Madras H.C : Whether in the facts and circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 22 lakhs paid by the employer to the assessee is not profits in lieu of salary ?

High Court Of Madras

CIT vs. A.K. Khosla

Section 4, 17(3)(i), 17(3)(iii)

Asst. Year 2001-02

Mrs. Prabha Sridevan & P.P.S. Janarthana Raja, JJ.

Tax Case (Appeal) No. 232 of 2010

27th April, 2010

Counsel Appeared :

Patty B. Jaganathan, for the Appellant : S.R. Wadhawa for T.R. Senthilkumar, for the Respondent

JUDGMENT

P.P.S. JANARTHANA RAJA, J. :

The appellant/Revenue has filed the above tax case appeal against the order of the Tribunal, ‘A’ Bench, Chennai, dt. 27th April, 2007 in ITA No. 1862/Mad/2004.

2. When the appeal came up for admission on 9th March, 2010, this Court admitted the same on the following substantial questions of law :

“1. Whether in the facts and circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 22 lakhs paid by the employer to the assessee is not profits in lieu of salary ?

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 22 lakhs paid by the employer to the assessee would not fall under s. 17(3)(i) of the IT Act ?

Whether the definition of the profits in lieu of salary given under s. 17(3) is an exhaustive definition or only illustrative ?

Whether s. 17(3)(iii) is an explanation which would have retrospective effect or not ?

Whether any lump sum amount received from the employer by the employee on or after cessation of his employment would be profits in lieu of salary or not ?

Whether in the facts and circumstances of the case, the Tribunal was right in holding for the AO erred in making the estimation of Rs. 2 lakhs as income of the assessee per month ?

Whether the Tribunal was right in holding that even in the absence of any books of accounts maintained by the assessee, the AO erred in making estimation of income ?”

3. The brief facts arising out of the case are as under : The assessee/respondent is an individual. He is highly qualified, experienced and an eminent chartered electrical engineer. The assessee/respondent was employed as Chief Executive Officer with the General Electric Co. of India Ltd., New Delhi. The assessee retired from the above company on 31st Jan., 2001 on attaining the age of 70. After his retirement, he took up the profession of consultancy. The relevant assessment year is 2001-02 and the corresponding accounting year ended on 31st March, 2001. He has also admitted the income from house property, other sources and long-term capital gain. The assessee filed a return of income of Rs. 32,13,540 and also claimed exemption of Rs. 22,00,000 being non- compete fee of a capital nature. The said return was processed under s. 143(1) of the IT Act on 17th March, 2003. The AO has also sent intimation under s. 143(1) determining the refund of Rs. 8,98,673 and the same was not granted. Later, the AO enquired the nature of the retirement benefit and sent letter dt. 25th July, 2003. The appellant also sent reply on 29th July, 2003, in which it was stated that the amount of Rs. 22,00,000 received from his former employer was exempted and the same was not taxable. The explanation was not accepted and therefore, the AO was of the view that there is an escape of income and has also issued a notice under s. 148 on 1st Aug., 2003. The assessee has also filed a reply on 15th Sept., 2003 requesting the AO to treat the return filed on 28th June, 2001 in response to the notice under s. 148 of the Act. The AO did not accept the contention that the amount of Rs. 22,00,000 was exempted and therefore, held that the same was assessable under s. 147 of the Act. The AO completed the assessment under ss. 143(3) and 147 of the Act determining the total income at Rs. 57,28,140. While determining the said total income, the AO assessed a sum of Rs. 22,00,000 under the head “Salaries” and also estimated the professional income at Rs. 4,00,000 under the head “Profession”. Aggrieved by that, the assessee has filed an appeal before the CIT(A). The said CIT(A) has dismissed the appeal confirming the order of the assessment. Aggrieved by that, the assessee has filed an appeal before the Tribunal questioning the reopening as well as the merits of the case. The Tribunal accepting the contention of the assessee, allowed the appeal on merits and upheld the reopening. The assessee has not filed an appeal challenging the reopening of the assessment. The Revenue alone has filed the present appeal.

