The Income Tax Appellate Tribunal, Bangalore Bench has recently held that the amount received by the assessee under non-compete agreement as Non-Competent Fee cannot be consider as “profit in-lieu of salary” u/s 17(3)(iii) of the Income Tax Act, 1961 on ground that, according to the facts and circumstances of the case, the relation of employer-employee is absent in the instant case.
The assessee, in the instant case, is an individual and was Financial Director in Deccan Aviation Ltd. The assessee filed his return of income for the Assessment Year under consideration on 31.10.2007 declaring a total income ofRs.29,00,170. In scrutiny assessment the Assessing Officer observed that the assessee left the company during the year and he has received an amount of Rs.2.5 Crores as non-compete fees from the employer Deccan Aviation Ltd. (DAL). While filing the return of income the assessee claimed the same as non-taxable being capital receipt. The Assessing Officer held that the receipt of non-compete fees is taxable as per the provisions of section 28(va) of the Income Tax Act, 1961. Accordingly, the said amount of Rs.2.5 Crores was brought to tax under the head “Business or Profession” while completing the assessment under Section 143(3) of the Act.
The assessee challenged the action of the Assessing Officer before the CIT (Appeals) and contended that the assessee was a professional being a Chartered Accountant and was appointed as Executive/Financial Director in the DAL. After the cessation of the employment with the DAL the assessee received the said amount under the said non-compete fees agreement and therefore it cannot be assessed as business income under Section 28(va) of the Act. It was also contended that the so called non-compete fees is invalid in terms of Article 19(1)(g) of Constitution of India and Section 27 of the Contract Act and therefore the said agreement is unenforceable as being invalid and void in restraint of trade. The CIT (Appeals) held that this payment is covered under the provisions of section 17(3)(iii) of the Act as profit in lieu of salary. Thus the CIT (Appeals) rejected the contention of the assessee by giving a different reasoning and holding that the said amount is assessed to tax as salary or payment as profit in lieu of salary under section 17(3)(iii) instead of income from “Business or Profession” under Section 28(va) of the Act held by the Assessing Officer.
The Tribunal, on second appeal found that there was a clause in the employment agreement which restricts the employees to reveal confidential details to a third person. Since it is not possible to invoked this clause against the employee after the termination of employment, the company enter into an agreement to non-compete with the employee i.e, the assessee. As per the relevant clauses of the said agreement, the assessee agreed to the restrictive covenant of not accepting any employment including holding of office in the Board of Directors of anybody/company engaged in the airline business as well as providing any consultancy, advisory services to anybody or person engaged in the airline business or to aid or associate with anybody to promote, set up, get interest in airline business. The substance of the restrictive covenents of the agreement is to restrict the assessee to associate in any manner whatsoever with anybody or person engaged or proposed to engage in the airline business. As observed by the Appellate Tribunal, the agreement cannot constitute to be related to termination of employment or to compensate the loss of salary due to termination of employment. The payment made under this agreement clearly not in the nature of compensation for loss of the employment of the assessee with DAL but it is all about the future engagement of the assessee to provide its services of knowledge in the airlines business to third party and particularly to the competitor or prospective competitor.
The Tribunal cited the judgment of the High Court in Pritam Das Narang, in which it was held that Section 17(3)(iii)(b) of the Act presuppose the existence of relationship of employer and employee between the assessee and the person who makes the payment of “any amount” in terms of sectin 17(3)(iii) of the Act. The amount received by the assessee after cessation of the employment therefore was held as capital receipt and could not be taxed under the head “Profits in lieu of salary”. Following this, it was observed that the payment in question was made by DAL to the assessee for not sharing the assessee’s knowledge of the business of airlines and particularly the secrets of the trade with third party in the business of airlines as well as any party who is going to set up the business of airlines. Therefore, the CIT(A) was erred in finding the said income as “Profit in-lieu of salary”. On this basis, the impugned orders was set aside.
Read the full text of the Judgment below.
