Whistleblower Reward Earned via Systematic Assistance and Profit

Whistleblower Reward Earned via Systematic Assistance and Profit Motive Is Taxable as Income from Other Sources

Whistleblower Reward Earned via Systematic Assistance and Profit Motive Is Taxable as Income from Other Sources

Issue

Whether a substantial monetary reward received by an employee from the US SEC under a statutory whistleblower scheme—following a systematic collection of evidence and active participation in an investigation with an expectation of reward—constitutes a non-taxable capital receipt/windfall gain, or if it is chargeable to tax as “Income from Other Sources” under Section 56(1) of the Income-tax Act.

Facts

Employment & Action: The assessee, a resident individual employed with the Indian subsidiary of a US-based medical equipment company, filed a whistleblower complaint before the US Securities and Exchange Commission (SEC) regarding Foreign Corrupt Practices Act (FCPA) violations committed by the group entities.
The Reward: Following the complaint, the SEC imposed a civil penalty of USD 7.8 million on the US parent company. Under the SEC’s whistleblower program, the assessee was awarded 28% of the monetary sanction, translating to USD 1.09 million (approximately Rs. 8.16 crores).
Assessee’s Claim: The assessee argued that the reward was an unexpected, spontaneous windfall gain and a capital receipt, making it non-chargeable to income tax.
Systematic Effort: Internal records and facts revealed that the receipt was not accidental. The assessee had systematically collected evidence of corrupt practices, clandestinely recorded conversations, engaged US legal counsels under success-fee arrangements, and actively participated in the investigation.
Statutory Nature: The SEC whistleblower scheme was a structured framework requiring a separate application to claim the reward and provided an enforceable legal right to challenge any denial of the reward.

Decision

Not a Windfall or Capital Receipt: The ITAT/Court held that since the reward was granted under a statutory scheme in exchange for actionable information and extensive assistance, there was a clear element of quid pro quo (something for something) and a conscious profit motive. It cannot be treated as a casual, windfall gain or a tax-free capital receipt.
Taxable Under Section 56(1): Because the reward constitutes income under the wide scope of Section 2(24) and does not fall under any specific head of income (like Salaries or Business Income), it is systematically taxable as “Income from Other Sources” under Section 56(1).
Ruling in Favor of Revenue: The dynamic effort, structural application, and legally enforceable right to the reward firmly place the receipt within the tax net. The issue was decided entirely in favor of the revenue.

Key Takeaways

The Quid Pro Quo Test: If a receipt is the result of a deliberate, organized effort to provide information or services in exchange for a reward, it loses the character of a “casual or windfall gain” and becomes taxable income.
Broad Definition of Income: Section 2(24) of the Income-tax Act is inclusive and expansive. Just because a receipt is unique or rare does not automatically make it a capital receipt.
Enforceable Rights Matter: The presence of a statutory framework where an applicant can legally contest and claim a reward indicates a commercial/legal transaction rather than a voluntary, unexpected testimonial gift.

IN THE ITAT AHMEDABAD BENCH ‘B’

PREMAL P. PANDYA

Deputy Commissioner of Income-tax^*

Ms. Suchitra Kamble, Judicial Member
and Narendra Prasad Sinha, Accountant Member

IT Appeal No. 195 (AHD) of 2026
[Assessment year 2022-23]

MAY 14, 2026

S. N. Soparkar, Sr. Adv. for the Appellant. R.P. Rastogi, CIT-DR for the Respondent.

ORDER

Narendra Prasad Sinha, Accountant Member.- This appeal is filed by the assessee against the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘CIT(A)’] dated 22.12.2025 for the Assessment Year (A.Y.) 2022-23 in the proceeding u/s 143(3) r.w.s. 144B of the Income Tax Act (hereinafter referred as “the Act”).

2. The brief facts of the case are that the assessee had filed his return of income for A.Y. 2022-23 on 30.07.2022 declaring total income of Rs.33,190/-. The case was selected for scrutiny and a notice u/s. 143(2) of the Act was issued on 02.06.2023. The assessee is a resident individual deriving income from salary. In the course of assessment, the AO inquired about the receipt of USD 2.18 million by the assessee from US Securities and Exchange Commission (in short “SEC”). The assessee had explained that out of USD 2.18 million received, 50% was retained by the legal team and only balance amount of USD 1.09 million was received by him. Accordingly, the amount of Rs.8,16,27,000/- was credited in the bank accounts of the assessee. As regarding nature of this receipt, it was explained that the assessee undertook a whistle-blower activity to report grave corporate misconduct by his former employer, without any anticipation of reward. According to the assessee, the reward received from US SEC was a windfall gain and a capital receipt and it was not chargeable to tax under the provisions of the Income Tax Act. The AO, however, treated the receipt of Rs. 8,16,27,000/- as income of the assessee under the provisions of section 56(2)(x) of the Act. Accordingly, the assessment was completed u/s. 143(3) r.w.s. 144B of the Act on 15.03.2024 at total income of Rs. 7,91,65,713/-, after allowing eligible deductions under Chapter-VIA of the Act.

3. Aggrieved with the order of the AO, the assessee had filed an appeal before the first appellate authority, which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was dismissed. Th

4. Now the assessee is in second appeal before us. The following grounds have been taken in this appeal:

Ground No. I: Addition of Rs. 8,16,27,000/- received as reward from US Securities and Exchange Commission u/s 56(2)(x) of the Act

On the facts and circumstances of case and in law, the Hon’ble CIT(A) erred upholding the addition made by the Assessing Officer’ (“the AO”) of Rs. 8,16,27,000/- received as reward from US Securities and Exchange Commission (“SEC reward”) u/s 56(2)(x) of the Act.

The CIT(A) failed to appreciate that the SEC reward is a capital receipt not chargeable to tax under Act.

The Appellant prays that the AO be directed to delete the addition made towards the SEC reward of Rs. 8,16,27,000/- as the same is not chargeable to tax.

Ground No. II: Levy of interest u/s 234B and 234D of the Act

On the facts and circumstances of case and in law, the CIT(A) erred in confirming the levy of interest u/s 234B and u/s 234D of the Act, respectively.

