Under an agreement, the petitioner received INR 3,03,75,000 as final settlement, relinquishing all claims to the shares and their registration

The Delhi High Court ruled that the settlement consideration should be categorised as “capital gains” rather than “profits in lieu of salary.” The petitioner, an individual resident and former Chief Operating Officer at Tek Travels Private Limited ( TTPL ), argued that until March 31, 2010, no shares had been issued to him despite entitlement under his employment agreement, which included provisions for sweat equity. Get a Copy of GST SIMPLIFIED in Question & Answer Format, Click here Following TTPL’s subsequent issuance of 50,000 sweat equity shares in the Financial Year 2010-11, the petitioner sought their registration, leading to a legal dispute resolved through a Settlement Agreement signed on January 23, 2014. Under this agreement, the petitioner received INR 3,03,75,000 as final settlement, relinquishing all claims to the shares and their registration. In the Income Tax Return for Assessment Year 2014-15, the petitioner declared this amount as long-term capital gains, citing a cost of acquisition of “nil.” The Assessing Officer, however, treated the amount as taxable salary income under Section 17(3)(iii), disputing its classification as capital gains, which was later overturned by the Commissioner of Income Tax (Appeals). Get a Copy of GST SIMPLIFIED in Question & Answer Format, Click here The department appealed this decision before the tribunal, which upheld the AO’s view, distinguishing between the shares eligible for capital gains treatment and those deemed “profits in lieu of salary.” Justices Yashwant Varma and Ravinder Dudeja observed that the Tribunal’s error lay in overlooking the distinction between a “perquisite” and “profits in lieu of salary,” delineated separately under Section 17 of the Income Tax Act, 1961. Section 17(3) specifically addresses “profits in lieu of salary,” pertaining to compensation received upon termination of employment or modification of service terms. The Tribunal’s oversight was significant as the employment had ceased before any legal action was initiated before the Company Law Board ( CLB ). Get a Copy of GST SIMPLIFIED in Question & Answer Format, Click here The Delhi High Court overturned the tribunal’s decision, ruling that the settlement consideration could not be categorised as “profits in lieu of salary,” affirming its treatment as capital gains.