2010 (9) TMI 170 - HC - Income Tax

Interpretation of Section 17(3) of the Income-Tax Act - profits in lieu of salary or not - Exigible to tax - payment made as compensation for services - in addition to normal retiral benefits at the time of retirement - Word compensation - HELD THAT - In the present case all dues which were admissible to the assessee on his resignation are otherwise paid by the employer to him. Therefore whatever terminal dues including earned salary etc. which were payable to the assessee in terms of contract or otherwise were paid to him. In addition the employer agreed to pay in its discretion Rs. 35 lacs as an exceptionable and one off ex-gratia payment . It is very clearly stated in the letter that management had agreed to pay this amount in its discretion. It was not compelled by any obligation to pay this amount which would assume the nature of any compensation . The amount is also described as not only exceptionable but ex-gratia. It therefore clearly partakes the character of voluntary payment and cannot be termed as payment by way of compensation . In fact the legislature wanted such type of payments also to be treated as income at the hands of the employees/persons and to tax them. Thus clause (iii) was inserted in Section 17 (3). This also implies that such a payment was not taxable before this amendment was carried out by inserting this clause w.e.f 1.4.2002. In so far as the assessee is concerned the receipt of this payment by him would not be covered under clause (i) of sub section (3) of Section 17 of the Act. We thus answer the question in the negative holding that the amount received was not profits in lieu of salary therefore not an income exigible to tax. Appeal 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.