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Commissioner Of Income Tax iv Vs. Pritam Das Narang
October, 19th 2015
+                          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.


       PRITAM DAS NARANG                          ..... Respondent
                    Through: Mr M. P. Rastogi and Mr K. N. Ahuja,

       %             16.09.2015

1. This is an appeal under Section 260A of the Income Tax Act, 1961 filed

by the Revenue against the order dated 30th August, 2013 by the Income Tax

Appellate Tribunal (`ITAT') in ITA No.4158/Del/2011 for Assessment Year

(`AY') 2008-09.

2. By an order dated 9th February, 2015, the following questions of law were


       (a)     Did the ITAT fall into error in holding that the sum of
               Rs.1,95,00,000/- in the circumstances of the case, was
               compensation in the hands of the Assessee and could not

ITA 203/2014                                                     Page 1 of 11
               be treated as income as profits in lieu of salary?

       (b)     Did the ITAT fall into error in allowing the order of the
               CIT (Appeals) in allowing the credit of TDS of
               Rs.22,09,350 on Rs.1,95,00,000/- to the respondent?

3. The facts are that the Assessee filed return of income on 28 th July, 2008

declaring total income of Rs. 1,65,70,750/- and also claiming a refund of

Rs.1369/-. The return was processed under Section 143(1) on 26th August,

2009 determining a refund of Rs.860/-.

4. The case was subsequently selected for scrutiny and a notice was issued

by the Assistant Commissioner of Income Tax (ACIT) to the Assessee on

12th August, 2009. It was followed by notices under Section 142(1) of the

Act. The Assessee was asked to furnish the bank accounts for the period 1 st

April, 2007 to 31st August, 2008. The Assessing Officer (AO) noticed a

credit entry of Rs.1,70,90,650/-. The Assessee filed a letter on 16th

November, 2010 explaining the circumstances under which the payment was

received from M/s. ACEE Enterprises ('ACEE') against an Employment

Agreement entered into between him and ACEE on 10th January, 2007. In

terms of the said Employment Agreement, the Assessee was to be employed

as Chief Executive Officer (`CEO') and the employment was to commence

ITA 203/2014                                                        Page 2 of 11
from 1st July, 2007. Either party at its option could terminate the

employment by giving six months' notice to the other party in writing. In

case the notice period was less than six months, then compensation

equivalent to the shortfall of the notice period was payable by the party


5. The Assessee produced two letters before the AO. The first dated 1st May,

2007 was written by ACEE to the Assessee informing him that there was a

"sudden change in business plan of the 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 the Assessee's

services "as and when its operation starts". The second letter was dated 15th

May 2007 which was the Assessee's response to ACEE that the news was a

"big financial loss personally" since there were "many other opportunities

available to me". The 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, the 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 the financial loss incurred by me".

6. On 25th August 2007, ACEE informed the Assessee that "as a mark of

goodwill/gesture" it was pleased to announce a payment of Rs.1,95,00,000/-

to the Assessee subject to income tax compliances as "a one-time payment

to you for non-commencement of employment as proposed." Before the

AO, the Assessee pointed out that the tax of Rs.22,09,350/- had been

deducted at source by a letter dated 7th December, 2010. The Assessee

offered an explanation as to why he had not offered the above sum to tax or

claimed refund of the TDS.

7. The AO rejected the Assessee's explanation on the ground that under

Section 17 (3) (iii) of the Act the receipt by the Assessee of a sum from any

person prior to his joining with such person was taxable. The AO was of the

view that the condition of a pre-existing relationship of employer and

employee was done away with by the use of the words "by any Assessee

from any person" introduced by the Finance Act, 2001 with effect from 1st

April, 2002. The AO also sought to distinguish the decision in CIT v. Rani

Shankar Mishra (2010) 320 ITR 542 (Del) which was referred to by the

ITA 203/2014                                                     Page 4 of 11
Assessee on the ground that the compensation in that case was received

pursuant to a gender discrimination claim stemming from the company's

refusal to offer the woman candidate a position whereas in the present case

the job was offered and accepted. The AO also drew an adverse inference as

regards failure to disclose that TDS had been deducted by ACEE, in

particular since the Assessee had not brought a claim in the return regarding

such TDS. The AO concluded that the payment was taxable under the head

`salary'. The addition of Rs.1.95 crores was added to the returned income

and penalty proceedings were also directed to be initiated.

8. The Assessee's appeal against the aforesaid order was allowed by the

Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) noted that

Clause (iii) of Section 17(3) had been brought in to account for `joining

bonus' received from the prospective employer as profit in lieu of salary

liable to be included as part of taxable income under the head `salary' or

also the amount paid to an employee 'after the employment comes to an end

(termination bonus).'    The CIT (A), after analysing the documents on

record, came to the conclusion that there was no master and servant

relationship between the Appellant and ACEE. No payment had been made

by ACEE to the Appellant from the date on which the contract was signed

ITA 203/2014                                                     Page 5 of 11
till the date when the offer of employment was withdrawn. The CIT(A)

concluded that the payment was made by the 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 the Act. Nor could it be taxed under some other head. The CIT(A) relied

on the decision of this Court in Rani Shankar Mishra (supra) to conclude

that the said receipt could not be taxed as a business/professional receipt

under Section 28 or as a gift under Section 56 of the Act. The CIT(A)

concluded that the receipt by the Assessee was bonafide and, accordingly,

deleted the addition. The CIT (A) further ordered that "the appellant is

entitled to refund of TDS paid on Rs. 1,95,00,000/- and accordingly the

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. The Revenue's further appeal has been dismissed by the ITAT in the

impugned order. The two issues addressed by the ITAT were:

       "1. On the facts and circumstances of the case and in law whether the
       Ld. CIT (A) was correct in deleting the addition of Rs.1,95,00,000/-
       taxed as revenue receipts by the AO since the same was not offered to
       tax by the assessee?

