Conclusion: Amount received by SushmitaSen from Coca Cola Company in connection with settlement of a sexual harassment case was not liable to tax as the compensation received could not be termed as any benefit, perquisites arising to the assessee out of the exercise of profession.
Held: In the instant case, assessee-actress, received Rs. 145 Lacs from M/s Coca-Cola India Limited but offered only a part of the same i.e. Rs.50 Lacs to tax and claimed the balance Rs.95 Lacs to be capital receipts in nature in view of the fact that the same represented compensation received by the assessee towards damages caused to assessee’s reputation however, AO subjected the whole amount to tax. It was held only an amount of Rs.50 Lacs was due to the assessee as per the terms of the contract in case of default by CCIL and nothing more.The balance amount of Rs.95 Lacs was stated to be received for loss of reputation etc. and therefore, being capital in nature, claimed to be not taxable as the said compensation did not accrue / arise out of exercise of profession by assessee and could not be construed to be the income of the assessee or profits and gains of profession within the meaning of Section 2(24) and Section 28.
FULL TEXT OF THE ITAT JUDGMENT
1. Aforesaid appeals by assessee for Assessment Year [in short referred to as ‘AY’] 2004-05 contest the orders of Ld. first appellate authority qua confirmation of certain addition as well as penalty u/s 271 (1)(c). Since the penalty arises out of quantum addition, both the appeals are being disposed-off by way of this common order for the sake of convenience and brevity. First we take up quantum appeal ITA No. 4352/Mum/2015 which contest the order of Ld. Commissioner of Income-Tax (Appeals)-4, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-4/Tr-26/Appeal-(3)/ACIT. 11(1)/2014-15 dated 24/03/2015 by raising following effective grounds of appeal:-
1. The learned Commissioner of Income Tax (Appeals)-4, Mumbai has erred, in law and the fact and circumstances of the case in confirming certain additions of the order of the learned A CIT 11(1) Mumbai.
2. The learned CIT(A) has erred, in law and facts and circumstances of the case in considering the Capital receipt of Rs.95,00,000/- received from M/s. Coca Cola India Ltd. as income liable to tax. The appellant respectfully submits that the additions of this sum may kindly be deleted.
This is second round of appeal since the matter, in the first round, was set aside by the Tribunal to the file of Ld. CIT(A) with certain directions. Pursuant to the aforesaid directions, the matter has been reconsidered by first appellate authority wherein certain quantum additions as made by Ld. AO have been confirmed against which the assessee is under appeal before us.
2.1 Facts germane to the issue are that the assessee [hereinafter referred to as ‘SS’] being resident individual is a film actress by profession. The assessee was assessed in scrutiny assessment u/s 143(3) on 1 1/12/2006 by Ld. Assistant Commissioner of Income Tax-Circle 11(1), Mumbai [in short referred to as ‘AO’] at Rs.258.91 Lacs after certain additions as against returned income of Rs.157.54 Lacs filed by the assessee on 01/11/2004. The assessee derived income by way of fees for acting assignment in films, stage shows and by way of endorsements. The addition of Rs.95 Lacs representing certain receipts from Coca Cola is the sole subject matter of dispute before us.
