the relevant facts. As observed in CIT v. Rai Bahadur Jairam Valji [35 ITR 148, 152] by Venkatarama Aiyar, J. "The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the "highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide, Van Den Berghs Ltd. v. Clark [(1935) 3 ITR (Engl Cas) 17]. That, however, is not to say that the question is one of fact, for, as observed in Davies (H.M. Inspector of Taxes) v. Shell Company of China Ltd. [(1952) 22 ITR (Suppl) 1] 'these questions between capital and income, trading profit or no trading profit, are questions which though they may depend no doubt to a very gr....
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....e person or persons having a controlling interest in the shareholding of the Company, M/s Mugneeram Bangur and Co. were anxious to be appointed managing agents of the principal Company; and for that purpose the appellant had to be persuaded to agree to a premature termination of its agency. This was secured for a triple consideration : sale of shares held by the appellant at an agreed price, stipulation to discharge the liability of the Company to repay the loans due by the Company, and payment of Rs 3,50,000 as compensation for termination of the appellant's agency. 6. The High Court summarised the effect of the agreement between the appellant and M/s Mugneeram Bangur and Co., as follows : The sum of Rs 3,50,000 described as compensation of loss of office of the managing agent was part of the whole scheme incorporated in the agreement. Each clause of the agreement was a consideration of the other clauses and payment of compensation for the alleged loss of office did not, being part of the total scheme, stand by itself. Determination of the managing agency of the appellant was not compulsory cessation of business : it was a voluntary resignation for which under the age....
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....ncy is not an asset for which there is a market, for it depends upon the personal qualifications of the agent. Counsel appearing on behalf of the Commissioner conceded that the case that the managing agency was of the nature of stock-in-trade was not set up before the Tribunal, and he does not rely upon this part of the reasoning of the High Court in support of the plea that the compensation received by the appellant is a revenue receipt. He relies upon the alternative ground, and contends that the managing agency of Fort William Jute Co. Ltd. was a part of the framework of the business of earning profit by working as managing agent of different companies, and in the normal course, termination of employment by the pripcipal companies of the appellant as managing agent being a normal incident of such business compensation received by the appellant is not for loss of capital but must be regarded as a trading receipt, especially when the termination of the agency does not impair the structure of the business of the appellant. 8. In the present case there is a special circumstance which must first be noticed. In truth of the amount of Rs 3,50,000 was received by the appellant ....
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....proposition was not found acceptable, the right of the assessee in the managing agency of the principal Company was to ensure for another five years and which in the normal course would have continued for another twenty years was an enduring asset and consideration received by the appellant for extension of that asset was a capital receipt. 10. On behalf of the Income Tax Department it was contended that Shaw Wallace and Co. case [(1935) 3 ITR (Engl Cas) 17] does not lay down any proposition of general application to compensation paid for determination of all agency contracts. It was further submitted that, having regard to the nature of the agreement and the voluntary resignation submitted by the assessee, no enduring asset remained vested in the assessee, and none was attempted to be transferred : the compensation directly paid by the principal Company (which compensation was under the terms of the contract not payable) was only a "measure of profit" which the appellant would, but for the resignation, have earned, and was therefore in the nature of revenue. It was also urged that compensation was not payable to the assessee when resignation of the managing agency was ten....
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....r modification of his managing agency agreement with the Company, or by a manager of an Indian Company at or in connection with the termination of his office or modification of the terms and conditions relating thereto, or by any person managing the whole or substantially the whole affairs of any other Company in the taxable territories at or in connection with the termination of his office or the modification of the terms and conditions relating thereto, or by any person holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of terms and conditions relating thereto, shall be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly. But this amendment was made under the Finance Act, 1955, with effect from April 1, 1955, and has no application to the present case. 12. The Indian Income Tax Act is not in pari materia with the English Income Tax Statutes. But the authorities under the English law which deal not with the interpretati....
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....if it is for loss of a asset of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction. 16. In Chibbet v. Joseph Robinson and Sons [9 TC 48] the assessees who were ship-managers employed by a steamship Company under a contract which provided that they should be paid a percentage of the Company's income, were paid compensation for loss of office in anticipation of liquidation of the steamship Company. It was held that payment to make up for loss resulting from cessation of profits from employment was not itself an annual profit, but was payment in respect of termination of employment and was not assessable to tax. 17. In Du Cross v. Ryall [19 TC 444] the assessee settled a claim made by his employee for damages for wrongful dismissal and paid GBP57,250 as compensation for wrongful dismissal. It was held that no part could be apportioned to salary and commission and the whole escaped assessment. 18. In Duff v. Barlow [23 TC 633] the Managing Director of the appellant Company who was employed for a period of ten years was asked by it to manage the business of one of its subsidiaries, and to receiv....
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....dered or abandoned practically nothing remained of the Company's business. It was forced to reduce its staff and to transfer into other premises, and it really started a new trading life. Its trading existence as practised up to that time had ceased with the liquidation of the shipping Company." 20. These cases establish the distinction between compensation for loss of a trading contract and solatium for loss of the source of income of the assessee. 21. But payment of compensation for loss of office is not always regarded as capital receipt. Where compensation is payable under the terms of the contract which is determined, payment is in the nature of revenue and therefore taxable. For instance in Henry v. Foster [(1931) 145 LTR 225] it was held that when compensation stipulated under a contract is paid for loss of office, it is taxable under Schedule 'E', and it was also held in Dale v. D.E. Soissons [(1950) 2 AIR 460] that compensation paid under an agreement to an assistant of the Managing Director for premature termination of employment was held to be income. The principle on which these cases proceeded was also applied by the Court of Session in Scotland i....
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....them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down the aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. But even if a payment is measured by annual receipts, it is not necessarily in itself an item of income." 23. In Wiseburgh v. Domvile [26 TC 527] the appellant had entered into an agreement in 1942 under which he acted as sole agent for the manufacturer. In 1948 when this agreement could have been determined by notice expiring in October 1949, the manufacturer dismissed him. The appellant received 4000 as damages for breach of agreement. The appellant had several agencies from time to time as agents and it was one of the incidents of agency business that one agency may be stopped and another may be stopped and another may come and it being normal incident of the kind of business that the appellant was doing, that an agency should come to an end, compensation paid was regarded as income on the principle laid down in Kelsall Persons and Co. case [2....
