Compensation Received Under Mutual Agreement For Non-Renewal Of Contract Can't Form Basis Of Addition U/s 28(Ii)(E): Delhi ITAT

The Bench of the ITAT comprising of Yogesh Kumar U.S (Judicial Member) and N.K. Billaiya (Accountant Member) reiterated while considering the decision of Supreme Court in the case of G.K. Choksi & Co. 295 ITR 376 that, “Though the phrase has been used in certain sections as "business or profession", but nowhere has the phrase been used as the "business and profession. In fact, wherever the legislature intended that the benefit of a particular provision should be for both business or profession, it has used the words "business or profession" and wherever it intended to restrict the benefit to either business or profession, then the legislature has used the word either "business" or "profession", meaning thereby that it intended to extend the benefit to either "business" or "profession", i.e., the one would not include the other.” (Para 23)

As per the brief facts of the case, the Assessee's return was selected for scrutiny. The main reason for scrutiny is that the assessee has claimed substantial amount of refund which needs verification. During assessment proceeding the AO came to know that the assessee has received compensation which was claimed to be exempt by her u/s 4. The AO notice that the said compensation is not reflected in the profit and loss account submitted for the year under consideration. The AO was of the firm belief that the said compensation is taxable u/s 28(ii)(e) read with the Board Circular No. 8/2018, accordingly, issued show cause notice asking the assessee to show cause as to why exemption claimed in respect of the said receipt on termination of contract should not be treated as taxable receipt and be added back to the total income. The assessee filed a detailed reply strongly contending that the compensation received is in the nature of capital receipt. Reply of the assessee did not find any favour with the AO who strongly relied upon the provisions of section 28(ii)(e).

The Bench noted that the main subject matter of the case is the amount of compensation which was awarded to the assessee on behalf of settlement proceedings before the Division Bench of Delhi High court, after dismissal of her appeal before the Labour Court at Hamburg and Single Judge of the High Court of Delhi.

The Bench pointed out by the plain reading of section 28(ii)(e) that any compensation received by any person on termination or modification of the terms and conditions of any contract relating to his business is taxable under the head “Profits and gains of business or profession.

The Bench highlighted that wherever the Legislature thought of referring to both “Business” and “Profession”, it has used both the words in the enactment which means that wherever the word only “Business” is used, it does not include “Profession”.

The Bench further stated that the phrase “or profession” has been inserted by the Finance Act, 2016 which makes the intent of the Legislature absolutely clear that the Legislature wanted the insertion of the word “Profession” along with “Business”.

The Bench observed while referring the decision of Supreme Court in the case of G.K. Choksi & Co. 295 ITR 376, that he word “business” occurring in clause (iv) of section 32(1), by no stretch of imagination, can be said to include profession as well. By the same analogy, reference to business in section 32(ii)(e) would not amount to reference to profession.

The Bench further observed that non-renewal does not mean termination. The assessee is a freelance journalist. She is not under employment of Spiegel Verlag. Therefore, there is no employer-employee relationship.

The Bench stated that since the contract was not renewed, it came to an end and compensation received by the assessee is by way of mutual agreement between Spiegel Verlag and the assessee.

The Bench further explained with the help of section 2(zh) of the Industrial Relations Code, 2020 that non-renewal of any contract does not amount to retrenchment.

Therefore, on finding that provisions of section 28(ii)(e) do not apply on the given facts, ITAT allowed the assessee's appeal.

Counsel for Appellant/Taxpayer: Ajay Vohra

Counsel for Respondent/Department: Vivek Sharma

Case Title: Ms. Padma Rao verses C.I.T

Case Number: ITA No. 2759/DEL/2023

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