Non-Renewal of Contract Doesn’t Amount to Termination; Compensation Received on Non-Renewal of Contract Isn’t Taxable

Case Details: Ms Padma Rao v. Commissioner of Income-tax - [2024] 159 taxmann.com 30 (Delhi-Trib.)

Judiciary and Counsel Details

• • Yogesh Kumar U.S., Judicial Member & N.K. Billaiya, Accountant Member
  • Ajay Vohra, Sr. Adv. Ms Saumya Meehrotra & Vivek Sharma, Advs. for the Appellant.
  • V.K. Dubey, Sr. DR. for the Respondent.

Facts of the Case

Assessee was an individual who filed her Return of Income declaring an income of Rs. 18,51,090. She entered into an agreement with one SV, a publishing company. However, said agreement was not renewed, and consequently, SV paid a sum of Rs. 3 crores to the assessee in full and final settlement of dues arising out of labour dispute. Rs. 3 crores received as compensation was claimed as exempt under section 4.

During the assessment, Assessing Officer (AO) held that compensation received by the assessee was taxable under section 28(ii)(e) and made additions. The assessment was challenged before the CIT(A) but without any success. The matter reached before the Delhi Tribunal.

ITAT Held

The Delhi Tribunal held that not renewing the contract doesn’t automatically mean termination. In the given case, the assessee was a freelance journalist and not employed by SV. Hence, there was no employer-employee relationship.

The agreement’s relevant clauses state that if it’s not renewed by January 31, 2000, it will expire on April 30, 2000. As the contract wasn’t renewed, it concluded. The compensation received by the assessee results from a mutual agreement between SV and the assessee.

While the dispute was under consideration by the Hon’ble High Court of Delhi, the Division Bench of the Hon’ble High Court, in its order dated September 19, 2019, resolved the appeal by acknowledging that a settlement had been reached between SV and the assessee involving payment of an agreed sum of Rs. 3 crores.

It would be pertinent to refer to section 2(zh) of the Industrial Relations Code, 2020, which inter alia, provides:

“retrenchment” means the termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include—

(i)

(ii)

(iii) termination of the service of the worker as a result of the non-renewal of the contract of employment between the employer and the worker concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or

…..”

Thus, it can be seen from the above that non-renewal of any contract does not amount to retrenchment. Considering the facts of the case in totality, it was to be held that the provisions of section 28(ii)(e) do not apply to the given facts and, therefore, the orders of the lower authorities were erroneous in law.