The issue dates back many years when the actor and others proposed bringing Sony TV channel to India.
A tribunal recently ruled in favour of actor Jackie Shroff in an income tax (I-T) case relating to compensation received by him for withdrawing a complaint.
The issue was whether the money received is capital receipt or revenue receipt.
If the former and not defined in the I-T Act, it will be exempt from income tax, explained Rahul Singh, an expert at Taxmann.
For assessment year 2011-12, Shroff got $1.5 million (Rs 6.98 crore at the time) from one Sudesh Iyer. He did not offer it for taxation.
The issue dates back many years when the actor and others proposed bringing Sony TV channel to India.
A company - Atlas Equfin - was incorporated to hold shares in Multi Screen Media India (MSM), owners of the Sony TV channel.
The aggregate share holding of Atlas and another Mauritius-based company, Grandway Global Holdings, in MSM was 23 per cent.
In 1995, Atlas and Grandway were trying to exit MSM and Standard Chartered Bank, Singapore (SCB) was given the mandate.
The actor refused to sign it but found his signature on the mandate.
In 2010, Shroff filed a complaint with the Mumbai police's economic offences wing (EOW) for an investigation into the matter. He had, he said, never signed that mandate.
After the complaint was made, he was approached to settle the matter amicably.
In January 2011, a deed of settlement was signed between the actor and Sudesh Iyer for settling the dispute.
According to the terms, Iyer agreed to pay a sum of $3,500,000 on the condition that Shroff withdraw the criminal complaint.
The amount was to be paid in two installments. Shroff withdrew his EOW complaint and got the first installment of Rs 6.98 crore.
Since the amount was compensation, the actor argued, he treated it as capital receipt and non-taxable.
However, the I-T assessing officer disagreed and held the amount be treated as Shroff's income and hence taxable.
Shroff petitioned the department's commissioner (appeals), who agreed with his contention that the amount should not be taxed.
The revenue department then appealed against this order to the Income Tax Appellate Tribunal at Mumbai which also agreed with the commissioner (appeals) and Shroff.
"The compensation received by the assessee (Shroff) was not for his professional activities but for settlement of a dispute between him and some other party resulting in filing of a criminal complaint," the order said.
Rahul Singh explains that taxpayers and the department are often at loggerheads as to whether a payment received is capital receipt or revenue receipt.
The I-T Act is silent on the factors to be considered in this regard.
"This recent judgment is another addition in the list of rulings which categorise a receipt into (either).
"This controversy won’t be resolved unless the I-T department provides a clear mechanism for determination of the nature of a receipt," he said.
Photograph: Pradeep Bandekar