2.2 During assessment proceedings, it transpired that the assessee received a sum of Rs.145 Lacs from a multi-national company namely M/s Coca Cola India Limited [in Short referred to as CCIL / company] but offered only a part of the same i.e. Rs.50 Lacs to tax and claimed the balance Rs.95 Lacs to be capital receipts in nature in view of the fact that the same represented compensation received by assessee towards damages caused to assessee’s reputation. However, the failure to substantiate the same with sufficient documentary evidences and for want of proper justification thereof resulted into impugned addition in the hands of the assessee. The same upon confirmation by Ld. first appellate authority on 19/03/2008 came up for hearing before the Tribunal vide ITA No. 5132/Mum/2018 order dated 14/01/2011 wherein the matter was remitted back to the file of Ld. CIT(A) with following directions / observations:-
12. Keeping in view the decision of Hon’ble Gauhati High Court in the case of Ranjeet Kumar Choudhury (supra) and having regard to the facts of the case, we are of the view that the impugned order of the ld. CIT(A) disposing of the appeal of the assessee by admitting the additional evidence without complying with the mandatory requirements of Rule 46-A is required to be set aside and the matter has to be remitted back to him for deciding the appeal of the assessee afresh on merits as per law. We find no merit in the objection raised by the learned counsel for the assessee in this regard that the Revenue has not challenged the order of the ld. CIT(A) on this issue by filing any appeal or cross objection. In our opinion, the issue relating to the admission of additional evidence without passing any speaking order or without allowing any opportunity to the A.O. to examine the same has been decided by the ld. CIT(A) against the Revenue and as a respondent, the Revenue is at liberty to raise the said issue as per Rule 27 of Appellate Tribunal Rules, 1963. Even otherwise, if the order of the ld. CIT(A) is found to be passed in violation of mandatory Rule 46-A, the Tribunal, in our opinion, is duly empowered to set aside the same with a direction to the ld. CIT(A) to make the same afresh in accordance with law after complying with the said Rule. We, therefore, set aside the impugned order of the ld. CIT(A) and restore the matter to his file with a direction to dispose of the appeal of the assessee afresh in accordance with law after complying with the requirements of Rule 46-A.
Upon perusal, it emerges that the matter was set aside to the file of Ld. CIT(A) primarily in view of the fact that additional evidences were considered by the first appellate authority in violation of Rule 46A. 2.3 Pursuant to the aforesaid directions of the Tribunal, the matter was reconsidered by the Ld. first appellate authority vide impugned order dated 24/03/2015 wherein additional evidences submitted by the assessee were remanded to Ld. AO. The remand report was furnished by Ld. AO on 22/12/2014, the contents of which have been extracted at para 4.3.1 of the impugned order wherein Ld. AO opined that the amount of Rs.145 Lacs received by the assessee was in lieu of settlement between the two parties for breach of terms of celebrity engagement contract [in short ‘Commercial Contract / Contract] dated 11/02/2002 and therefore, the stated amount was taxable in the hands of the assessee. In defence, the assessee by way of written submissions, inter-alia, submitted that the assessee entered into a commercial contract with CCIL to endorse / promote the products of CCIL for consideration of Rs.1 .50 Crores. For certain reasons, the said commercial contract was cancelled / terminated prematurely and accordingly, a settlement agreement dated 18/09/2003 was entered pursuant to which the assessee received a sum of Rs.1 .45 Crores. It was further submitted that the full amount of Rs.1.45 Crores was received as compensation in lieu of sexual harassment case filed by the assessee against an employee of CCIL. However, out of abundant caution, the assessee considered a sum of Rs.50 Lacs which was outstanding amount due to her under the commercial contract as her income. It was submitted that extra compensation received by the assessee was not as per the terms of the contract and therefore, the extra receipts, being capital in nature was not taxable in the hands of the assessee. The attention was also drawn to the fact that under the contractual terms, only an amount of Rs.50 Lacs was due to the assessee. It was also submitted that the CCIL had raised a claim of Rs.145 Lacs against the assessee for non performance of contractual commitment whereas subsequently, in contrast, it paid the compensation to the assessee when the assessee had still not performed the contractual commitment. Therefore, the only logical deduction was that the company accepted the contention of the assessee of the alleged sexual harassment and paid the compensation to avoid negative publicity / embarrassment which would have jeopardized the business of the company world over. Therefore, the additional compensation was not towards the service rendered and did not arise out of the contractual terms. The submissions of the assessee have been extracted on pages 4 to 6 of the impugned order whereas the contents of the remand report furnished by Ld. AO have been extracted on pages 7 to 10 of the impugned order. However the same could not find favor with first appellate authority, who confirmed the additions by observing as under:-
18.104.22.168 The appellant is a film actress and has been deriving income under the head “Business & Profession”, “Income from House Property” and “Income from Other Sources”. The appellant has been receiving business and profession income by way of fees for acting assignments in various films, stage shows in India and abroad and various commercial endorsements. During the F. Y.2003-04 relevant to A. Y.2004-05, the appellant had received a sum of Rs. 1.45 crores from M/s. Coca Cola India Ltd. in terms of Clause-2 of the Settlement Agreement dated 18.09.2003. The relevant Clause-2 of the Settlement Agreement dated 18.09.2003 may be reproduced as under:-
“2. Coca-Cola agrees to pay to SS, on or before signing of this agreement, a sum of Rs.1,45,00,000/- (Rupees One Crore Forty-Five Lacs only) as compensation, without admission of liability, towards SS’s alleged claims against Coca-Cola arising out of, or in relation to the Celebrity Agreement, and subsequent termination thereof as here in above stated. The said amount shall be accepted by SS in full and final settlement for all her claims against Coca-Cola arising out of or in relation to the Celebrity Agreement and the subsequent termination thereof, and SS confirms that she has no claim of whatsoever nature against Coca-Cola.”