The learned counsel appearing for the Revenue submitted that the Tribunal is wrong in holding that the amount of Rs. 22,00,000 received by the assessee is not taxable and also deleting the addition of Rs. 4,00,000 under the head “Profession”. He further contended that the amount of Rs. 22,00,000 was received in connection with the employment and therefore, the AO is justified in assessing the income as “profits in lieu of salary”. He also submitted that the employer had deducted the tax at source on the disputed amount and the assessee also estimated the advance tax and has paid the self-assessment tax. The Tribunal ought to have considered that the payment is for the free advice, but without considering the same, the Tribunal is wrong in deleting the addition and he also relied on the decision in the case of Chemplant Engineers (P) Ltd. vs. CIT (1997) 143 CTR (Mad) 75 : (1998) 234 ITR 23 (Mad) in support of his contention. He further contended that the Tribunal is wrong in deleting the estimated professional income without basis and the AO has correctly made the addition on the ground that he has not maintained the books of account and therefore, the AO was justified in estimating the income under the head “Profession”. Alternatively the learned counsel relied on the amended provision of s. 17(3)(iii) of the Act and contended that even though the said provision was inserted w.e.f. 1st April, 2002, it is only clarificatory in nature and therefore, the assessment made under the head “Salary” is in accordance with law. Under these circumstances, the order of the Tribunal is not in accordance with law and the same has to be set aside.

The learned counsel appearing for the assessee submitted that a sum of Rs. 22,00,000 received by the assessee from the company is only a capital receipt. It is not for the payment towards any service and whatever the service rendered by the assessee, he has been paid fee and the same was also shown as professional income. Therefore, it is nothing but a capital receipt. He further contended that s. 17(3)(iii) was inserted w.e.f. 1st April, 2002 and therefore, it is applicable only from the asst. yr. 2002-03. In the present case, the assessment year is 2001-02 and so the said provision is not applicable to the asst. yr. 2001-02. Further, it was contended that the AO is wrong in estimating the professional income of Rs. 4,00,000 when the assessee has already shown all the receipts under the head “Profession”. The amounts were paid only by way of cheque. The Tribunal has considered the relevant materials and rightly held that the amount of Rs. 22,00,000 received by the assessee is not salary and also correctly deleted the addition of Rs. 4,00,000 under the head ‘Profession’. Under these circumstances, the order passed by the Tribunal is based on valid materials and the same has to be confirmed. Heard the counsel on either side and perused the materials available on record.

The assessee was employed as Chief Executive Officer with the General Electric Co. India Ltd., New Delhi and retired on 31st Jan., 2001. On retirement, the assessee/respondent has received a sum of Rs. 22,00,000, which is a non-compete fee as per the company’s letter dt. 11th Dec., 2000. The said letter reads as follows : “Please refer to our discussions on your professional activities after retirement from the company on 31st Jan., 2001 when it was agreed that you will not take employment or join any competing organisation or part with or use your company know-how to or for them for a period of one year from 1st Feb., 2001, without our permission. You will be paid a lump sum of INR. 22,00,000 for agreeing to the restraint on your freedom in the practice of your profession.

