Author: Khushi J Prajapati
The Delhi High Court ruled that the settlement consideration received by the assessee for relinquishing rights to sweat equity shares should be taxed as capital gains.
The court regarding the proper classification of an amount received by the assessee from TTPL about sweat equity shares was about whether to treat it as income or capital gain. The first step in this direction was taken by the assessee who had sought registration of these shares but failed to obtain it and finally entered into a settlement agreement. This includes that in return for money, he gave up all his rights to these shares
The court observed that the tribunal had wrongly divided the settlement amount into ‘profits instead of salary’ under Section 17(3) of the Income Tax Act and capital gains under Section 48.
The bench said that the tribunal erroneously considered part of the settlement as ‘profits in lieu of salary’ when this compensation was given for giving up rights over shares because employment was already over before making such a deal and it was no more subject matter of litigation although termination from the job was there.
Therefore, the court decided to treat the whole compensation as capital gains.
The Delhi High Court set aside the Tribunal’s order, ruling that the settlement consideration should be recognized solely as capital gains, based on the provisions of Sections 48 and 17(3) of the Income Tax Act.
The Court clarified that compensation for relinquishing shares is distinct from compensation related to employment cessation.
Facts
This is the case in which they argued about how the tax would work if someone gets paid with 50,000 sweat equity shares from TTPL. The claimant moved to have his name inserted in the Register of Members after losing his job. After several attempts, finally, a settlement was reached which compensated him for relinquishing any claim to enforce their registration. Revenue contended that, since the assessee’s name was no longer on the Register of Members, it meant that the settlement amount must be split into two: “profits in lieu of salary” or capital gains. On the contrary, the taxpayer thought that since he was giving away shares, it was capital gain and should be taxed as such. Nevertheless, the Tribunal divided the amount incorrectly and part of it was taxed as “profits in lieu of salary” resulting appeal. The key questions were related to the correct classification of the settlement amount and the validity of the Tribunal’s division and categorization.
Case Details
Case Name – Akash Poddar vs Acit 30(1) New Delhi
Court: Delhi High Court
Judges: Yashwant Varma, J., and Ravinder Dudeja, J.
Date of Judgment: August 7, 2024
Citation: ITA 270/2023
