TaxTMI 
TaxTMI 
2025 (6) TMI 1329
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....ivate 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 to divestment/separation of PhonePe from FPS. In pursuance of the same....
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....serves 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 - [1964] 53 ITR 261 (SC); (vii) M/s. Karam Chand Thapar & Bros. Pvt. Ltd. v/s. CIT (Central), Calcutta - (1972) 4 SCC 1....
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....h 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 considered opinion, the impugned order passed by the 1st respondent rejecting the application filed by the petitioner under Section 197 of the I.T Act for issuance of 'Nil Tax Deduction Certificate' is illegal, arbitrary and contrary to law and facts and the same dese....
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....uld 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 Saheb of Morvi [(1963) 49 ITR 594 (Bom)] head-note of which is extracted: "A voluntary payment which is made entirely without consideration and is not traceable to any source which a practical man may regard as a real source of his income but depends entirely on the whim of the donor cannot fall in the ca....
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....ands 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 the receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly or partly out or capital, and the receiver receives it as income on his part, the entire receipt is taxable in the hands of th....
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.... 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 the latter case the assessees had rights under the articles of association and received a capital sum to release them. The decision was merely that there was evidence to support the finding of the Commissioner, whereas in the present case the Commissioner held that the receipt was not of a capital nature; the observations of Rowlatt J., relied on, were obiter. That the compensation received in thi....
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....4. 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, but had no formal agreement with either company. In or about the year 1927 the two companies combined and decided to make other arrangements for the distribution of their products. The respondents' agency of the Burma company was accordingly terminated on December 31, 1927, and that of the Anglo-Persian company on June 30 following. Some time in the early part of 1928 the Burma company paid to the respondents a sum of Rs. ....
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....), 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 that it was only if it was in the nature of an income receipt that it would fall to be assessed to the tax. The question was, however, restated by the learned Chief Justice in more precise terms- namely, "whether these sums are income profits or gains within the meaning of the Act at all," and for the reasons stated in his judgment he came to the conclusion that they were not. Their Lordships think that his conclusion was right though they arrive at this result by a slightly different ....
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....m 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) business. By s. 2, sub-s. 4, business "includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture." The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under s. 10 the tax is to be payable by an assessee under the head business "in respect of the profits or gains of any business carried on by him." Again, their Lordships think, the same central idea: the words italicized are an essential constituent of that which is to produce the taxable ....
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....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 their Lordships are of opinion that question (a) was rightly answered by the High Court in favour of the assessee. No objection has been taken to the form of the answer or to its sufficiency, and it would seem unnecessary therefore to deal with the other two questions. Their Lordships will only add that the reasoning of this judgment would apply equally if the appellant based his claim on head (vi) "other sources" and the corresponding provisions of s. 12. With regard to the claim to exemption under s. 4, sub-s. 3 (vii), their Lordships think that the decision on the case of In re Turner Morrison & Co., to which refere....
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....y 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 structure of the petitioner and therefore, the payment is of capital receipt in nature, which is not subject / exigible / amenable to tax. In this context, it is relevant to refer to the judgment of the Apex Court in Ellis Bridge Gymkhana's case supra, wherein it was held as under: "5. The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxe....
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....ersons 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 the assets of the association on the date of its formation or at any time thereafter, are indeterminate or unknown, wealth tax will be levied upon and recovered from such association in the like manner and to the same extent as it is leviable upon and recoverable from an individual who is a citizen of India and is resident in India at the rates specified in Part I of Schedule I or at the rate of 3 per cent, whichever course is more beneficial to the Revenue." 33. It will appear from this notification that the Central Board of Direct Taxes clearly recognised that the charge of wealth tax was on individuals and Hindu Undivided Families and not on any other body of individuals or association of persons. ....
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....t 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 would expiry on January 14, 1957 i.e. on the expiry of twenty years from the date on which the Indian Companies (Amendment) Act, 1956, was brought into operation. Section 87-A(2), however, did not prevent the managing agent from being reappointed after the expiry of that period. 2. Beside the managing agency of Fort William Jute Co. Ltd. the appellant held at all material time managing agencies of five other limited companies viz. Fort Gloster Jute Manufacturing Co. Ltd., Bowreach Cotton Mills Co. Ltd., Dunbar Mills Ltd., Mothola Co., Ltd., and Joonktollee Tea Co. Ltd. The appellant had advanced Rs 12,50,000 to Fort William Jute Co. Ltd. on the security of the stocks, raw materials and manufactured goods of that Compa....
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....newal 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 tendered its resignation with effect from July 1, 1952, in pursuance of the terms of the agreement and M/s Mugneeram Bangur and Co. were appointed as managing agent of the Company. The sum of Rs 3,50,000 received by the appellant from the Company - which it is common ground was provided by M/s Mugneeram Bangur and Co. - was credited in the profit and loss account of the appellant as received from Fort William Jute Co. Ltd. on account of compensation for loss of office. But in arriving at the net profit in the return for income tax for the year 1953-54 this amount was deleted. In the proceedings for assessment for the year 1953-54 the Income Tax Officer, Companies District IV, Calcutta, included this amount in the appellant's taxable income. In appeal the Appellate....
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....ide, 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 great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts'." The interrelation of facts which have a bearing on the question propounded must therefore first be determined. The managing agency was not, except in the circumstances set out in clause 2 of the agreement, liable to be determined at the instance of the Company before January 14, 1957, unless the appellant by giving notice of three weeks voluntarily resigned the agency. At the date of termination the agency had five more years to run, and the Companies Act did not prohibit renewal of the agency in favour of the appellant, after the expiry of the initial period of twenty years. The appellant Company was formed for the object, amongst others, [vide clause 3(2) of the memorandum of association of t....
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....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 agency agreement the appellant was not entitled to any compensation, but by the device of procuring a purchaser the appellant was doing "business of selling the managing agency and getting a profit and value for it which it otherwise could not have got". The High Court stamped this transaction with the nature and character of a trading or a business deal, because in their view the managing agency of a Company - a institution peculiar to Indian business conditions - which creates a managing agent as an alter ego of the managed Company with authority to utilise the existing structure of the Company's organisation to carry on business, earn profits, and in fact, virtually to trade in every possible sphere open to the Company, may be regarded as circulating capital, where several managing agencies are conducted by an asses....
