Case Law Details
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.
AO held that loss sustained/damage suffered. if any. during a subsequent year cannot alter the receipt of income by an assessee in the year of receipt. CIT(A) uphold the finding of AO.
Conclusion- When a particular amount is actually not retained by an assessee, then there does not arise any question of tax for that amount. If the event of transaction is for A.Y. 2017-18 then also, the department should have given effect to the amount which is actually not part of the total income of the assessee. 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.
Held that the assessee had made a refund of Rs. 80.5 lakhs on account of provisions contained in the confidentiality and non-compete agreement read with MOU between the assessee and Vedanta Ltd. and therefore, such refund cannot be construed as salary for the purpose of charging to tax. Such amount therefore, is not assessable as income.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal preferred by the assessee emanates from order of the ld. CIT(A)-5, Pune, dated 31-01-2020 for assessment year 2016-17 as per the following grounds of appeal.
1. Not allowing the deduction of refunded amount Rs. 80,50,000/-.
2. Only real income can be taxed.
3. Non-acceptance of REVISED return.
4. Non-observation of section 4 of Income-tax Act, 1961.”
2. The relevant facts are that the assessee e-filed his original return of income for AY 2016-17 on 28/07/2016, declaring total income of Rs.4,63,15,860/-. Subsequently, the assessee filed a revised Return of income on 26/03/2018 wherein the total income was reduced to RS.3,82,65,860/-. The case was selected for scrutiny under CASS and a Notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) was issued to the assessee on 08/08/2018, through e-assessment portal of the ITBA. Thereafter, notice uls 142(1) of the Act with a questionnaire was issued on 11/09/2018, through e-assessment portal, calling for various details which was duly served to the assessee.
3. In response to the Notices along with the questionnaire issued, the assessee has submitted various details called for such as copy of ITRs filed, computation of income, copy of 26AS, form No. 16, etc. through e-filing portal. During the year under consideration, the assessee was in employment with multiple employers, namely, Vedanta Limited, Goa, KEC International Limited, Mumbai & Hindalco Industries Ltd., Mumbai, from whom he has received salary. Apart from salary, the assessee has claimed loss from house property and shown income from other sources which mainly consists of interest received on deposits.
4. 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. During the assessment proceedings, the assessee was asked to explain the reduction in the salary income disclosed in the revised return filed. In his submission made, the 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.
5. The ld. A.O observed and held as follows:
“4. The submission of the assessee has been carefully examined with reference to the facts of the case and material on record. Sec.15 of the I.T. Act defines that any salary ‘paid or allowed’ tcraI18sseseee shall be chargeable to income-tax under the head “Salaries” in the relevant previous year. In the present case, it is a fact that the assessee has received the entire amount of Rs.2.01 crore from his previous employer pursuance to the severance package awarded to him. During the period relevant to the assessment year under consideration, which is not disputed by the assessee. The entire amount so received by him is in the nature of profit lieu of employment and !be same was accordingly correctly disclosed as salary received in the original return 70f income filed The non-compete and confidentiality agreement entered into b he assessee with his previous employer prohibited the assessee from taking employment with any company operating in the same field for a period of 30 months. The terms of this agreement would have become operational only in the case of breach of e agreement which would be a subsequent event and the same would not have affected the factum of receipt of salary by the assessee during the year as the same has already received by him. As highlighted in the show cause notice extracted hereinabove, the terms of the agreement became operational upon breach of the same by the act of the assesee in taking-up employment with a competitor within the cool off period. Thus. any compensation the assessee had to pay or loss he had to sustain is inextricably linked to taking up of the subsequent employment and the same cannot in any way affect the actual receipt of salary by the assessee from his previous employer.
4.1 Another aspect of the matter is that, as can be seen from the relevant documents on record, the MoU wherein the compensation amount is quantified has been executed on 27/06/2016 and the payment was actually made on 01/07/2016 i.e. both the events took place in the FY 2016-17 and not in the year under consideration. It is trite law that each assessment year is a separate unit for the purpose of Income-tax and any income • received or is deemed to be received or accrues or arises or is deemed to accrue or arise during that year is taxable in that year itself. Therefore. loss sustained/damage suffered. if any. during a subsequent year cannot alter the receipt of income by an assessee in the year of receipt.
6. The ld. CIT(A) also after considering the assessment order, submissions of the assessee upheld the findings of the ld. A.O. Being aggrieved, the assessee is in further appeal before the Tribunal.