In addition you have agreed that, if requested, you would provide free advice on business matters in India to Marconi business for upto twelve months following your retirement on 31st Jan., 2001. If, following such advice you are engaged by any Marconi business to act on their behalf, they would be required to establish, the document, a suitable consultancy arrangement with you.” From a reading of the above letter, it is clear that the assessee agreed that “he will not take employment or join any competing organisation and also will not use know-how of the company for a period of one year from 1st Feb., 2001 without prior permission”. Therefore, the company has agreed to pay a sum of Rs. 22,00,000. So the said amount is paid to the assessee for not taking up any employment. It amounts to non-compete fee. The AO was of the view that the assessee/respondent has agreed to provide free advice on business matters in India to Marconi business for a period of twelve months following his retirement. Therefore, the AO was of the view that the said amount of Rs. 22,00,000 was paid as an advance for future advice. The AO brought the same under s. 17(3)(i) of the Act. But the Tribunal, after considering the above agreement and also the records, came to the conclusion that the assessee has provided consultancy service to the assessee’s group companies for which he was paid consultancy fees. Whatever the services rendered by the assessee, he was adequately paid and no free service was rendered. Therefore, the Tribunal was of the view that it cannot be said to be an arrangement for payment of advance fee for future payment. A sum of Rs. 22,00,000 is paid only to restrain the assessee from freely engaging in gainful employment. The AO completely disregarded first para of the letter dt. 11th Dec., 2000 and only relied on the second part of the letter and came to the conclusion that only for future service. The AO is wrong in holding that the amount was paid only for free services, whereas the Tribunal, after considering the facts and circumstances of the case, held that the amount is paid only for non-compete fee. The following judgments are cited by the learned counsel appearing for the assessee/respondent and in these judgments, it was held that the amount paid towards restrictive covenant is the compensation paid for agreeing to refrain from carrying on competitive business and hence, it is not subjected to tax and further it was held that it is only a capital receipt : (1) CIT vs. Best & Co. (P) Ltd. (1966) 60 ITR 11 (SC); (2) CIT vs. K.K. Roy (1972) 84 ITR 701 (SC); (3) CIT vs. Saraswathi Publicities (1981) 132 ITR 207 (Mad); (4) CIT vs. T.I. & M. Sales Ltd. (2003) 181 CTR (Mad) 461 : (2003) 259 ITR 116 (Mad); (5) CIT vs. Shyam Sundar Chhaparia (2008) 220 CTR (MP) 172 : (2008) 14 DTR (MP) 309 : (2008) 305 ITR 181 (MP); (6) CIT vs. Ajit Kumar Bose (1986) 52 CTR (Cal) 250 : (1987) 165 ITR 90 (Cal); (7) CIT vs. Saroj Kumar Poddar (2006) 200 CTR (Cal) 616 : (2005) 279 ITR 573 (Cal); (8) B.K. Kotru vs. CIT (2005) 199 CTR (Bom) 388 : (2006) 282 ITR 1 (Bom).

The learned counsel appearing for the appellant/Revenue fairly stated that he is not disputing the principles enunciated in the above judgments. So it is not necessary to consider the above case law one by one except the case of Madhya Pradesh High Court in CIT vs. Shyam Sundar Chhaparia (supra) as well as the Bombay High Court in the case of B.K. Kotru vs. CIT (supra) wherein the Courts considered the similar issue as in the present case. In case of CIT vs. Shyam Sundar Chhaparia cited supra, the Madhya Pradesh High Court has held as follows :

“31. In the case at hand, we have noted that the assessee retired from service on attaining the age of superannuation w.e.f. 30th Sept., 2000, there was thus severance of master-servant relationship and no material is brought on record by the Revenue to suggest that there existed a service contract providing therein a restrictive covenant preventing thereby the assessee to take up any employment, activities on consultation which would be prejudicial to the business/interest of Grasim Industries. It was only on 21st Oct., 2000, that the assessee ‘surrenders his rights’ by executing an agreement refraining himself from taking up any competitive employment/assignment in future which leads to grant of special compensation of Rs. 27,50,000. It cannot, as suggested by the Revenue, be termed as ‘profit in lieu of salary’ because it is not any compensation due to or received by an assessee from his employer or partner-employer at or in connection with the termination of his employment. In the modification of the terms and conditions relating thereof, the period of restriction in our considered opinion is of no consequence. And, as noted in CIT vs. Captain H.C. Dhanda (1970) 76 ITR 404 (MP) in matters relating to revenue, the Court must regard what is called ‘the substance of the matter’ to bring the subject within the charge to a tax. And, therefore, the outward form of a transaction might be disregarded.

