Introduction
1. Fools rush in, where angels fear to tread. The income-tax authorities a few days ago made an uncouth dash to tax sexual harassment damages/compensation received by stunning diva Sushmita Sen and brazenly levied penalty charges too. Aghast, the Mumbai Tribunal punctured the balloon of income-tax department by ruling that the amount was a capital receipt and there was no concealment.
Here's the case, which shows the meanness of the income-tax department:
Case of Sushmita Sen v. Asstt. CIT [2018] 99 taxmann.com 252 (Mum. - Trib.)
2. The assessee was a film actress by profession. She derived income by way of fees for acting assignment in films, stage shows and by way of endorsements.
During assessment proceedings, it transpired that the assessee received a sum of Rs. 145 Lakhs from a multinational company, namely, M/s Coca Cola India Limited (CCIL) but offered only a part of the same, i.e., Rs. 50 Lakhs to tax and claimed the balance Rs. 95 Lakhs to be capital receipts in view of the fact that the same represented compensation received by assessee towards damages compensation caused to assessee's reputation. However, the failure to substantiate the same with sufficient documentary evidences and for want of proper justification thereof resulted into impugned addition in the hands of the assessee. The AO opined that the amount of Rs. 145 Lakhs received by the assessee was in lieu of settlement between the two parties for breach of terms of celebrity engagement contract and, therefore, the stated amount was taxable in the hands of assessee. In defence, the assessee submitted that she entered into a commercial contract with CCIL to endorse/promote the products of CCIL for consideration of Rs. 1.50 Crores. For certain reasons, the said commercial contract was cancelled/terminated prematurely and, accordingly, a settlement agreement was entered into pursuant to which the assessee received a sum of Rs. 1.45 Crores. It was further submitted that the full amount of Rs. 1.45 Crores was received as compensation in lieu of sexual harassment case filed by the assessee against an employee of CCIL. However, out of abundant caution, the assessee considered a sum of Rs. 50 Lakhs which was outstanding amount due to her under the commercial contract as her income. It was submitted that extra compensation received by the assessee was not as per the terms of the contract and, therefore, the extra receipts, being capital in nature were not taxable in the hands of the assessee. The attention was also drawn to the fact that under the contractual terms, only an amount of Rs. 50 Lakhs was due to the assessee. It was also submitted that the CCIL had raised a claim of Rs. 145 Lakhs against the assessee for non-performance of contractual commitment whereas, subsequently, it paid the compensation when the assessee had still not performed the contractual commitment. Therefore, the only logical deduction was that the company accepted the contention of the assessee of the alleged sexual harassment and paid the compensation to avoid negative publicity/embarrassment which would have jeopardized the business of the company world over. Therefore, the additional compensation received was not towards the service rendered and did not arise out of the contractual terms.
However, the same could not find favour with the first appellate authority, who confirmed the additions by observing as under:-
Undisputedly, the appellant had received compensation for termination of a contract but such contract was one of many which the appellant held including, inter alia, professional contracts for acting in films, professional contracts for stage shows and professional contracts for commercial endorsement. The termination of contract with M/s. Coca Cola India Ltd. did not impair the profit-making structure of the appellant, but was within the framework of appellant's business and profession, it being a necessary incident of the business that the contract may be terminated and fresh commercial endorsements and fresh professional contracts for acting in films and stage shows, etc., may be taken. Undisputedly, the said payment has been made to compensate the appellant for cancellation of a certain contract which did not affect the trading structure of appellant's business and profession, not deprived her of what in substance is her source of income. The impugned termination of contract being a part and parcel of business and profession and such cancellation of contract leaves her free to carry on her business and profession (freed from the contract terminated). Even if the said contract was terminated, the appellant had other professional and business income as well as other sources of income.
Such termination of contract did not amount to a loss of an enduring asset causing an abrupt closedown of the business and profession, dislocating the entire structure of the business and profession earning apparatus. Hon'ble Supreme Court in the case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 has held that once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. Therefore, the entire receipt of Rs. 1.45 crores and not only Rs. 50 lakhs, is a revenue receipt.