22.214.171.124 Whereas, the appellant had received the aforesaid sum of Rs. 1.45 crores from M/s.Coca Cola India Ltd., it had offered to tax only a sum of Rs.50,00,000/- as income and the remaining amount of Rs.95,00,000/- was treated by her as a capital receipt not chargeable to tax. Undisputedly, the appellant had received compensation for termination of a contract but such contract was one of many which the appellant held including, inter-alia, professional contracts for acting in films, professional contracts for stage shows and professional contracts for commercial endorsement. The termination of contract with M/s. Coca Cola India Ltd. did not impair the profit-making structure of the appellant, but was within the framework of appellant’s business and profession, it being a necessary incident of the business that the contract may be terminated and fresh commercial endorsements and fresh professional contracts for acting in films and stage shows etc. may be taken. Undisputedly, the said payment has been made to compensate the appellant for cancellation of a certain contract which did not affect the trading structure of appellant’s business and profession, not deprived her of what in substance is her source of income. The impugned termination of contract being a part and parcel of business and profession and such cancellation of contract leaves her free to carry on her business and profession (freed from the contract terminated). Even if the said contract was terminated, the appellant had other professional and business income as well as other sources of income. Such termination of contract did not amount to a loss of an enduring asset causing an abrupt close-down of the business and profession, dislocating the entire structure of the business and profession earning apparatus. Hon’ble Supreme Court in the case of CIT vs. Rai Bahadur Jairam Valji (1959) 35 ITR 148, 163 (SC) has held that once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. Therefore, the entire receipt of Rs. 1.45 crores and not only Rs.50 lacs, is a revenue receipt.
126.96.36.199 Secondly, so far as the fiscal provisions of the Act are concerned, whenever there is a receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purpose of the act but the receipt would have to be considered under the provisions of the act from the commercial point of view. Strong reliance is placed on the Hon’ble Bombay High Court decision in the case of CIT vs. Scindia Workshop Ltd. (1979) 119 ITR 526, 531 (Bom). Therefore, from the commercial point of view, such receipt of Rs.1.45 crores is a revenue receipt that arose by way of termination of commercial contract (Celebrity Agreement) and by way of Settlement Agreement dated 18.09. 2003. Hon’ble Supreme Court in the case of CIT vs. Panbari Tea Company Ltd. (1965) 57 ITR 422, 425 (SC) has held that the nomenclature used may not be decisive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties. Hon’ble Allahabad High Court in the case of Seth Banarsi Das Gupta Vs. CIT (1971) 81 ITR 170 (All) has held that the amount received by the assessee under a compromise decree, in a suit for setting aside the lease was a revenue receipt. Similarly, in the case of United Construction Contractors vs. CIT (1994) 208 ITR 914, 919-20 (Ker). following CIT vs. Govinda Chaudhary & Sons (1993) 203 ITR 881 (SC), dispute regarding payment due from PWD was settled through arbitration. Such amount along with interest were held to be revenue receipt even though payment was delayed as a result of certain disputes.
188.8.131.52 Having regard to facts and circumstances of the case and in view of the above, the entire receipt of Rs. 1.45 crores, and not only Rs.50 lacs as offered by the appellant, is a revenue receipt chargeable to tax. Therefore, the addition of Rs.95 lacs made by the A.O. under the head “Business and Profession” is confirmed. Ground of Appeal No.2 is not allowed.
As per the observations, the payment received by the assessee arose out of cancellation of the commercial contract and did not affect the trading structure of assessee’s business or profession. Further, the termination was part and parcel of business and profession and the termination did not amount to loss of an enduring asset causing an abrupt close down of the business or profession, dislocating the capital structure of business and profession earning apparatus for the assessee and therefore, the entire receipts were revenue receipts. Aggrieved as aforesaid, the assessee is in further appeal before us.
