2010 (9) TMI 170 - HC - Income Tax

Profits in lieu of salary (Section 17 (3) of the Income-Tax Act) - retirement benefits at the time of his retirement - employer had deducted the tax at source - Held that - employer agreed to pay in its discretion Rs. 35 lacs as an exceptionable and one off ex-gratia payment- It, therefore, clearly partakes the character of voluntary payment and cannot be termed as payment by way of compensation - the receipt of this payment by him would not be covered under clause (i) of sub section (3) of Section 17 of the Act - appeal of the revenue is dismissed

Summary

Issues Involved:
1. Whether the amount of Rs. 35 lakhs received by the assessee was chargeable to tax under Section 17(3) of the Income-Tax Act as "profits in lieu of salary".

Issue-wise Detailed Analysis:

1. Nature of the Payment:
The primary issue was whether the Rs. 35 lakhs received by the assessee upon retirement was taxable under Section 17(3) of the Income-Tax Act as "profits in lieu of salary." The Assessing Officer considered this amount as "compensation" for services rendered, thus taxable under Section 17(3)(i). The assessee argued that the payment was ex-gratia, voluntary, and not in connection with the termination of employment.

2. Interpretation of Section 17(3):
Section 17(3) defines "profits in lieu of salary" and includes:
- (i) Compensation received in connection with the termination or modification of employment terms.
- (ii) Payments from an employer or a provident fund, excluding certain specified payments.
- (iii) Amounts received before joining or after cessation of employment (added w.e.f. 1st April 2002).

3. Tribunal's Findings:
The Income Tax Appellate Tribunal (ITAT) held that the Rs. 35 lakhs was not taxable under Section 17(3)(i) as it was voluntary and at the employer's discretion. The Tribunal noted that the payment was not a vested right of the assessee and was not contingent upon his resignation.

4. Legal Definitions and Precedents:
The court referred to definitions of "compensation" from the Oxford Dictionary and Black's Law Dictionary, emphasizing that compensation implies a right to receive payment for loss or injury. The court cited previous judgments (Lachman Das vs. CIT, Commissioner of Income Tax vs. Jamini Mohan Kar, and Commissioner of Income Tax vs. Ajit Kumar Bose) which held that voluntary payments without a vested right are not taxable as "profits in lieu of salary."

5. Analysis of the Employer's Letter:
The court examined the employer's letter dated 25th January 2001, which stated the payment was "exceptional and one off ex-gratia" and at the management's discretion. The Tribunal interpreted this as a voluntary payment, not a compensation for services rendered.

6. Distinction Between Clauses (i) and (iii):
The court highlighted the difference between "compensation" in clause (i) and "amount" in clause (iii). Clause (iii) would cover such payments but was not applicable for the relevant assessment year as it was inserted later.

7. Conclusion:
The court concluded that the Rs. 35 lakhs was a voluntary, ex-gratia payment and not compensation. Therefore, it did not fall under Section 17(3)(i) and was not taxable as "profits in lieu of salary."

Judgment:
The court answered the question in the negative, holding that the amount received was not "profits in lieu of salary" and thus not taxable. The revenue's appeal was dismissed.