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....ed : Sabine v. Lookers Ltd. [38 TC 120] Under agreements, annually renewed with the manufactures, the respondent Company had acted for many years as their main distributors in the Manchester area of the manufacturer's products, which it bought for resale. The respondent had sunk considerable sums in fixtures and equipment specially designed for the trade of wholesale dealers and carried a large stock of spare parts mainly for wholesale sale. The whole of the trade of the respondent was geard to the display, sale, service and repairs of the manufacturer's products. Up to 1952 inclusive, the manufacturers had included in its agreements with distributors a standard "continuity clause" giving the distributors, on certain conditions, the option of renewal for a further year. But in 1953, the manufactures, adopted a new standard agreement, containing a new continuity clause which the respondent Company regarded as giving it less security than before. As compensation for loss resulting from the alterations, the manufacturers paid to the respondent Company, a sum calculated on sales to the trade during the contract period. It was held that this was a capital receipt, because by the....
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....e agencies of the oil companies in the year in which they were received by the assessee. But when once it was admitted that they were sums received, not for carrying on this business, but as some sort of solatium for its compulsory cessation, the answer seemed fairly plain. The Board observed that if compensation received for sale of the business or its goodwill was capital, the same reasoning ought to apply when the sum received was in the nature of a solatium for cessation of a part of the business, and it was a matter of no consequence that the assessee continued to pursue its other independent commercial interests, and profits from which were taxed in the ordinary course, for the sums sought to be taxed had no connection with the continuance of the assessee's other business : the profits earned by the assessee, it was observed, "were the fruit of a different tree, the crop of a different field", and if under Section 10 the compensation was not taxable, it was not taxable under Section 12 under the head "other sources" as well. 30. The judgment of the Board proceeds upon the ground that compensation received not for carrying on the business but as solatium for its c....
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....o yield the principle that compensation for loss of an agency may in all cases be regarded as capital receipt. Nor does it lay down that where the assessee has several lines of business line must in ascertaining the character of compensation for loss of a line of business be deemed an independent source. This view is examplied by decisions of this Court and decision of the Madras High Court. In the South India Pictures Ltd case [29 ITR 910] compensation received for determination of the distribution rights of films was held taxable. After the assessee had exploited partially its right of distribution of cinematographic films to which it was entitled under the terms of agreement under which he had advanced money to the producers, the agreements were cancelled and the producers paid an aggregate sum of Rs 26,000 to the assessee towards commission. It was held by Das, C.J., and Venkatarama Aiyer, J., (Bhagwati, J., dissenting) that the sum paid to the assessee was not compensation for not carrying on its business, but was a sum paid in the ordinary course of business to adjust the relations between the assessee and the producers, and was taxable. Similarly in Rai Bhahdur Jairam Valji ....
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....derstood that the latter is always, and as a matter of law, to be held to be a capital receipt. An "agency contract which has the character of a capital asset in the hands of one person may assume the character of a trading receipt (asset) in the hands of another, as for example, when the agent is found to make a trade of acquiring agencies and dealing with them". Therefore, when the question arises whether the payment of compensation for termination of an agency is a capital or a revenue receipt, it must be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it was only part of his stock-in-trade. The learned Judge also observed that payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue, but where a trader is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on stock-in-trade. 32. In Peirce Laslie and Co. Ltd. v. CIT, Madras [38 ITR 356] the assesse....
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....cally or at all affect or alter the structure of the assessee's business, that the sum received was revenue. Rai Bahadur Jairam Valji case [35 ITR 148, 152] was one of compensation received for termination of a trading contract. In Peirce Leslie and Company case [38 ITR 356] there was termination of office, but it was held to be brought about in the ordinary course of the trading operations of the assessee. 34. On the other side of the line are cases of Commissioner of Income Tax Hyderabad-Deccan v. Vazir Sultan and Sons [36 ITR 175] and Godrej and Co. v. CIT, Bombay City [37 ITR 381]. In Vazir Sultan and Son's case [36 ITR 175] the majority of the Court held that compensation paid for restricting the area in which a previous agency agreement operated was a capital receipt, not assessable to income tax. It was held that the agency agreements were not entered into by the assessee in the carrying on of their business, but formed the capital asset of the assessee's business which was exploited by the assessee by entering into contracts with various customers and dealers in the respective territories : it formed part of the fixed capital of the assessee's busin....
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....y with Fort William Jute Co. Ltd. to conduct the remaining agencies. The transaction was not in the nature of a trading transaction, but was one in which the assessee parted with an asset of an enduring value. We are, therefore, unable to agree with the High Court that the amount received by the appellant was in the nature of revenue a receipt. 38. We accordingly record the answer on the question submitted by the Tribunal in the negative. The appellant would be entitled to its costs in this Court." In Karan Chand Thapar's case supra, the Apex Court held as under: "8. As held by this Court in CIT v. Chari & Chari Ltd. [AIR 1966 SC 54 : (1965) 3 SCR 692 : 57 ITR 400] that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in the case where the agency was one of many which the assessee held and its termination did not impair the-profit-making structure of the assessee but was within the framework of the business, it being a necessary incident of the business that existing agencies may be ter....
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....llation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue; where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. In Oberoi Hotel's case supra, the Apex Court held as under: "4. On the basis of the said agreement, the assessee has received a sum of Rs 29,47,500 from the Receiver after the sale of the Hotel. The question which was considered by the Income Tax Authorities was whether the receipt of the said amount is capital receipt or revenue receipt. The Income Tax Officer arrived at a conclusion that it was a revenue receipt, the Commissioner of Income Tax (Appeals) held that it was a capital receipt, the Tribunal confirmed the said finding, on reference to th....
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....d in its return, the agreed consideration was as stated above in clause 10. On the basis of the said agreement, the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and/or to operate the property. Further it is a loss of source of income to the assessee and that right is determined for consideration. Obviously therefore, it is a capital receipt and not a revenue receipt. 11. The aforesaid principle is relied upon in the case of Karam Chand Thapar and Bros. [(1972) 4 SCC 124 : 1973 SCC (Tax) 614 : (1971) 80 ITR 167] Considering the aforesaid principles laid down as per Article XVIII of the principal agreement, the amount received by the assessee is for the consideration for giving up his right to purchase and or to operate the property or for getting it on lease before it is transferred or let out to other persons. It is not for settlement of rights under trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement has resulted in loss of source of the assessee's income." In Godrej's case supra,....
