01 January 0001

Direct Tax Amicus: January 2018

by Sumitha Krishnan

Non-compete fee received from former employer - The argument of capital receipt

The income chargeable under the head ‘salaries’ is one of the heads of incomes which covers exhaustively, ‘payments’ made between persons in the capacity of employer and employee. The term ‘Salaries’, ‘perquisites’ and ‘profits in lieu of salary' are defined under Section 17 of the Income Tax Act, 1961 (‘the Act’). Of the items that Section 17 of the Act covers, profits in lieu of salary is of special interest. It is a settled principle that only revenue receipts are taxable under the Act, while capital receipts are exempted unless specifically mentioned in the Act. To overcome this, the Income Tax Act,1922 was amended to include even payments received as compensation for loss within the ambit of Section 7. To understand if ‘payment received by an employee from former employer towards non-compete fee or other restrictive covenants is liable to be taxed under Act’, it is first necessary to understand the nature and scope of the receipt in the hands of the employee. i.e. whether it is a capital receipt or revenue receipt...



  • Assessees to be intimated about variation in income as per TDS returns while processing returns under Section 143(1)


Ratio decidend

  • Write off of obsolete stock which is not liable to be replaced by AE is not an international transaction – ITAT, Mumbai
  • Salary and tax borne by same person albeit indirectly - Tax component is to be taxed as salary in hands of recipient - Kerala High Court
  • Section 45(3)applies to transfer of assets as capital contribution and not Section 50C – ITAT, Mumbai
  • Section 50C may apply in preference over Section 45(3) on transfer of assets as capital contribution – Allahabad High Court
  • Lease rental paid as upfront fee in advance is revenue expenditure – ITAT, Delhi
  • Corporate guarantee extended to fulfil shareholder obligations is not an international transaction – ITAT, Kolkata
  • Medical research centre not engaged in processing or manufacture of goods is not an industrial undertaking for purposes of Section 72A – ITAT, Bangalore


January, 2017/Issue-41 January, 2018/Issue-41

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