3. The Ld. Authorized Representative for Assessee, Shri Astad Randeria drawing our attention to the relevant agreements and other documents / correspondences, by way of oral as well as written submissions, contended that that the additional consideration /compensation received by the assessee was capital in nature since it did not arise out of exercise of the profession by the assessee. Per Contra, Ld. Departmental Representative [DR], Shri Asghar Zain submitted that the receipts, being part and parcel of the contractual contract, were revenue in nature and therefore, the stand of first appellate authority was fair and justified.
4.1 We have carefully heard the rival submissions and perused relevant material on record including the Celebrity Engagement Contract dated 11/02/2002 entered into between CCIL and the assessee. Upon perusal, we find that vide clauses 2 & 3, of the agreement, the assessee was to render services by making herself available for 30 days [15 days in each calendar year] over a period of two years beginning from 01/02/2002 to undertake / facilitate promotional, advertising, endorsement & marketing activities of CCIL for various products. The manner of rendering services, procedure thereof, schedules etc. have also been provided under the said Clause-3. In terms of Clause-7, the assessee was entitled for aggregate payment of Rs.150 Lacs payable in the following manner:-
|No.||Amount (Rs.)||Schedule of Payment|
|1.||Rs. 75 Lacs||Within 10 days of signing the agreement|
|2.||Rs.25 Lacs||On completion of 8 days or 01/06/2002|
|3.||Rs.25 Lacs||On completion of 15 days or 30/12/2002|
|4.||Rs.20 Lacs||On completion of 23 days or 01/06/2003|
|5.||Rs.5 Lacs||On completion of 30 days or 30/12/2003|
|Total||Rs. 150 Lacs|
The eventuality of defaults and consequences thereof has been provided under Clause-9, which reads as follows:-
Default and its Consequences:
At any time during the Term:
a) should Sushmita fail to fulfill any of her obligations hereunder for a period of fifteen (15) days from the date of notice from Coca-Cola to fulfill her commitments hereunder, fails to comply with the terms of such, Coca-Cola shall have the right to terminate this Agreement forthwith without payment of any further compensation and shall be entitled to pro rata refund of all monies paid to Sushmita as per clause 9 (b).
b) notwithstanding anything hereincontained should Sushmita neglect, default, fail and/or breach, any of her obligations under Clauses 3(c), 4, 6(b), 6(c), 6(d), 15 and/or any of the representations, warranties and undertakings as specified in Clause 5, Coca-Cola shall in addition to its other legal and equitable remedies, have the right to forthwith terminate this Agreement without payment of any further
However, if after receiving communication from Coca-Cola as stated under Clause 3, e, Sushmita fails to render the services as per clause 3, then Coca-Cola shall have the right to seek pro rata reduction or refund, based on the number of days used as on the date of termination. For purpose of compensation, each day is being calculated at Rs. 5,00,000( Rupees Five Lacs Only ) and each month is calculated at Rs.6,25,000 (Rupees Six Lacs Twenty Five Thousand Only)
If during the term of this agreement Coca-Cola by it own accord fails to utilise the services of Sushmita as per Clause 3, Sushmita shall have the right to receive the entire consideration due as per clause 7.
In the event Coca-Cola breaches any of the terms and conditions of this agreement, Sushmita shall have the right to terminate this agreement.
In the event of termination, Coca-Cola shall not develop and /or undertake any fresh advertising endeavour using Sushmita.
Upon perusal, we find that upon failure of CCIL to utilize the services of SS as per Clause-3, SS would have the right to receive the entire consideration due as per Clause-7. Further, in case of default by the assessee, CCIL was entitled to seek refund of money on pro-rata basis.