Secondly, regarding fiscal provisions of the Act, whenever there is a receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purpose of the Act but the receipt would have to be considered under the provisions of the Act from the commercial point of view. The Revenue placed strong reliance on the Bombay High Court's decision in the case of CIT v. Scindia Workshop Ltd. [1979] 1 Taxman 418/119 ITR 526. Therefore, from commercial point of view, such receipt of Rs. 1.45 crores was a revenue receipt that arose by way of termination of commercial contract (Celebrity Agreement) and by way of Settlement Agreement. The Supreme Court in case of CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 had held that the nomenclature used may not be decisive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties. The Allahabad High Court in case of Seth Banarsi Das Gupta v. CIT [1971] 81 ITR 170 held that the amount received by the assessee under a compromise decree, in a suit for setting aside the lease was a revenue receipt. Similarly, in the case of United Construction Contractors v. CIT [1994] 75 Taxman 621/208 ITR 914 (Ker). following CIT v. Govinda Choudhury & Sons [1994] 74 Taxman 331/[1993] 203 ITR 881 (SC), a dispute regarding payment due from PWD was settled through arbitration. Such amount along with interest were held to be revenue receipt.
Therefore, the addition of Rs. 95 lakhs made by the A.O. under the head "Business and Profession" stood confirmed. Ground of Appeal No.2 was not allowed.
As per the observations, the payment received by the assessee arose out of cancellation of the commercial contract and did not affect the trading structure of assessee's business or profession. Further, the termination was part and parcel of business and profession and the termination did not amount to loss of an enduring asset causing an abrupt close down of the business or profession, dislocating the capital structure of business and profession earning apparatus for the assessee and, therefore, the entire receipts were revenue receipts. Aggrieved, the assessee went in further appeal before the Tribunal.
The assessee's counsel contended that that the additional consideration/compensation received by the assessee was capital in nature, since it did not arise out of exercise of the profession by the assessee. Per Contra, the DR submitted that the receipts, being part and parcel of the contractual contract, were revenue in nature and, therefore, the stand of first appellate authority was fair and justified.
2.1 The Judgment - The Tribunal carefully heard the rival submissions and perused relevant material on record including the Celebrity Engagement Contract dated 11-2-2002 entered into between CCIL and the assessee.
The Contract dated 11-2-2002 entered into between CCIL and the assessee showed that vide clauses 2 & 3, of the agreement, the assessee was to render services by making herself available for 30 days [15 days in each calendar year] over a period of two years beginning from 1-2-2002 to undertake/facilitate promotional, advertising, endorsement & marketing activities of CCIL for various products. The manner of rendering services, procedure thereof, schedules, etc., had also been provided under the said clause-3. In terms of clause-7, the assessee was entitled to aggregate payment of Rs. 150 lakhs.
The eventuality of defaults and consequences thereof were provided under clause-9, as under:-
Default and its Consequences:
At any time during the Term:
| (a) | should Sushmita fail to fulfil any of her obligations hereunder for a period of fifteen (15) days from the date of notice from Coca-Cola to fulfil her commitments hereunder, fails to comply with the terms of such, Coca-Cola shall have the right to terminate this Agreement forthwith without payment of any further compensation and shall be entitled to pro rata refund of all monies paid to Sushmita as per clause 9(b). | |
| (b) | notwithstanding anything herein contained should Sushmita neglect, default, fail and/or breach, any of her obligations under clauses 3(c), 4, 6(b), 6(c), 6(d), 15 and/or any of the representations, warranties and undertakings as specified in clause (5), Coca-Cola shall, in addition to its other legal and equitable remedies, have the right to forthwith terminate this Agreement without payment of any further compensation. |
However, if after receiving communication from Coca-Cola as stated under clause 3, (e), Sushmita fails to render the services as per clause 3, then Coca-Cola shall have the right to seek pro rata Reduction or refund, based on the number of days used as on the date of termination. For purpose of compensation, each day is being calculated at Rs. 5,00,000 (Rupees Five Lakhs Only) and each month is calculated at Rs. 6,25,000 (Rupees Six Lakhs Twenty Five Thousand Only).
If during the term of this agreement Coca-Cola by it own accord fails to utilise the services of Sushmita as per clause 3, Sushmita shall have the right to receive the entire consideration due as per clause 7.
