$ * IN HIGH COURT OF DELHI AT NEW DELHI 1. + ITA 203/2014 COMMISSIONER OF INCOME TAX IV ..... Appellant Through: Mr Kamal Sawhney, Senior Standing Counsel with Mr Raghvendra Singh, Junior Standing Counsel and Mr Shikhar Garg, Advocate. versus PRITAM DAS NARANG ..... Respondent Through: Mr M. P. Rastogi and Mr K. N. Ahuja, Advocate. CORAM: HON'BLE DR. JUSTICE S.MURALIDHAR HON'BLE MR. JUSTICE VIBHU BAKHRU ORDER % 16.09.2015 1. This is appeal under Section 260A of Income Tax Act, 1961 filed by Revenue against order dated 30th August, 2013 by Income Tax Appellate Tribunal ( ITAT ) in ITA No.4158/Del/2011 for Assessment Year ( AY ) 2008-09. 2. By order dated 9th February, 2015, following questions of law were framed: (a) Did ITAT fall into error in holding that sum of Rs.1,95,00,000/- in circumstances of case, was compensation in hands of Assessee and could not ITA 203/2014 Page 1 of 11 be treated as income as profits in lieu of salary? (b) Did ITAT fall into error in allowing order of CIT (Appeals) in allowing credit of TDS of Rs.22,09,350 on Rs.1,95,00,000/- to respondent? 3. facts are that Assessee filed return of income on 28 th July, 2008 declaring total income of Rs. 1,65,70,750/- and also claiming refund of Rs.1369/-. return was processed under Section 143(1) on 26th August, 2009 determining refund of Rs.860/-. 4. case was subsequently selected for scrutiny and notice was issued by Assistant Commissioner of Income Tax (ACIT) to Assessee on 12th August, 2009. It was followed by notices under Section 142(1) of Act. Assessee was asked to furnish bank accounts for period 1 st April, 2007 to 31st August, 2008. Assessing Officer (AO) noticed credit entry of Rs.1,70,90,650/-. Assessee filed letter on 16th November, 2010 explaining circumstances under which payment was received from M/s. ACEE Enterprises ('ACEE') against Employment Agreement entered into between him and ACEE on 10th January, 2007. In terms of said Employment Agreement, Assessee was to be employed as Chief Executive Officer ( CEO ) and employment was to commence ITA 203/2014 Page 2 of 11 from 1st July, 2007. Either party at its option could terminate employment by giving six months' notice to other party in writing. In case notice period was less than six months, then compensation equivalent to shortfall of notice period was payable by party concerned. 5. Assessee produced two letters before AO. first dated 1st May, 2007 was written by ACEE to Assessee informing him that there was "sudden change in business plan of Company vis-a-vis foraying into new financial ventures" and that "the company is extremely disappointed to convey that it shall not be able to take you on board from 1 st July, 2007 as per employment contract." ACEE promised to reconsider Assessee s services "as and when its operation starts". second letter was dated 15th May 2007 which was Assessee's response to ACEE that news was "big financial loss personally" since there were "many other opportunities available to me". Assessee stated that since he had opted for ACEE he did not consider "other lucrative opportunities available to me". Since it was not clear when ACEE was going to start its new venture, Assessee proposed that "your company must consider something for financial loss incurred by me not available other opportunities. I propose that you must ITA 203/2014 Page 3 of 11 give me at least one year compensation offered to me by your company to cover up financial loss incurred by me". 6. On 25th August 2007, ACEE informed Assessee that "as mark of goodwill/gesture" it was pleased to announce payment of Rs.1,95,00,000/- to Assessee subject to income tax compliances as "a one-time payment to you for non-commencement of employment as proposed." Before AO, Assessee pointed out that tax of Rs.22,09,350/- had been deducted at source by letter dated 7th December, 2010. Assessee offered explanation as to why he had not offered above sum to tax or claimed refund of TDS. 7. AO rejected Assessee's explanation on ground that under Section 17 (3) (iii) of Act receipt by Assessee of sum from any person prior to his joining with such person was taxable. AO was of view that condition of pre-existing relationship of employer and employee was done away with by use of words "by any Assessee from any person" introduced by Finance Act, 2001 with effect from 1st April, 2002. AO also sought to distinguish decision in CIT v. Rani Shankar Mishra (2010) 320 ITR 542 (Del) which was referred to by ITA 203/2014 Page 4 of 11 Assessee on ground that compensation in that case was received pursuant to gender discrimination claim stemming from company s refusal to offer woman candidate position whereas in present case job was offered and accepted. AO also drew adverse inference as regards failure to disclose that TDS had been deducted by ACEE, in particular since Assessee had not brought claim in return regarding such TDS. AO concluded that payment was taxable under head salary . addition of Rs.1.95 crores was added to returned income and penalty proceedings were also directed to be initiated. 8. Assessee s appeal against aforesaid order was allowed by Commissioner of Income Tax (Appeals) [CIT(A)]. CIT(A) noted that Clause (iii) of Section 17(3) had been brought in to account for joining bonus' received from prospective employer as profit in lieu of salary liable to be included as part of taxable income under head salary or also amount paid to employee 'after employment comes to end (termination bonus). CIT (A), after analysing documents on record, came to conclusion that there was no master and servant relationship between Appellant and ACEE. No payment had been made by ACEE to Appellant from date on which contract was signed ITA 203/2014 Page 5 of 11 till date when offer of employment was withdrawn. CIT(A) concluded that payment was made by prospective employer as compensation towards breach of promise and not for any services rendered or to be rendered. Such payment could not be taxed under Section 17(3)(iii) of Act. Nor could it be taxed under some other head. CIT(A) relied on decision of this Court in Rani Shankar Mishra (supra) to conclude that said receipt could not be taxed as business/professional receipt under Section 28 or as gift under Section 56 of Act. CIT(A) concluded that receipt by Assessee was bonafide and, accordingly, deleted addition. CIT (A) further ordered that "the appellant is entitled to refund of TDS paid on Rs. 1,95,00,000/- and accordingly refund of TDS may be adjusted against tax demand if any arising on appeal effect to this order, and further refund due may be given to appellant." 