32. Having thus considered, it is held that the payment of Rs. 27,50,000 received by the assessee being solely as compensation for his agreement not to take up any competitive employment/assignment in future, the same, as rightly held by the CIT(A) and the Tribunal, cannot be added for the purpose of income-tax for the year 2001-02 and question is answered accordingly.” Further, this Court also considered the new provision of s. 17(3)(ii), which was inserted by the Finance Act, 2002 and held that the amendment is only prospective in nature and not retrospective and in para 22, it has been held as follows : “In the case of CIT vs. Varas International (P) Ltd. (2006) 204 CTR (SC) 119 : (2006) 283 ITR 484 (SC) their Lordships of the apex Court were concerned with the issue that ‘for the amendment of a statute to be construed as being retrospective, should not the amended provision itself indicate either in terms or by necessary implication that it is to operate retrospectively ? And having noted the issue having been conclusively determined affirmatively, refrained from resolving the issue. Which thus, leaves no manner of doubt that the introduction of new provisions in the form of s. 17 (3)(iii) introduced w.e.f. 1st April, 2002, will not have any bearing upon the construction/interpretation of s. 17(3)(i) and its applicability to the transactions which took place prior to 1st April, 2002.”

8. The Bombay High Court also considered the similar issue of restrictive covenant in B.K. Kotru vs. CIT (supra) and held as follows : “It appears from the statement of facts that the assessee was offered employment by competitors of M/s Sandvik Asia Ltd., like M/s Widia & Drilleco. In order to prevent the assessee from accepting such offers, it appears that M/s Sandvik Asia Ltd., had offered additional amount of Rs. 96,000 to the assessee on his agreeing not to accept similar job in any other competing organisation for a minimum period of two years from 13th July, 1979, and not to disclose or part with any information/knowledge or know-how of the company products/processes which he may have acquired during his tenure with them. The assessee, on receipt of the said amount, executed a restrictive covenant and undertook not to take any employment with any other competitors in lieu of payment of Rs. 96,000. This payment of Rs. 96,000, thus, can hardly be linked up with the salary, or perquisites and profits. The receipt of this amount is after cessation of the employer and employee relationship. This receipt of amount, thus, can only be capital receipt. The Tribunal was, thus, not justified in treating it as part of the salary for the asst. yr. 1980-81. In view of our finding, the question is answered in the negative, i.e., in favour of the assessee and against the Revenue.”

The learned counsel appearing for the Revenue relied on the judgment of this Court in the case of Chemplant Engineers (P) Ltd. vs. CIT cited supra to support his contention. But in that case, the facts involved are entirely different. There is a specific finding that the compensation was paid for loss of earning the commission for procuring orders. Therefore, it has been held that it is a revenue receipt. The said judgment is not helpful to the Revenue. After taking into consideration the principles enunciated in the abovesaid judgments relied on by the respondent/ assessee, we are of the view that the compensation received was only for not carrying on business and therefore, it is only a capital receipt and the amount is not paid for any free service rendered by the assessee. Therefore, the same cannot come under term “profits in lieu of salary”.

