TaxTMI 
TaxTMI 
2026 (6) TMI 131
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....SD 2.18 million by the assessee from US Securities and Exchange Commission (in short "SEC"). The assessee had explained that out of USD 2.18 million received, 50% was retained by the legal team and only balance amount of USD 1.09 million was received by him. Accordingly, the amount of Rs. 8,16,27,000/- was credited in the bank accounts of the assessee. As regarding nature of this receipt, it was explained that the assessee undertook a whistle-blower activity to report grave corporate misconduct by his former employer, without any anticipation of reward. According to the assessee, the reward received from US SEC was a windfall gain and a capital receipt and it was not chargeable to tax under the provisions of the Income Tax Act. The AO, however, treated the receipt of Rs. 8,16,27,000/- as income of the assessee under the provisions of section 56(2)(x) of the Act. Accordingly, the assessment was completed u/s. 143(3) r.w.s. 144B of the Act on 15.03.2024 at total income of Rs. 7,91,65,713/-, after allowing eligible deductions under Chapter-VIA of the Act. 3. Aggrieved with the order of the AO, the assessee had filed an appeal before the first appellate authority, which was decided ....
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....afety/ corporate vendetta, the assessee had engaged U.S. counsel to represent him before Securities and Exchange Commission (SEC) and he filed a Whistleblower complaint to the SEC through US counsel, describing the alleged bribery and kickback scheme of the Stryker group. On the basis of the complaint of the assessee, investigations were carried out by SEC wherein the assessee had provided assistance and corroborative evidences. The SEC had imposed a civil penalty of USD 7.8 million on U.S. parent company in September 2018. Subsequently, the assessee was awarded 28% of the penalty amount as reward on 2nd August, 2021, for his assistance in the matter. The Ld. Sr. Counsel explained that the total reward of USD 2.18 million was credited to an escrow account, of which 50% was paid to two U.S. attorneys and balance 50% being USD 1.09 million was received by the assessee. 6. On the action of the AO taxing the reward received by the assessee under section 56(2)(x) of the Act, the Ld. Sr. Counsel submitted that the said section was not applicable in the present case, as SEC reward cannot be said to be "without consideration". He explained that the reward was paid u/s. 21F(b)(1) of the ....
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....ervices rendered in a commercial sense; * The payment is not of a recurring or periodical nature; and * The grant is made under a statutory framework based on regulatory considerations and not from any income-producing activity of the Appellant. According to the Ld. Senior counsel, the SEC reward being unconnected with any professional or commercial activity and lacking any element of quid pro quo, has the character of a capital receipt. In this regard he placed reliance on the following decisions: i. Aroon Purie Vs. CIT [2015] 375 ITR 188 (Del HC) ii. Padmaraje R. Kadambande Vs. CIT [1992] 195 ITR 877 (SC). 10. The Ld. Senior counsel contended that the SEC reward does not satisfy the core attributes of income. Therefore, the AO was not correct in treating the same as taxable under the provision of section 56(2)(x) of the Income Tax Act. Submissions of the Revenue 11. Per contra, Shri R P Rastogi, the Ld. CIT-DR controverted the arguments of the Ld. Senior counsel and strongly supported the order of the lower authorities. He explained that the income defined u/s. 2(24) of the Act was an inclusive and not exhaustive definition. Relying....
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.... is whether the reward received by the assessee from US SEC is taxable under the provisions of the Income Tax Act. The thrust of the assessee's argument is that SEC reward is a windfall gain and capital receipt and not income u/s 2(24) of the Act and, therefore, not chargeable to tax. Relying upon the decision of Hon'ble Privy Council in the case of CIT. Vs. Shaw Wallace & Co.(supra), the assessee has contended that the following tenets of "income" were not fulfilled in the present case: i. A periodical monetary return, ii. Coming with some regularity, iii. Arising from the definite source, and iv. Excludes receipts in the nature of a mere windfall. The judgment in the case of Shaw Wallace & Co was delivered by the Hon'ble Privy Council in the context of Income Tax Act, 1922, wherein the word "income" was not defined. On the other hand, the Income Tax Act, 1961, contains a specific and inclusive definition of "income" u/s. 2(24) of the Act. Therefore, the reliance of the assessee on the decision of Privy Council in the case of Shaw Wallace & Co, explaining the attributes of income, is misplaced. The observation of the Hon'ble Privy Council in ....
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....509 (L) and - 'United States of America v. Stewart', [1940] 311 US 60 (M) and - 'Resch v. Federal Commissioner of Taxation', [1943] 66 CLR 198 (N). In each of these cases very wide meaning was ascribed to the word 'income' as its natural meaning. The relevant observations of learned Judges deciding those cases which have been quoted in the judgment of Tendolkar, J. quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word 'income'. Its natural meaning embraces any profit or gain which is actually received. This is in consonance with the observations of Lord Wright to which reference has already been made . . . The argument founded on an assumed legislative practice being thus out of the way, there can be no difficulty in applying its natural and grammatical meaning to the ordinary English word 'income'. As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislati....
