subject: Payment Of Commission To An Employee In The Garb Of Non-compete Fee Has To Be Taxed As Salary In His [print this page] The assessee was a general sales agent (GSA) of UC Corporation. During the year, he received a salary of Rs. 1,32,000. By a non-compete agreement (NCA), he was further entitled to certain commission in addition to his regular salary. During assessment, the AO held that commission debited by UC was Rs. 8.47 crores, while the assessee had shown merely Rs. 74 lakhs as business income following cash system of accounting. The AO contended that such NCA was to be taxed as salary instead of business income. On appeal, the CIT(A) upholding the order of AO concluded that characterization of the amount as non-compete fees was an attempt to reduce the tax liability. However, the Tribunal reversed the findings of the CIT(A) and held that an arrangement where the source follows the mercantile system of accounting and the recipient follows the cash system is well recognized one and followed, and was, thus, not a colourable device to evade taxes.
On appeal, the High Court held in favour of revenue as under:
1) The assessee argued that he was the controller of the firm. However, if that was correct then he could not claim receipt of Rs.1,32,000 as salary paid by the firm to him in his capacity as an employee. Consequently, all the amounts received by him should be income from business. However, that was not what he contended;
2) The assessee, admittedly, did not have a business of his own and was being treated as an employee for the purpose of the deductions;
3) The assessee continued to earn the non-compete commission in his capacity as an employee, to refrain from carrying on any business similar to that of UC;
4) He also continued his employment with the firm, and was given commission for doing what he was normally expected to do, i.e., work for the said firm in his area of expertise; and
5) In addition to salary, he was also given commission for not competing with his employer, during his employment, in regard to the same line of business, in which he worked as an employee of the firm.
Therefore, it was held that the commission was clearly a part of salary under the inclusive definition under Section 17 - [2012] 28 taxmann.com 28 (Delhi)