The Appellant prays that the AO be directed to delete the interest levied u/s 234B and U/s 234D of the Act.

Ground No. III: General

The appellant craves leave to add, alter and/or amend, withdraw or vary all or any of the above grounds of appeal either before or at the time of hearing of this appeal.

Submissions of the Assessee

5. Shri S. N. Soparkar, the Ld. Senior Advocate, appearing for the assessee, explained that the assessee was employed with – (India) Private Limited in 2011, an Indian subsidiary of a U.S based medical equipment company, as Director – Commercial Operations and Marketing (South Asia). During his employment, he identified alleged physician kickback scheme involving public hospitals in India, which violated the Foreign Corrupt Practices Act (FCPA), which was against his conscience and public interest. In March, 2013, the assessee had reported the matter to the – Group’s U.S. headquarters, through the internal compliance hotline but no corrective action was taken and his employment was terminated in April, 2013, which was a direct consequence of the assessee’s reporting of the illegal practices. Thereafter, considering the seriousness of the misconduct and concerns for personal safety/ corporate vendetta, the assessee had engaged U.S. counsel to represent him before Securities and Exchange Commission (SEC) and he filed a Whistleblower complaint to the SEC through US counsel, describing the alleged bribery and kickback scheme of the – group. On the basis of the complaint of the assessee, investigations were carried out by SEC wherein the assessee had provided assistance and corroborative evidences. The SEC had imposed a civil penalty of USD 7.8 million on U.S. parent company in September 2018. Subsequently, the assessee was awarded 28% of the penalty amount as reward on 2^nd August, 2021, for his assistance in the matter. The Ld. Sr. Counsel explained that the total reward of USD 2.18 million was credited to an escrow account, of which 50% was paid to two U.S. attorneys and balance 50% being USD 1.09 million was received by the assessee.

6. On the action of the AO taxing the reward received by the assessee under section 56(2)(x) of the Act, the Ld. Sr. Counsel submitted that the said section was not applicable in the present case, as SEC reward cannot be said to be “without consideration”. He explained that the reward was paid u/s. 21F(b)(1) of the Securities Exchange Act, 1934 establishing statutory whistleblower programme and the award was granted only where enforcement action resulted in monetary sanction exceeding USD 1 million. He explained that the eligibility and grant of reward depended upon satisfaction of statutory conditions and regulatory considerations and the quantum of award was solely at the discretion of US SEC. According to the Ld. Senior counsel, the SEC reward received by the assessee was:

not a gift or voluntary transfer made out of personal relationship;

ii.

not contractual compensation or remuneration for services;

iii.

not consideration arising from any commercial or business arrangement; and

iv.

not a negotiated payment.

Therefore, the receipt cannot be regarded as one received without consideration.

7. The Ld. Sr. Counsel contended that the SEC reward was a windfall gain, a capital receipt and not income u/s. 2(24) of the Act and, therefore, it was not chargeable to tax. He explained that the reward lacks the essential attributes of income and falls outside the scope of section 2(24) of the Act. In this regard he relied upon the following decisions:

CIT v. Shaw Wallace & Co. [1932] 6 ITC 178

ii.

Cadell Wvg. Mill Co. (P.) Ltd. v. CIT 249 ITR 265 (Bombay)

iii.

Vodafone India Services (P.) Ltd. v. Union of India [2001] 249 ITR 265 (Bom HC)

iv. Shendra

Advisory Services (P.) Ltd. v. Dy. CIT 482 ITR 385 (Bombay)

Batliboi Ltd. v. DCIT (Mumbai – Trib.)

8. The Ld. Senior counsel further submitted that the SEC reward was in the nature of windfall and was not a product of any profit-making activity or organised pursuit of income and, therefore, it did not possess the character of income. In this regard, the reliance was placed on the following decisions:

Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758 (Bombay)

ii.

CIT v. M. Ramalakshmi Reddy [1981] 131 ITR 415 (Madras)

9. According to Ld. Sr. Counsel, the discretionary nature of SEC reward indicates its capital character. He explained that SEC whistleblower reward had the following characteristics:

The payment is not made pursuant to any employment, business or professional obligation of the Appellant;

The reward is not in the nature of consideration for services rendered in a commercial sense;

The payment is not of a recurring or periodical nature; and

The grant is made under a statutory framework based on regulatory considerations and not from any income-producing activity of the Appellant.

According to the Ld. Senior counsel, the SEC reward being unconnected with any professional or commercial activity and lacking any element of quid pro quo, has the character of a capital receipt. In this regard he placed reliance on the following decisions:

Aroon Purie v. CIT 375 ITR 188 (Delhi)

ii.

Padmaraje R. Kadambande v. CIT 195 ITR 877 (SC).

10. The Ld. Senior counsel contended that the SEC reward does not satisfy the core attributes of income. Therefore, the AO was not correct in treating the same as taxable under the provision of section 56(2)(x) of the Income Tax Act.

Submissions of the Revenue

11. Per contra, Shri R P Rastogi, the Ld. CIT-DR controverted the arguments of the Ld. Senior counsel and strongly supported the order of the lower authorities. He explained that the income defined u/s. 2(24) of the Act was an inclusive and not exhaustive definition. Relying upon the decision of Hon’ble Supreme Court in the case of CIT v. G.R. Karthikeyan 201 ITR 866 (SC), the Ld. CIT-DR submitted that the inclusive definition does not limit the meaning of income rather it widens its scope/amplitude. Therefore, even if a receipt does not specifically fall within any of sub-clauses of section 2(24) of the Act, it may still be characterised as income. The Ld. CIT-DR explained that the assessee did not stumble upon the reward of the SEC accidently. Rather he had actively and deliberately identified FCPA violation and reported the matter to US SEC, with a clear objective of obtaining a monetary reward. Further, prior to making the complaint, the assessee had engaged US counsels to represent his matter before SEC. The assessee had prosecuted the claim for reward systematically by providing detailed explanation, identifying key records, corroborative evidences and engaging in video/telephonic interaction with SEC enforcement personnel. Considering the degree of preparation and deliberation carried out by the assessee, the reward cannot be considered as a windfall gain. The sharing of reward with US counsels on success fee basis and sharing 50% of gross reward to the counsels, establishes that the economic accretion had resulted from deliberate, systematic and sustained activity which represented income of the assessee. According to the Ld. CIT-DR, the receipt was in the character of a business venture and could not have been considered as a mere windfall. The Ld. CIT-DR submitted that the case laws relied upon by the assessee were all distinguishable on facts.