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....ue receipt. We do not accept this contention. If this argument were correct, then, on a parity of reasoning, our decision in Vazir Sultan and Sons case [Civil Appeal No. 346 of 1957, decided on March 20, 1959;(1959) 36 ITR 175] would have been different, for, there also the agency continued as before except that the territories were reduced to their original extent. In that case also the agent agreed to continue to serve with the extent of his field of activity limited to the State of Hyderabad only. To regard such an agreement as a mere variation in the terms of remuneration is only to take a superficial view of the matter and to ignore the effect of such variation on what has been called the profit-making apparatus. A managing agency yielding a remuneration calculated at the rate of 20 per cent of the profits is not the same thing as a managing agency yielding a remuneration calculated at 10 per cent of the profits. There is a distinct deterioration in the character and quality of the managing agency viewed as a profit-making apparatus and this deterioration is of an enduring kind. The reduced remuneration having been separately provided, the sum of Rs 7,50,000 must be regarded a....
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....capital receipt within the decisions of this Court in the earlier cases referred to above." In Senairam Doongarmall's case supra, the Apex Court held as under: "This appeal which has been filed with a certificate under section 66A(2) granted by the High Court of Assam against its judgment and order dated March 29, 1955, concerns the assessment of the appellants, a Hindu undivided family, for the assessment year 1945- 1946 and 1946-1947. The appellants owned a tea garden called the Sewpur Tea Estate in Assam. They had on the estate factories labour quarters staff quarters, etc. On February 27, 1942, the military authorities requisitioned all the factory buildings, etc., under rule 79 of the Defence of India Rules. Possession was taken sometime between March 1 and March 8, 1942. The tea garden was however left in the possession of the appellants. The possession of the military continued till the year 1945, and though the appellants looked after their tea garden, the manufacture of tea was completely stopped. Under the Defence of India Rules, the military authorities paid compensation. For the year 1944, corresponding to the assessment year 1945-1946 they paid a total sum ....
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....e the application of rule 24. It appears that through some inadvertence these two orders, which were not unanimous were sent to the appellants and the Department. The Commissioner of Income-tax filed an application under section 66(1) for a reference, while the appellants filed an application under section 35 for rectification of the orders since many other matters in appeal were not considered at all. When these two applications came before the Tribunal, it was realised that the matter had to go to a third member for setting the difference. The President then heard the appeal and agreed with the Accountant Member. Though he expressed a doubt whether the appellants were entitled to the benefit of rules 23 and 24,he did not given an opinion because this point was not referred to him. The Tribunal then referred the case to the High Court of Assam on the following two questions: "(1) Whether the sums of Rs. 2,12,080 and Rs. 2,31,563 paid by the Government to the assessee in 1945 and 1946 respectively (exclusive of the sums paid specifically for building repairs) were revenue receipts in the hands of the assessee comprising any element of income? (2)....
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.... manufacturer is not merely to grow tea plants but to collect tea leaves and render them fit for sale. During the years in question, the appellants were tending their teagarden to preserve the plants, but this activity cannot be described as a continuation of the business, which had come to an end for the time being. It would have hardly made any difference to the carrying on of business, if instead of the factories and buildings, the garden was requistioned and occupied, because in that event also, the business would have come to a standstill. The compensation which was paid in the two years was no doubt paid as an equivalent of the likely profits in those years; but as pointed out by Lord Buckmaster, in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue* and affirmed by Lord Macmillan in Van den Berghs Ltd. v. Clark**, "there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test." This proposition is as sound as it is well- expressed, and has been followed in numerous cases under the Indian Income-tax Act and also by this....
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....e whether they formed capital or revenue items. The observations which have been made are sometimes appropriate to the nature of the business to which the case related and the quality of the payment in relation to that business. Similarly the corporation profits tax was a tax intended to be imposed upon the profits of British companies (which included some other corporate bodies) carrying on tread or business including the business of investments. The profits which were taxed under section 52 of the English Finance Act were required to be determined according to the principles laid down in that Act. It is thus obvious that though the English cases may be of some help in an indirect way by focusing one's attention on what is to be regarded as relevant and what rejected they cannot be regarded in any sense as precedents to follow. Since this court on other occasions used these cases as an aid, we shall prefer to them briefly; but we have found it necessary to sound a warning because the citation of these authorities has occasionally outrun their immediate utility. We begin with the oft-cited case of Glenboig Union Fireclay Co. Ltd's case supra. That was a case u....
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....brought to tax in the earlier year when the original compensation was paid. The observations of Rowlatt, J., though made to distinguish the case from one in which the compensation is paid for destruction of business are instructive. We shall refer to them later. The learned Judge held that this was a case of compulsory sale of rum, and that a compulsory sale was also a sale. The receipt was held to be a profit. The decision was affirmed by the Court of Appeal. This case also so far as its facts go, was very different and the actual decision has no relevance. Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. Ltd. was a case like Short Bros.' Case**. ? 3000 in a lump sum were paid to be relieved from a contract, and as the business was a going business, it was held to be profit. In fact, Short Bros. Case* was applied. Ensign Shipping Co. Ltd. v. Commissioners of Inland Revenue**, a case of excess profits duty is interesting. During the Coal Strike of 1920, two ships of the company were ready to sail with cargoes of coal. They were detained for 15 and 19 days respectively by orders of Government. In April, 1924, ? 1,078 were paid as compensa....
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....upon by the Department as one which laid down a principle applicable here. We do not agree. The payment there was made towards loss of profits of a going business, which was not destroyed. As a source of income, the business was intact, and the business instead of being worked for the whole period, was worked for period less by a few days and the profit of that period was made up. That may be true of one is going to determine standard profits of a particular period, because what is paid goes to profits in the period but is of no significance in a case like the present, where during the whole of the year no business at all was done nor profits made. This case also does not help to solve the problem. Charles Brown & Co. v. Commissioners of Inland Revenue (1929) 12 Tax Cas. 1256. is yet another case of excess profits duty. In that case, the business of the taxpayer was carried on under the control of the Food Controller from 1917 to 1921, and he was compelled to buy and sell at prices fixed by the Controller. By agreement a "mill standard" was fixed, and the taxpayer was allowed to retain profits up to that standard, and if there was shortfall, it was to be made up by t....
