Wherever word only “Business” is used, it does not include “Profession” – ITAT

Wherever word only “Business” is used, it does not include “Profession” – ITAT deletes addition for compensation u/s 28(ii)(e)

In a latest decision, ITAT while deleting addition u/s 28(ii)(e) held that in the Income Tax Act, 1961 wherever word only “Business” is used, it does not include “Profession”

ABCAUS Case Law Citation:
ABCAUS 3853 (2024) (02) ITAT

Important Case Laws relied upon by parties:
Nalinikant Ambalal Mody v. S.A.L. Narayan Row, ClT 1966 (61)
G.K. Choksi & Co. 295 ITR 376

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition u/s 28(ii)(e) of the Income Tax Act, 1961 (the Act) in respect of the amount claimed as a capital receipt.

Business or profession

The assessee was an individual and was a freelance journalist.  Her Return was selected for scrutiny assessment and accordingly, statutory notices were issued and served upon the assessee. The main reason for scrutiny was that the assessee has claimed substantial amount of refund which needed verification.

During the course of scrutiny assessment proceedings, the Assessing Officer came to know that the assessee had received compensation from a publisher which was claimed to be exempt by her.

The Assessing Officer noticed that the said compensation was not reflected in the profit and loss account submitted for the year under consideration. The Assessing Officer was of the firm belief that the said compensation is taxable u/s 28(ii)(e) of the Act read with the CBDT Circular No. 8/2018 dated 26.12.2018 and, accordingly, issued show cause notice asking the assessee to show cause as to why exemption claimed in respect of the said receipt on termination of contract should not be treated as taxable receipt and be added back to the total income.

The assessee filed a detailed reply strongly contending that the compensation received was in the nature of capital receipt.

Reply of the assessee did not find any favour with the Assessing Officer who strongly relied upon the provisions of section 28(ii)(e) of the Act and made the impugned addition.

Before the Tribunal, the assessee assessee drew our attention to the relevant provisions of section

28(ii)(e) of the Act and vehemently contended that the said provision was not applicable on the facts of the case. Similarly, provisions of section 56(2)(xi) of the Act were also not applicable on the facts of the case.

The assessee objected to hat the ‘either-or’ approach adopted by the Income Tax Department (i.e. invocation of section 28(ii)(e) or alternatively, section 56(2)(xi)) and argued that it is against fundamental prudence of Income tax laws. It is settled law that heads of income are mutually exclusive (i.e. if an assessee cannot be brought under a particular head of income and is not taxable by operation of the provisions for that head, she cannot be simultaneously/consecutively brought to tax under another head). The assessee placed reliance on several judicial decision.

The Tribunal observed that the assessee was employed on contract by a German media company. As per the agreement it can be terminated by both sides through a notice of six weeks at the end of an annual quarter.

The assessee had a labour dispute with the said company over non renewal of the contract and ultimately parties arrived at an amicable settlement and the said company in full and final settlement and the dues arising out of the Labour dispute paid compensation to the assessee.

The Tribunal observed that provisions of section 28(ii)(e) of the Act applied by the Assessing Officer provides that any compensation received by any person on termination or modification of the terms and conditions of any contract relating to his business is taxable under the head “Profits and gains of business or profession”.

The Tribunal observed that the question that needed to be addressed was whether reference to “business” includes “profession”?

The Tribunal opined that wherever the Legislature thought of referring to both “Business” and “Profession”, it has used both the words in the enactment which means that wherever the word only “Business” is used, it does not include “Profession”. In this regard, section 28(va) of the Act can be referred to for a reference in which the phrase “or profession” has been inserted by the Finance Act, 2016 w.e.f 01.04.2017 which makes the intent of the Legislature absolutely clear that the Legislature wanted the insertion of the word “Profession” alongwith “Business”.

The Tribunal further observed that this view is Our view is fortified by the decision of the Hon’ble Supreme Court. The Tribunal observed that the Hon’ble Supreme Court had made it clear that the word “business” occurring in clause (iv) of section 32(1) of the Act, by no stretch of imagination, can be said to include profession as well. By the same analogy, reference to business in section 32(ii)(e) of the Act would not amount to reference to profession.

The second aspect was if the impugned compensation received on termination or modification of terms and conditions of any contract. The Tribunal opined that non renewal does not mean termination. The assessee was a freelance journalist. She was not under employment of the company. Therefore, there was no employer-employee relationship. Since the contract was not renewed, it came to an end. Compensation received by the assessee was by way of mutual agreement.

The Tribunal held that the provisions of section 28(ii)(e) do not apply on the given facts and therefore, the orders of the lower authorities were erroneous in law.

The Tribunal further noted that section 56(xi) also refer to termination of employment. Therefore, this section is also not applicable on the given facts.

Accordingly, the addition was directed to be deleted.

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