12. The Ld. CIT-DR submitted that the SEC reward was taxable as per US tax laws. Further, section 10(17A) of the Income Tax Act, specifically exempted awards/rewards and the reward received by the assessee from US SEC was not of any exempt category. Drawing parallel from the rewards given to Income-tax informants in India, the Ld. CIT-DR submitted that all unexempted rewards are taxable under the provisions of the Act. He, therefore, strongly supported the order of the AO taxing the reward received from US SEC under the provision of section 56(2)(x) of the Act. He further submitted that the reward was taxable u/s 56(1) of the Act, if not u/s 56(2)(x) of the Act.

Our Findings:

13. We have considered the rival submissions. The core issue to be decided in this case is whether the reward received by the assessee from US SEC is taxable under the provisions of the Income Tax Act. The thrust of the assessee’s argument is that SEC reward is a windfall gain and capital receipt and not income u/s 2(24) of the Act and, therefore, not chargeable to tax. Relying upon the decision of Hon’ble Privy Council in the case of CIT. v. Shaw Wallace & Co.(supra), the assessee has contended that the following tenets of “income” were not fulfilled in the present case:

A periodical monetary return,

ii.

Coming with some regularity,

iii.

Arising from the definite source, and

iv.

Excludes receipts in the nature of a mere windfall.

The judgment in the case of Shaw Wallace & Co was delivered by the Hon’ble Privy Council in the context of Income Tax Act, 1922, wherein the word “income” was not defined. On the other hand, the Income Tax Act, 1961, contains a specific and inclusive definition of “income” u/s. 2(24) of the Act. Therefore, the reliance of the assessee on the decision of Privy Council in the case of Shaw Wallace & Co, explaining the attributes of income, is misplaced. The observation of the Hon’ble Privy Council in that case cannot be now pressed into service as of general application.

Concept of income

14. The concept of income was discussed by the Hon’ble Supreme Court in the case of G R Karthikeyan (supra), and the relevant part of the judgement is reproduced below:

6. It is not easy to define income. The definition in the Act is an inclusive one. As said by Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC) “income . . . is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation”. In Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237, the Privy Council pointed out that “anything that can properly be described as income is taxable under the Act unless expressly exempted”. This Court had to deal with the ambit of the expression ‘income’ in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758. The Indian Income-tax and Excess Profits Tax (Amendment) Act, 1947 had inserted section 12B in the Indian Income-tax Act, 1922. Section 12B imposed a tax on capital gains. The validity of the said Amendment was questioned on the ground that tax on capital gains is not a tax on ‘income’ within the meaning of entry 54 of List-I, nor is it a tax on the capital value of the assets of individuals and companies within the meaning of entry-55, of Iist-1 of the Seventh Schedule to the Government of India Act, 1935. The Bombay High Court repelled the attack. The matter was brought to this Court. After rejecting the argument on behalf of the assessee that the word ‘income’ has acquired, by legislative practice, a restricted meaning – and after affirming that the entries in the Seventh Schedule should receive the most liberal construction – the Court observed thus:

“What, then, is the ordinary, natural and grammatical meaning of the word ‘income’? According to the dictionary, it means ‘a thing that comes in’. (See Oxford Dictionary, Vol. V, p. 162; Stroud, Vol. II, pp. 14-16). In the United States of America and in Australia both of which also are English speaking countries the word ‘income’ is understood in a wide sense so as to include a capital gain. Reference may be made to – ‘Eisner v. Macomber’, [1919] 252 US 189 (K); – ‘Merchants’ Loan and Trust Co. v. Smietankd, [1920] 255 US 509 (L) and – ‘United States of America v. Stewart’, [1940] 311 US 60 (M) and – ‘Resch v. Federal Commissioner of Taxation’, [1943] 66 CLR 198 (N). In each of these cases very wide meaning was ascribed to the word ‘income’ as its natural meaning. The relevant observations of learned Judges deciding those cases which have been quoted in the judgment of Tendolkar, J. quite clearly indicate that such wide meaning was put upon the word ‘income’ not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word ‘income’. Its natural meaning embraces any profit or gain which is actually received. This is in consonance with the observations of Lord Wright to which reference has already been made . . . The argument founded on an assumed legislative practice being thus out of the way, there can be no difficulty in applying its natural and grammatical meaning to the ordinary English word ‘income’. As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power.” [Emphasis supplied] (p. 764)

Since the definition of income in section 2(24) is an inclusive one, its ambit, in our opinion, should be the same as that of the word income occurring in entry 82 of List I of the Seventh Schedule to the Constitution (corresponding to entry 54 of List-I of the Seventh Schedule to the Government of India Act). [Emphasis supplied]

15. The Hon’ble Supreme Court in the case of G R Karthikeyan (supra) has rejected the argument that income must be periodic or regular, to be taxable. The Hon’ble Court has held that the word “income” is of widest amplitude and it must be given its natural and grammatical meaning. In the subsequent decision in the case of UOI v. A. Sanyasi Rao 219 ITR 330 (SC), the Hon’ble Supreme Court has ruled that the word income occurring in Entry 82 in List 1 of the 7th Schedule to the Constitution should be construed liberally and in a very wide manner and the power to legislate will take in all incidental and ancillary matters including the authorization to make provision to prevent evasion of tax, in any suitable manner.

