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Issues: Whether the amount received by the assessee can be treated as profits in lieu of salary under section 17(3) of the Income-tax Act, 1961.
Summary: During the accounting period for the assessment year 1970-71, the employer terminated the services of the assessee by giving three months' notice and paid him a sum of Rs. 24,933 in addition to salary and notice period pay. The Tribunal found that this amount was a capital receipt and an ex gratia payment, not compensation under section 17(3) of the Act, as it was voluntarily paid without any obligation. Section 17 of the Act deals with salary, perquisite, and profits in lieu of salary, where clause (3) includes compensation received by an assessee from the employer in connection with termination of employment. The amount in question was received by the assessee in connection with termination, but it was deemed ex gratia by the employer, indicating it was not paid as compensation for termination. The employer's letter specified the payment as ex gratia, and the assessee had no guaranteed employment up to a certain age, making the payment voluntary and not an obligation. Therefore, the payment was not considered profits in lieu of salary under section 17(3) and was not taxable as such. The judgment favored the assessee, ruling that the amount received could not be treated as income under the relevant sections. The question of law posed whether the amount could be treated as income under the charging section or for income computation was answered in the negative, in favor of the assessee and against the Department. The judgment concluded without any order as to costs, with agreement from the other Judge.
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