By TIOL News Service

NEW DELHI, DEC 19, 2016: THE issue before the Apex Court is - Whether if non-compete fee is paid in the form of salary under Sec 192, there is no question of any advance tax nor any interest obligation that arises. YES is the verdict.

Facts of the case

The assessee was founder director of Log-In Systems Innovations Limited, the company engaged in the business of software development and consultancy. The company was acquired by one Synergy Credit Corporation Limited, as a result of which assessee was offered a position of Executive Director in the Acquirer Company for a gross compensation of Rs.1,77,200/- per annum. An Acquisition Agreement was executed on a going concern basis for a total consideration of Rs.6,00,000/-. On the same date, a Non-Compete Agreement was signed between the assessee and the Acquirer Company imposing a restriction on the assessee from carrying on any business of similar nature for a period of five years for which the assessee was paid a sum of Rs.21,00,000/-. The question that arose in the proceedings commencing with the Assessment Order is whether the amount of Rs.21 lakhs was on account of 'salary' or the same was a 'capital receipt'. The HC ruled that such a payment was 'salary amount' on which interest would be chargeable/leviable u/s 234B and 234C.

On appeal, the Apex Court held that,

++ against salary a deduction, at the requisite rate at which income tax is to be paid by the person entitled to receive the salary, is required to be made by the employer failing which the employer is liable to pay simple interest. In cases where receipt is by way of salary, deductions u/s 192 is required to be made. No question of payment of advance tax under Part 'C' of Chapter VII can arise in cases of receipt by way of 'salary'. If that is so, Part 'F' of Chapter VII dealing with interest chargeable in certain cases (Section 234B – Interest for defaults in payment of advance tax and Section 234C – Interest for deferment of advance tax) would have no application to the present situation in view of the finality that has to be attached to the decision that what was received by the assessee under the Non-Compete Agreement was by way of salary. For the said reasons, the appeals are allowed; the order of the High Court so far as the payment of interest u/s 234B and Section 234C is set aside.

(See 2016-TIOL-234-SC-IT)