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....hikeyan (supra), the Hon'ble Supreme Court had held that even if the receipt does not fall into any of the sub-clauses of section 2(24), it may yet constitute income. The observation of the Hon'ble Supreme Court in that case is reproduced below: 7. ....Further, even if a receipt does not fall within sub-clause (ix), or for that matter, any of the sub-clauses in section 2(24), it may yet constitute income. To say otherwise, would mean reading the several clauses in section 2(24) as exhaustive of the meaning of 'income' when the statute expressly says that it is inclusive. It would be a wrong approach to try to place a given receipt under one or the other sub-clauses in section 2(24) and if it does not fall under any of the sub-clauses, to say that it does not constitute income. Even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to widen its net. This Court has repeatedly said that the word 'income' is of widest amplitude, and that it must be given its natur....
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....ceipt, it will be relevant to recapitulate the facts of the case in the right perspective. Genesis & nature of receipt: 18. On 19.08.2013 the assessee, as a "Whistleblower", had entered into a Common Interest Agreement (CIA) with "Whistleblowers Against Fraud LLC" (WAF). The purpose of this agreement was to assist and advise the Whistleblower in researching and developing the action against Stryker group to file a qui tam action under the Federal False Claims Act and/or other whistleblower claims under US SEC, US Commodity Futures Trading Commissions, US Internal Revenue Services and/or any other federal or state agency or legal regime. WAF was also to advise the Whistleblower and his legal counsel in the filing, development and prosecution of a qui tam and/or agency whistleblower action through legal counsel and to facilitate the Government investigation of the allegations in such an action. It is thus evident from this CIA that the assessee, as a whistleblower, had planned to file complaint with various enforcement agencies in USA and WAF was engaged for the purpose of researching and developing the action and also to work in conjunction with legal counsel. As per the terms....
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....d pro quo arrangement, as Mr. Kumar instructed Stryker employees not to discuss such matters in writing. According to Mr. Pandya, discussions regarding the physician kickback scheme typically occurred in-person or by phone. In fact, Mr. Pandya possesses an audio recording of an in-person conversation between two Stryker employees and two surgeons (from a non-governmental hospital) in which he believes the parties are discussing prospective bribes. [Emphasis supplied.] 21. It is thus evident that the assessee had filed the whistleblower complaint after diligent collection of evidences pertaining to corrupt practices by the Stryker group over a sustained period of time. He had clandestinely collected specific evidences in respect of supply made to different hospitals and also recorded in-person conversation of Stryker employees and the doctors. It was further stated in the Supplement to TCR that the assessee was available on phone or for video conferencing and was also willing to travel to US in person for meeting and to produce to SEC the documents and other information in his possession. The whistelblower complaint was filed by the assessee with sole intention of gettin....
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....h the consideration of the question whether such receipt would be income or not, we will have to restrict the concept of such windfall to a case where the unexpectedness of the advantage pertains to the factum of receipt and not to the quantum of receipt. By reason of the exigencies of the economic situation or political or international situation a trader or a businessman or an industry may make unduly large profits which are often loosely expressed as windfall profits. But this is not the nature of the windfall we are contemplating. Where the element of windfall or unexpectedness pertains only to the quantum of receipt, such element will not have any bearing on the question we are considering and such receipt will be profit or income of the assessee although unusually large. What we are considering as "windfall" is some unexpected receipt not in the contemplation of the assessee and not directly attributable to or occurring by way of its business profits. To put it in other words, if the assessee had produced the picture, Mother India, or if it can even be said that it was producing motion pictures with the idea that they would be exempted from entertainment duty by the Governmen....
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....lable all the relevant information. With such sustained effort of collection of evidences and participation in the enquiry proceedings, the reward received by the assessee can't be held as an unforeseen windfall. The reward received by the assessee was attributable to conscious efforts on the part of the assessee and was implicit in the process of whistleblower complaint filed by the assessee. There was clear cut expectation of receiving the advantage in the form of reward in the process of whistleblower complaint and it was not a windfall. The factum of receiving the reward was known and anticipated. Merely because the quantum of reward was at the discretion of the SEC, it cannot be held as a windfall gain. 26. In view of the facts as discussed above the reliance of the assessee on the decision of Hon'ble Bombay High Court in the case of Mehboob Productions (P) Ltd (supra), is found to be totally misplaced. The reward received by the assessee was not unexpected rather the entire effort of the assessee from the very beginning was to obtain reward by filing the whistleblower complaint. The assessee had meticulously planned his action, appointed U.S. counsels before filing of whis....
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....EC is as under: 9. How do I apply for an award? Once the case you believe your information led to is posted, you must complete and return Form WB-APP within 90 calendar days to the Office of the Whistleblower via email to [email protected], by fax (703) 813-9322, or by mail to the address listed on OWB's website. See Rule 21F-10. Deadlines for submissions to the Office of the Whistleblower that fall on a weekend or holiday will be extended to the next business day. Please send the Form WB-APP to OWB using only one method of transmission. Duplicate applications sent in multiple ways can cause a delay in processing the award claim. 29. Thus, one is required to make an application in Form WB-APP within 90 calendar days from the date of Notice for Covered Action is posted by the SEC for claiming reward from US SEC. A 'Notice for Covered Action' is a public notice issued by the US Securities and Exchange Commission under its whistleblower program informing potential whistleblowers that the SEC has obtained a qualifying enforcement result and that the eligible persons may now apply for a whistleblower award. Further, under section 21F of the US Securities ....