16. The word “income” as defined in section 2(24) of the Act, start with the word “income includes”. The word “includes” makes it clear that the definition of the term “income” in section 2(24) is not exhaustive. This definition includes various items as mentioned in clauses (i) to (xviii). If an item of receipt is/or contains the element of income in common parlance, that would still be included within ‘income’ under this provision, notwithstanding the fact that there is no specific inclusion of such item of income in the definition. The word ‘income’ has to be understood in the generic sense. The inclusive definition of income adds several artificial categories to the concept of income, but on that account the word ‘income’ does not lose its natural connotation. It has to be construed as comprehending only such things which are income according to the natural import of the term. It is well settled rule of construction that entries in the Legislative list cannot be read in a narrow or restricted sense. The contention of the assessee is that the reward received by him doesn’t fall in any of the sub-clauses of section 2(24) of the Act and, therefore, it is not income. In the case of G R Karthikeyan (supra), the Hon’ble Supreme Court had held that even if the receipt does not fall into any of the sub-clauses of section 2(24), it may yet constitute income. The observation of the Hon’ble Supreme Court in that case is reproduced below:

7…..Further, even if a receipt does not fall within sub-clause (ix), or for that matter, any of the sub-clauses in section 2(24) , it may yet constitute income. To say otherwise, would mean reading the several clauses in section 2(24) as exhaustive of the meaning of ‘income’ when the statute expressly says that it is inclusive. It would be a wrong approach to try to place a given receipt under one or the other sub-clauses in section 2(24) and if it does not fall under any of the sub-clauses, to say that it does not constitute income. Even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to widen its net. This Court has repeatedly said that the word ‘income’ is of widest amplitude, and that it must be given its natural and grammatical meaning. Judging from the above standpoint, the receipt concerned herein is also income. Maybe it is casual in nature but it is income nevertheless. That even the casual income is ‘income’ is evident from section 10(3). Section 10 seeks to exempt certain ‘incomes’ from being included in the ‘total income’. A casual receipt-which should mean, in the context, casual income -is liable to be included in the total income, if it is in excess of Rs. 1,000, by virtue of clause (3) of section 10. Even though it is a clause exempting a particular receipt/income to a limited extent, it is yet relevant to the meaning of the expression ‘income’. In our respectful opinion, the High Court, having found that the receipt in question does not fall within sub-clause (ix) of section 2(24), erred in concluding that it does not constitute income. The High Court has read the several sub-clauses in section 2(24) as exhaustive of the definition of income when in fact it is not so .[Emphasis supplied.]

In the case of G R Karthikeyan the issue involved was prize money received in motor rally race and even though it was casual in nature, it was held as income by the Hon’ble Supreme Court. Following the ratio of that decision, the reward received by the assessee, even if casual in nature, qualify as income and is liable to tax under the provisions of the Act.

17. The other contention of the assessee is that the reward received by the assessee from SEC was in nature of “windfall”. With the omission of section 10(3) of the Act, vide Finance Act, 2002 w.e.f. 01.04.2003, all the casual and non-recurring receipts including windfall gains from betting, horse racing, lotteries etc. are brought under the tax net. A fortiori, the exemption provided by the Legislature in the Act, may itself furnish an infallible clue to the income character of a particular receipt. With the exemption u/s 10(3) having been withdrawn, the windfall gains become liable to tax. Further, the reward received by the assessee from the SEC cannot be held as casual in nature and a windfall gain. The Hon’ble Supreme Court has held in the case of RM. AR. AR. RM. AR. AR. Ramanathan Chettiar v. CIT [1967] 63 ITR 458 (SC), that receipt which is foreseen and anticipated cannot be regarded as casual even if it is not likely to occur again. In order to determine the true character of the receipt, it will be relevant to recapitulate the facts of the case in the right perspective.

Genesis & nature of receipt:

18. On 19.08.2013 the assessee, as a “Whistleblower”, had entered into a Common Interest Agreement (CIA) with “Whistleblowers Against Fraud LLC” (WAF). The purpose of this agreement was to assist and advise the Whistleblower in researching and developing the action against – group to file a qui tam action under the Federal False Claims Act and/or other whistleblower claims under US SEC, US Commodity Futures Trading Commissions, US Internal Revenue Services and/or any other federal or state agency or legal regime. WAF was also to advise the Whistleblower and his legal counsel in the filing, development and prosecution of a qui tam and/or agency whistleblower action through legal counsel and to facilitate the Government investigation of the allegations in such an action. It is thus evident from this CIA that the assessee, as a whistleblower, had planned to file complaint with various enforcement agencies in USA and WAF was engaged for the purpose of researching and developing the action and also to work in conjunction with legal counsel. As per the terms of this agreement, WAF was to be compensated an amount equal to 50% of any award to Whistleblower in the Action, less the legal fee payable by the assessee to the legal counsel. It is thus evident that the intention of the assessee from the very beginning was to obtain reward by filing complaint with various enforcement agencies in USA. This is explicit from the terms and the payment clause to WAF, as stipulated in CIA dated 19.08.2013.

19. Thereafter, the assessee and WAF had entered into an agreement with MOLO LAMKEN LLP on 28.12.2013, whereby MOLO LAMKEN was appointed as legal counsel to represent their case before US SEC. As per the terms of the agreement, MOLO LAMKEN was to file a whistleblower complaint with US SEC alleging FCPA violations in connection with – sale of medical supplies and/or devices The legal counsel was to be paid fee of 25% of gross amount of reward. Thus, the service fee under both the agreements was based on percentage of reward to be granted to the assessee by US SEC.

20. MOLO LAMKEN on behalf of the assessee and WAF had filed a whistleblower complaint with U.S SEC on 17.03.2014. A copy of Form TCR (Tip, Complaint or Referral) filed with US SEC has been brought on record in the paperwork filed by the assessee. At serial no.-9 of Form TCR, it was mentioned that “The complainant possesses copies of emails and purchase orders, as well as an audio recording of a conversation between a – employees.” Further, in Supplement to Form TCR, the details of FCPA violations and corrupt practices by – group was enumerated in detail. In fact, instances of corrupt practices in 10 cases with details of the medical college and the concerned doctor(s) was specifically mentioned. In another Annexure to Form TCR, the assessee has detailed the supply made to 16 different hospitals with name of the employee, the concerned physician of the hospital involved in the kickback scheme, the product(s) supplied and the manner of providing illegal gratification. Regarding the corroborative evidences available with the assessee it was stated by the Whistleblower as under:

Corroborative evidence

Mr. – possesses copies of emails and invoices pertaining to the transactions in question. However, with the exception of the abovedescribed E&S email, he does not have documents which reflect an explicit discussion of a quid pro quo arrangement, as Mr. Kumar instructed – elemployees not to discuss such matters in writing. According to Mr. -, discussions regarding the physician kickback scheme typically occurred in-person or by phone. In fact, Mr. – possesses an audio recording of an in-person conversation between two – employees and two surgeons (from a non-governmental hospital) in which he believes the parties are discussing prospective bribes. [Emphasis supplied.]