4.2 Thereafter, the correspondences dated 28/11/2002, 02/12/2002, 11/12/2002, 24/12/2002 & 11/01/2003 exchanged between the CCIL and SS as placed on record reveal that certain dispute arose between the two parties as to availability of schedules / dates etc. Finally, the contract was terminated by CCIL vide letter dated 27/02/2003 wherein CCIL, inter-alia, demanded refund of Rs.145 Lacs from SS calculated in the following manner:-
|1.||Amount Paid to Assessee as on November 30||1.00 Crores|
|2.||Payment to SS for services utilized for 11 days @Rs.5 Las per day||0.55 Crores|
|3.||Refund Due||0.45 Crores|
|4.||Business Loss||1.00 Crores|
|Total Refund Due from SS||1.45 Crores|
4.3 In response to aforesaid termination, the assessee, through its solicitors’ firm M/s Bachubhai Munim & Co., issued a legal notice dated 07/04/2004 to Doughlas N.Daft, Chairman of CCIL, USA & Alex Von Behr, President & CEO of CCIL, India wherein the assessee while disputing the termination of the contract alleged that the termination was mala-fide and dishonest and was for the collateral and illegal purpose to punish the assessee since she rightly resisted the sexual harassment by an employee of CCIL in the course of discharge of his duties. It was further stated that the assessee held CCIL and its USA based parent company liable for all the consequences flowing from the assessee being made a victim of sexual harassment by an employee of CCIL and for having failed to discharge its statutory duty of providing the assessee with a safe work place environment protected from sexual harassment. In the said notice, the assessee claimed the balance sum of Rs.50 Lacs due to her under the contract and specifically reserved her right to claim the damages arising out of her being sexually harassed for having disparaged her well established professional reputation by false, malicious and defamatory allegations of gross negligence and willful conduct and for the repudiatory breach of contract by CCIL. In sum and substance, the assessee alleged the termination was done for collateral and illegal purpose of punishing the assessee for resisting attempts of sexual harassment by an employee of CCIL. For ease of reference, relevant clauses of the legal notice could be extracted here-in-below:-
4. We state at the outset, that the purported termination of the Agreement (incorrectly referred to in the letter as the Agreement dated February 1, 2002) has been done for collateral and illegal purpose to punish Ms. Sen who rightly resisted ”Sexual Harassment” by one of your employees based in Mumbai Office of Coca Cola Company, in the course of discharge of his duties as an employee of Coca Cola Company. At no time Ms.Sen was in breach of the Agreement, as alleged or otherwise, and had performed and was always ready to perform her part of the
5. In the circumstances Ms. Sen treats the purported termination as a breach of the Agreement by repudiation by Coca Cola Company and accepts the breach and hereby terminates the Agreement and holds Coca-Cola Company, which expression as per the Agreement includes the principal Coca Cola Company, U.S.A. (“the Company”), liable for all consequences thereof including the consequences flowing from her being made a victim of “Sexual Harassment” by one of the employees of the Company and the Company having failed to discharge its statutory obligations of providing Ms. Sen with a safe work place environment protected from “Sexual Harrasment”. She is also entitled to he unpaid remuneration and the balance of the expenses she incurred on account of the Company and which remains to be reimbursed to her fully and damages for repudiatory breach of the Agreement by the
6. As to the serious matters concerning “Sexual Harassment”, before we set out the details including identifying the delinquent employee who lacked honesty and integrity in dealing with our client, Ms. Sen instructs us to offer you an opportunity to discuss the matter with you Mr. Alex Von Behr, CEO India and! or an Executive from your Head Office in USA, alongwith your legal adviser, in a meeting in our offices at a mutual convenient time during the next seven days. May we request you to revert.
7. The allegations on the basis of which the Agreement is purported to be terminated are false and without any basis. The allegations of gross negligence and willful conduct ascribed to Ms.Sen, are malicious, and irresponsible and are clearly defamatory and are made with the intent to willfully cause injury to her reputation and her calling as an artist knowing full well that the allegations are false. *****
10. The above mentioned facts only go to establish what is stated at the outset of this letter that the only motive and purpose for the extreme step of purported termination, which otherwise is totally baseless and of no effect, is to drive Ms. Sen to go to the delinquent employee and fall a victim to his unwelcome sexually determined behavior and demands.
11. Whilst reserving her right to claim damages including those arising out of her being “Sexually Harassed”, for having disparaged her well established professional reputation by false, malicious and defamatory allegations of gross negligence and willful conduct and for the repudiatory breach of contract by the Company we on behalf of our client demand of Coca Cola Company the payment of the balance of her remuneration under the Agreement viz. Rs.5,000,000!- (five million) and Rs.4,785/- towards balance unrecouped expenses incurred by her for and on account of the Company, no later than 7 days from the receipt of this letter by you. Please note that our client will be entitled to interest on the said amount at the rate of 18% per annum from the date hereof until payment or realisation.
