2005 (2) TMI 70 - HC - Income Tax

Whether the compensation paid by a non-resident Mehta Group for loss of employment in India was profits in lieu of salary/within the meaning of the expression in section 17(3)(i) and therefore taxable as salary under section 15? - Till the insertion of clause (iii) in section 17(3) such an amount received by an assessee namely from a person who is not an employer either before or after cessation of employment with that person is not taxable. In the circumstances the Tribunal was not justified in holding that the amount of compensation was taxable under the head Salaries within the meaning of the phrase profits in lieu of salary . - Whether the Tribunal was right in law in taxing in the hands of the assessee Rs. 7, 500 paid to advocate Shri Raval for his services in respect of Girnar Scooter Project? - It is not possible to accept the finding of the Tribunal that the amount of Rs. 7500 was application of income or that it was not expended wholly and exclusively for the purposes of making or earning income. -Both questions are answered in the negative i.e. in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Taxability of compensation of Rs. 30,000 as "profits in lieu of salary" under section 17(3)(i) of the Income-tax Act, 1961.
2. Deductibility of Rs. 7,500 paid to an advocate under section 57(iii) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Compensation of Rs. 30,000:
The primary issue was whether the compensation of Rs. 30,000 received by the assessee from the Mehta Group for loss of employment in India was taxable as "profits in lieu of salary" under section 17(3)(i) of the Income-tax Act, 1961. The Tribunal held that the amount was taxable under the head "Salaries" as it was "profits in lieu of salary." The assessee contended that the compensation was not taxable under the head "Salaries" since it was not received from an employer or former employer but from a third party (Mehta Group International Ltd., Projects Division). The court noted that section 17(3)(i) defines "profits in lieu of salary" to include compensation received from an employer or former employer in connection with the termination of employment. Since the compensation was received from a third party and not the employer or former employer, it did not fall within the definition of "profits in lieu of salary." The court also referenced the amendment effective from April 1, 2002, which included compensation from any person, but clarified that this was not applicable to the assessment year in question. Therefore, the court concluded that the amount of Rs. 30,000 was not taxable under the head "Salaries."

2. Deductibility of Rs. 7,500 Paid to an Advocate:
The second issue was whether the amount of Rs. 7,500 paid to advocate Shri N.U. Raval for services rendered in relation to the Girnar Scooter Project was deductible under section 57(iii) of the Income-tax Act, 1961. The Tribunal disallowed the deduction, holding that the amount was not expended wholly and exclusively for the purpose of making or earning income. The assessee argued that the payment was necessary to render a complete report to the Gujarat Small Industries Corporation (GSIC) and had a direct nexus with earning the income. The court examined section 57(iii), which allows deductions for expenditures incurred wholly and exclusively for the purpose of making or earning income. It referenced the case of Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659, which laid down tests for determining the allowability of such deductions. The court found that the expenditure of Rs. 7,500 met the requirements of being laid out wholly and exclusively for earning income and was not merely an application of income. Therefore, the court concluded that the deduction was wrongly disallowed by the Tribunal and should be allowed under section 57(iii).

Conclusion:
The court answered both questions in favor of the assessee and against the Revenue. The compensation of Rs. 30,000 was not taxable under the head "Salaries," and the deduction of Rs. 7,500 paid to the advocate was allowable under section 57(iii). The reference was disposed of accordingly with no order as to costs.