21. It is thus evident that the assessee had filed the whistleblower complaint after diligent collection of evidences pertaining to corrupt practices by the – group over a sustained period of time. He had clandestinely collected specific evidences in respect of supply made to different hospitals and also recorded in-person conversation of – employees and the doctors. It was further stated in the Supplement to TCR that the assessee was available on phone or for video conferencing and was also willing to travel to US in person for meeting and to produce to SEC the documents and other information in his possession. The whistelblower complaint was filed by the assessee with sole intention of getting the reward, which is authenticated by the fact that the fee to the two US Attorneys appointed by the assessee, was to be paid out of the reward amount only.

22. On the basis of the complaint filed by the assessee, SEC had initiated investigation wherein the assessee had provided substantial assistance to SEC’s enforcement staff by providing explanation to complex transactions, identifying key records, giving all corroborative evidences, had multiple calls and video meetings that helped to build case against the ex-employer which led to a successful civil enforcement action. The SEC had also referred the matter to the US Department of Justice which had criminal enforcement authority.

23. In September 2018 the SEC had passed a cease-and-desist order against the US parent levying a civil penalty of USD 7.8 million. Thereafter, on August 02, 2021 the SEC had communicated to the assessee that he was rewarded with “28% of civil penalty” levied on the ex-employer and had acknowledged the efforts of the assessee in providing original information and assistance in the investigation.

Whether windfall gain?

24. In view of the facts as discussed above, the reward received by the assessee cannot be considered as a windfall gain. The whistleblower complaint was filed by the assessee with clear-cut expectation of receiving the advantage or profit with the help of two US counsels by utilising his professional knowledge about malpractices in medical equipment business. The fee to be paid to the two counsels was out of the reward received by the assessee. The assessee has relied upon the decision of Hon’ble Bombay High Court in the case of Mehboob Productions (P.) Ltd. (supra) and contended that the windfall represents a casual or unexpected advantage not attributable to business profit. It will be relevant here to reproduce the relevant part of the judgment of Hon’ble Bombay High Court in order to understand the real nature of windfall:

At this juncture a few words are necessary in order to appreciate the true nature of what, according to me, would be a “windfall”, having relevance to the question being considered by us. In the Oxford English Dictionary, volume II, the word “windfall” has been given the meaning of a casual or unexpected acquisition or advantage. Now, it has to be made clear that when we are talking of a windfall receipt in connection with the consideration of the question whether such receipt would be income or not, we will have to restrict the concept of such windfall to a case where the unexpectedness of the advantage pertains to the factum of receipt and not to the quantum of receipt. By reason of the exigencies of the economic situation or political or international situation a trader or a businessman or an industry may make unduly large profits which are often loosely expressed as windfall profits. But this is not the nature of the windfall we are contemplating. Where the element of windfall or unexpectedness pertains only to the quantum of receipt, such element will not have any bearing on the question we are considering and such receipt will be profit or income of the assessee although unusually large. What we are considering as “windfall” is some unexpected receipt not in the contemplation of the assessee and not directly attributable to or occurring by way of its business profits. To put it in other words, if the assessee had produced the picture, Mother India, or if it can even be said that it was producing motion pictures with the idea that they would be exempted from entertainment duty by the Government of Bombay and the amount attributable to the collections of entertainment duty would be paid over to the assessee, then such receipt, perhaps, may not be said to be a windfall received by the assessee. Similarly, if the assessee had produced a motion picture with a particular situation which becomes extremely successful commercially by reason of some extraneous fact, the extra profits received by the assessee or by the exhibitors may be called windfall profits loosely or in ordinary parlance, but would not be a “windfall” for our purposes. Where the obtaining of a particular advantage or receipt could not be said to be within the ordinary contemplation of the party obtaining or receiving it, then only would it be proper to characterise the advantage or receipt as a windfall. On the other hand, where there was clear expectation, though small, of receiving such advantage or profit, then it cannot be properly regarded as windfall merely because the advantage or receipt is much more than could have been reasonably contemplated.

That the advantage received must be attributable to some conscious process on the part of the assessee also appears to be implicit in the aspect of a “return”. Now, it must be made clear that when we talk of return in the context of this aspect of the question, we are not considering the return on any outlay or investment made by the assessee in the sense of capital employed. This may be one of the ways of securing a return, but not the only way. But, return will involve conscious outlay of resources or of effort or of talent. It is the consciousness of the effort made which invests the receipt with the character of a return and removes it from the category of a windfall. [Emphasis supplied.]

25. The Hon’ble Bombay High Court has held in the case of Mehboob Productions (P) Ltd. (supra), that a receipt qualifies as a windfall only when the unexpectedness pertains to the very factum of receipt and not merely to the quantum or timing of receipt. In the present case the assessee had consciously collected the evidences against the exemployer much before filing of the whistleblower complaint and had persistently pursued the matter through his legal counsels in US, in expectation of reward. The assessee had participated in the proceedings before US SEC, attended video conferences explaining the transactions and made available all the relevant information. With such sustained effort of collection of evidences and participation in the enquiry proceedings, the reward received by the assessee can’t be held as an unforeseen windfall. The reward received by the assessee was attributable to conscious efforts on the part of the assessee and was implicit in the process of whistleblower complaint filed by the assessee. There was clear cut expectation of receiving the advantage in the form of reward in the process of whistleblower complaint and it was not a windfall. The factum of receiving the reward was known and anticipated. Merely because the quantum of reward was at the discretion of the SEC, it cannot be held as a windfall gain.

