2000 (6) TMI 797 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of ex gratia payment as salary.
2. Nature of the ex gratia payment (capital receipt vs. taxable compensation).
3. Levy of interest under section 220(2).

Issue-Wise Detailed Analysis:

1. Taxability of Ex Gratia Payment as Salary:
The primary issue in both appeals was whether the ex gratia payments of Rs. 1,00,000 received by the assessee from his former employer were taxable as salary. The CIT(A) held that these payments were in the nature of salary, treating them as compensation for services rendered during the assessee's employment, thus taxable under section 17(3) of the Income Tax Act. The CIT(A) emphasized that the payments were linked to the assessee's meritorious services and loyalty during a difficult period for the company, and they were recorded as remuneration in the company's books, subject to tax deduction at source.

2. Nature of the Ex Gratia Payment (Capital Receipt vs. Taxable Compensation):
The assessee contended that the ex gratia payments were capital receipts, not chargeable to tax, arguing that they were made in appreciation of his personal qualities and attributes, not as compensation for services rendered. The assessee cited Supreme Court and Calcutta High Court decisions to support his claim. The Tribunal examined the letter dated 7th April 1989, from the managing director, which stated that the payments were in recognition of the assessee's personal qualities and attributes. The Tribunal found that the payments were voluntary, made in appreciation of the assessee's loyalty and sincerity, and were not linked to his employment contract. Therefore, the Tribunal concluded that the ex gratia payments were not taxable as compensation but were capital receipts.

3. Levy of Interest Under Section 220(2):
In the assessment year 1991-92, the assessee raised an additional ground regarding the levy of interest under section 220(2) amounting to Rs. 2,715. The CIT(A) did not decide on this issue as no such interest was levied in the assessment order. The assessee's counsel did not press this ground during the hearing, and it was dismissed as not pressed.

Conclusion:
The Tribunal allowed the appeal for the assessment year 1990-91, holding that the ex gratia payments were capital receipts and not taxable as compensation under section 17(3). For the assessment year 1991-92, the appeal was partly allowed, with the ground regarding the levy of interest under section 220(2) being dismissed as not pressed.