In the event Coca-Cola breaches any of the terms and conditions of this agreement, Sushmita shall have the right to terminate this agreement.
In the event of termination, Coca-Cola shall not develop and/or undertake any fresh advertising endeavour using Sushmita.
Upon perusal, the Tribunal found that upon failure of CCIL to utilize the services of SS as per clause-3, SS would have the right to receive the entire consideration due as per clause-7. Further, in case of default by the assessee, CCIL was entitled to seek refund of money on pro-rata basis.Thereafter, the correspondences exchanged revealed that certain dispute arose between the two parties as to availability of schedules/dates, etc. Finally, the contract was terminated by CCILvide letter dated 27-02-2003 wherein CCIL, inter alia, demanded refund of Rs. 145 Lakhs from Sushmita Sen.
In response to aforesaid termination, the assessee issued a legal notice to Doughlas N. Daft, Chairman of CCIL, USA & Alex Von Behr, President & CEO of CCIL, India wherein the assessee while disputing the termination of the contract alleged that the termination was mala fide and dishonest and was for the collateral and illegal purpose to punish the assessee, since she rightly resisted the sexual harassment by an employee of CCIL in the course of discharge of his duties. It was further stated that the assessee held CCIL and its USA based parent company liable for all the consequences flowing from the assessee being made a victim of sexual harassment by an employee of CCIL and for having failed to discharge its statutory duty of providing the assessee with a safe work place environment protected from sexual harassment. In the said notice, the assessee claimed the balance sum of Rs. 50 Lakhs due to her under the contract and specifically reserved her right to claim the damages arising out of her being sexually harassed for having disparaged her well established professional reputation by false, malicious and defamatory allegations of gross negligence and wilful conduct and for the repudiatory breach of contract by CCIL. In sum and substance, the assessee alleged the termination was done for collateral and illegal purpose of punishing the assessee for resisting attempts of sexual harassment by an employee of CCIL. For ease of reference, relevant clauses of the legal notice could be extracted hereinbelow:-
4. We state at the outset, that the purported termination of the Agreement (incorrectly referred to in the letter as the Agreement dated February 1, 2002) has been done for collateral and illegal purpose to punish Ms. Sen who rightly resisted ''Sexual Harassment" by one of your employees based in Mumbai Office of Coca Cola Company, in the course of discharge of his duties as an employee of Coca Cola Company. . . .
The allegations on the basis of which the Agreement is purported to be terminated are false and without any basis. The allegations of gross negligence and wilful conduct ascribed to Ms. Sen, are malicious, and irresponsible and are clearly defamatory and are made with the intent to wilfully cause injury to her reputation and her calling as an artist knowing fully well that the allegations are false.
| ** | ** | ** |
The above mentioned facts only go to establish what is stated at the outset of this letter that the only motive and purpose for the extreme step of purported termination, which otherwise is totally baseless and of no effect, is to drive Ms. Sen to go to the delinquent employee and fall a victim to his unwelcome sexually determined behaviour and demands.
The aforesaid notice finally culminated into Settlement Agreement wherein CCIL agreed to pay SS a sum of Rs. 145 lakhs towards full and final settlement of all her claims against CCIL arising out of or in relation to the said agreement and subsequent termination thereof.
In terms of clauses 5 to 7, CCIL viewing the allegations serious in nature, agreed to inquire into the allegations. The inquiry was to be conducted by Hon'ble Mr. Justice S.P. Bharucha (Retd.), Former Chief Justice of India.
A careful consideration of above factual matrix and chain of events reveals that the final settlement as arrived between the parties was not a simple settlement of commercial claims of the assessee arising out of contractual terms. Only an amount of Rs. 50 Lakhs was due to the assessee and as per the terms of the contract, the assessee had a right to receive only that much of amount in case of default by CCIL and nothing more. As against this, the assessee had received an amount of Rs. 145 Lakhs out of which Rs. 50 Lakhs had been offered to tax by the assessee. The balance amount of Rs. 95 Lakhs was stated to be received for loss of reputation, etc., under the circumstances as discussed and, therefore, being capital in nature, claimed to be not taxable. The factual matrix led Tribunal to believe that the contract did not envisage any additional payment over and above the amount of Rs. 150 Lakhs to the assessee. The perusal of documents showed that the said compensation did not accrue/arise out of exercise of profession by the assessee and could not be construed to be the income of the assessee or profits and gains of profession within the meaning of section 2(24) and section 28 of the Income -tax Act, 1961. The compensation could not be termed as any benefit, perquisites arising to the assessee out of exercise of profession. The first appellate authority fell in error to adjudicate the same on the threshold of impact of the compensation on profit making apparatus without understating the true nature of the receipts. This being so, the Tribunal had no hesitation in deleting the impugned addition of Rs. 95 Lakhs and ordered so.
