Payout received as compensation in case of sexual harassment not chargeable to tax: ITAT

Published: November 26, 2018 12:52 PM

Mumbai based Income Tax Appellate Tribunal has given a judgement stating that any payout received as compensation in case of sexual harassment shall be in nature of capital receipt, not chargeable to tax.

income tax, Income Tax Department Vs Sushmita Sen, ITAT, MeeToo movement, Coca-Cola, capital gain, When the model-actress filed her Income Tax Return in the year 2004-05, she declared only Rs 50 lakh as taxable income and the balance Rs 95 lakh as the capital receipt, which is not taxable.

#MeToo hits back again and this time it is the Income Tax Department v/s ex-Miss Universe Sushmita Sen. On November 14, Mumbai based Income Tax Appellate Tribunal (ITAT) gave a judgement stating that any payout received as compensation in case of sexual harassment shall be in nature of capital receipt, not chargeable to tax. Let’s dig deeper into the whole story.

Facts of the Case

In the year 2003-04, the assessee (Sushmita Sen) entered into a contract with the soft-drink giant Coca-Cola India Pvt Ltd as a brand ambassador for an amount of Rs 1.50 crore.

In that year, Ms. Sen made a complaint to the company’s management regarding sexual harassment by one of its employees. As a result, the contract was terminated prematurely. In order to save itself from a potential sexual harassment lawsuit, Coca-Cola settled the issue with Ms. Sen by handing a compensation worth Rs 1.45 crore.

Issue

When the model-actress filed her Income Tax Return in the year 2004-05, she declared only Rs 50 lakh as taxable income and the balance Rs 95 lakh as the capital receipt, which is not taxable. To this, the Assessing Officer issued a notice demanding tax on Rs 95 lakh and an additional penalty of Rs 35 lakh for hiding income. The issue went to the CIT(A) which ruled in favour of the Income Tax Department. After that Sushmita Sen appealed against the order of CIT(A) before the ITAT.

ITAT Order

On 14 November, the Mumbai based Income Tax Appellate Tribunal (ITAT) passed its order in favour of Sushmita Sen. The order stated that any payout received as compensation in case of sexual harassment is a capital receipt which is not chargeable to tax. The reasons given by ITAT to support the judgement are as follows:

While filing the original return the assessee took due caution, and declared Rs 50 lakh as taxable income. This amount represented the actual balance due for payment as per the original contract.

The remaining amount of Rs 95 lakh was a compensation made by the multinational giant to settle the sexual harassment case in order to save its brand image. Such type of amount is extraordinary in nature and the assessee has not earned it in her regular business/ profession.

With the current-hype around the #MeToo Movement, such decision by the ITAT has been received very positively by the public in general.

(By CA Abhishek Soni, Founder, tax2win.in)

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