The Pune Income Tax Appellate Tribunal (ITAT) determined that the reimbursement of severance cannot be regarded as salary for the purposes of taxation due to terms in the secrecy and non-compete agreement that were read with the memorandum of understanding between the assessee and Vedanta Ltd. Thus, such a sum cannot be considered income.
The assessee e-filed his original return of income for A.Y. 2016-17 on 28th July 2016, declaring total income of Rs. 4,63,15,860. Subsequently, the assessee filed a revised Return of income on 26th March 2018 wherein the total income was reduced to Rs. 3,82,65,860.
The fact is that he had taken retirement from Vedanta Ltd. in June 2015 on medical grounds pursuant to which he had received a severance package of Rs.2.01 crores. However, as per the Non-Compete and Confidentiality Agreement signed with the said company, the assessee was refrained from accepting employment with any competitor for a period of 30 months.
Further, the assessee joined a competitor within the cool off period in contravention of the MoU with his previous employer which gave rise to a dispute.
The assessee claimed that subsequent to an agreement reached with the previous employer i.e. Vedanta Ltd., the assessee was required to pay compensation of Rs.80,50,000 to Vedanta Ltd. for breach of the terms of the Non-Compete Agreement. The assessee claimed that the compensation of Rs. 80,50,000 paid back to Vedanta Ltd. has been reduced from the salary shown in the original return of income.
In the course of verification, it was observed that total income of the assessee has been reduced to RS.3,82,65,860 in the revised return filed, from Rs. 4,63,15,860 as disclosed in the original return, which is found to be attributable to reduction in the salary income disclosed originally.
The Assessing Officer (AO) noted that it is common knowledge that each assessment year is treated separately for income-tax purposes, and any income received, accrued, or presumed to accrue during that year is subject to taxation in that year. Hence, loss or damage incurred in a later year, if any, cannot change the amount of income received by an assessee in the year of receipt.
The Commissioner of Income Tax (Appeals) [CIT(A)] supported the observations of AO. Thus the assessee filed an appeal before the Tribunal.
The assessee argued that because he had returned Rs. 80.5 lakhs of the entire package he had received, he should have filed a revised return with the aforementioned sum subtracted. However, the department argues that this action of reducing the total salary is actually connected to the assessee’s violation of the terms of the severance/non-compete agreement that was entered into between the assessee and his employer, Vedanta, and that it has no bearing whatsoever on the assessee’s actual receipt of salary from his former employer.
On the other hand, the department claims that the relevant document, an MOU, in which the compensation amount is quantified, was signed on June 27, 2016, and that the payment was actually made on July 1, 2016, meaning that both of these events occurred in the preceding fiscal year (FY) 2016–17 and are therefore not relevant to the year under consideration. The bench of Inturi Rama Rao (Accountant Member) and Partha Sarathi Chaudhury (Judicial Member) observed that when a particular amount is actually not retained by an assessee, then there does not arise any question of tax for that amount. The amount which has already been refunded back cannot be brought within purview of tax since the chargeability to tax of such refunded amount does not arise.
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