In respect of other argument the amount received is to be considered under s. 17(3)(i) of the Act does not also hold good. Chapter IV of the IT Act, 1961 enumerated heads of income. Sec. 14 deals with same and they are as follows : A—Salaries B—Interest on securities—omitted from 1st April, 1989 C—Income from house property D—Profits and gains of business or profession E—Capital gains F—Income from other sources A—Heading “Salaries” consists of three provisions. They are ss. 15, 16, and 17. Sec. 15 deals with the income that is chargeable to income-tax under the head “Salaries”. Sec. 16 deals with deduction from salaries. Sec. 17 defines “salary”, “perquisites” and “profit in lieu of salary” for the purpose of ss. 15 and 16. “Sec. 17(1) ‘salary’includes— (i) ……….. (ii) ………. (iii) ………. (iv) any fees, commission, perquisites or profits in lieu or in addition to any salary or wages.” “‘Profits in lieu of salary” is defined in s. 17(3) of the Act, which reads as follows :”‘profits in lieu of salary’ includes— (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto; (ii) any payment other than any payment referred to in cl. (10), cl. (10A) cl. (10B), cl. (11), cl. (12), cl. (13) or cl. (13A) of s. 10, due to or received by an assessee from an employer or a former employer or from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation—For the purposes of this sub-clause, the expression ‘keyman insurance policy’ shall have the meaning assigned to it in cl. (10D) of s. 10.” From a reading of the above, it is clear that the “profits in lieu of salary” include any compensation due to or received by an assessee from his employer or former employer. It is not the case that the compensation is due to the assessee. Whatever the income received by the assessee was returned by him and also a sum of Rs. 22,00,000 paid is not in connection with the termination of the employment or modification of the terms and conditions. Therefore, s. 17(3)(i) of the Act is not applicable and the said amount cannot come within the purview of the definition. The Supreme Court, in the case of CIT vs. E.D. Sheppard (1963) 48 ITR 235 (SC), has considered the corresponding provision in Expln. 2 to s. 7(1) of the Indian IT Act, 1922, wherein it has been held that when there is no employer-employee relationship between the parties, if any amount paid and not related to the relationship does not fall within the expression “profit in lieu of salary”. It has also held as follows : “Once it is held that the payment in the present case was a payment made solely as compensation for loss of employment, there is an end of the appeal, because Expln. 2 in clear terms excepts such payment from being treated as a profit received in lieu of salary. The Tribunal held on the evidence before it that the payment was made solely as compensation for loss of employment. The High Court rightly took the view that no distinction could be made between compensation for loss of employment and compensation for loss of prospects rooted in that employment. The High Court also rightly pointed out that if the object of the payment was unrelated to the relation between the employer and employee, it would not fall within the expression ‘profit received in lieu of salary’ in Expln. 2. We think that the High Court committed no error in answering the question referred to it.”

In the present case, the Tribunal had categorically found as a fact that there was no employer-employee relationship between the assessee and the company. The Tribunal correctly followed the principle enunciated in the above judgment and held that if the object of the payment is unrelated to the relation between the employer and employee, it would not fall within the expression “profits in lieu of salary” under s. 17(3)(i) of the Act. Further, alternative argument was advanced that the amount received by the assessee will come within the definition of s. 17(3)(iii) of the Act. The said section was introduced by Finance Act, 2001 w.e.f. 1st April, 2002. The amended provision reads as follows :

“Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person— (A) before his joining any employment with that person; or (B) after cessation of his employment with that person.”

The said provision was brought by the Finance Act of 2001 w.e.f. 1st April, 2002. It is applicable only to the asst. yr. 2002-03 and for the subsequent assessment years. It is prospective in nature and not retrospective as contended by the Revenue. Notes on Clauses explaining various provisions containing the details reported in (2001) 166 CTR (St) 95, p. 105 : (2001) 248 ITR (St) 106, p. 118 deals with sub-cl. (b) of cl. 13, which reads as follows :

“Sub-cl. (b) seeks to insert a new sub-cl. (iii) in cl. (3) of the said section so as to include any amount due to or received, whether in lump sum or otherwise, by any assessee from any person before joining any employment, or after cessation of such employment as income of that person under the head ‘Salaries’. This amendment will take effect from 1st April, 2002, and will, accordingly, apply in relation to the asst. yr. 2002-03 and subsequent years.” The CBDT also issued a Circular No. 14 of 2001 explaining the above notes on provision relating to direct taxes reported in [(2002) 172 CTR (St) 13 : (2001) 252 ITR (St) 65] and paras 28.2, 28.3 and 28.4 read as follows :

“The definition of ‘perquisite’ has also been amended to include the value of any other fringe benefit or amenity as may be prescribed. The details of fringe benefits are to be calculated in the manner prescribed in the IT Rules. It is further provided that ‘profits in lieu of salary’ shall include amounts received in lump sum or otherwise, prior to employment or after cessation of employment for the purposes of taxation.

