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Dear Students/Readers,

Let us start with a small practical scenario.

Mr. Dave is holding agency of Ambuja Cement Limited in South Gujarat since 2000-01. During the relevant previous year, as a part of marketing strategy, Ambuja Cement Limited terminated the agency of Mr. Dave and paid Rs. 10,00,000 as compensation. Mr. Dave claims that Rs.10,00,000 shall not be taxed since it is a capital receipt, being a compensation for the loss of source of income. Verify the contention of Mr. Dave.

Technical issue involved

On close reading of the above referred problem of Mr. Dave, only issue involved is that the compensation received by Mr. Dave is for the loss of source of income and therefore such compensation obtains a characteristic of a capital receipt. Now, the moot question is whether such type of business compensation being a capital receipt be chargeable to tax?

Analysis

I have already published one article on "Taxability of Capital Receipts under Income Tax Act,1961" on 25th June, 2020 wherein we concluded that only those capital receipts would be taxable under the Income Tax Act,1961 which are expressly provided under the definition of term "income" under section 2(24) of the Act. In the same article, I also shared the list of capital receipts expressly included in the definition of "income" which inter alia includes compensation or other payments due to or received by some specified person covered under section 28(ii) of the Act.

At present, Section 28(ii) provides that compensation received or receivable by following persons, shall be taxed under the head "Profits and Gains from Business or Profession".

Sr. No.

Person

Nature of Compensation

(a)

Any person managing the whole or substantially the whole of affairs of an Indian company,

in connection with the termination of his management or the modification of the terms and conditions relating thereto

(b)

Any person managing the whole or substantially the whole of the affairs in India of any other company

in connection with the termination of his office or the modification of the terms and conditions relating thereto;

(c)

Any person, holding an agency in India for any part of the activities relating to the business of any other person

in connection with the termination of the agency or the modification of the terms and conditions relating thereto

(d)

Any person

in connection with the vesting in the Government or in any corporation owned or controlled by the Government under any law for the time being in force, of the management of any property or business

(e)

Any person

in connection with the termination or the modification of the terms and conditions, of any contract relating to his business.

Conclusion

Finally, what shall be the outcome in Mr. Dave’s case. Is contention of Mr. Dave that the compensation shall not be taxed under the Act, is tenable in the eyes of law? Do post your answer in comment box.

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Happy Learning,
All the best.

CA/CMA Final Direct Tax Laws and International Taxation Course Pack for May 21 / Nov 21 / June 21 / Dec 21 attempt by CA Mehul Thakker

 
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Category Income Tax, Other Articles by - CA Mehul Thakker 



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