Compensation Compensation Received on Termination/Modification of the Business Contracts Will be Business Income from 142019

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The Tax Publishers Compensation Compensation Received on Termination/Modification of the Business Contracts Will be Business Income from 1-4-2019 CA. Ajay Joshi section 28 of the Income Tax Act, 1961 has been amended by the Finance Act, 2018 with regard to any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions of any contract relating to its business. The amendment has been brought in as the Government was not comfortable with existing law on the subject. The learned author has very lucidly discussed the implications of the said amendment. 1. Introduction Profits on sale of license, cash assistance for exports, dutydraw backs, payments received by a partner and non-compete fees were all included in its ambit to make the receipts taxable. Further, restrictive covenants not to carry on any activity in relation to business will be treated as taxable receipts with effect from the assessment year 2003-04. Such non-compete fees were held to be capital receipts earlier - Guffic Chem (P) Ltd. v. CIT (2011) 332 ITR 602 (SC). 2. Amendment to Section 28 by Finance Act, 2018 A new sub-clause (e) has been inserted into Section 28(ii) so as to provide that any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be chargeable to tax as profits from business or profession. Section 56 has also been modified by the insertion of a new clause (xi) in sub-section (2) so as to provide that any compensation or other payment due to or received by any person in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to tax under the head 'Income from other sources'. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Compensation

Compensation Received on Termination/Modification of the Business Contracts Will be Business Income from 1-4-2019

CA. Ajay Joshi

section 28 of the Income Tax Act, 1961 has been amended by the Finance Act, 2018 with regard to any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions of any contract relating to its business. The amendment has been brought in as the Government was not comfortable with existing law on the subject. The learned author has very lucidly discussed the implications of the said amendment.

1. Introduction

Profits on sale of license, cash assistance for exports, dutydraw backs, payments received by a partner and non-compete fees were all included in its ambit to make the receipts taxable. Further, restrictive covenants not to carry on any activity in relation to business will be treated as taxable receipts with effect from the assessment year 2003-04. Such non-compete fees were held to be capital receipts earlier - Guffic Chem (P) Ltd. v. CIT (2011) 332 ITR 602 (SC).

2. Amendment to Section 28 by Finance Act, 2018

A new sub-clause (e) has been inserted into Section 28(ii) so as to provide that any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be chargeable to tax as profits from business or profession. Section 56 has also been modified by the insertion of a new clause (xi) in sub-section (2) so as to provide that any compensation or other payment due to or received by any person in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to tax under the head 'Income from other sources'.