4.4 The aforesaid notice finally culminated into Settlement Agreement dated 18/09/2003 wherein CCIL agreed to pay SS a sum of Rs.1 45 Lacs towards full and final settlement of all her claims against CCIL arising out of or in relation to the said agreement and subsequent termination therefore. The assessee was to confirm that thereafter, she had no claim of whatsoever nature against CCIL. Further, the assessee was to withdraw all her allegations that termination was wrongful. In terms of Clauses 5 to 7, CCIL viewing the allegations serious in nature, agreed to inquire into the allegations. The inquiry was to be conducted by Hon’ble Mr. Justice S.P.Bharucha (Retd.), Former Chief Justice of India. Finally, as per Clause-14, the assessee was to confirm that she had no claim of whatsoever nature against CCIL. Further, the assessee was to confirm that she had not initiated any proceedings civil or criminal against CCIL or any of its employees.
4.5 Proceeding further, we find that It is an undisputed fact that prior to the aforesaid dispute between the parties, CCIL had already paid a sum of Rs.1 Crores under the contract to the assessee which is evident from the copies of TDS certificates dated 15/03/2002 & 20/06/2002 on record as issued by CCIL. Therefore, undisputedly, the balance payment due to the assessee under the contract was Rs.50 Lacs at the time of dispute.
4.6 A careful consideration of above factual matrix and chain of events as narrated by us reveal that the final settlement as arrived between the parties was not a simple settlement of commercial claims of the assessee arising out of contractual terms. Only an amount of Rs.50 Lacs was due to the assessee and as per the terms of the contract, the assessee had a right to receive only that much of amount in case of default by CCIL and nothing more. As against this, the assessee has received an amount of Rs.145 Lacs out of which Rs.50 Lacs has been offered to tax by the assessee. The balance amount of Rs.95 Lacs is stated to be received for loss of reputation etc. under the circumstances as discussed by us in the preceding paragraphs and therefore, being capital in nature, claimed to be not taxable. The factual matrix leads us to believe so in view of the fact that the contract did not envisage any additional payment over and above the amount of Rs.150 Lacs to the assessee. The perusal of documents leads us to believe that the said compensation did not accrue / arise out of exercise of profession by the assessee and could not be construed to be the income of the assessee or profits and gains of profession within the meaning of Section 2(24) and Section 28 of the Income Tax Act, 1961. The compensation could not be termed as any benefit, perquisites arising to the assessee out of exercise of profession. The Ld. first appellate authority, in our opinion, fell in error to adjudicate the same on the threshold of impact of the compensation on profit making apparatus without understating the true nature of the receipts. This being so, we have no hesitation in deleting the impugned addition of Rs.95 Lacs. We order so.
4.7 The Ld. AR, during the course of hearing, had canvassed that the compensation received for breach of the terms of the contract has been brought to tax by way of insertion of new sub-clause (e) to Section 28(ii) with effect from 01/04/2018 and therefore, had no applicability to the present case. In our opinion, the said submissions are irrelevant in view of the fact that the additional compensation received by the assessee did not arise from the contractual terms at all and hence, do not require any further elaboration against the same.
Assessee’s Appeal : ITA No. 4351/Mum/2013
5. Against the aforesaid addition of Rs.95 Lacs, the assessee has been saddled with penalty of Rs.31 .35 Lacs u/s 271(1 )(c) vide order dated 15/03/2010. The same, upon confirmation by first appellate authority vide impugned order dated 27/03/2015, is under appeal before Since, we have allowed assessee’s appeal against quantum addition, the consequential penalty do not survive. Even otherwise, upon consideration of factual matrix, we are of the opinion that there was no concealment of income or furnishing of inaccurate particulars on the part of the assessee. It was the case where the assessee made certain claim which has not been accepted by the revenue. Viewed from any angle, the impugned penalty could not survive. The appeal stand allowed.
6. Both the appeals stands allowed.
Order pronounced in the open court on 14th November, 2018.