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....ellant 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 from M/s Mugneeram Bangur and Co., in consideration of the former agreeing to forego the agency which it held and which M/s Mugneeram Bangur and Co. were anxious to obtain. It was in a business sense a sale of such rights as the appellant possessed in the agency to M/s Mugneeram Bangur and Co. This is supported by the recitals made in clause 2 of the agreement that if at any time within six months after the completion of such sale M/s Mugneeram Bangur and Co. were unable to exercise the voting rights attached to the shares purchased by them, the appellant will appoint any person nominated by M/s Mugneeram Bangur and Co. to attend and vote for them at any meeting of the Company or the holders any class of shares to be held within such period in such manner as M/s Mugneeram Bangur and Co., may decide. The object underlying the agreement was therefor....
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....ny (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 tendered under clause 8 of the agreement and therefore the amount sought to be brought to tax was received by the assessee in the course of a normal trading transaction of the assessee. Finally, it was urged that in any event, by the loss of the agency the framework of the business of the assessee was not at all impaired, and therefore also the compensation received must be regarded as revenue and not capital. 11. Whether a particular receipt is capital or income from business, has frequently engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt : what is received as profit in trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Cases on the ....
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....rdingly. 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 interpretation of any specific provision, but on the concept of income, may not be regarded as proceeding upon any special principles peculiar to the English Acts so as to render them inapplicable in considering problems arising under the India Income Tax Act. It is well-settled in England that money paid to compensate for loss caused to an assessee's trade is normally regarded as income. In Short Bros. Ltd. v. Commissioner of Inland Revenue [12 TC 955] a sum received as compensation for loss resulting from cancellation of a contract was held to be revenue in the ordinary course of the assessee's trade, and liable to excess profits duty. Similarly in Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. Ltd. [12 TC 1162], compensation paid by a person who had agreed to purchase a certain quantity of chalk yearly for ten years, from a Company which was the owner of a....
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....ioned 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 receive a percentage of profits made by the subsidiary. The employment was terminated by mutual agreement two years after its commencement and GBP4000 were paid as compensation to the Managing Director for loss of his rights of future remuneration. This was held not taxable, because it was a sum paid as compensation for loss of a source of income and hence a capital asset. This case was followed in Honley v. Murray [31 TC 351] where the appellant employed as a Managing Director of a property Company under a service agreement which was not determinable till March 31, 1944, was also appointed a Director of a subsidiary Company. At the request of the Board of Directors of the property Company the appellant resigned his office in the property Company as well as its subsidiary and received from the property Company an amount equal to the remuneration which he would, under the agreement, have been entitled to if his appointment....
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....at 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 in Kelsall Parsons and Co. v. Commissioners of Inland Revenue [21 TC 608] to a case in which there was no express term for payment of compensation on termination of employment. The appellants in that case carried on business as agents on a commission basis for sale in Scotland of the products of various manufacturers, and entered into agency agreement for the purpose. At the instance of the manufacturer concerned one of the agreements which was for a period of three years were terminated at the end of the second year in consideration of a payment of GBP1500. It was held by the Court of Session that no capital asset of the assessee was depreciated in value, or became of less use for the purpose of the assessor's business. The sum paid was accordingly included in the calculation of the taxable profits for the year in which it was received. Lord President Normand observed at p. 620. "We are not embarrassed here by the kind of difficulties wh....
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....eing 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 [21 TC 608] . 24. In another case which soon followed Anglo-French Exploration Co., Ltd. v. Claysons [36 TC 545] the appellant Company carried on business, among others, as secretary and agent for a number of other companies. A South African company appointed the appellant Company as its secretary and agent at remuneration of a GBP1500 per annum under a contract terminable at six months' notice. Under on arrangement with the purchaser of the controlling interest of the shareholders under which the appellant Company was to resign its office as secretary and agent of the South African company, an amount of GBP20,000 received by the appellant Company was held by the Court of Appeal in the nature of a trading receipt. 25. In Blackburn v. Close Bros Ltd. [9 TC 164] the respondent Company carried on business of merchant bankers and of a finance and issuing house and derived income in the form of allowances for performing managerial and secretarial services. Following a d....
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....terations, 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 modification the framework of the respondent's business was impaired. 28. Elaborate arguments were presented before us on the decision of the Judicial Committee in Shaw Wallace and Co. case [LR 59 IA 206]. The appellant contended that Shaw Wallace and Co. case [LR 59 IA 206] laid down a principle of general application applicable to all cases of compensation received from the principal as solatium for determination of the contract of agency. Counsel for the Revenue contended that the principle should be restricted to its special facts, and cannot be extended in view of the later decisions, it is necessary to closely examine the facts which gave rise to that case. Shaw Wallace and Company carried on business as merchants and agents of various companies and had branch offices in different parts of India. For a number of years they acted as distributing agents in India for the Burma Oil Company and Anglo Persian Oil Company, but without a formal agreement with either Company. The two Oil Compan....
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....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 compulsory cessation, would be regarded as capital receipt, and for the application of this principle, existence of other independent commercial interests out of which profits were earned by the assessee was irrelevant. Two comments may be made at this stage. It cannot be said as a general rule, that what is determinative of the nature of the receipt is extinction or compulsory cessation of an agency or office. Nor can it be said that compensation received for extinction of an agency may always be equated with price received on sale of goodwill of a business. The test, applicable to contracts for termination of agencies is : what has the assessee parted with in lieu of money or money's worth received by him which is sought to be taxed? If compensation is paid for cancellation of a contract of agency, which does not affect the trading structure of the business of the recipient, or involve loss of an enduring asset, leaving the taxpayer free to carry on his trade released from the contract which is cancelled, the rece....
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....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 case [35 ITR 148, 152] a contract for the supply of limestone and dolomites was terminated when the purchaser Bengal Iron Company Ltd. found the rates uneconomical. A suit was then filed by the respondent for specific performance of the contract and for an injunction restraining the Company from purchasing limestone and dolomite from any other person. A fresh agreement made between the respondent and the Company fell through because of circumstances over which the parties to the agreement had no control. The Company then agreed to pay Rs 2,50,000 to the respondent as solatium, besides the monthly instalments of Rs 4000 remaining unpaid under the contract of 1940. The Income Tax Department sought to bring to tax the amount of Rs 2,50,000 and the balance due towards the monthly instalments of Rs 4000. It was held by this Court that the sum of Rs 2,50,000 was not paid to the respondent as compensation for expenses laid out for works at the quarry of a capital nature and could not be held to be a capital receipt on that account, ....
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....s 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 assessee Company took up managing agencies of several plantation companies. The managing agencies were liable to termination, but the assessee was entitled to compensation by the terms of the agreement. Talliar Estates Ltd. was one of the companies managed by the assessee. The agreement was a composite agreement about the managing agency rights and certain other rights. When Talliar Estates Ltd. went into liquidation the assessee received Rs 60,000 by way of compensation for loss of office and the question arose whether that amount was income in the hands of the assessee. The Madras High Court held that the loss of one of several managing agencies had little effect on the structure of the assessee's business even in tea or on its profit earning apparatus as a whole and the termination of the agreement with Talliar Estates could well be said to have been brought about in the ordinary course of business of the assessee and therefore the amount received was a trading receipt. 33. In the South India Pictures Ltd. case [29 ITR 910]: Rai B....