ITA 203/2014                                                       Page 6 of 11
       2. On the facts and circumstances of the case and in law, whether the
       Ld. CIT (A) was correct in allowing the credit of TDS of
       Rs.22,09,350/- on Rs.l.95 crore to the assessee?"

10. On the first issue, the ITAT concurred with the CIT(A) that prior to the

coming into existence of any relationship of employer and employee

between the Assessee and ACEE, the offer on the basis of which the

employment agreement was drawn up had itself come to an end. This was a

case where a prospective employee i.e. the Assessee had been compensated

for denial of opportunity to be employed by the prospective employer.

Therefore, the amount paid could not be said to be in lieu of the salary and a

benefit of employment. On the second issue the ITAT observed that the

finding of the CIT (A) that the receipt of Rs.1.95 crore was taxable as capital

receipt has been upheld by it and therefore the second ground also had to be


11. The Court has heard the submissions of Mr. Kamal Sawhney, learned

Senior standing counsel for the Revenue and Mr. M.P.Rastogi, learned

counsel for the Assessee.

ITA 203/2014                                                       Page 7 of 11
12. Mr. Sawhney urged that since the wording of Section 17(3)(iii) of the

Act was that "any amount received from any person", it was not necessary

that the amount had to be received only from an employer in order that such

sum be brought to tax in the hands of an assessee under the head 'profits in

lieu of salary'. It was submitted that the expression "any person" could

include a prospective employer as in the present case. It was submitted that

the clauses of the Employment Agreement showed that the Assessee had in

fact been employed as a CEO and the Assessee had also accepted such

employment. Therefore, notwithstanding that the employment was to

commence at a later date, the relationship of employer and employee had

been brought into existence by the Employment Agreement. Mr. Sawhney

sought to distinguish the decision in Rani Shankar Mishra (supra) on facts.

13. This Court is unable to agree with the above submissions on behalf of

the Revenue. The Employment Agreement itself mentions that the

employment shall commence `latest by 1st July, 2007'. Although it further

states that the employee "shall endeavour to join the company as early as

possible", the intention and expectation of the parties was that the

employment would commence not earlier than 1st July 2007. This becomes

evident from a reading of the letter dated 1st May 2007 written by ACEE to

ITA 203/2014                                                    Page 8 of 11
the Assessee in which it stated that that it would not be possible to take the

Assessee "on board from 1st July, 2007 as per employment contract." That

the employment did not commence from the date of the Employment

Agreement is further evident from the fact that ACEE stated in its letter

dated 25th August 2007 that it was making the payment of Rs. 1.95 crores

as "a one-time payment to you for non-commencement of employment as


14. The Court is unable to accept the interpretation sought to be placed on

the plain language of Section 17 (3) (iii) of the Act by the Revenue. The

words "from any person" occurring therein have to be read together with the

following words in sub-clause (A): "before his joining any employment with

that person". In other words, Section 17 (3) (iii) (A) pre-supposes the

existence of an employment, i.e., a relationship of employee and employer

between the Assessee and the person who makes the payment of "any

amount" in terms of Section 17 (3) (iii) of the Act. Likewise, Section 17 (3)

(iii) (B) also pre-supposes the existence of the relationship of employer and

employee between the person who makes the payment of the amount and the

Assessee. It envisages the amount being received by the Assessee "after

cessation of his employment". Therefore, the words in Section 17 (3) (iii)

ITA 203/2014                                                      Page 9 of 11
cannot be read disjunctively to overlook the essential facet of the provision,

viz., the existence of `employment' i.e. a relationship of employer and

employee between the person who makes the payment of the amount and the


15. The Court accordingly concurs with the concurrent view of the CIT (A)

and the ITAT that this was a case where there was no commencement of the

employment and that the offer by ACEE to the Assessee was withdrawn

even prior to the commencement of such employment. The amount received

by the Assessee was a capital receipt and could not be taxed under the head

'profits in lieu of salary'.

16. The other plea of the Revenue that the said amount should be taxed

under some other head of income, including 'income from other sources', is

also unsustainable. The decision of this Court in Rani Shankar Mishra

(supra) held in similar circumstances that where an amount was received by

a prospective employee `as compensation for denial of employment,' such

amount was not in the nature of profits in lieu of salary. It was a 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 the negative, i.e. in favour of the

Assessee and against the Revenue.

18. Consequently, question (b) is also answered in favour of the Assessee

and against the Revenue. The order of the CIT (A), as concurred with by the

ITAT, that the Assessee is entitled to the refund of the TDS paid on Rs.

1,95,00,000/- and that the refund of TDS may be adjusted against tax

demand if any arising on appeal effect being given to the said order of the

CIT (A) is upheld.

19. The appeal is dismissed but without any order as to costs.

                                                    S.MURALIDHAR, J

                                                    VIBHU BAKHRU, J
SEPTEMBER 16, 2015

ITA 203/2014                                                       Page 11 of 11
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