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....Cas. 1256.) were of business actually done and profits therefrom. None of these rulings is directly in point. In the case with which we are concerned, the payment was not towards any capital asset to attract the first group, there was not going business so as to attract the second, and nothing was brought nor any business done with the taxpayer to make the third group applicable. We shall next see some cases which involved corporation profits tax. In Gloucester Railway Carriage and Wagon Co. Ltd. v. Commissioners of Income Tax((1925) 12 Tax Cas. 720.), the company was doing business of selling wagons and of hiring them out. The company then sold all the wagons which it was using for purposes of hiring. The receipt was treated as profit of trade, there being but one business and the wagons being the stock-in-trade of that business. In Green v. Gliksten & Son Ltd.(1929) 14 Tax Cas. 364.) stocks of timber were destroyed. Their written down value was ? 160,824 but the insurance company paid ? 477,838. The House of Lords held that the timber, though burnt, was realised, and that the excess of the sum over the written down book value must be brought into account. These two cases....
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....n not without some danger of error. We shall now turn to the cases of this court, which were referred to at the hearing. The first case of this court is Commissioner of Income-tax v. South India Pictures Ltd. [1956] 29 I.T.R. 910. The South India Pictures Ltd. held distribution rights for 5 years of three films towards the completion of which they had advanced money to a film producing company, called the Jupiter Pictures. When the term had partially run out, the agreement for distribution was cancelled, and the South India Pictures Ltd. received Rs. 26,000 as commission. The question was whether this sum was on capital or revenue account. Das, C.J., and Venkatarama Aiyar, J., held that it was the latter, while Bhagwati, J., held that it was the former. The Learned Chief Justice came to his conclusion on four grounds: (i) that the payment was towards commission which would have been earned; (ii) that it was not the price of any capital asset sold, surrendered or destroyed; (iii) that the structure of the business, which was a going business, was not affected; and (iv) that the payment was merely an adjustment of the relation between the ....
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....of business. All the English decisions to which we have referred were examined in search for principles, but the principle on which the decision was rested was that the payment was an adjustment of the rights under the contract and must be referred to the profits which could be made if the contract had instead been carried out. The payment not being on account of capital outlay and the assessee not being prevented from carrying on his business, the receipt was held to be revenue, that is to say, related to income from a contract terminated prematurely. In a sense, the case is analogous to the South India Pictures Ltd. Case [1956] 29 I.T.R. 910 which it follows. In Commissioner of Income-tax v. Vazir Sultan & Sons [1959] 36 I.T.R. 175., the assessee held the sole selling agency and distribution rights of a particular brand of cigarette in the Hyderabad State on foot of a 2 per cent. discount on all business done. Subsequently, the area outside Hyderabad State was also included on the same terms. Later still, the area was again reduced to the Hyderabad State. Rs. 2,19,343 were paid by way of compensation "for loss of territory outside Hyderabad". Bhagwati, J., and Sinha, J. ....
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....n of other decisions in search for the true principles, it cannot be said that they resulted in the discovery of any principle of universal application. To summarise them: South India Pictures' case [1956] 29 I.T.R. 910.,was so decided because the money received was held to be in lieu of commission which would have been earned by the business which was still going, and the receipt was treated as the fruit of business. The same reason was given in Jairam Valji's case [1959] 35 I.T.R. 148., and the Shamsher Printing Press case [1960] 39 I.T.R. 90. In Vazir Sultan's case [1959] 36 I.T.R. 175., the compensation was held to replace loss of capital, and in Godrej's case [1959] 37 I.T.R. 381., the compensation was said not to have any relation to the likely income or profits but to loss of capital. Each case was thus decided on its facts. We have so far shown the true ratio of each case cited before us, and have tried to demonstrate that these cases do no more stimulate the mind, but none can serve as a precedent, without advertence to its facts. The nature of the business, or the nature of the outlay or the nature of the receipt in each case was the decisive factor, ....
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....ere was a business at all of which it could be said to be income. We shall now take up for consideration the facts of our case, and see how far any principle out of the several which have governed earlier cases can be usefully applied. The assessee was a tea-grower and tea manufacturer. His work consisted in growing tea and in preparing leaves by a manufacturing process into a commercial commodity. The growing of tea plants only furnished the raw material for the business. Without the factory and the premises, the tea leaves could not be dried, smoked and cured to become tea, as is known commercially, and it could not be packed or sold. The direct and immediate result of the requisition of the factories was to stop the business. That the tea was grown or that the plants were tended did not mean that the business was being continued. It only meant that the source of the raw material was intact but the business was gone. Now, when the payment was made to compensate the assessee, no doubt the measure was the out-turn of tea which would have been manufactured; but that has little relevance. The assessee was not compensated for loss or destruction of or injury of a cap....
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....ection cannot be made applicable, and the compensation that he receives cannot bear the character of profits of a business. It is for this reason that the Judicial Committee in Shaw Wallace's case [1932] L.R. 59 I.A. 206. observed that the compensation paid in that case was not the product of business, or, in other words, profit, but some kind of solatium for not carrying on business and thus, not revenue. It is to be noted that Das, C.J., in South India Pictures' case*, in distinguishing Shaw Wallace's case**, made the following observation: "In Shaw Wallace's case**, the entire distributing agency work was completely closed, whereas the termination of the agreements in question did not have that drastic effect on the assessee's business at all.....In Shaw Wallace's case**, therefore, it could possibly be said that the amount paid there represented a capital receipt." The observation is guarded, but in recognises the difference made in the Privy Council case and others between payment to compensate interference with a going business and compensation paid for stoppage of a business altogether. This distinction was emphasised in the dissenting o....
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....es not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue: where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." 17. We have considered the matter in the light of the aforenoted broad principle. It is clear from Clause 6 of the agreement dated 1-9-1967, extracted above, that the liquidated damages were to be calculated at 0.5% of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation ....
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.... enquire whether contextually Section 45, in which the expression "capital asset" is used, excludes goodwill. 9. Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Crutwell v. Lye [1810, 17 Ves 335] that goodwill was nothing more than "the probability that the old customers would resort to the old places" was expanded by Wood V.C. in Churton v. Douglas [1859 John 174] to encompass every positive advantage "that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business". In Trego v. Hunt [1896 AC 7] Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. Lawson in his Introduction to the Law of Prope....
