2015 (10) TMI 2434 - HC - Income Tax

Profits in lieu of salary - Taxability of amount received in accordance with the High Court Judgment under section 17(3) - Held that - Assessee s services came to be terminated by the order dated 6th May, 1984 under rule 44 of the relevant Service Rules after giving three months pay. Therefore, insofar as the obligation of the employer to pay any amount to the assessee in relation to the termination of his services, the same came to an end in view of the discharge of his services under rule 44. While the assessee succeeded in the writ petition filed by him, the letters patent appeal preferred by the employer came to be allowed. Therefore, the discharge of the assessee s services by the employer attained finality. However, during the pendency of the letters patent appeal, the assessee and the employer arrived at a settlement, in terms whereof, the amount was to be computed in the manner stated therein and was to be paid to the assessee. Therefore, the services of the assessee came to be terminated in terms of the rules, and the amount in question was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee in terms of the service rules. The employer, voluntarily at its discretion, agreed to pay the amount in question to the assessee with a view to bring an end to the litigation. There was no obligation cast upon the employer to make such payment and, therefore, the same would not take the colour of compensation as envisaged under section 17(3)(i) of the Act. The amount in question would, therefore, not fall within the ambit of the expression profits in lieu of salary as contemplated under section 17(3)(i) of the Act. - Decided in favour of assessee.

Issues Involved:
1. Whether the amount of Rs. 3,51,308/- received by the appellant was income liable to tax under section 17(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of the Amount Received by the Appellant:
The primary issue revolves around whether the amount of Rs. 3,51,308/- received by the appellant qualifies as "income" under section 17(3) of the Income Tax Act, 1961. The appellant, assessed as an individual, received this amount as ex-gratia compensation on premature cessation of services. The appellant argued that this amount was a capital receipt and not liable to tax since it was not paid as retrenchment compensation under labor laws or the terms of employment. The Assessing Officer, however, considered it as compensation in lieu of salary under section 17(3) of the Act and added it to the total income.

2. Tribunal's Findings and Appellant's Argument:
The Tribunal held that the amount was taxable under section 17(3) of the Act, which includes any compensation received by an assessee from his employer or former employer at or in connection with the termination of employment. The appellant contended that the amount was paid voluntarily and not due to any obligation on the part of the employer. The appellant relied on decisions from the Calcutta High Court and the Delhi High Court, which held that ex-gratia payments are not taxable as "profits in lieu of salary."

3. Respondent's Argument:
The respondent argued that the compensation was paid in connection with the termination of employment and thus falls within the ambit of section 17(3) of the Act. The respondent pointed out that the amount was calculated based on the last pay and allowances drawn, indicating its connection to the termination of employment.

4. Legal Provisions and Relevant Facts:
Section 2(24) of the Act defines "income" to include profits in lieu of salary taxable under section 17(3). Section 17(3) includes any compensation received by an assessee from his employer at or in connection with the termination of employment. The Tribunal noted that the payment was not an ex-gratia payment but was connected to the termination of employment.

5. Court's Analysis and Judgment:
The court analyzed the nature of the payment and the legal provisions. It referred to the decisions of the Calcutta High Court and the Delhi High Court, which held that voluntary payments without any obligation are not taxable as "profits in lieu of salary." The court found that the appellant's services were terminated under rule 44 of the Service Rules, and the employer had no further obligation to pay any amount. The payment was made voluntarily to settle the litigation and was not compensation as envisaged under section 17(3)(i) of the Act.

6. Conclusion:
The court concluded that the amount received by the appellant was not taxable under section 17(3) of the Act as it was a voluntary payment without any obligation on the part of the employer. The Tribunal's order was quashed, and the order of the Commissioner (Appeals) deleting the addition made by the Assessing Officer was restored. The appeal was allowed in favor of the appellant.

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