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....s customers and dealers in the respective territories : it formed part of the fixed capital of the assessee's business and was not circulating capital or stock-in-trade of their business and therefore payment made by the Company for determination of the contract or cancellation of the agreement was a capital receipt in the hands of the assessee. 35. In Godrej and Co. case [37 ITR 381] the managing agency agreement in favour of the assessee of a limited Company which was originally for a period of thirty years and under which the assessee was entitled to a commission at certain rates was modified and remuneration payable to the managing agents was reduced. As compensation for agreeing to this reduction, the assessee received Rs 7,50,000 which was sought to be taxed as income in the hands of the assessee. This Court held, having regard to all the attending circumstances, that the amount was paid not to make up the difference between the higher remuneration and the reduced remuneration, but in truth as compensation for releasing the Company from the onerous terms as to remuneration as it was in terms expressed to be : so far as the assessee firm was concerned it was received as ....
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....s, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. But it is for the income tax department to clearly establish that the case fell within the exception to the ordinary rule. In the present case according to the findings of the tribunal, the termination of the agency in question had resulted in the destruction of a source of income of the company. The tribunal had arrived at the conclusion that the managing agencies held by the company represented the sources from which it received its income by way of commission. 9. In the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question 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. That, however, is not to say that the question is one of fact, for these questions between capital and income trading profit or no trading profit, are questions which, though they may depend to a very great ex....
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....bunal confirmed the said finding, on reference to the High Court, the High Court arrived at a conclusion that it was a revenue receipt assessable to income tax as business income for Assessment Year 1979-80. Hence, this appeal by special leave by the assessee. 5. The question whether the receipt is capital or revenue is to be determined by drawing the conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This Court in the case of Karam Chand Thapar & Bros. (P) Ltd. v. CIT [(1972) 4 SCC 124 : 1973 SCC (Tax) 614 : (1971) 80 ITR 167] discussed and held that in CIT v. Chari and Chari Ltd. [(1965) 57 ITR 400 : AIR 1966 SC 54] it was held that ordinarily compensation for loss of an office or agency is regarded as 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 nec....
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....me." In Godrej's case supra, the Apex Court held as under: "8. This sum of Rs. 7,50,000/- has undoubtedly not been paid as compensation for the termination or cancellation of an ordinary business contract which is a part of the stock-in-trade of the assessee and cannot, therefore, be regarded as income, as the amounts received by the assessee in CIT and Excess Profits Tax v. South India Pictures Ltd [(1956) SCR 223, 228] and in CIT v. Rai Bahadur Jairam Valji [(1959) 35 ITR 148 : (1959) SCR Supp 110] had been held to be. Nor can this amount be said to have been paid as compensation for the cancellation or cessation of the managing agency of the assessee firm, for the managing agency continued and, therefore, the decision of the Judicial Committee of the Privy Council in CIT v. Shaw Wallace and Co. [(1932) LR 59 IA 206] cannot be invoked. It is, however, urged that for the purpose of rendering the sum paid as compensation to be regarded as a capital receipt, it is not necessary that the entire managing agency should be acquired. If the amount was paid as the price for the sterilisation of even a part of a capital asset which is the framework or entire structure of the assessee....
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....000 must be regarded as having been paid as compensation for this injury to or deterioration of the managing agency just as the amounts paid in Glenboig case [(1922) 12 TC 427] or Vazir Sultan case [ Civil Appeal No. 346 of 1957, decided on March 20, 1959;(1959) 36 ITR 175] were held to be. This is also very nearly covered by the majority decision of the English House of Lords in Hunter v. Dewhurst [(1932) 16 TC 605]. It is true that in the later English cases of Prendergast v. Cameron [(1940) 23 TC 122] and Wales Tilley [(1943) 25 TC 136] the decision in Hunter v. Dewharst [(1932) 16 TC 605] was distinguished as being of an exceptional and special nature but those later decisions turned on the words used in Rule 1 of Schedule E. to the English Act. Further, they were cases of continuation of personal service on reduced remuneration simpliciter and not of acquisition, wholly or in part, of any managing agency viewed as a profit-making apparatus and consequently the effect of the agreements in question under which the payment was made upon the profit making apparatus, did not come under consideration at all. On a construction of the agreements it was held that the payments made were....
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.... a total sum of Rs. 2,22,080 as compensation including a sum of Rs. 10,000 for repairs to quarters for labourers and Rs. 144 which represented the assessor's fee. For the year 1945, corresponding to the assessment year 1946-1947, the military authorities paid a sum of Rs. 2,46,794 which included a sum of Rs. 15,231 for other repairs. The sums paid for repairs appear to have been admitted as paid on capital account and rightly so. The question was whether the two sums paid in the two years minus these admitted sums, or any portion thereof were received on revenue or capital account. The assessments for the two years were made by different Income- tax Officers. For the assessment year 1945-1946 the Income-tax Officer deducted from Rs. 2,22,080, a sum of Rs. 1,03,000 on account of admissible expenses. He then applies to the balance Rs. 1,17,080, rule 24 of the Indian Income-tax Rules, 1922, and brought to tax 40 per cent. of that sum amounting to Rs. 46,832. The assessment was made under section 23(4). For the assessment year 1946-47, the assessment was made under section 23(3) of the Income-tax Act. The Income-tax Officer excluded the sum paid on account of repairs and treated ....
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....ole of the said sums less the expenses incurred by the assessee in tending the tea bushes constituted agricultural income in his hands exempt from tax under the Indian Income- tax Act, 1922?" The reference was heard by Sarjoo Prasad, C.J., and Ram Labhaya, J., along with two writ petitions which had also been filed. They delivered separate judgments, but concurred in their answers. The High Court answered both the question against the appellants. The writ petitions were also dismissed. Before we deal with this appeal, we consider it necessary to state at this stage the method of calculation of compensation adopted by the military authorities. It is not necessary to refer to both the years, because what was done in the first year was also done in the following year except for the change in the amounts. This method of calculation is taken from the order of the Judicial Member and is as follows: Rs. a. p. Crop-2,11,120 1bs. at 17.85 d (half) and at 18.35 d (half) 2,12.292 14 0 15,480 1bs. at Rs. 0-11-10 11,449 12 0 52,600 1bs. at Rs. 0-15-6 50,956 4 0 Less-Saving of plucking and manufacturing: (a) Expenses at annas 3 per 1b.....