28.3 The nature and the value of other fringe benefits have already been prescribed under the rules. The value of different perquisites, benefits, amenities and other fringe benefits will henceforth be worked out in accordance with r. 3 of the IT Rules which has been rewritten and notified vide No. 940(E), dt. 25th Sept., 2001.

28.4 These amendments shall come into effect from 1st April, 2002, and shall, accordingly, apply to the asst. yr. 2002-03 and subsequent years.” From a reading of the above provision, Notes on Clauses and the circular explaining the Notes on Clauses made it clear that the above provision came into effect only from 1st April, 2002 i.e., applicable only for the asst. yr. 2002-03 onwards. In the present case, the assessment year involved is 2001- 02, which is prior to the amendment. So the intention of the legislature does not suggest that it is clarificatory in nature and it takes effect retrospectively.

11. The apex Court, in the case of Virtual Soft Systems Ltd. vs. CIT (2007) 207 CTR (SC) 733 : (2007) 289 ITR 83 (SC), has considered the scope of interpretation of statute and held that there is no assumption as to the retrospectivity of an amendment. Retrospectivity has to be enacted specifically in the fiscal statute and it is more so in the case of penal provisions as otherwise it would be contradictory or derogatory to Art. 20(1) of the Constitution of India. In paras 53 to 56 it has been held as follows : “It may be noted that the amendment made to s. 271 by the Finance Act, 2002, only stated that the amended provision would come into force w.e.f. 1st April, 2003. The statute nowhere stated that the said amendment was either clarificatory or declaratory. On the contrary, the statute stated that the said amendment would come into effect on 1st April, 2003, therefore, would apply only to future periods and not to any period prior to 1st April, 2003 or to any assessment year prior to the asst. yr. 2003-04. It is well-settled legal position that an amendment can be considered to be declaratory and clarificatory only if the statute itself expressly and unequivocally states that it is a declaratory and clarificatory provision. If there is no such clear statement in the statute itself, the amendment will not be considered to be merely declaratory or clarificatory. Even if the statute does contain a statement to the effect that the amendment is declaratory or clarificatory, that is not the end of the matter. The Court will not regard itself as being bound by the said statement made in the statute but will proceed to analyse the nature of the amendment and then conclude whether it is in reality a clarificatory or declaratory provision or whether it is an amendment which is intended to change the law and which applies to future periods. In this connection, see the following : (1) Sakru vs. Tanaji (1985) 3 SCC 590 at pp. 593-594; (2) Harding vs. Commrs. of Stamps for Queensland (1898) AC 769 (PC) at 775 to 776; (3) R. Rajagopal Reddy vs. Padmini Chandrasekharan (1995) 124 CTR (SC) 311 : (1995) 213 ITR 340 (SC) : (1995) 2 SCC 630 at 646; (4) CIT vs. Patel Brothers & Co. Ltd. (1995) 126 CTR (SC) 132 : (1995) 215 ITR 165 (SC); and (5) Sedco Forex International Drill Inc. & Ors. vs. CIT (2005) 199 CTR (SC) 320 : (2005) 279 ITR 310 (SC) at p. 317.

In the present case, it is only in the Notes on Clauses relating to the 2002 [see (2002) 173 CTR (St) 107 : (2002) 254 ITR (St) 118] amendment that it has been stated that the said amendment is clarificatory. There is no such mention of the said amendment being clarificatory, anywhere in the statute itself. Such a statement in the Notes on Clauses cannot possibly bind the Court when even a statement in the statute itself is not regarded as binding or conclusive. In the present case, the statute expressly states that the amendment would take effect only from 1st April, 2003. Consequently, this amendment cannot possibly be applied to or in respect of any period prior to 1st April, 2003. Otherwise also, it has been consistently held that a provision must be read subject to the rule that in the absence of an express provision or clear implication, the legislature does not intend to attribute to the amending provision, a greater retrospectivity than is expressly mentioned. It is settled law that a taking provision imposing liability is governed by the normal presumption that is not retrospective. Reference made to the decisions in : (i) S.S. Gadgil vs. Lal & Co. (1964) 53 ITR 231 (SC); (ii) K.M. Sharma vs. ITO (2002) 174 CTR (SC) 210 : (2002) 254 ITR 772 (SC); (iii) Gem Granites vs. CIT (2004) 192 CTR (SC) 481 : (2004) 271 ITR 322 (SC); and (iv) Sedco Forex International Drill Inc. & Ors. vs. CIT (2005) 199 CTR (SC) 320 : (2005) 279 ITR 310 (SC).”

