Taxability of compensation in connection to business or employment

Under the existing provisions of the Act, certain types of compensation receipts are taxable as business income under section 28. However, the existing provisions of clause (ii) of section 28 is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation receipts in connection with business and employment is out of the purview of taxation leading to base erosion and revenue loss.

Therefore, it is proposed to amend section 28 of the Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be taxable as business income. It is further proposed that any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year 2019-20 and subsequent assessment years.

Extract of Clause 3, 9 & 21 of Finance Bill 2018

Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.

Clause (24) of the said section defines the expression “income”.

It is proposed to insert a new sub-clause (xiia) in the said clause (24) so as to include the fair market value of inventory referred to in Clause (via) of section 28, also within the definition of income.

It is further proposed to insert a new sub-clause (xviib) in the said clause (24) so as to include any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56, also within the definition of income.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019- 2020 and subsequent years.

Clause 9 of the Bill seeks to amend section 28 of the Income-tax Act relating to profits and gains of business or profession.

The said section, inter alia, provides that certain types of compensation receipts as set out in sub-clauses (a) to (d) of clause (ii) of the said section are taxable under the head “Profits and gains of business or profession”.

It is proposed to insert a new sub-clause (e) in the said clause (ii) so as to provide that any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, as the case may be, of any contract relating to his business shall be chargeable to tax under the head “Profits and gains of business or profession”.

It is further proposed to amend the said section so as to provide that the fair market value determined in the prescribed manner ofthe inventory as on the date of its conversion or treatment as capital assets shall be chargeable to tax under the head “Profit and gains of business and profession”.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.

Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.

It is also proposed to insert a new clause (xi) in sub-section (2) of the said section so as to provide that any compensation or other payment due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to income-tax under the head “Income from other sources”.

This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.

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Category : Income Tax (27624)
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Tags : Budget (1957) Budget 2018 (400)

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