26. In view of the facts as discussed above the reliance of the assessee on the decision of Hon’ble Bombay High Court in the case of Mehboob Productions (P) Ltd (supra), is found to be totally misplaced. The reward received by the assessee was not unexpected rather the entire effort of the assessee from the very beginning was to obtain reward by filing the whistleblower complaint. The assessee had meticulously planned his action, appointed U.S. counsels before filing of whistleblower complaint, pursued the matter through them, himself participated in the proceeding before SEC and the reward received by the assessee was an outcome of these combined efforts. In fact, SEC had acknowledged the fact that the assessee had provided more than limited assistance. The information provided by the assessee was not only significant but it was also acknowledged by SEC that participation of the assessee in interview with enforcement staff, his help in identifying key individuals and entities involved in the investigation, his help to focus investigation into Company’s conduct in India etc. had helped the Commission conserve significant time and resources. It was for this reason that the assessee was awarded 28% of the monetary sanction as reward whereas the other claimant was rewarded only 2%.

27. The reward was granted to the assessee by virtue of section 21F(d)(i) of Securities Exchange Act, wherein the whistleblower, who had voluntarily provided original information to the SEC that led to a successful enforcement of covered judicial or administrative action, was entitled to award between 10% to 30% of the monetary sanction. Thus, the factum of reward being between 10% and 30% of the monetary sanction was a certainty in the present case. The receipt of reward was entirely expected in factum, only the precise quantum and timing of the reward was uncertain. The assessee had engaged the two counsels in USA having legal expertise and with their payment term based on success-fee basis, in order to turn this uncertainty into certainty. Therefore, the reward received by the assessee cannot be held as a windfall gain.

Whether unsolicited reward?

28. The SEC’s whistleblower program was established to incentivize whistleblowers to report specific, timely and credible information about possible federal securities laws violations. The Commission is authorized to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action in which over $1 million in sanctions is ordered. The range for awards is between 10% and 30% of the money collected. The assessee was not eligible for reward merely on filing of whistleblower complaint with SEC. The process required a separate application to be made for claim of reward. The process of claiming reward as per website of US SEC is as under:

9. How do I apply for an award?

Once the case you believe your information led to is posted, you must complete and return Form WB-APP within 90 calendar days to the Office of the Whistleblower via email to FormWB-APPSubmission@sec.gov, by fax (703) 813-9322, or by mail to the address listed on OWB’s website. See Rule 21F-10. Deadlines for submissions to the Office of the Whistleblower that fall on a weekend or holiday will be extended to the next business day. Please send the Form WB-APP to OWB using only one method of transmission. Duplicate applications sent in multiple ways can cause a delay in processing the award claim.

29. Thus, one is required to make an application in Form WB-APP within 90 calendar days from the date of Notice for Covered Action is posted by the SEC for claiming reward from US SEC. A ‘Notice for Covered Action’ is a public notice issued by the US Securities and Exchange Commission under its whistleblower program informing potential whistleblowers that the SEC has obtained a qualifying enforcement result and that the eligible persons may now apply for a whistleblower award. Further, under section 21F of the US Securities Exchange Act and SEC Rules a “covered action” means an SEC judicial and administrative action in which monetary sanctions exceeding US$ 1 million have been ordered. After such an order becomes final, the SEC posts a Notice of Covered Action on the SEC whistleblower website. US SEC can’t grant whistleblower award unless the claimant files Form WB-APP within the prescribed time after publication of the notice of covered action. If no WB-APP is filed within the stipulated time, the claim is usually barred and the claimant is deemed to have waived the claim for award. Further, one can also file an appeal against SEC’s decision to deny the reward. The process of filing appeal is explained as under:

17. Can I appeal the SEC’s award decision?

OWB will notify you of the preliminary determination of the SEC’s Claims Review Staff (“CRS”) to recommend that the SEC either grant or deny your award application, and if granted, the percentage amount of your award. You may request reconsideration of this preliminary determination by submitting your response to OWB within 60 days of the later of (i) the issuance of the preliminary determination or (ii) your receipt of the record that was relied upon in making the preliminary determination, if you requested the record within 30 days of the issuance of the preliminary determination. See Rule 21F-10. Please note there are shorter time periods if your claim was subject to the Preliminary Summary Disposition process established by Rule 21F-18. Deadlines for submissions to the Office of the Whistleblower that fall on a weekend or holiday will be extended to the next business day.

The CRS will consider your response and forward its proposed final determination to the Commission. If the Commission denies your application for an award, you may file an appeal in an appropriate United States Court of Appeals within 30 days of the Commission’s final decision being issued. See Rule 21F-13. However, if you are granted an award and the Commission follows the factors described above and the total amount awarded is between 10 and 30% of the monetary sanctions collected in the action, then the Commission’s decision is not appealable. [Emphasis supplied.]

From the process as explained above, it is evident that the decision of the US SEC regarding reward can be challenged in the US Court of Appeals, except in the case where the reward was given between 10% to 30% of the monetary sanctions collected. The process of claiming the reward, right of the whistleblower over the eligible reward and right to challenge the decision of the Commission over the reward, as discussed above, makes it crystal clear that the payment of reward by US SEC to the assessee, was neither voluntary nor gratuitous.

Reward v. Award : Quid Pro Quo

30. The assessee has strongly relied upon the decision of Hon’ble Delhi High Court in the case of Aroon Purie (supra) in support of his contention that the reward received by him was a capital receipt, akin to gift which has no element of quid pro quo. The facts of that case are found to be totally different. In that case the award was given by an independent foundation entirely of its own volition without any prior application, claim, request or participation by the recipient. There was complete absence of quid pro quo in that case. In the present case, however, there was a definite and unambiguous element of quid pro quo as the assessee had provided internal business secrets of his erstwhile employer, which was systematically traded in exchange for statutory monetary reward. Thus, the reward was not a gratuitous payment in the present case. Without the information provided by the assessee there would have been no enforcement action and thus the reward paid by SEC was directly attributable to the information provided and the efforts made by the assessee. The complaint filed by the assessee was not without any expectation of reward. Rather the assessee was fully aware about the reward scheme and made separate application for reward as per procedure discussed above and the payment made by him to his legal counsels was on the basis of percentage of the reward received. Thus, the present case squarely falls within the taxable category as held by Hon’ble Delhi High Court in the case of Aroon Purie (supra). In fact, the judgement in that case rather supports the case of the Revenue as the Hon’ble High Court in para-36 had observed as under:

36……It may be unwritten and overtly voluntary, but gifts or payments received as a norm and a convention, are taxable income. Periodicity is a good indicator of what may be income as it can denote and manifest the causa causans between the “act” of the assessed and the earning. However, periodicity is not determinative in all cases, for one solitary instance of receipt can be income. Similarly, expectation of reward even when there is no obligation would be income; but if a person performs an action unaware that the other person would reward him, the receipt may not be towards or for a service rendered, unless there is an element of quid pro quo. [Emphasis supplied.]