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....d its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting the business. Undoubtedly, it is an asset of the business, but is it an asset contemplated by Section 45? 10. Section 45 charges the profits or gains arising from the transfer of a capital asset to income tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings Section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head, "Capital gains". Section 45 is a charging section. For the purpose of imposing the charge. Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied m....
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....character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by Section 49 and its cost, for the purpose of Section 48 is determined in accordance with those provisions. There are other provisions which indicate that Section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is sub-section (2) of Section 55. None of the provisions pertaining to the head "Capital gains" suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital va....
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....f no cost is incurred in building up the goodwill of the business, it is nevertheless a capital asset for the purpose of capital gains, and the cost of acquisition being nil the entire amount of sale proceeds relating to the goodwill must be brought to tax under the head "Capital gains". It is apparent that the preponderance of judicial opinion favours the view that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income tax." In the instant case, the material on record discloses that undisputedly the petitioner did not exercise his options under the subject FSOPs nor was there any allotment or transfer of shares in his favour and the subject compensation was paid to him only towards compensation for loss on reduction/diminution in the value of stock options held by the petitioner; it is significant to note that FSOPs would become taxable only under two circumstances viz., when the petitioner exercises his option and the differential amount is taxed or when the shares allotted to him are either sold or transferred, thereby becoming taxable as capital gain; as stated supra, the petitioner neither exercises his opt....
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....y, then the consideration received for transfer thereof would not be chargeable as revenue receipt. It is well-settled that all receipts are not taxable under the Income-Tax Act. Section 2(24) defines "income". It is no doubt an inclusive definition. However, a capital receipt is not income under section 2(24) unless it is chargeable to tax as capital gains under section 45. It is for this reason that under section 2(24)(vi) that the Legislature has expressly stated, inter alia, that income shall include any capital gains chargeable under section 45. Under section 2(24)(vi), the Legislature has not included all capital gains as income. It is only capital gains chargeable under section 45 which has been treated as income under section 2(24). If the argument of the Department is accepted then all capital gains whether chargeable under section 45 or not, would come within the definition of the word "income" under section 2(24). Further, under section 2(24)(vi), the Legislature has not stopped with the words "any capital gains". On the contrary, the Legislature has advisedly stated that only capital gains which are chargeable under section 45 could be treated as income. In other words,....
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....are required to be charged and computed under the scheme of section 45 to section 55 and it is for this reason that such capital gains do not fall under section 10(3). In other words, business income, salary income, and capital gains chargeable under section 45 stand outside section 10(3) because salary income, business income and such capital gains are chargeable and computable under a different set of sections. Therefore, when the source of a receipt has a link with business income or salary income or capital gains chargeable under section 45 then section 10(3) will not apply. Hence, we respectfully do not agree with the view taken by the Allahabad High Court in Gulab Chand's case, [1991] 192 ITR 495. In the case of B.K. Roy P. Ltd. v. CIT, [1995] 211 ITR 500 (Cal), the petitioner received Rs. 21 lakhs from Shaw Wallace and Company as compensation on surrender of monthly tenancy. The tenancy was a capital asset and no cost of acquisition was incurred for its acquisition. In the assessment proceedings, the Assessing Officer accepted that the said sum could not be assessed to tax since there was no cost of acquisition of the monthly tenancy. The Commissioner, however, took the ....
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....mphasised the judgment of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty, [1981] 128 ITR 294. He submitted that like goodwill, statutory tenancy denotes a benefit. He contended that statutory tenancy cannot be described as an asset if there is no cost of acquisition. Therefore, he relied upon the above judgment. In the case of B.C. Srinivasa Setty's case, [1981] 128 ITR 294, the Supreme Court has held that goodwill generated in a newly commenced business cannot be described as an asset within section 45 of the Act and the transfer of the goodwill generated in a business does not give rise to a capital gain for the purposes of Income-Tax. That, goodwill denotes the benefit arising from connection and reputation. That, the charging sections and the computation provisions together constitute an integrated code and when there is a case to which the computation provisions do not apply, it is evident that such a case was not intended to fall within the charging section. Accordingly, learned counsel for the Department argued that in the case of transfer of a capital asset like tenancy where computation provisions do not apply, the Supreme Court has laid down that such a ....
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.... is sought to be contended. The circular clearly shows that the Income-Tax Act defines income to include capital gains chargeable under section 45. That, the judicial interpretation clearly laid down that only if an asset did cost something to the assessee in terms of money that the provisions relating to levy of tax under section 45 read with section 48 would apply. It is for this reason that the Finance Bill proposed to amend the provisions relating to capital gains and provide that the cost of acquisition of the tenancy rights be taken at nil. In the case of CIT v. Merchandisers (P.) Ltd., [1990] 182 ITR 107, the Division Bench of the Kerala High Court has considered the entire case law covering all judgments cited before us and has come to the conclusion that no tax on capital gains could be levied in respect of transfer of the tenancy right. The Kerala High Court agreed with the view of the Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT, [1984] 149 ITR 29 in which it has been held that if the computation provisions cannot apply to a given case then such a case could not be intended by the Legislature to fall within the charging section. That, if the whole of the....
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.... cannot be ascertained. We do not find any merit in this argument. If the full value of the consideration received as a result of the transfer of tenancy is made taxable, then the tax is not levied on the capital gains, but, in substance, it is being levied on the capital value of the asset. This is not permissible under section 56. The full consideration minus the cost of acquisition results in capital gains. However, the Department seeks to tax the full consideration on the ground that cost of acquisition is not ascertainable. If this contention is accepted, then the tax is not levied on capital gains, but it is being levied on the capital value of the asset which is not permissible under section 56 of the Act. This is also the ratio of the judgment of the Kerala High Court in the case of Merchandisers (P.) Ltd., [1990] 182 ITR 107. Hence, the above argument is rejected. 12. The intent of levying capital gains tax goes to the nature and character of the asset. It is an asset which possesses the inherent quality of being available on expenditure of money to a person seeking to acquire it. The courts have repeatedly held that none of the provisions pertaining to the head "....
