Section 56(2)(x)(xi) applicability to compensation for non-commencement of employment

Seeking views on an open point. Delhi HC in CIT v. Pritam Das Narang [2015] 61 taxmann.com 322 (Delhi) held that compensation received from a prospective employer for non-commencement of employment (offer withdrawn before joining) is a capital receipt, not "profits in lieu of salary" u/s 17(3)(iii), since that section presupposes an actual employer-employee relationship. Followed CIT v. Rani Shankar Mishra [2010] 320 ITR 542 (Delhi).

Query: Section 56(2)(x)(xi), inserted by Finance Act 2018 w.e.f. 1-4-2019, brings to tax compensation received "in connection with the termination of employment or modification of terms and conditions relating thereto" under Income from Other Sources.

Has this new residuary clause been applied/tested (by any ITAT/HC ruling, CBDT circular, or in practice) to a fact pattern where employment never commenced at all (i.e., "denial of employment" as opposed to "termination/modification" of an existing employment)? Would appreciate any citations or practical experience on this specific point for AY 2025-26 filing.

Pritam Das Narang's "capital receipt" reasoning is pre-2019 law — it turned entirely on the absence of an employer-employee relationship taking the payment outside Section 17(3)(iii) (profits in lieu of salary), since that provision presupposes an actual employment relationship. That gap is exactly what Section 56(2)(xi) was legislated to plug from AY 2019-20 onward — it's a deliberate residuary sweep-up clause, not limited to "termination/modification of an existing employment." The statutory language "in connection with the termination of his employment or the modification of the terms and conditions relating thereto" is broad enough to be read by the department as covering the pre-commencement scenario too — as their own illustration shows.
So "denial of employment" is treated the same as "termination" for this purpose in practice — the department doesn't appear to draw the fine distinction you're testing (never-commenced vs. terminated-after-commencing). I haven't found a reported ITAT/HC ruling that has tested this specific Section 56(2)(xi) fact pattern yet (it's still a relatively new provision, and litigation lag is typical), but the CBDT's own explanatory stance leaves little room to argue the old capital-receipt position survives post-1.4.2019.
Practical filing position for AY 2025-26: I'd treat such compensation as taxable under Section 56(2)(xi) (Income from Other Sources) rather than relying on Pritam Das Narang/Rani Shankar Mishra to claim it as an exempt capital receipt — those rulings predate the residuary clause and were decided precisely because no such clause existed at the time.

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Aashok Kumar Sharma

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