31. In the present case the entire activity of the assessee as already discussed earlier was in expectation of reward only and there was clear cut element of quid pro quo. Therefore, the reward received by the assessee was taxable as held by the Hon’ble Delhi High Court in that case.

Whether capital receipt?

32. The other contention of the assessee is that the reward received by him was a capital receipt. In order to find out the nature of a receipt, one has to see its nature in the hands of the receiver, not its nature in the hands of the payer. Merely because the reward is a one-time event it cannot be held as a capital receipt. The reward in the present case was not a completely unsolicited personal gift. It was given under a defined Scheme and was linked to the specific and actionable information as well as substantial help provided by the assessee. There was clear cut element of quid pro quo and an enforceable expectation of reward in the present case. The reward was given considering the usefulness of the information, and based on the quantum of civil penalty recovered. A mere label of reward on the receipt does not make it capital in nature.

33. Hon’ble Supreme Court has held in the case of P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC) that “If any business, profession or vocation in fact produces an income, that is taxable income and none the less because it was carried on without the motive of producing any income.” The Hon’ble Supreme Court has further held in that case that the activity of vocation may not be an organized activity and a single act may constitute vocation. To quote from the order:

We do not appreciate the significance of saying that in order to become a vocation an activity must be organised. If by that a continuous, or as was said, a systematic activity, is meant we have to point out that it is well-known that a single act may amount to the carrying on of a business or profession.

In the present case the single act of the assessee providing information to SEC in anticipation of reward can be treated as his vocation and the reward received in the process becomes his taxable income. The reward received by the assessee by no stretch of imagination can be categorized as a capital receipt.

34. The reward received by the assessee was not in the nature of a testimonial. The causa causans of reward in the present case is directly relatable to the carrying on of vocation as a whistleblower. It is not at all connected and linked with the personal achievements and personality of the person i.e. the assessee. The payment was made by the authority associated with the “vocation/profession” being carried on by the assessee. The reward was not paid by any third person but by the entity who had utilized the information provided by the assessee and was intrinsically connected with the “vocation/profession” of the assessee. It was not payment of a personal nature and, therefore, it can’t be treated as capital payment, being akin to or like a gift, which does not have any element of quid pro quo. The reward was not a voluntary payment at all. Considering these tenets of the receipt, the reward received by the assessee can’t be held as a capital receipt.

35. The assessee while drawing parallel with the case of Aroon Purie (supra) has contended that the tests laid down in para 41 of the said judgement were applicable in his case as well. In order to examine the contention of the assessee, it is relevant to reproduce para-41 of the said judgement.

41. When we apply the aforesaid test to the present receipt, it has to be held that the said amount would be a capital receipt, being purely in the nature of a testimonial. The causa causans in the present case is not directly relatable to the carrying on of vocation as a journalist or as a publisher. It is directly connected and linked with the personal achievements and personality of the person i.e. the appellant. Further, it is to be noted that the payment in this case was not of a periodical or repetitive nature. The payment was also not made by an employer; or by a person associated with the “vocation” being carried on by the appellant; or by a client of his. The prize money has in the instant case been paid by a third person, who was not concerned with the activities or associated with the “vocation” of the appellant. It being a payment of a personal nature, it should be treated as capital payment, being akin to or like a gift, which does not have any element of quid pro quo. The aforesaid prize money was paid to the assessee on a voluntary basis and was purely gratis.

36. We have carefully considered the observation of the Hon’ble Delhi High Court in para-41 of the judgement. It is found that the assessee fails on many of the parameters as mentioned therein. In that case it was held that the award was not connected with recipient’s vocation as journalist or a publisher. The assessee has contended that he too was not engaged in vocation or profession of whistleblowing. However, from the agreement of the assessee with WAF, it is evident that WAF was engaged to assist and advise the assessee in respect of whistleblower complaint with various enforcement authorities, including SEC. Thus, the assessee was certainly engaged in vocation/profession of giving information to Government agencies which is titled as ‘whistleblowing’. In the case of Aroon Purie (supra), the award was linked with personal achievement wherein in the present case the reward has been given to the assessee in exchange of information of FCPA violation and there is a clear-cut element of quid pro quo. In the case of Aroon Purie, the award was paid by an independent foundation unrelated to profession and without making any application. In the present case, however, the reward was payable only on making an application after Notice for Covered Action is posted by the SEC and accordingly the assessee must have made a specific application for grant of reward. Further, the reward was granted by the authority who was handling such complaints and was thus connected with the vocation of the assessee. The award given in the case of Aroon Purie was in the nature of testimonial and no service was rendered for obtaining the award. On the other hand, in the present case, the assessee had provided the information and rendered services which was duly acknowledged by the SEC while sanctioning the reward. In view of these material differences, the ratio of the decision of Hon’ble Delhi High Court in the case of Aroon Purie (supra) is not found applicable at all in the present case and the reward received by the assessee cannot be treated as capital receipt.

Nature of receipt

37. The assessee has contended that the whistleblower reward is granted within a highly uncertain and discretionary framework and probability of reward is exceedingly limited. According to the assessee approximately 76% of the final order issued by SEC were denial orders. Under the circumstances, the success-based fee arrangement with US counsels cannot be held to be a planned and commercial structured venture. According to assessee, the Revenue’s contention that the assessee had entered into a planned profit-making venture was entirely misconceived. We do agree that the activity of the assessee cannot be considered as a planned profit-making venture only on the basis of success-based fee arrangement with the US counsels. However, from the Form TCR it is evident that the assessee had made systematic effort to identify and collect evidences of FCPA violation by his ex-employer. He had not only actively and deliberately identified a FCPA violation but also collected evidences in respect of supply made to various hospitals and identified the employees and the physicians along with details of gratification provided to them. The assessee had also clandestinely audio recorded the conversations of the employees and the doctors. Further, the agreement made with WAF was not only for filing whistleblower complaint with US SEC, but also with other agencies such as US Commodity Futures Trading Commission, US IRS and other federal and state agency as well. The whistleblower complaint made by the assessee was not only a call of conscience and his value system but it was equally guided by the profit motive of getting reward from various agencies. Had it not been so, the assessee would not have made claim for reward by filing separate Form WB-APP for reward within 90 days. Had the assessee been really guided by the call of conscience and value system, he wouldn’t have filed Form WB-APP and would have waived the reward. The facts as discussed above and also earlier in the order, clearly establish that the assessee had entered into an adventure in the nature of vocation and the receipt from such an enterprise was certainly taxable under the provisions of the Act.