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....xcept in the case where the reward was given between 10% to 30% of the monetary sanctions collected. The process of claiming the reward, right of the whistleblower over the eligible reward and right to challenge the decision of the Commission over the reward, as discussed above, makes it crystal clear that the payment of reward by US SEC to the assessee, was neither voluntary nor gratuitous. Reward vs. Award : Quid Pro Quo 30. The assessee has strongly relied upon the decision of Hon'ble Delhi High Court in the case of Aroon Purie Vs. CIT (supra) in support of his contention that the reward received by him was a capital receipt, akin to gift which has no element of quid pro quo. The facts of that case are found to be totally different. In that case the award was given by an independent foundation entirely of its own volition without any prior application, claim, request or participation by the recipient. There was complete absence of quid pro quo in that case. In the present case, however, there was a definite and unambiguous element of quid pro quo as the assessee had provided internal business secrets of his erstwhile employer, which was systematically traded in exchange fo....
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....and actionable information as well as substantial help provided by the assessee. There was clear cut element of quid pro quo and an enforceable expectation of reward in the present case. The reward was given considering the usefulness of the information, and based on the quantum of civil penalty recovered. A mere label of reward on the receipt does not make it capital in nature. 33. Hon'ble Supreme Court has held in the case of P. Krishna Menon v. Commissioner of Income-tax* [1959] 35 ITR 48 (SC) that "If any business, profession or vocation in fact produces an income, that is taxable income and none the less because it was carried on without the motive of producing any income." The Hon'ble Supreme Court has further held in that case that the activity of vocation may not be an organized activity and a single act may constitute vocation. To quote from the order: We do not appreciate the significance of saying that in order to become a vocation an activity must be organised. If by that a continuous, or as was said, a systematic activity, is meant we have to point out that it is well-known that a single act may amount to the carrying on of a business or profession. In t....
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.... "vocation" of the appellant. It being a payment of a personal nature, it should be treated as capital payment, being akin to or like a gift, which does not have any element of quid pro quo. The aforesaid prize money was paid to the assessee on a voluntary basis and was purely gratis. 36. We have carefully considered the observation of the Hon'ble Delhi High Court in para-41 of the judgement. It is found that the assessee fails on many of the parameters as mentioned therein. In that case it was held that the award was not connected with recipient's vocation as journalist or a publisher. The assessee has contended that he too was not engaged in vocation or profession of whistleblowing. However, from the agreement of the assessee with WAF, it is evident that WAF was engaged to assist and advise the assessee in respect of whistleblower complaint with various enforcement authorities, including SEC. Thus, the assessee was certainly engaged in vocation/profession of giving information to Government agencies which is titled as 'whistleblowing'. In the case of Aroon Purie (supra), the award was linked with personal achievement wherein in the present case the reward has been given to the....
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....e employees and the doctors. Further, the agreement made with WAF was not only for filing whistleblower complaint with US SEC, but also with other agencies such as US Commodity Futures Trading Commission, US IRS and other federal and state agency as well. The whistleblower complaint made by the assessee was not only a call of conscience and his value system but it was equally guided by the profit motive of getting reward from various agencies. Had it not been so, the assessee would not have made claim for reward by filing separate Form WB-APP for reward within 90 days. Had the assessee been really guided by the call of conscience and value system, he wouldn't have filed Form WB-APP and would have waived the reward. The facts as discussed above and also earlier in the order, clearly establish that the assessee had entered into an adventure in the nature of vocation and the receipt from such an enterprise was certainly taxable under the provisions of the Act. Taxability of reward 38. On the issue of taxability, the assessee has contended that the provision of section 56(2)(x) of the Act was not applicable to the facts of the present case. According to the assessee, the statutor....
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....ssessee from US SEC was not exempt under the provisions of Section 10(17A) of the Act. In India, reward is given to informants who provide information to various enforcement agencies viz. Income Tax Department, GST, Central Excise, Customs etc. These reward schemes do not provide that the reward received is exempt from tax. The CBDT reward schemes only provide for grant of reward, they do not declare the reward to be tax free. The exemption under section 10(17A) of the Act applies only to certain approved awards/ decorations in public interest and Income Tax informant rewards are not covered by that provision. In the case of CIT Vs. J.C. Malhotra (230 ITR 361), the Hon'ble Delhi High Court had held that the reward given to an Income Tax Officer is his taxable income. Similarly, in the case of CIT v. S. N. Singh (1991) 192 ITR 306 : (1990) 83 CTR1 69 : 53 Taxman 234 (Pat.)], the Hon'ble Patna High Court had held as under: From a perusal of the provisions of section 10(17B) it is clear that a payment made as reward by the State or the Central Government is not includible in computing total income only when the reward is for such purposes as may be approved by the Central Gov....