12. It is pertinent to note that the said provision of s. 17(3)(iii) is a definition provision. It enlarges the scope of the definition. It includes the object of the new provision to expand the scope of provision of “profits in lieu of salary” so as to include any amount due to or received, whether in lump sum or otherwise, by any assessee from any person, i.e., (a) before his joining any employment with that person; or (b) after cessation of his employment with that person. Whenever enlarging the scope of existing provision and also including the particular transaction as income, the provision always comes into effect prospectively unless specifically stated that it operates retrospectively. The Supreme Court, in the case of CIT vs. Infosys Technologies Ltd. (2008) 214 CTR (SC) 293 : (2008) 1 DTR (SC) 330 : (2008) 297 ITR 167 (SC), has considered the scope of amended provision of s. 17(2)(iiia) which was inserted by the Finance Act, 1999 w.e.f. 1st April, 2000. The issue in that judgment is whether the said provision comes into effect retrospectively or prospectively. The Supreme Court, in paras 13, 14 and 15, has held as follows : “13. We quote hereinbelow s. 17(2)(iiia), which reads as under : ‘(iiia) the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to an individual who is or has been in employment of that person : Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Explanation—For the purposes of this clause,— (a) ‘cost’ means the amount actually paid for acquiring specified securities and where no money has been paid, the cost shall be taken as nil; (b) ‘specified security’ means the securities as defined in cl. (h) of s. 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and includes employees’ stock option and sweat equity shares; (c) ‘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; and (d) ‘value’ means the difference between the fair market value and the cost for acquiring specified securities.’

As stated above, unless a benefit/receipt is made taxable, it cannot be regarded as ‘income’. This is an important principle of taxation under the 1961 Act. Applying the above principle to the insertion of sub-cl. (iiia) in s. 17(2) one finds that for the first time w.e.f. 1st April, 2000, the word “cost” stood explained to mean the amount actually paid for acquiring specified securities and where no money had been paid, the cost was required to be taken as nil.

In the case of CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) this Court held that the charging section and the computation provision under the 1961 Act constituted an integrated code. The mechanism introduced for the first time under the Finance Act, 1999, by which ‘cost’ was explained in the manner stated above was not there prior to 1st April, 2000. The new mechanism stood introduced w.e.f. 1st April, 2000, only. With the above definition of the word ‘cost’ introduced, vide sub-cl. (iiia), the value of the option became ascertainable. There is nothing in the memorandum to the Finance Act, 1999, to say that this new mechanism would operate retrospectively. Further, a mechanism which explains ‘cost’ in the manner indicated above cannot be read retrospectively unless the legislature expressly says so. It was not capable of being implemented retrospectively. Till 1st April, 2000, in the absence of the definition of the word ‘cost’, the value of the option was not ascertainable. In our view, sub-cl. (iiia) is not clarificatory. Moreover, the meaning of the words ‘specified securities’ in sub-cl. (iiia) was defined or explained for the first time, vide Finance Act, 1999, w.e.f. 1st April, 2000. Moreover, the words ‘allotted or transferred’ in sub-cl. (iiia) made things clear only after 1st April, 2000. Lastly, it may be pointed out that even sub-cl. (iiia) has been subsequently deleted w.e.f. 1st April, 2001. For the aforestated reasons, we are of the view that sub-cl. (iiia) cannot be read as retrospective.”