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....e thus required to determine what was it that was paid for, or in other words what did the two payments replace if they replaced anything. The arguments at the Bar followed the pattern which has by now become quite familiar to courts. We were taken to the 12th volume of the Tax Cases series, where are collected cases dealing with excess profits duty and corporation profits tax in England following the First World War, and to other English case reported since. These cases have been considered and applied on more than one occasion by this court and we were referred to those cases as well. Now, it is necessary to point out that the English cases were decided under a different system of taxation and must be read with care. A case can only be decided on its own facts, and the desire to base one's decision on another case in which the facts appear to be near enough sometimes leads to error. It is well to remember the wholesome advice given by Loar Dunedin in Green v. Gliksten & Son Ltd.,*[1929] 14 Tax. Cas.364 that "in these Income Tax Act cases one has to try as far as possible to tread a narrow path because there are quagmires on either side into which one can easily be led ......
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....e of capital. The hole made in the capital was filled up by the compensation paid. It was said that a portion of the capital asset was sterilised and destroyed, and even though the business went on, the payment was treated as on capital account. The case cannot be used as precedent because here no doubt the factories and buildings were a part of fixed capital, but the payment was not so much to replace them in the hands of the appellants as to compensate them for the stoppage of business. The Glenboig case does not apply. The case of Short Bros. Ltd. v. Commissioners of Inland Revenue - (1927) 12 Tax.Cas.955, another case under the excess profits duty illustrates a contrary principle. The company had agreed to build two ships but the contracts were cancellation and ? 100,000 was paid for cancellation of the contracts. This was held to be a receipt in the ordinary course of the company's trade. Rowlatt, J., said that it was "simply a receipt in the course of a going business, from that going business-nothing else". In the Court of Appeal, Lord Hanworth, M.R., affirmed the decision, observing: "Looked at from this (business) point of view it appears clear that the sum receive....
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....issioners of Inland Revenue because the ships lay idle and their use was interrupted. The learned Judge then concluded: "Now it is quite clear that if a source of income is destroyed by the exercise of the paramount right....and compensation is paid for it, that is not income, although the amount of the compensation is the same as the total of the income that has been lost....but in this case I have got to decide the case of temporary interference.... Here these ships remained as ships of the concern....they merely could not sail for a certain number of days, and in lieu of the value of the use which they would have been to their owners in their profit earning capacity during those days, in lieu of that receipt, this money was paid to the owners, although they were not requisitioned, as if requisitioned....I think I ought to regard this sum, as the Commissioners have obviously regarded it, as a sum paid which to the shipowners stands in lieu of the receipts of the ship during the time of the interruption." This decision was approved by the Court of Appeal. Now, the case was one of loss of time during which the ships would have been usefully and profitably employed. It was argue....
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....clearer case than the Ensign case (1927) 12 Tax Cas. The matter was covered by section 38 of the Finance (No. 2) Act of 1915, Fourth Schedule, Part 1(1), where the words were "The profits shall be taken to be the actual profits arising in the accounting period." In Barr Crombie & Co, Ltd. v. Commissioners of Inland Revenue [1947] 15 I.T.R. (Suppl.) 56., the company's business consisted almost entirely of managing shipping for another company. When the shipping company went into liquidation, a sum was paid as compensation to the managing company. It was held that this was a capital receipt. The reason for holding thus was that the structure of the managing company's whole business was affected and destroyed, and this was not profit but compensation for loss of capital. Kelsall Parsons & Co. v. Commissioners of Inland Revenue (1938) 21 Tax, to which we shall refer presently, was distinguished on the ground that, though in that case the agency was cancelled, the payment was for one year and that too, the final year. This case is important is one respect, and it is that if the entire business structure is affected and destroyed, the payment may be regarded as replacing capita....
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....yhound Racing Association (Liverpool) Ltd. v. Cooper (1936) 20 Tax Cas. 373., which was a case of surrender of an agreement in which the amounts were treated as trading receipts, are not cases of stoppage of a business and are not relevant. Kelsall Parsons' case (1938) 21 Tax Cas. 608, where one of the agreements of a commission agency which was to run for 3 years was terminated at the end of the second year and compensation of ? 1,500 was paid for the last and final year, was held on its special facts to involve taxable profits of trading. Though the business came prematurely to an end, the structure of the business was not affected because the payment was in lieu of profits in the final year of the business as if business had been done. The payment was held to be within the structure of the business in the same way as in Shove v. Dura Manufacturing Co. Ltd. (1941) 23 Tax Cas. 779. The converse of these cases is the well-known Van den Berghs Ltd. v. Clark (1935) 3 I.T.R. (Eng. Cas.) 17., where mutual trade agreements were rescinded between two companies and ? 450,000 were paid to the assessee company as "damages". This was treated as capital receipt and not and income receipt to b....
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....ancy. He observed that money advanced to produce the cinema pictures, it returned, would have been credited on the capital side as a return of capital, just as expenditure for distribution work was revenue expenditure and the commission, a revenue receipt. On a purity of reasoning, the learned judge held that money spent in acquiring distribution rights was a capital outlay, and that when distribution rights were surrendered, it was capital which was returned, since the agreement was a composite one, the films were a capital asset and the payment for their release was a return of capital. With due respect, it is difficult to see how the payment could be regarded as capital in that case. The fact which seems to have been overlooked in the minority view was that the entire capital outlay had, in fact, been previously recouped and even the security held by the South India Pictures had been extinguished. It was a portion of the running business which ceased to be productive of commission and by the payment, the commission which would have been earned and would have constituted a revenue receipt when so earned, was put in the pockets of the South India Pictures. The business of the So....
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....f what was adjusted was the relationship between the parties and if there was a going business as, in fact, there was, the case comes within the dicta in the South India Pictures Ltd. Case [1956] 29 I.T.R. 910 and Jairam Valji's case [1959] 35 I.T.R. 148.. The case can only be a decision on the narrow ground that a portion of the "fixed capital" was lost and paid for. In Godrej & Co. v. Commissioner of Income-tax [1959] 39 I.T.R. 381., the assessee firm, which held a managing agency, released the managed company from an onerous agreement and in consideration was paid Rs. 7,50,000. It was held that the payment was not made to make up the difference in the remuneration of the managing agency firm but to compensate it for the deterioration or injury of an enduring kind to the managing agency itself. The injury being thus to a capital asset, the compensation paid was held to be on capital account. The last case of this court to which reference may be made is Commissioner of Income-tax v. Shamsher Printing Press [1960] 39 I.T.R. 90. That was a very special case. There, the premises of the press were requisitioned by Government, but the press was allowed to set up its business el....
