Amount paid by employee due to breach of non-compete agreement cannot be taxed as salary

Pramod Murlidhar Unde Vs ACIT (ITAT Pune)

ITAT Pune held that amount refunded back to the employer on account of breach of non-compete agreement by the employee cannot be construed as salary for the purpose of charging income tax.

Facts- 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.

During the assessment proceedings, the assessee was asked to explain the reduction in the salary income disclosed in the revised return filed.

Assessee contended 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. The assessee is said to have joined a competitor within the cool off period in contravention of the MoU with his previous employer which gave rise to a dispute. It is 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,OOO/- 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. However, the argument advanced by the assessee to support the reduction of income in the current year was found to be untenable as the documentary evidence furnished showed that the compensation was paid on 01-07-2016 pursuant to an MoU signed on 27-06-2016 (both falling in the subsequent F.Y. i.e. F.Y. 2016-17) and not in the year under consideration.

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