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....bservations of the above judgment applies to the facts of the present case. In the case of Withers v. Nethersole, [1948] 1 All ER 400, the House of Lords held that in cases involving sale of property with a limited life by a person not engaged in trade or profession of dealing in such property, the proceeds of such a sale were in the nature of capital and, therefore, not taxable. The Department, in that matter, came to the conclusion that the taxpayer was assessable to Income-Tax in respect of her share in the proceeds of the assignment of the exclusive motion picture rights in the novel and the play. It was not disputed before the House of Lords that the matter concerned assignment of the proprietary rights. The taxpayer under the relevant agreement made partial assignment of her copy right and she ceased to be the owner of that portion which was assigned for which she received a sum of money in exchange. The court held that this amounts to sale of property by a person, who was not engaged in the trade of dealing in such property. Therefore, the amount received by the taxpayer was a capital receipt. It was untaxable and not in the nature of taxable revenue. If the argument of the.....
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....a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter." (vi) The material on record discloses that FSOPs are a right but not an obligation to buy the underlying instrument and represent a right to subscribe to the shares of a Company. On vesting, the option holder acquires an unfettered right to exercise the option and get the allotment of shares. The FSOPs have not been exercised yet and there are no shares in existence which have been allotted or transferred. A voluntary one-time payment of this nature before the allotment of shares cannot be taxed as perquisites. The stage from allotment of Stock Options to the sale of allotted shares is as follows: a. Issuance of Stock Options b. Vesting of Stock Options c. Exercise of Stock Options d. I....
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....ubsidiary called PhonePe. Thereafter, the value of the stock options of FPS fell pursuant to the disinvestment and subsequent remittances to the shareholders of FPS on account of dividend payments, buy-back etc. 5. Consequently, on 21.04.2023, the petitioner received a communication from FPS stating that as a one-time measure, FPS had decided to grant the option holders a payment of USD 43.67 per option as compensation towards loss in the value of the options and it was based on the number of options held by the petitioner as on 23.12.2022. Furthermore, it was also stated that the FPS would be withholding tax on the said compensation. 6. Subsequently, on 29.04.2023, the petitioner preferred an application under Section 197 of the Act seeking a 'Nil' declaration certificate on the deduction of TDS by FPS. On 23.05.2023, the petitioner preferred a revised application under Section 197 of the Act. 7. Thereafter, on 15.07.2023, the Revenue passed the impugned order rejecting the petitioner's application on the score that the amount received would be in the nature of perquisite under Section 17(2)(vi) of the Act. 8. Aggrieved thereby, the ....
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....reliance on the decision of this Court in National Petroleum Construction Co. v. Dy. CIT 2019 SCC OnLine Del 12353. 12. We have heard the learned counsels appearing on behalf of the parties and perused the record. 13. The short controversy that emerges for resolution in the present case is whether the one-time payment made on behalf of FPS formed a part of salary under Section 17 of the Act or not? The consequential question of taxability of such payment is contingent upon the aforesaid issue and shall be answered as a corollary of the same. 14. For the sake of convenience, the relevant extracts of the order impugned before us are reproduced herein for reference:- "After perusal of the facts of the case and the written submissions of the Assessee, following observations are made. 1. The assessee has contended that the amount receivable by him for FPS does not constitute income u/s 2 (24) of the Income Tax Act, 1961. In this regard, it is observed that section 2 (24) of the Act provides an inclusive definition of "Income" and it is not an exhaustive definition. Thus even if a nature of receipt is not specifically mentioned under this sect....
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....ution of the intrinsic value of ESOPs held by an employee including an ex- employee would be in the nature of income, and the same is not specifically exempt under the Act. The compensation is linked to the vested ESOPs in the instant case. ESOPs result in a taxable perquisite on the allotment of shares equivalent to the fair market value less the exercise price of the shares so allotted under section 17(2)(vi) and is taxable under the head 'Salaries' in hands of the employee or ex-employee, as the case may be. Consequently, the compensation receivable on the said ESOPs, even though from a former employer, directly or indirectly, on account of diminution of fair value of the underlying shares, should also have the same characterization and tax treatment and hence, in my view, is taxable under the head 'Salaries'. It also does not matter whether the said amount is being paid by the former employer directly to the assessee or through any of its group companies indirectly and the amounts would remain taxable as salary. Further, this amount would have been taxable as salary if the assessee would have been in current employment with the payer or its group compan....
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....urchased by Walmart in the year 2018 (30% of the total remaining vested stock options) [30% of (viii)] =14,347 x. Balance as on record date [(viii)-(ix)] =33482 xi. Compensation [(x) x Compensation per stock options x USD conversion rate] 33,482 x 43.67 x 82 =Rs. 11,98,97,033/- 17. As the facts of the matter suggest, undisputedly, the petitioner has not exercised his vested right with respect to stock option under FSOP till date, which signifies that the right of holding the stocks under his name had not been exercised. Therefore, the moot question is only limited to the extent whether the one-time voluntary payment made on behalf of FPS to the petitioner can be pegged as perquisite under Section 17(2)(vi) of the Act. 18. It is germane to point out that the perquisites, as defined in Section 17(2) of the Act, constitute a list of benefits or advantages, which are made taxable and are incidental to employment and received in excess of salary. Furthermore, as per Section 17(2)(vi) of the Act, perquisite refers to value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former emp....
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....particular case. This position was also fructified in the decision of CIT v. Saurashtra Cement Ltd. [2010] 192 Taxman 300/325 ITR 422/ 11 SCC 84. The relevant paragraphs of the said decision are reproduced herein for reference:- "14. The question whether a particular receipt is capital or revenue has frequently engaged the attention of the courts but it has not been possible to lay down any single criterion as decisive in the determination of the question. Time and again, it has been reiterated that answer to the question must ultimately depend on the facts of a particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a conclusion. 15. In Rai Bahadur Jairam Valji [AIR 1959 SC 291 : (1959) 35 ITR 148] it was observed thus: (AIR pp. 292-93, para 2) "2. The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any....