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....rities prior to 1935 to which we have referred (and some more) were used in aid of arguments; but the Judicial Committee, for reasons which are now illustrated by this judgment, declined to comment on them. Shaw Wallace and Co. did many business, and included in them was the managing agency of two oil-producing companies. This agency was terminated, and compensation was paid for it. The usual question arose about capital or revenue. The Full Bench of the Calcutta High Court related the payment of goodwill, but the Judicial Committee rejected that ground because no goodwill seemed to have been transferred. The Judicial Committee also rejected the contention that it was compensation in lieu of notice under section 206 of the Indian Contract Act, as there was no basis for it either. The Judicial Committee held that income meant a periodical monetary return coming in with some sort of regularity or expected regularity from a definite source and in business was the produce of something "Loosely spoken of as capital". In business, income is profit earned by a process of production, or, in other words, by the continuous exercise of an activity. In this sense, the sum sought to be charge....
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....t involve the buying of tea either as raw material or even as a finished product. If that had been the case, it might have been possible to say that since business was done, though compulsorily, profits had resulted. It was not even a case in which the business continued, and what was paid was to bring up the profits to normal level. the observations of Rowlatt, J., in Newcastle Breweries' case (1927) 12 Tax Cas. 927., distinguish a case where business is carried on and one in which business comes to an end. The learned Judge observes: "Now I have no doubt that a Government requisition, such as took place during the war, could destroy a trade, and anything which was paid would be compensation for such destruction. I can understand, for instance, if they had requisitioned in this case the people's building and stopped them either brewing and selling or doing anything else, and paid a sum, that could not be taken as a profit; they would have destroyed the trade pro tempore and paid compensation for that destruction; and in fact I dare say if they take the whole of the raw materials of a man's trade and prevent him carrying it on, and pay a sum of money, that is to be taken,....
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....is sufficient to say that it was not profit of a business. Once it is held that this was not profit at all, it is clear that rules 23 and 24 of the Indian Income-tax Rules could not apply, and there was no question of apportioning the amount, as laid down in rule 24. The whole of the amount received by the assessee was not assessable. It remains to consider whether the payment could be treated as income from property under section 9 of the Income-tax Act. That this was never the case of the Department is clear from the fact that the income was not processed under that section, and even the Judicial Member of the Tribunal, who entertained this opinion, did not express it as his decision in the case. This aspect of the matter not having been considered in the case before, we cannot express any opinion upon it. In our opinion, the answer to the two questions ought to have been: Question (1): No. Question (2): Does not arise. In the result, the appeal is allowed with costs here and in the High Court. Appeal allowed." In Saurashtra Cement's case supra, the Apex Court held as under: "16. In Kettlewell Bullen and Co. Ltd. [AIR 1965 SC 65] dealing with the question whether....
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....ment and Clause 6 thereof came into play. The aforestated amount received by the assessee towards compensation for sterilisation of the profit earning source, not in the ordinary course of their business, in our opinion, was a capital receipt in the hands of the assessee. 19. We are, therefore, in agreement with the opinion recorded by the High Court on Questions (i) and (ii) extracted in Para 2 and hold that the amount of Rs. 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt."" (iii) The one time voluntary compensation paid to the petitioner also cannot be treated as a salary under Section 15 of the I.T Act or perquisite under Section 17(2)(vi) of the I.T Act; in this context, it is relevant to state that taxability would arise only when the option holder exercises its option, at which stage the market value of the allotted share and the value of the stock option is charged as perquisite in the hands of the option holder, especially when there is computational impossibility, when there is no allotment of shares as held by the Apex Court in Srinivasa Shetty's case supra as under: "8. The section operates if there is a tran....
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....n of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit' and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896 AC 7] as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern." A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Macnaghten to remark in CIT v. Muller & Co.'s Margarine Limited [1901 AC 217] that although goodwill was easy to describe, it was nonetheless difficult to define. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the r....
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....e charging section. Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head. 11. The point to consider then is whether if the expression "asset" in Section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer. 12. The mode of computation and deductions ....
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.... passes to an assessee in any of the modes specified in sub-section (1) of Section 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can sub-section (3) of Section 55 be invoked, because the date of acquisition by the previous owner will remain unknown. 16. We are of opinion that the goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of Section 45, and therefore its transfer is not subject to income tax under the head "Capital gains". 17. The question which has been raised before us, has been considered by some High Courts, and it appears that there is a conflict of opinion. The Madras High Court in CIT v. K. Rathnam Nadar [(1969) 71 ITR 433 (Mad HC)], the Calcutta High Court in CIT v. Chunilal Prabhudas & Co. [(1970) 76 ITR 566 (Cal HC)], the Delhi High Court in Jagdev Singh Mumick v. CIT [(1971) 81 ITR 500 (Del HC)], the Kerala High Court in CIT v. E.C. Jacob [(1973) 89 ITR 88 (Ker HC)], the Bombay High Court in the CIT v. Home Industries & Co. [(1977) 107 ITR 609 (Bom HC)] and CIT v.....
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....f acquisition under Section 48, there is, as we have said, no doubt that a monthly tenancy or leasehold right is a capital asset and that the amount received on its surrender was a capital receipt. But because we have held that Section 45 cannot be applied, it is not open to the Department to impose tax on such capital receipt by the assessee under any other section. This Court, as early as in 1957 had, in United Commercial Bank Ltd. v. CIT [(1957) 32 ITR 688 : 1958 SCR 79] held that the heads of income provided for in the sections of the Income Tax Act, 1922 are mutually exclusive and where any item of income falls specifically under one head, it has to be charged under that head and no other. In other words, income derived from different sources falling under a specific head has to be computed for the purposes of taxation in the manner provided by the appropriate section and no other. It has been further held by this Court in East India Housing and Land Development Trust Ltd. v. CIT [(1961) 42 ITR 49 (SC)] that if the income from a source falls within a specific head, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head....
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....erefore, whenever an amount which is otherwise a capital receipt is to be charged to tax, section 2(24) specifically so provides. In the case of CIT v. Gulub Chand, [1991] 192 ITR 495 (All), the assessee received Rs. 15,000 as surrender value for surrendering the tenancy of a godown occupied by the assessee as a tenant. In the return filed by him, the amount was shown as capital gains. The assessee claimed that the amount was non- taxable. The Income-Tax Officer held that the amount was taxable as a casual and non-recurring receipt under section 10(3) of the Act. The Tribunal held that the amount received was a capital gain. On a reference, it was held by the High Court that section 10(3) applied to capital receipts. That, if the amount received for surrender of the tenancy right was a capital gain but was not chargeable under section 45 then the receipt would fall under section 10(3). With respect, we do not agree with the said judgment. The Allahabad High Court has failed to read section 2(24)(vi) in its entirety. Reading section 2(24)(vi) in its entirety, it is only capital gains which are chargeable under section 45 which are included in the definition of the word "income". ....