7. We have perused the case records, heard the submissions and analyzed the facts and circumstances. In this case, the assessee is an individual previously employed with Vedanta Ltd. (hereinafter referred to as “the company) as a Chief Operating Officer in their Iron Ore business (previously known as Sesa Goa Ltd) which eventually got merged with Vedanta Ltd. The assessee had resigned from the said organization on medical grounds and considering the circumstances and long period of service, the company supported the assessee by way of ex-gratia/severance/non-compete package of Rs. 2,01,09,000/-. For receiving this non-compete/severance package, the company and the assessee entered into a “Confidentiality and Non-Compete Agreement” dated 26th May 2015 wherein as per the covenant, the assessee agreed that 30 months from the date of relieving, the assessee shall not directly or indirectly on behalf of the company‟s competitive business perform the same or substantially the same job duties or otherwise be associated with any other business, etc. i.e. the same or similar to or competitive with the company ……….. However, this clause was not followed by the assessee and he had taken up a job with one of the competitor to the said company and thus there was a dispute. Accordingly a Memorandum of Understanding (hereinafter referred to as “the MOU”) was entered into by the company and the assessee on 27th June 2016. This MOU is made part of this order:
“MEMORANDUM OFUNDERSTANDING
The Memorandum of Understanding (MOU) is entered into by and between
Mr. Pramod Muralidhar Unde, resident of
601-A, Aarav Society, Hissa No. 1+3+4 )
(Part S.No. 28, Near (Mhatoba Temple, Kothrud,
(hereinafter referred to as “Promod”),
Pune-411 038, Maharashtra;
And
Vedanta Ltd. (Iron Ore Division), having its office at 20 EDC Complex, Patto, Panaji,
Goa (hereinafter referred to as “the Company).
Whereas
A. Pramod W:JS employed with the Company till .26111 May . .20} S (Date of Relieving) and on the Date of Relieving, executed Confidentiality and Non-Compete Agreement dated .261b May 2015 (CAN). ).
B, CNCA inter-alia provided that PRAMOD shall not during the period of 30 months from the date of relieving, join or serve any competing organization, whether directly or indirectly.
C. Company issued a letter to Pramod alleging violation of the terms and conditions of CNCA, which were contested by Pramod. The Com v also demanded refund of severance package of Rs. 80.5 l.akh (Rupees Eighty Lakhs Thousand only) on these
d. Company and Pramod have been in discussion since (the issue of letter by the Company to Pramod and have the Parties have agreed to resolve any inter se issues amicably and have therefore agreed to enter into this agreement.
NOW THE PARTIES AGREE AS FOLLOWS:
1. Within 30 days of execution of this MOU. PRAMOD shall remit an amount OF Rs. 80.5 lakhs to the Company.
2.Effective from the date of refund till the amount of Rs. 80.5 lakhs;
a. PRAMOD shall stand relived of his non-compete obligations under- the CCNA. It is agreed between the Parties that Non Solicitation 8:.
Confidentiality Obligations contained in the CNC” would continue to be operative and binding on Pramod.
b. Clause: 2 of the CCNA shall stand deleted and remaining part of the CNC shall continue 10 be
3. Parties represent and warrant that inter se issues relating 10 non-compete between the Company and Pramod stand settled in its entirety and after the refund of amount agreed herein there would be no outstanding claims against each other on account of non-compete condition.
4. The panics represents that the,’ have had II full and complete opportunity to consult ; with their respective legal counsel prior to signing of Ibis MOU.
5. In the event that PRAMOD for any reason whatsoever, fail, neglects or do not refund the agreed amount within 30 days from the dale of this MOU. this MOU shall have no effect and the Parties shall be tree to claim all their rights and contentions under the CNC A and al/ other prior agreements between the Parties herein Executed by the Parties on this 27th of June 2016.
8. The assessee had also submitted the copy of cheque issued to the company i.e. Vedanta Ltd., for Rs. 80.5 lakhs which is out of the non-compete/severance package of Rs. 2.01 crores which was paid to the assessee by his previous employer i.e. Vedanta Ltd. This is placed in the paper book filed by the assessee. The assessee has, in his original return of income included severance payment of Rs. 2.01 crores and declared the total income. However, when there was a dispute the assessee paid back Rs. 80.5 lakhs to Vedanta, therefore, in the revised return, this amount was reduced from the total income. It is the contention of the assessee since he had paid back Rs. 80.5 lakhs out of the total package received by him, therefore, he has filed a revised return deducting the said amount. Whereas the contention of the department is that such action of reduction from the total salary is actually linked with violation of the provisions of severance/non-compete agreement by the assessee entered between the assessee and his employer i.e. Vedanta and it does not in any way affect the actual receipt of salary by the assessee from his previous employer. Another ground of the department is that the relevant document on record i.e. MOU wherein the compensation amount is quantified has been executed on 27-06-2016 and the payment was actually made on 01-07-2016 i.e. both the events have taken place in F.Y. 2016-17 relevant to A.Y. 2017-18 and not in the year under consideration. Since every assessment year is separate unit for the purpose of Income-tax Act, therefore, any income received or is deemed to be received or accrued or arised or is deemed to be accrued or arised during that year is taxable in that year itself. Therefore, loss sustained/damage suffered, if any, during the subsequent year cannot alter the receipt of income by an assessee in the year of receipt.
9. Admittedly, when the assessee had received the entire compensation package of Rs. 2.01 crores from Vedanta, he had shown that in in his original return of income. Thereafter, due to the dispute, the assessee had paid back Rs. 80.5 lakhs back to the employer out of the said total amount. This has been duly reflected again in the revised return of income. Before us also, the evidence has been placed by which the event of refunding the money of Rs. 80.5 lakhs to Vedanta Ltd. is established. When a particular amount is actually not retained by an assessee, then there does not arise any question of tax for that amount. If the event of transaction is for A.Y. 2017-18 then also, the department should have given effect to the amount which is actually not part of the total income of the assessee. 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.