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....out the observations made by the Supreme Court in the case of Shrimant Padmaraje R. Kadambande (supra), wherein one-time voluntary cash allowance was given to the assessee and the Court held that such monetary receipts, rather it was a capital receipt and thus, not liable to tax. The relevant paragraphs of the said decision are reproduced as under:- "15. A case similar to the one on hand is H.H. Maharani Shri Vijaykuverba Saheb of Morvi [[1963] 49 ITR 594 (Bombay)] wherein the High Court held that a voluntary payment without consideration cannot fall in the category of income. The position here is exactly the same. There is no compulsion on the part of the Government to give any allowance. It is purely discretionary. It cannot be got over by saying that after the order is passed the assessee gets a right. That has nothing to do in determining the question. 16. In S.R.Y. Sivaram Prasad Bahadur [(1971) 3 SCC 726, 732 : (1971) 82 ITR 527, 535] in no uncertain terms it was laid down that it is the quality of the payment that is decisive of the character of the payment and not the method of payment or its measure which will make it fall within the category of capital o....
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....rge fortune. Held, that as the payments were commenced long after the ruler had abdicated, they were not made under a legal or contractual obligation. As the allowances were not also made under a custom or usage or as a maintenance allowance, they were not assessable." 36. The position is exactly the same. The payment made by the Government is undoubtedly voluntary. However, it has no origin in what might be called the real source of income. No doubt Section 15(1) proviso clause (d) enables the applicant to seek payment but that is far from saying that it is a source. Therefore, it cannot afford any foundation for such a source. Further, it is a compassionate payment, for such length of period as the Government may, in its discretion, order. *** 39. As a result of the above discussion, we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts and, therefore, are not income within the meaning of Section 2(24) of the Income Tax Act. Accordingly, we set aside the judgment of the High Court and allow the appeals with no order as to costs." 21. It is also significant to pl....
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....of any part of the capital asset and the business structure or the profit making apparatus, namely, the managing agency, remains unaffected. There is no destruction or sterilisation of any part of the business structure. The amount in question was paid in consideration of the assessee firm agreeing to continue to serve as the managing agent on a reduced remuneration and, therefore, it bears the same character as that of remuneration and, therefore, a revenue receipt. We do not accept this contention. If this argument were correct, then, on a parity of reasoning, our decision in Vazir Sultan and Sons case [Civil Appeal No. 346 of 1957, decided on March 20, 1959;(1959) 36 ITR 175] would have been different, for, there also the agency continued as before except that the territories were reduced to their original extent. In that case also the agent agreed to continue to serve with the extent of his field of activity limited to the State of Hyderabad only. To regard such an agreement as a mere variation in the terms of remuneration is only to take a superficial view of the matter and to ignore the effect of such variation on what has been called the profit-making apparatus. A managing a....
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....r words, so far as the managed company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee firm for the rest of the term of the managing agency and, therefore, a capital expenditure and so far as the assessee firm was concerned, it was received as compensation for the deterioration or injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt within the decisions of this Court in the earlier cases referred to above." 22. It is also apposite to deal with the contention of the Revenue that the facts pertaining to the exercise of the options held by the petitioner were not apprised to the AO in the proceedings referrable to Section 197 of the Act. On the said aspect, it was contended that in such a scenario, only the facts which were before the AO should be kept in mind while deciding the present controversy. However, a bare perusal of the application dated 29.04.2023 made by the petitioner under Section 197 of the Act, which has been appended in the petition as Annexure-P4, would reveal that the petitioner had duly placed the pertinent details all....
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.... expenditure or revenue expenditure. We shall have to examine this question on principle but before we do so, we must refer to the decision of this Court in Maheshwari Devi Jute Mills case [AIR 1965 SC 1974 : (1965) 3 SCR 765 : (1965) 57 ITR 36] since that is the decision which weighed heavily with the High Court, in fact, compelled it to negative the claim of the assessee and hold the expenditure to be on capital account. That was a converse case where the question was whether an amount received by the assessee for sale of loom hours was in the nature of capital receipt or revenue receipt. The view taken by this Court was that it was in the nature of capital receipt and hence not taxable. It was contended on behalf of the Revenue, relying on this decision, that just as the amount realised for sale of loom hours was held to be capital receipt, so also the amount paid for purchase of loom hours must be held to be of capital nature. But this argument suffers from a double fallacy. 5. In the first place it is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact ....
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.... obligation. Notably, the present is not a case where the option holder has exercised his right. Rather, the facts suggest that the petitioner has not exercised his options under the FSOP till date. It appears that due to the disinvestment of the PhonePe business from FPS, the Board of Directors of FPS had decided to provide a one-time voluntary payment to all the option holders pursuant to FSOP. It is imperative to point out that the management proceeded by noting that there was no legal or contractual right under FSOP to provide compensation for loss in current value or any potential losses on account of future accretion to the ESOP holders. It was further noted that FPS, on its own discretion, has estimated and decided to pay USD 43.67 as compensation for each stock option as held on the record date. The relevant extract of the said communication dated 21.04.2023 is reproduced herein for reference:- "Dear All, As you are aware, the Board of Directors (BoD) of Flipkart Private Limited, publicly announced the complete separation of PhonePe business, by selling off its entire shareholding, in Dec 2022. With this announcement, the value of ESOPs granted to all stakeholders ....
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....ent of PhonePe was held to be perquisites under Section 17(2)(vi) of the I.T. Act by the Revenue, the Court while quashing the impugned order passed under Section 197 of the Act held that: a. Section 17(2)(vi) I.T. Act does not apply before the exercise of options and before the issuance of shares. b. A onetime voluntary payment is a capital receipt and not a revenue receipt. c. Merely because the deductor has sought to deduct TDS would not determine the taxability of a transaction. d. The payment was not linked to the employment of the petitioner. e. There was no transfer of any stock options by the petitioner. f. The petitioner was entitled to apply for a refund of TDS as the amount received was not taxable in his hands. The above judgment was rendered in the case of another Employee of Flipkart in the identical set of facts and the very same transaction, which is the subject matter of the present writ petition and the reasoning of the judgment squarely applies to the facts of the instant case of the petitioner. (viii) The respondents have placed reliance upon the subsequent judgment of the learned Single Judge of the Ma....