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....capital gains by the statute would become taxable as casual and non- recurring receipt. That, capital gains have been specifically dealt with under sections 45 to 55 of the Act. That, any amount received on transfer of a capital asset is liable to be taxed in accordance with the specific provisions of section 45 to section 55 of the Act and if any amount of capital gain is not taxable as capital gain for any reason, then that amount cannot be treated as a casual and non-recurring receipt under section 10(3) of the Act. That, section 10(3) does not apply to capital receipts. That, proviso (i) to section 10(3) recognises that capital gains chargeable under section 45 will not come within its ambit. That, section 10 lays down that certain categories of income will not be included in the computation of total income of a person. That, a casual receipt not exceeding. Rs. 5,000 will not be taxed. However, from this it does not follow that any capital receipt above Rs. 5,000 will have to be taxed. That, if a person receives Rs. 10,000 by way of legacy, the amount cannot be brought to tax on the ground that it is a casual and non-recurring receipt above Rs. 5,000. That/section 10 is not a c....
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.... It is further contended that section 14 of the Income-Tax Act shows that all capital gains constitute income. That, under section 14 the expression "capital gains" is not restricted to chargeability under section 45. We do not find any merit in this contention. The' point which arises for determination in this case did not arise in the case of B.C. Srinivasa Setty's case, [1981] 128 ITR 294 (SC). Secondly, as stated above, capital gains chargeable under section 45 alone are treated as income by the Legislature. Thirdly, statutory tenancy is held to be property by the Supreme Court. It is a real asset. It is not a self-generated asset as in the case of a goodwill. Lastly, the amendments made to the Income- Tax Act with effect from April 1, 1995, under which cost of acquisition is to be calculated as nil clearly shows that the Act applies only to capital gains chargeable under section 45. If such gains fell under section 56 as is now sought to be contended then one fails to understand why the Legislature should have opted for a lesser incidence of tax. If capital gains fell under section 56 as is contended by the Department then such receipt would be liable to tax at the rat....
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....ising on transfer of such an asset would fall under section 56. We do not find merit in this argument. A cost to the assessee in the acquisition of the asses is contemplated. If the whole of the value of the capital asset transferred is brought to tax under section 56 then what would be charged is the capital value of the asset and not any profit and gain as is contemplated only in section 45. The term "capital asset" means property of any kind held by an assessee whether or not connected with his business or profession [see section 2(14)]. On the other hand, "capital gains" means any profit or gain arising from the transfer of a capital asset. Under section 2(47), the word "transfer" in relation to a capital asset is defined to include sale, exchange or relinquishment of the asset or extinguishment of any rights therein. In the present matter, the Department has not disputed that tenancy right is a property. It has not disputed that tenancy right is a capital asset. It has not disputed that surrender of the tenancy rights constituted transfer. Section 48 provides that from the full value of consideration received or accruing as a result of the transfer of capital asset, the follow....
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....operty. It falls under section 2(14) of the Income-Tax Act. As stated above, both sides have agreed on the footing that tenancy right is a property right. Both sides have argued on the footing that it is a capital asset. The only difference in the arguments of two sides is that, according to the Department, the Income-Tax Act seeks to tax capital gains arising from transfer of an asset which has no cost of acquisition under section 56 of, the Act (see the written propositions). As stated above, we do not find any merit in the above arguments. Even section 14 can only apply provided the receipt accrues on revenue account, either in the general sense or under the extended meaning given under the Income- Tax Act. Even if the Department seeks to bring such receipts under the residuary head, the onus is on the Department in the first instance to show as to how such a receipt would constitute income item. The Department has failed to discharge this burden. In the case of CIT v. J.V. Kolte, [1999] 235 ITR 239 (Bom), the Division Bench of this court laid down that in construing fiscal statutes and in determining the liability of a subject to tax, one must have regard to the strict letter o....
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....been held that income which falls under one specific head could not be brought to tax under any other head. If for any reason, the computation machinery fails, it is not open to the Department to apply the residuary clause." (v) It is also relevant to state that in the instant case, the cost of acquisition of stock auctions by the petitioner cannot be determined and therefore, Section 48 of the I.T. Act cannot be applied; similarly, Section 45 is not applicable because the charging section and the computation section constitute an integrated code as held by the Apex Court in Mathuram Agarwal's case supra, as under:- "12. Another question that arises for consideration in this connection is whether sub-section (1) of Section 127-A and the proviso to sub-section (2)(b) should be construed together and the annual letting values of all the buildings owned by a person to be taken together for determining the amount to be paid as tax in respect of each building. In our considered view this position cannot be accepted. The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In ....
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....ly remains the same does not constitute a revenue receipt that can be subject to Income Tax. (vii) As rightly contended by the learned Senior counsel for the petitioner, the issue in controversy in relation to the subject FSOPs issued in favour of an employee of FIPL who was identically / similarly situated to that of the petitioner came up for consideration before the Division Bench of the Delhi High Court in Sanjay Baweja's case supra, wherein it was held as under:- The petitioner, vide the instant petition, seeks to assail the order dated 15.07.2023 passed under Section 197 of the Income Tax Act, 1961 ["Act"], whereby, the Revenue rejected the petitioner's application seeking 'Nil' deduction at source certificate. 2. The brief facts relevant to appreciate the controversy at hand would reveal that the petitioner is an ex-employee of the company namely Flipkart Internet Private Limited ["FIPL"] which is a wholly-owned subsidiary of Flipkart Marketplace Private Limited ["FMPL"]. In addition thereto, the FMPL is the wholly-owned subsidiary of Flipkart Pvt. Ltd., Singapore ["FPS"]. 3. In 2012, the FPS rolled out an Employee Stock Option Plan ["ESOP"] called as Flip....
