In the case of Padma Rao v CIT[1] (Taxpayer), a freelance journalist, the Taxpayer entered into a contract with Spiegel Verlag (publisher) to render certain services. As per the terms of contract, the contract was to expire on 30 April 2012, unless the same was renewed on or before 31 January 2012. In absence of renewal, the contract expired, and the Taxpayer was not eligible for any monthly fee from publisher on or after 1 May 2012.
The Taxpayer filed petition challenging the non-renewal of contract, and as an out-of-court settlement the publisher agreed to pay INR 3 Crores as compensation for labor dispute raised by the Taxpayer[2].The Taxpayer treated such compensation received during the tax year (TY) 2020-21 as capital receipt and claimed it to be exempt from income tax. The tax authority asserted that the compensation was received on termination of contract and hence, held to be taxable as business receipt[3].
On appeal before Delhi Tribunal, the Tribunal noted that under the Indian Tax Laws (ITL) compensation on termination of contracts in relation to “business” is taxable as business receipt. Whereas in the present case, the Taxpayer, being a professional journalist, cannot be said to be engaged in business for the receipt of compensation from publisher to be treated as business receipt. Reliance was placed on the Supreme Court ruling in the case of G.K. Choksi & Co[4] which held that the term ‘business’ cannot include ‘profession’. Further, the Tribunal observed that non-renewal of contract post expiry of tenure of the contract is not similar to termination of contract. Accordingly, the receipt of compensation on non-renewal cannot be said to be received on termination of contract to be treated as business receipt.
[1] ITA No. 2759/DEL/2023 – Date of Order 30 January 2024
[2] Decision does not provide for reasoning for publisher agreeing for such compensation.
[3] Under section 28(ii)(e) of Income-tax Act, 1961
[4] [(2007)(295 ITR 376)(SC)]