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.... was whether the order impugned was correct in holding that there was a right to sue which was created in favor of the assessee and that such right to sue was a capital asset which was transferred by the assessee and the compensation received could be regarded as consideration for such a transfer and could be taxed under the head 'Capital Gain'. The learned Single Judge categorically came to the finding at that the impugned order was incorrect and the finding that the compensation was liable to be taxed under the Head 'Capital Gain' was incorrect and having said so, the learned Single Judge ought to have allowed the writ petition and set aside the order impugned before it. (f) The finding that ESOPS are not capital asset is erroneous: It is seen that the learned Single Judge erroneously held that ESOPs are not capital asset and that the term 'Capital Asset' are defined under Section 2(14) of the Act as "property of any kind held by an assessee, whether or not connected with his business or profession". The definition is extremely wide and covers property of all kind which includes rights in assets. (g) The learned Single Judge misconstrued the Explanation-....
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.... and consequently, fall within the scope of Explanation(a) to Section 17(2)(vi) of the I.T. Act. In this regard, it is seen that taxability of ESOPs is well settled, inasmuch as, when an employee exercises his vested option, then the difference between the fair market value and the exercise price is taxable as perquisite under Section 17(2)(vi) of the I.T. Act. Secondly, when the shares so allotted or transferred are sold by the employee, it is taxable as 'capital gains' under Section 45 of the I.T. Act. Further, in the instant case, the petitioner has not exercised its options till date and therefore, Section 17(2)(vi) of the I.T. Act cannot be invoked at all. In any case, in absence of a calculation mechanism receipts cannot be taxed as held by the Apex Court in CIT v. B.C.Srinivas Setty - 128 ITR 294 (SC), wherein, it was held that if the cost of acquisition cannot be ascertained, in that case, capital gains cannot be attracted. The learned Single Judge ignored the well settled principle that in the absence of computational mechanism, no tax can be charged. (k) The learned Single Judge rendered an erroneous finding by holding that ESOPs would come within the pur....
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....he availability of alternative remedy under Section 264 of the I.T. Act is concerned, it is necessary to state that the impugned order having been passed with the approval of the Commissioner and in the absence of any remedy by way of an appeal, the petitioner is entitled to invoke the jurisdiction of this Court under Article 226 of the Constitution of India, particularly when the right to file a revision petition under Section 264 cannot be construed or treated as availability of an equally efficacious and alternative remedy so as to come in the way of this Court exercising its jurisdiction under Article 226 of the Constitution of India and consequently, even this contention urged by the respondents cannot be accepted. In Manpowergroup's case supra, the Delhi High Court held as under:- "18. This Court is of the view that the present writ petition is maintainable as there is no efficacious alternate remedy available to the petitioner to challenge the impugned order. In fact, the Commissioner of Income Tax can entertain a revision petition under section 264 only when the order, which is the subject matter of revision is passed by an authority subordinate to him. Further, th....
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....mitted that the estimated loss for Assessment Year 2017-18 is approx. Rs. 1000.00 Crores. Thus, there will be no assessable profit under the Act for the assessment year in 2018-19 in view of huge carry forward losses. Besides, the application points out that there was an amount of Rs. 101.53 Crores up to 10 February 2017 receivable as refund from the Revenue. It was also pointed out that the financial health of the Petitioner is such that it has taken long term debts, at huge interest payments. Therefore, the amounts which are blocked on account of tax deduction at source aggravates its financial hardship including cash crunch. Lastly, it was pointed out that the amount of Rs. 6.68 Crores which is the outstanding tax demand for the assessment year 2012-13 was on account of an issue which already stands concluded in its favour by an order of the Tribunal dated 27 May 2016, on identical issues for assessment years 2009-10 to 2012-13 (upto July 2011). This demand of Rs. 6.68 Crores is thus, likely to be set aside by the CIT(A) as he would be bound by the order of the Tribunal. It was pointed out so far as the demand for the balance amount of Rs. 28.00 Lakhs is concerned it is on accou....
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....y 2017 issued under Section 197 of the Act, was canceled. The impugned order holds that while issuing the certificate dated 4 May 2017 the existing demand of Rs. 6.90 Crores was as recorded in the impugned order "Apparently, the demand was not considered on the basis that this demand was under a covered issue". This i.e "covered issue" in terms of Rule 28AA(2) of the Income Tax Rules 1961 (Rules), cannot be a subject of consideration while granting the certificate. Further, it holds that in view of the current financial status, the future liability, if any, which may arise on assessment or otherwise against the company, would be impossible to recover. 11. Before considering the rival submissions urged on behalf of the respective parties, it would be useful to reproduce Section 197 of the Act and Rule 28AA of the Rules, which arises for our consideration:- "Section 197 of the Act :- (1) Subject to rules made under sub-section (2A), where, in the case of any income of any person or sum payable to any person, income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions o....
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....of making application under sub-rule (1) of rule 28; and (vi) tax collected at source for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28. (3) The certificate shall be valid for such period of the previous year as may be specified in the certificate, unless it is cancelled by the Assessing Officer at any time before the expiry of the specified period. (4) The certificate for no deduction of tax shall be valid only with regard to the person responsible for deducting the tax and named therein. (5) The certificate referred to in sub-rule (4) shall be issued direct to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate." 12. Mr. Tarun Gulati, learned Counsel, in support of the Petition, submits as under:- (a) The impugned order dated 23 October 2017 cancelling the certificate dated 4 May 2017, is without jurisdiction as Rule 28AA(3) of the Rules could not be invoked in the present facts; (b) The impugned order is arbitrary as it cancels a valid certificate under Section 197 o....
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....is unsustainable and would be set aside in appeal due to the issue being considered in its favour; (d) No prejudice would be caused to the Petitioner in case the nil withholding certificate dated 4 May 2017 is withdrawn. This, for the reason that the amounts so received by the Revenue on account of withholding tax would be refunded if no tax demand is payable in future by the Petitioner. 14. Before dealing with the rival submissions on merits, we shall first deal with the preliminary objection of the Respondent to entertain this Petition. The objection is that an effective efficacious alternative remedy to challenge the impugned order under Section 264 of the Act, is available. Therefore, this Petition should not be entertained. It is submitted that a Revision under Section 264 of the Act would lie to the Commissioner of Income Tax (CIT). This is so for the reason that under Section 264 of the Act, Revision lies from any order passed by any authority - subordinate to CIT other than an order which is appealable and from which an appeal has been filed or an order to which Section 263 of the Act is applicable. In fact, this Court in Larsen & Toubro Ltd. v. Asstt. CIT....