10. We find Hon‟ble Delhi High Court in the case of CIT Vs. Raghunath Murti (200) 178 Taxman 144 Del) on identical facts and circumstances has observed and held as follows:
4. “With regard to the proposed question (a), the factual background is that the assessee in his original return had declared an income of Rs. 26,81,110. This return was filed on 26-6-1988. revised return was filed on 16-8-1999 and the income returned was shown at Rs. ]6,64,000. The assessee had revised the returned income because the assessee had refunded a sum of Rs. 10,17,112 to his employer-company (M/s. Alcatel Modi Network Systems Ltd.). The said amount was refunded because the same was found to be excess amount paid to the assessee by way of remuneration. This resulted in the assessee revising his salary income to Rs. 8,58,217 as against the original returned salary income of Rs. 18,75,329. As per the revenue, the refund of the said sum of Rs. 10,17,112 cannot be treated as excess salary paid once the same had accrued to the assessee in the relevant year. The Assessing Officer, consequently, held that the refund of the said amount was not liable to be treated as reduction in the salary retrospectively.
5. In appeal before the Commissioner of Income-tax (Appeals), the said finding was reversed. The Commissioner of Income-tax (Appeals) arrived at the conclusion that the assessee had refunded the said amount in view of the legal requirement contained in the Companies Act, 1956 and particularly, the provisions of sections 309( 5A) and 309( 5B) read with section II of Part II of Schedule XIII to the Companies Act, 1956. The Commissioner of Income-tax (Appeals) also held that the said refund to the assessee’s employer was not voluntary and, therefore, could not be construed as foregoing of salary. He noted that since the salary has been refunded in view of the legal requirements under the Companies Act, 1956, the same could not be held as the assessee’s income and, therefore, was not assessable. Consequently, the assessee got the relief of Rs. 10,17,112 in respect of the refunded amount.
6. Being aggrieved, the revenue preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal, by virtue of the impugned order, has accepted the finding, returned by the Commissioner of Income-tax (Appeals) and has rejected the plea raised by the revenue. The Tribunal noted that the assessee being the Managing Director of the Company (M/s. Alcatel Modi Network Systems Ltd.) was entitled to managerial remuneration in accordance with the resolution passed in the AGMs of the shareholders of the company held on 30-9-1996 and 5- 5-1997. It was in the AGM held on 30-9-1996 that the assessee had been appointed as a whole-time director for a period of five years with effect from 4-12-1995 on the remuneration stated therein. In the AGM held on 5-5-1997, the assessee was appointed as the Managing Director with effect from 10-4-1997. The resolution passed in that AGM specifically indicates that where in any financial year, during the tenure of the Director the company has no profits or its profits are inadequate, the remuneration payable to such Director, notwithstanding the resolution, would be governed by the limits laid down in section II of Part II of Schedule XIII to the Companies Act, 1956. It is also noted that the company suffered loss in the financial year ended on 31-12-1997 and consequently, the remuneration payable to the assessee came within the restrictions placed in the Companies Act, 1956 as indicated above. Consequently, the excess remuneration paid earlier to the assessee was required to be refunded to the company and it is in this background that the assessee refunded the amount of Rs.10,17,112. The said refund is also supported by the certificate of the employer-company as also the bank statement of the company for the relevant year. The Tribunal concluded, after noting the provisions of the Companies Act, 1956 as well as the resolutions passed in the AGMs indicated above, that the refund made by the assessee was on account of statutory provisions contained in the Companies Act, 1956. The further conclusion arrived at by the Tribunal was that the amount originally paid to the assessee over and above the limits prescribed in the Companies Act, 1956 could not even be construed as salary so as to fell within the fold of taxation under section 15 of the Income-tax Act, 1961. The Tribunal confirmed the conclusion of the Commissioner of Income-tax (Appeals) that the amount of Rs. 10,17,112 was not assessable as an income.
7. We have heard the counsel for the parties and have examined the facts as well as the legal position in detail and we find that the Tribunal has rightly confirmed the finding returned by the Commissioner of Income-tax (Appeals). Both the said authorities have returned a finding of fact that the refund of Rs. 10,17,112 was neither voluntary nor was it for any extraneous consideration and that the refund was made merely with a view to comply with the provisions of the Companies Act, 1956. In these circumstances, the view sought to be canvassed by the revenue cannot be accepted and was rightly rejected by the Tribunal. No substantial question of law arises for our consideration. The appeal is dismissed.”
11. Reverting to the facts of the present case, the assessee had made a refund of Rs. 80.5 lakhs on account of provisions contained in the confidentiality and non-compete agreement read with MOU between the assessee and Vedanta Ltd. and therefore, such refund cannot be construed as salary for the purpose of charging to tax. Such amount therefore, is not assessable as income. In view thereof, we set aside the order of the ld. CIT(A) and allow the grounds of appeal.
12. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 31st January 2023
Author Bio