13. In the case of CIT vs. Shyam Sundar Chhaparia cited supra, the Madhya Pradesh High Court has considered the scope of amended provision of s. 17(3)(iii) as in the present case and held that it would be applicable only prospectively and not retrospectively as contended by the Revenue. After taking into consideration the principle enunciated in the above judgments, we are of the view that the amended provision viz., s. 17(3)(iii) comes into effect only prospectively and not retrospectively.

The learned counsel appearing for the Revenue further submitted that the employer of the assessee had deducted tax at source on the disputed amount and further the assessee/respondent had also estimated the advance tax on the amount and has also paid the self-assessment tax. Relying on the above factors, the learned counsel appearing for the Revenue vehemently contended that the assessee himself treated the same as income nature. Therefore, the AO is right in assessing the compensation under the head “Salary”. The argument does not hold good on the ground that the employer of the assessee had deducted the tax at source only on the advice of the tax consultant and also on abundant caution. The assessee also paid advance tax only at the instance of his counsel. Concession or consent certainly does not confer any jurisdiction on Revenue to assess it. Therefore, the said factors do not help the Revenue. In these circumstances, we are of the view that the amount received by the assessee is only a capital receipt and the same is not taxable and further the amended provision inserted by the Finance Act of 2002 comes into effect only for the asst. yr. 2002-03 onwards and the same is not applicable prior to the earlier assessment years. Accordingly, we answer the questions 1 to 5 in favour of the assessee/respondent and against the Revenue.

In respect of question No. 6, the assessee/respondent has filed a return admitting the professional income of Rs. 3,89,335 for the months of February and March, 2001. The auditor’s statement also furnished to the AO. The details regarding the same are as follows :

The AO was of the view that there is difference in the statement of profit as shown in the audited P&L a/c and shown in the return of income. The AO failed to see that the difference between the income returned of Rs. 85,400 (profit before tax) and the net profit of Rs. 55,732 (profit after tax) is only because of the provision for taxation of Rs. 29,670 which had to be added to arrive at the assessable income from the profit. The AO erred in assuming that the assessee had omitted certain receipts in the P&L a/c and estimating a sum of Rs. 4,00,000 as the professional income of the assessee for the two months. The main reason for the AO to estimate the professional income is that no proper tax account has been maintained by the assessee. Whatever the amount was received by the assessee from the group company is only through the bank accounts. The assessee/respondent retired on 31st Jan., 2001 and the assessee has received the payment for a period of two months and the same was returned for tax purpose. Therefore, the AO wrongly estimated the professional income of Rs. 2,00,000 per month and the Tribunal is correct in coming to the conclusion that the estimated amount of Rs. 4,00,000 made by the AO is not in accordance with law and correctly deleted the same and in para 5.2, the Tribunal has held as follows : “From a perusal of the above submissions, it is clear that the anomaly pointed out between the income returned and the income mentioned in P&L a/c is without any basis. The AO has clearly erred in appreciating the facts of the case and this so-called anomaly cannot be a reason for estimate of assessee’s income. Another point of the Revenue in this regard is that proper books of accounts have not been maintained by the assessee. In this regard, it is noted that assessee has done only business for two months at the end of the financial year and in which only a few payments have been received which have been accounted through bank. Similarly receipt of salary for the past ten months and receipt of Rs. 22,00,000 as found exempted by us cannot also be a basis of any estimate. Hence, in our opinion, the estimated addition of Rs. 4,00,000 is devoid of cogency and is liable to be deleted.”

From a reading of the above, it is clear that the Tribunal has considered all the facts and circumstances of the case and also categorically given a finding that the estimate made by the AO has no basis and correctly deleted the addition. It is a question of fact. It is not a perverse order. Therefore, the order passed by the Tribunal deleting the addition is justified and the same is in accordance with law. In view of the above, we also answer the question Nos. 6 and 7 in favour of the assessee and against the Revenue.

16. Under these circumstances, we do not find any error or illegality in the order passed by the Tribunal warranting interference. Accordingly, the order passed by the Tribunal is confirmed and the above tax case appeal is devoid of merits and the same is dismissed. No costs.

[Citation : 327 ITR 406]

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