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....tock options were merely held by the petitioner and the same had not been exercised till date. 10. Furthermore, he argued that the one-time voluntary payment made by FPS was not in relation to the employment of the petitioner with FIPL and thus, cannot partake the character of salary which was liable to be taxed under Section 15 of the Act. It is, therefore, submitted that since the payment made by FPS cannot be construed as perquisite, the direction for deduction of TDS cannot be countenanced in law. In order to substantiate his submissions, he placed reliance on the decisions of Empire Jute Co. Ltd. v. CIT [1980] 3 Taxman 69/124 ITR 1/ 4 SCC 25, Shrimant Padmaraje R. Kadambande v. CIT [1992] 3 SCC 432., Godrej & Co. v. CIT 1959 SCC OnLine SC 101 and Empire Jute Co. Ltd.'s case (supra). 11. Per contra, Mr. Prashant Meherchandani, learned Senior Standing Counsel appearing on behalf of the Revenue, vehemently opposed the submissions. He argued that the present writ petition has become infructuous as the transaction already took place on 31.07.2023. He submitted that proceedings under Section 197 of the Act are not a fact-intensive exercise and rather, it is an administrative....
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....yer company that this payment would not be subject to withholding tax but interestingly, the assessee has not challenged the deduction of tax at source by the payer but instead he has chosen to request for issuance of a Nil TDS certificate. 1. The assessee has not been able to satisfactorily prove that the amount receivable by him would be exempt under any express provisions of the Act. 1. The assessee has stated that he would be reporting this income as exempt in his ITR. Since the quantum of income sought to claimed as exempt is quite substantial, there is a high probability that this ITR would selected for scrutiny assessment and if the claim of the assessee is not accepted by the assessing officer, it may result in creation of tax demand. Hence issuance of a Nil TDS certificate at this stage would be detrimental to the interest of revenue and recovery of taxes. 1. Section 17 (2) (vi) of the Act states that Perquisite includes "...the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the assessee.." The phrase "directly or indirectly" used in th....
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....ived was linked to ESOPs as a form of compensation for diminution of the fair market value of stocks. 16. At the outset, it is relevant to point out that this Court vide order dated 23.08.2023 directed the petitioner to file an affidavit apprising about the number of options held by him as on the record date. Pursuant to the said order, the petitioner filed an affidavit stating that out of the total number of shares i.e., 1,27,552 allotted to him, he holds 33,482 stock options as on the record date of 23.12.2022. The detailed calculation as appended in the tabular chart is reproduced herein for reference:- S.No. Particulars No. of stock options/compensation i. Options granted 1,27,552 ii. Vested options (25% of the total options granted) after 1 year i.e.01.11.2015 [25% of (i)] =31,888 iii. Remaining 75% stock options to be vested in next 36 months [(i)-(ii)] =95,664 95,664/36=(2657/month) iv. Vested Options upto 31.10.2016 (2657x12 months) =31,884 v. Total vested options upto 31.10.2016 [(i)+(v)] =63,772 vi. Cancelled options on account of termination of employment on 31.10.2016 [(i)-(v)] =63,780 vii. Options repurchased by Walmart in the year 2017 (....
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....and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme; (b) "sweat equity shares" means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; (c) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee in respect of such security or shares; (d) "fair market value" means the value determined in accordance with the method as may be prescribed; (e) "option" means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price" 19. At this juncture, it is imperative to point out that the determination as to whether a particular receipt would tantamount to a capital receipt or rev....
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.... numerous judgments on the point, this Court laid down the following broad principle, which may be taken into account in reaching a decision on the issue: (Kettlewell Bullen and Co. Ltd. case [AIR 1965 SC 65], AIR p. 79, para 36) "36. ... Where on a consideration of the circumstances, payment is made to compensate a person for cancellation 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." 20. As per the understanding of the Revenue, the said one-time voluntary payment at the discretion of the management of FPS shall be pegged under the head of perquisite as per Section 17(2)(vi) of the Act. It is thus pertinent t....
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.... clauses (i), (ii) and (iii) of sub- section (1) of Section 15. These constitute different clauses as has already been pointed out by us. The fact that the assessee has applied for a grant for maintenance, nor again, the periodicity of payment, would be conclusive as we will demonstrate later. *** 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 Saheb of Morvi [[1963] 49 ITR 594 (Bombay) ] head-note of which is extracted: "A voluntary payment which is made entirely without consideration and is not traceable to any source which a practical man may regard as a real source of his income but depends entirely on the whim of the donor cannot fall in the category of income. The ruler of a native State abdicated in favour of his son in January, 1948. From April, 1949, onwards his son paid him a monthly allowance. The allowance was not paid under any custom or usage. The allowance could not be regarded as maintenance allowance, as the assessee possessed a large fortune. Held, that as the payments were c....
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....oked. It is, however, urged that for the purpose of rendering the sum paid as compensation to be regarded as a capital receipt, it is not necessary that the entire managing agency should be acquired. If the amount was paid as the price for the sterilisation of even a part of a capital asset which is the framework or entire structure of the assessee's profit making apparatus, then the amount must also be regarded as a capital receipt, for, as said by Lord Wrenbury in Glenboig Union Fireclay Co. Ltd. v. IRC [(1922) 12 TC 427] "what is true of the whole must be equally true of part"- a principle which has been adopted by this Court in CIT v. Vazir Sultan and Sons [Civil Appeal No. 346 of 1957, decided on March 20, 1959; (1959) 36 ITR 175]. The learned Attorney-General, however, contends that this case is not governed by the decisions in Shaw Wallace's case [(1932) LR 59 IA 206] or Vazir Sultan and Son case [Civil Appeal No. 346 of 1957, decided on March 20, 1959;(1959) 36 ITR 175] because in the present case there was no acquisition of the entire managing agency business or sterilisation of any part of the capital asset and the business structure or the profit making apparatus....
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....ter and not of acquisition, wholly or in part, of any managing agency viewed as a profit-making apparatus and consequently the effect of the agreements in question under which the payment was made upon the profit making apparatus, did not come under consideration at all. On a construction of the agreements it was held that the payments made were simply remuneration paid in advance representing the difference between the higher rate of remuneration and the reduced remuneration and as such a revenue receipt. The question of the character of the payment made for compensation for the acquisition, wholly or in part, of any managing agency or injury to or deterioration of the managing agency as a profit-making apparatus is covered by our decisions hereinbefore referred to. In the light of those decisions the sum of Rs 7,50,000 was paid and received not to make up the difference between the higher remuneration and the reduced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. In other words, so far as the managed company was concerned, it was paid for securing immunity fr....
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.... receipt as revenue receipt and that too on the basis of the manner or nature of payment, as comprehensible by the deductor. Such a position was also settled in the decision of the Supreme Court in the case of Empire Jute Co. Ltd. (supra), wherein, it was held as under:- "4. Now an expenditure incurred by an assessee can qualify for deduction under Section 10(2)(xv) only if it is incurred wholly and exclusively for the purpose of his business, but even if it fulfils this requirement, it is not enough; it must further be of revenue as distinguished from capital nature. Here in the present case it was not contended on behalf of the Revenue that the sum of Rs 2,03,255 was not laid out wholly and exclusively for the purpose of the assessee's business but the only argument was and this argument found favour with the High Court, that it represented capital expenditure and was hence not deductible under Section 10(2)(xv). The sole question which therefore arises for determination in the appeal is whether the sum of Rs 2,03,255 paid by the assessee represented capital expenditure or revenue expenditure. We shall have to examine this question on principle but before we do so, we must ....