9. Revenue s further appeal has been dismissed by ITAT in impugned order. two issues addressed by ITAT were: "1. On facts and circumstances of case and in law whether Ld. CIT (A) was correct in deleting addition of Rs.1,95,00,000/- taxed as revenue receipts by AO since same was not offered to tax by assessee? ITA 203/2014 Page 6 of 11 2. On facts and circumstances of case and in law, whether Ld. CIT (A) was correct in allowing credit of TDS of Rs.22,09,350/- on Rs.l.95 crore to assessee?" 10. On first issue, ITAT concurred with CIT(A) that prior to coming into existence of any relationship of employer and employee between Assessee and ACEE, offer on basis of which employment agreement was drawn up had itself come to end. This was case where prospective employee i.e. Assessee had been compensated for denial of opportunity to be employed by prospective employer. Therefore, amount paid could not be said to be in lieu of salary and benefit of employment. On second issue ITAT observed that finding of CIT (A) that receipt of Rs.1.95 crore was taxable as capital receipt has been upheld by it and therefore second ground also had to be rejected. 11. Court has heard submissions of Mr. Kamal Sawhney, learned Senior standing counsel for Revenue and Mr. M.P.Rastogi, learned counsel for Assessee. ITA 203/2014 Page 7 of 11 12. Mr. Sawhney urged that since wording of Section 17(3)(iii) of Act was that "any amount received from any person", it was not necessary that amount had to be received only from employer in order that such sum be brought to tax in hands of assessee under head 'profits in lieu of salary'. It was submitted that expression "any person" could include prospective employer as in present case. It was submitted that clauses of Employment Agreement showed that Assessee had in fact been employed as CEO and Assessee had also accepted such employment. Therefore, notwithstanding that employment was to commence at later date, relationship of employer and employee had been brought into existence by Employment Agreement. Mr. Sawhney sought to distinguish decision in Rani Shankar Mishra (supra) on facts. 13. This Court is unable to agree with above submissions on behalf of Revenue. Employment Agreement itself mentions that employment shall commence latest by 1st July, 2007 . Although it further states that employee "shall endeavour to join company as early as possible", intention and expectation of parties was that employment would commence not earlier than 1st July 2007. This becomes evident from reading of letter dated 1st May 2007 written by ACEE to ITA 203/2014 Page 8 of 11 Assessee in which it stated that that it would not be possible to take Assessee "on board from 1st July, 2007 as per employment contract." That employment did not commence from date of Employment Agreement is further evident from fact that ACEE stated in its letter dated 25th August 2007 that it was making payment of Rs. 1.95 crores as "a one-time payment to you for non-commencement of employment as proposed." 14. Court is unable to accept interpretation sought to be placed on plain language of Section 17 (3) (iii) of Act by Revenue. words "from any person" occurring therein have to be read together with following words in sub-clause (A): "before his joining any employment with that person". In other words, Section 17 (3) (iii) (A) pre-supposes existence of employment, i.e., relationship of employee and employer between Assessee and person who makes payment of "any amount" in terms of Section 17 (3) (iii) of Act. Likewise, Section 17 (3) (iii) (B) also pre-supposes existence of relationship of employer and employee between person who makes payment of amount and Assessee. It envisages amount being received by Assessee "after cessation of his employment". Therefore, words in Section 17 (3) (iii) ITA 203/2014 Page 9 of 11 cannot be read disjunctively to overlook essential facet of provision, viz., existence of employment i.e. relationship of employer and employee between person who makes payment of amount and Assessee. 15. Court accordingly concurs with concurrent view of CIT (A) and ITAT that this was case where there was no commencement of employment and that offer by ACEE to Assessee was withdrawn even prior to commencement of such employment. amount received by Assessee was capital receipt and could not be taxed under head 'profits in lieu of salary'. 16. other plea of Revenue that said amount should be taxed under some other head of income, including 'income from other sources', is also unsustainable. decision of this Court in Rani Shankar Mishra (supra) held in similar circumstances that where amount was received by prospective employee as compensation for denial of employment, such amount was not in nature of profits in lieu of salary. It was capital receipt that could not be taxed as income under any other head. ITA 203/2014 Page 10 of 11 17. Question (a) is accordingly answered in negative, i.e. in favour of Assessee and against Revenue. 18. Consequently, question (b) is also answered in favour of Assessee and against Revenue. order of CIT (A), as concurred with by ITAT, that Assessee is entitled to refund of TDS paid on Rs. 1,95,00,000/- and that refund of TDS may be adjusted against tax demand if any arising on appeal effect being given to said order of CIT (A) is upheld. 19. appeal is dismissed but without any order as to costs. S.MURALIDHAR, J VIBHU BAKHRU, J SEPTEMBER 16, 2015 MK ITA 203/2014 Page 11 of 11 COMMISSIONER OF INCOME TAX IV v. PRITAM DAS NARANG