The AR had canvassed that the compensation received for breach of the terms of the contract had been brought to tax by way of insertion of new sub-clause in Section 28(ii) with effect from 1-4-2018 and, therefore, had no applicability to the present case. The Tribunal opined that the said submissions were irrelevant in view of the fact that the additional compensation received by the assessee did not arise from the contractual terms at all and, hence, did not require any further elaboration against the same.
Against the aforesaid addition of Rs. 95 Lakhs, the assessee had been saddled with penalty of Rs. 31.35 Lakhs u/s. 271(1)(c)vide order dated 15-03-2010.
The Tribunal held that since it had allowed assessee's appeal against quantum addition, the consequential penalty would not survive. The Tribunal also expressed opinion that there was no concealment of income or furnishing of inaccurate particulars on the part of the assessee. It was the case where the assessee had made certain claim which had not been accepted by the revenue. Viewed from any angle, the impugned penalty could not survive. Both the appeals stood allowed.
Coarse Tax Measure But Dignified Judgment
3. Both Coca Cola and income-tax department were really made to taste the thunder, by enthralling, spunky beauty, Sushmita Sen in this case.
For the first time in India sexual harassment damages have been recognized to be capital receipt, not liable to tax. This is a pioneer case of its kind.
The tax authorities acted in a highly improper way, by trying to locate income, where there was none.
The income-tax department had been properly ticked off for its avariciousness.
Mischievous Interpretation
4. The income-tax department poked its nose into an issue, where it had no business to be. First of all damages payable for harm to reputation were not taxable. Secondly, the amount was not for any services rendered. Thirdly, the damages did not arise out of the contract.
The compensation received by the film actress from Coca Cola was towards damages caused to assessee's reputation & not income liable to tax.
The amount of Rs. 95 lakhs was stated to be received towards damages arising out of her being sexually harassed by CCIL employee, for having disparaged her professional reputation by false allegations and for the repudiatory breach of contract by the coca cola company. Such compensation could not be termed as any benefit, perquisites arising to assessee out of exercise of profession. Hence, it could not be construed to be assessee's income either under section 2(24)or under section 28 of the Act.
Most Nutty Theory of the Tax Authorities
5. The most nutty theory in the case was that it was all a normal part of the Bollywood actresses' profession. It meant that it was routine affair of the heroine to get harassed. In fact, it was part and parcel of her profession!
Further, it did not hit her source of income or professional structure; the CIT advanced the said theory. How could it be a capital receipt, then? The reality is that the model-actress was deprived of her income and her professional money dipped.
The tax authorities made a snide remark too, that being freed from contract, she was completely free to undertake any professional work. Losing the contract was certainly no joke to gloss over. It also meant that she would have to start all over again, for a big company contract.
Spouting by such theories, the aim of tax authorities was simple - to declare the damages as revenue receipts and haul them under tax dragnet. The Tribunal was sagacious enough to classify the sexual harassment damages/compensation as capital receipts.
Impish Reading of Tax Laws
6. The tax department made gross errors, while interpreting the sections of income-tax law.
The first wrong argument of the tax authorities was that the sexual harassment damages were, in fact, income. As everyone familiar with income-tax laws knows, there are more than 20 items listed under income, given in section 2(24) of Act. But nowhere it is mentioned that such harassment damages are also income. Certainly sexual harassment damages can't be profits/gains, perquisites or special allowances.