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....allotment, directly or indirectly, by the employer. As per Explanation (c) to Section 17(2)(vi) of the Act, the value of specified security could only be calculated once the option is exercised. A literal understanding of the provision would provide that the value of specified securities or sweat equity shares is dependent upon the exercise of option by the petitioner. Therefore, for an income to be included in the inclusive definition of "perquisite", it is essential that it is generated from the exercise of options, by the employee. The facts of the present case suggest that the petitioner has not exercised his options under the FSOP till date. Under the facts of the present case, the stock options were merely held by the petitioner and the same have not been exercised till date and thus, they do not constitute income chargeable to tax in the hands of the petitioner as none of the contingencies specified in Section 17(2)(vi) of the Act have occurred. 26. Moreover, the compensation was a voluntary payment and not transfer by way of any obligation. Notably, the present is not a case where the option holder has exercised his right. Rather, the facts suggest that the petitioner has....
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....nnot be countenanced in law, as the stock options were not exercised by the petitioner and the amount in question was onetime voluntary payment made by FPS to all option holders in lieu of disinvestment of PhonePe business. 29. Accordingly, we set aside the impugned order dated 15.07.2023. We, however, note that since the transaction already took place on 31.07.2023, we, accordingly, accord liberty to the petitioner to file an application for refund of TDS amount before the Revenue. It is further directed to the Revenue to consider the application of the petitioner in view of the observations made hereinabove and as per extant regulations. 30. In view of the aforesaid, the writ petition is allowed in the above terms and disposed of, along with pending applications, if any." As can be seen from the aforesaid judgment, the Delhi High Court while dealing in the exact facts and circumstance where the onetime payment made by FPS on account of diminution of value of stock option, pursuant to the divestment 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 ....
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....y either the assessee or the Income Tax Department. A reading of the aforesaid Judgment also demonstrates that no argument either by the assessee or the department was made whether the compensation could be taxed as perquisites under the head 'salaries' or not. Despite, no issues having been raised by either side, the learned Single Judge erroneously come to a finding that compensation could be held as perquisites and charged to tax under the salary. (d) It is relevant to state that the aforesaid order of the learned Single Judge has not been accepted by the assessee and an appeal has been filed against the aforesaid order, which is pending consideration. (e) The order impugned before the learned Single Judge was that the compensation could be taxed under the head Capital Gain because the assessee had transferred the right to sue which was a capital asset: the only issue involved before the learned Single Judge 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 ....
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....d on several judgments of the Apex Court to hold that a onetime voluntary compensation for the diminution in value of profit making structure would amount to a capital receipt not chargeable to income tax. These judgments fully apply to the facts of the case where the divestment of PhonePe business by FPS would lead to a permanent loss and value of the ESOPs as the ability to generate profits from such business and would no longer enrich the value of ESOPs or the resultant shares. The learned Single Judge erroneously held that such ESOPs would be actionable claim not capable of generating revenue and ignored the fact that there was a permanent loss of revenue generating source. (j) The compensation has been erroneously held to be 'perquisites' by the learned Single Judge who erroneously concluded that the ESOP granted to the petitioner qualifies as ESOP under Companies Act, 2013 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 i....
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....er and nor the stock options scheme was restricted to employees. The stock options had been also allotted to employees of group companies, advisors, consultant etc. A compensation to such diverse group could not be characterised as perquisites or salaries and taxed by implication under the head 'salaries'. (n) It is therefore clear that while the judgment of the Division Bench of the Delhi High Court in Sanjay Baweja's case supra, is directly and squarely applicable to the facts of the instant case, the judgment of the learned Single Judge of the Madras High Court in Nishithkumar's case supra, cannot be relied upon by the respondents - revenue in support of their claim, which cannot be accepted. (ix) Insofar as the contention of the respondents-revenue that the present petition is not maintainable in the light of the 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, ....
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....etitioner it would not be liable to pay corporate tax in the immediate future in view of the likely loss for the assessment year 2018-19 and the huge carried forward losses. 6. Therefore, on 27 February 2017, Petitioners applied to the Respondent No. 1 seeking an issuance of nil/lower withholding taxes under Section 197 of the Act. This was to enable the Petitioner to receive its payments from various parties which are subject to tax deduction at source, without deduction at source. In support of the above, the application pointed out that their accumulated losses carried forward as on 1 April 2014 is over Rs. 4000.00 Crores - both as per MAT provisions and under the normal provisions. Further, the Petitioner had filed loss returns for Assessment Years 2015-16 and 2016-17. It was also submitted 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 fina....
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....er, calling upon it to show cause as to why the certificate dated 4 May 2017 should not be reviewed/ canceled. This was on account of outstanding demand of taxes payable. Besides, relying upon the extract of Central Action Plan 2017-18 issued by CBDT which directs the Officers to follow the instructions/certificate issued by the CBDT and also mentions of Certificates being issued where large demands are pending. The Petitioner responded by letter dated 7 September 2017 to the notice dated 30 August 2017 while reiterating its reply dated 20 August 2017 and called for withdrawal of the notice. 10. Thereafter, on 7 September 2017, a personal hearing was granted and on 23 October 2017, the impugned order was issued. By the impugned order, the certificate dated 4 May 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 con....
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....sting and estimated liability referred to in sub- rule (1) shall be determined by the Assessing Officer after taking into consideration the following:- (i) tax payable on estimated income of the previous year relevant to the assessment year; (ii) tax payable on the assessed or returned income, as the case may be, of the last three previous years; (iii) existing liability under the Income-tax Act, 1961 and Wealth-tax Act, 1957; (iv) advance tax payment for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28; (v) tax deducted at source for the assessment year relevant to the previous year till the date 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 perso....
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....ction; (b) Cancellation of the certificate dated 4 May 2017 became necessary in view of the fact that the financial condition of the Petitioner-company has further deteriorated. Thus, putting in jeopardy the recovery of any liability, which may arise against the Petitioner-company on account of future assessment or otherwise. Therefore, necessitating the cancellation of the nil withholding tax certificate dated 4 May 2017; (c) The existing demand of Rs. 6.90 Crores which continued to be pending. This cannot be ignored merely because, according to the Petitioner, the demand 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 t....