The meaning of compensation under section 28 of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of compensation.
Meaning of compensation defined by court
The phrase ‘compensation’ used in section 28, 17 of the Income Tax Act came up before various high courts as detailed under :
1. Hon’ble Delhi High Court explained the meaning of ‘compensation’ while delivering judgment in CIT vs. D.R. Sondhi  114 taxman 259/248 ITR 695 (Delhi) as under :
Meaning : While in civil actions, the expression ‘compensation’ may have peculiar significance, the expression as used in the act does not appear to be susceptible to only that meaning and no other. The primary significance of the word ‘compensation’ is ‘equivalence’ and the secondary or more common meaning is ‘something given or obtained as an equivalent’.
The large number of ways in which this expression ‘compensation’ has been interpreted has one common factor running through them all, that is, that compensation is regarded as an equivalent or recompense, that which makes good the lack of variation of something else. Flowing from this concept, the enlargement of the meaning of this expression takes in that which compensates for loss or provision, amends, remunerates or recompenses.
2. Hon’ble Supreme Court explained the meaning of ‘compensation’ while delivering judgment in CIT vs. E.D. Sheppard  48 ITR 237 (SC) as under :
Meaning : Compensation’ does not mean compensation which is payable at law.
Section 28 of Income Tax Act
Profits and gains of business or profession.
28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession“,— (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ;
(ii) any compensation or other payment due to or received by,—
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto ;
(c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto ;
(d) any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business ;
(e) any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business;
(iii) income derived by a trade, professional or similar association from specific services performed for its members ;
(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) ;
(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India ;
(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) ;
(iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) ;
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;
(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm :
Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ;
(va) any sum, whether received or receivable, in cash or kind, under an agreement for—
(a) not carrying out any activity in relation to any business or profession; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:
Provided that sub-clause (a) shall not apply to—
(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession, which is chargeable under the head “Capital gains”;
(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.
Explanation.—For the purposes of this clause,—
(i) “agreement” includes any arrangement or understanding or action in concert,—
(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;
(ii) “service” means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging;
(vi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation.—For the purposes of this clause, the expression “Keyman insurance policy” shall have the meaning assigned to it in clause (10D) of section 10;
(via) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner15;
(vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD.
Explanation 1.—[Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.]
Explanation 2.—Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as “speculation business”) shall be deemed to be distinct and separate from any other business.
In this article, you can get guidance from high courts on the meaning of compensation under section 28 of the Income Tax Act.
Updated up to Finance Act 2021