Taxability of reward

38. On the issue of taxability, the assessee has contended that the provision of section 56(2)(x) of the Act was not applicable to the facts of the present case. According to the assessee, the statutory reward granted under section 21F of SEC Act by the US SEC was in recognition of the information provided by the assessee and, therefore, it cannot be regarded as gratuitous receipt. According to the assessee, section 56(2)(x) was introduced as an anti-abuse provision to tax disguised gifts or gratuitous transfers of money or property and not to tax statutory rewards granted under regulatory schemes. Regarding the submission of the Revenue that the reward was taxable under section 56(1) of the Act, the assessee has reiterated that the residuary provision u/s 56(1) cannot be invoked in the present case as the reward was a mere windfall gain and a capital receipt. According to the assessee, when the lower authorities had made the addition u/s 56(2)(x) of the Act, the Revenue cannot seek to sustain the addition on an entirely new basis u/s 56(1) of the Act.

39. We have already discussed earlier and rejected the contention of the assessee regarding the receipt being a windfall gain and a capital receipt. The reward received by the assessee is neither found to be windfall gain nor a capital receipt. The reward given by US SEC was subject to federal and state taxes in USA. Though the taxability of the reward in the USA may not be a material factor to examine their taxability under the provisions of the Act; the taxability of identical reward received from the enforcement agencies in India, is certainly a relevant factor to examine. In the scheme brought by CBDT regarding payment of reward to Income-tax informants, the reward depends upon the usefulness of information, actual tax recovered and such rewards are taxable as regular receipt. The scheme does not provide that the reward is exempt from Income-tax. Rather, it is categorically mentioned in the reward scheme that the reward has not been notified u/s 10(17A)(ii) of the Act as yet and so it is not tax-free. Thus, the reward received from the Income Tax Department by the whistleblower, being taxable under the provisions of the Act, is certainly in the nature of revenue receipt.

40. Section 10(17A) of the Act, specifically exempts awards given in public interest by the Central Government or State Government or bodies approved by Central Government. Thus, the legislature has provided a limited exemption only for Government sanctioned awards. There is no quarrel to the fact that the reward received by the assessee from US SEC was not exempt under the provisions of Section 10(17A) of the Act. In India, reward is given to informants who provide information to various enforcement agencies viz. Income Tax Department, GST, Central Excise, Customs etc. These reward schemes do not provide that the reward received is exempt from tax. The CBDT reward schemes only provide for grant of reward, they do not declare the reward to be tax free. The exemption under section 10(17A) of the Act applies only to certain approved awards/ decorations in public interest and Income Tax informant rewards are not covered by that provision. In the case of CIT v. J.C. Malhotra [1998] 230 ITR 361 (Delhi), the Hon’ble Delhi High Court had held that the reward given to an Income Tax Officer is his taxable income. Similarly, in the case of CIT v. S.N. Singh 192 ITR 306 (Patna), the Hon’ble Patna High Court had held as under:

From a perusal of the provisions of section 10(17B) it is clear that a payment made as reward by the State or the Central Government is not includible in computing total income only when the reward is for such purposes as may be approved by the Central Government in this behalf in the public interest.

It was no doubt true that the payment had been made by the Central Government to the assessee as a reward and that the said payment was also in the public interest. But there was no material on record for holding that the purpose for which the reward in question had been given had been approved by the Central Government in public interest for the applicability of clause (17B) of section 10. Therefore, such reward would not qualify for exemption under section 10(17B). The Tribunal was, therefore, wrong in allowing the assessee’s claim.

Since the reward received by the assessee from US SEC was not notified as exempt category under section 10(17A) of the Act, the AO had rightly held it as taxable income of the assessee.

41. The AO had invoked the provision of Section 56(2)(x) of the Act to tax the reward received by the assessee from US SEC. As per that section, any amount received in excess of Rs.50,000/- from any person without consideration, is liable to tax. According to the assessee, the provision of this section was not applicable as the reward received was not ‘without consideration’. The assessee has, however, not explained as to what consideration was paid by him to receive the reward. Even if the information supplied by the assessee and the support and assistance rendered by the assessee in the course of inquiry is held as ‘consideration’ the fact remains that the reward received by the assessee was certainly taxable under the provision of section 56(1) of the Act, which is a residuary charging provision. As per section 56(1) of the Act “Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14,.”The reward received by the assessee was not chargeable to tax under the other heads viz. salary income, income from house property, business income or capital gains. Therefore, the reward received by the assessee was certainly taxable income as “income from other source” u/s 56(1) of the Act.

42. The contention of the assessee that the Tribunal cannot examine the taxability of the reward under a different section cannot be accepted. The provision of Section 254(1) of the Act, makes it categorical that the Appellate Tribunal may pass such orders as it deems fit. The reward received by the assessee was certainly without consideration as no monetary value can be attached to the information supplied by the assessee. Even if the information and help provided by the assessee to SEC is considered as “intangible consideration”, the reward received by the assessee was certainly taxable under section 56(1) of the Act, if not under section 56(2)(x) of the Act.

43. In view of the facts as discussed above, we are of the considered opinion that the AO had rightly held the amount of Rs.8,16,27,000/-received by the assessee as reward from US SEC as his taxable income. Accordingly, the order of the AO is upheld and the ground taken by the assessee is dismissed.

44. The other grounds pertain to levy of interest u/s. 234B and 234D of the Act, which are consequential in nature, and are dismissed.

45. In the result, the appeal of the assessee dismissed.

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