Moreover, income is a monetary return coming in with some regularity, as the dictionary meaning implies. It should be expected regularly from a definite source [CIT v Shaw Wallace & Co. Ltd. [1932] 6 ITC 178 (PC)]. Such harassment damages are not anticipated. Where, then, is the question of income?
No less authority than the Supreme Court has said: If it's not income, the ITO has no power to impose tax on it [CIT v. V. Mr p. Firm [1965] 56 ITR 67 (SC)]
The second argument raised by the Department is that the damages are revenue receipts. The actress claimed that what she got were capital receipts. In income-tax, as everyone familiar with law knows, fruits of a tree are revenue receipts, while tree is capital asset. Here also the damages were not of recurring nature like fruits, and, hence, not revenue receipts.
Again, if source of income is, intact, a revenue receipt can be envisaged. But if source is scorched or amount is received for loss of source, a capital receipt is created. In this case it was a one-time amount. A capital receipt had come into existence.
The third argument of the tax authorities was that compensation was received for damages, which were taxable under section 28 of the Act. But, they had completely missed out on a number of issues. In case of Oberoi Hotel (P.) Ltd. v CIT [1999] 103 Taxman 236/236 ITR 903 (SC), it was held that compensation received for loss of capital asset was capital receipt. Next, if the loss is normal part of transaction and occurs during course of events, it's revenue receipt [Kettlewell Bullen & Co. Ltd. v CIT [1964] 53 ITR 261 (SC), as the apex court ruled. Here the damages were by no stretch of imagination normal or ordinary.
The fourth argument by the Department was that section 28 would apply in this case. The reality is that section 28 applies only to business income-not to a profession. The new clause (e) of clause (ii), in Section 28 brought in 2018 budget also explicitly states that compensation by whatever name called in connection with termination relating to business shall be taxed.
The fifth argument was that the actress invited penalty, for her action. But, she did not hide income or come up with wrong facts. She did not bamboozle the tax officials - how could penalty be loaded on to her?
Considering all these facts, the income-tax department could not add, subtract, alter or modify the facts. A taxing statute can't be considered by making assumptions or presumptions [Goodyear India Ltd. v. State of Haryana [1991] 188 ITR 402 (SC)].
The Pestering Conflict
7. Only a Few know that this case arose in 2008 and for long period Sushmita Sen has been fighting the income-tax department. She, not only resisted the advances of coke harasser but also brought down the tax sleuths from their perch. Uncharitable comments like the actress was playing a stunt to get publicity for her forthcoming film "Paisa Vasool" have also bitten the dust, as she didn't file a lawsuit now. A point to be noted is that if the independent inquiry by retired Justice Bharucha rules that Sushmita Sen was right, she would get thrice the amount of damages from the cola giant. The income-tax department would have to twiddle thumbs, then just like in this case.
The American Scenario
8. At one time sexual harassment damages were fully exempt from income-tax, in America. Right from total amount awarded as fees for visit to psychologist after the trauma were deductible. But, now after Trump's win, the law has been turned on its head. Previously, the woman who underwent sexual harassment, spending money on lawyer fees out of compensation got tax deduction on amount paid for legal counsel, even if dispute was settled in private. But now the sexual harassment damages and lawyers fees are fully taxed. The psychologist's fees is also under tax lens.
If sexual harassment damages are settled privately and quietly, the American IRS would tax them, fully - that's the situation now.
Conclusion
9. The income-tax department wants to consider everything as income and tax it. Sushmita Sen has shown that the damages were, in fact not income, as the tax department thought but to use tax terminology, a penalty for sexual harassment suffered by the actress.
The beauty queen has also quietened those who have called her to be a gold digger, because she has handed entire amount to a charitable organization. A single mother of two girls the ex-Miss Universe has never been known to mince words. She feels that those who disrespect women are disrespecting their own mother. Respect must not be demanded by women, they should command it, is the outspoken actress's view.
Had the damages amount been taxed, the culprit guilty of sexual harassment would have enjoyed the last laugh. Because the amount would have been lost forever, by the actress. If, unluckily the damages had been taxed, the situation would have been something like this: The rabbit would have fallen from the clutches of the eagle (Coke harasser) to land into the waiting crocodile (income-tax department's) mouth.
Refer:[2019] 101 taxmann.com 236 (Article)
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