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TMI Blog2025 (1) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the income tax authorities erred in taxing the severance fee received on termination of employment under the compulsory retirement service scheme which is the compensation for loss of the source of income, is in the nature of capital receipt. 3. On the fact and circumstances of the case and under the provisions of the law, the income tax authorities violated Article 14 of the Constitution of India by treating unequally against the other assessees, wherein, the fact and question of the law were the same and similar. 4. On the fact and circumstances of the case and under the provisions of the law, the income tax authorities erred in taxing the severance fee, which is compensation received for loss of the source of income though the Hon'ble Delhi High Court held that such severance fee is in the nature of capital receipt. 5. On the fact and circumstances of the case and under the provisions of the law, the CIT(APPEAL), ADDL/JCIT (A) 1, Chandigarh erred in sustaining the order passed u/s 154 of the Income Tax Act, 1961 passed by the C.P.C, which was against the provisions of law and judicial precedence. 6. For these and other reasons which may be adduced at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts comes under the definition of "Profit in lieu of salary" as per provision of section 17(3)(i) of the Act which provides that the amount of any compensation due to be received by an assessee from his employer or former employer at or in connection with the termination of his employment or modification of the terms and conditions relating thereto will be included in the profit in lieu of salary and the same is chargeable to tax as salary income. Further, the Ld.CIT(A) held that the principles governing capital and revenue receipts are not relevant in lieu of the express provision regarding chargeability of the same. 6. Aggrieved by the order of the Ld.CIT(A), the assessee has filed the present appeal before the Tribunal. Further the AR of the assessee has also filed a written submission on 06/12/2024 along with the copy of the Order of the ITAT, "SMC" Bench, Ahmedabad in the case of Sudhakar Ratan Shanker Gautam Vs. The ITO, Ward-1(1)(3), Ahmedabad in ITA No. 1033/Ahd/2024 dated 03/10/2024. 7. The solitary issue that is raised is whether the Ld.CIT(A) is justified in confirming the severance fee received by way of compensation on voluntary retirement under the Compulsory Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year. Explanation 1.-For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. Explanation 2.-Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section. ""Salary", "perquisite" and "profits in lieu of salary" defined. 17. For the purposes of sections 15 and 16 and of this section,- (1) "salary" includes- (i) wages ; (ii) any annuity or pension ; (iii) any gratuity ; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages ; (v) any advance of salary; (vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part `A' of the Fourth Schedule; and (vii) the aggregate of al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income tax v. E.D. Sheppard reported in (SC) (1963) 48 ITR 237, the expression "Compensation for termination of employment used in section 17(3)(i) of the Act refers to any payment made, whether under a legal liability or voluntarily, to compensate or act as a solatium fot the loss of employment suffered by the employee. If the object of the payment is unrelated to the relation between the employer and the employee, it would not fall within the expression "Profit received in lieu of Salary" in Explanation 2 to section 7(1) of the 1922 Act.[ corresponding to section 17(3)(i) of the 1961 Act.] In the present case the object of payment of compensation is related to the relation between the employer and the employee then in our opinion it will certainly fall within the expression "Profit received in lieu of Salary". 10.3 Further the Jurisdictional Hon'ble High Court of Karnataka in the case of CIT v. Surendra Prabhu [2005] 279 ITR 402 (Kar.) has held that The expression 'profits in lieu of salary' has to be understood as comprehending not only such things as they signify to their nature and import but also those things which the interpretation clause declares that they shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment; or the Central Government; or an Institution having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette specify in this behalf; or such Institute of Management as the Central Government may by notification in the Official Gazette specify in this behalf; exempt from income-tax, at the time of his voluntary retirement or termination of his service, in accordance with any Scheme or Schemes of voluntary retirement or in the case of public sector company referred to sub-clause (1), a scheme of voluntary separation, to the extent that such amount does not exceed five lakh rupees. The second proviso to this sub-clause provides that where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year. Chapter IV of the Act provides for computation of total income. Section 14 of the Act classifies the chargeable income into various heads of income, such as salaries, income from house property, income from business or profession, capital gains and income from other sources. Section 15 of the Act d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sites, and (iv) profits in lieu of or in addition to salary. In common parlance, fees, commissions, perquisites or payments of profits in lieu of salary may not be considered to be salary, but by this inclusive definition of the word "salary", a further inclusive definition is given to the word "perquisite", with which we are not concerned in these appeals. Thereafter clause (3) provides for an inclusive definition of the phrase "profits in lieu of salary". Subclause (i) of clause (3), inter alia, includes the amount of any compensation received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto. The inclusion of this amount of compensation has a direct connection with the employment or the terms and conditions relating thereto... ." (p. 151) [Emphasis supplied] 22. Having noticed the meaning assigned by the Apex Court of the term 'salary', in our view, it would be appropriate to notice the provisions of section 17(3) of the Act, which in our view, is the section which would assist to answer the issue, which we have framed for our determination in these app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms and conditions relating thereto." The expression "compensation" is explained by the Apex Court in the case of E.D. Sheppard ( supra). Though the decision was rendered prior to the amendment of section 7 of 1922 Act with effect from 1955, still the meaning assigned to the word can be usefully applied to understand the meaning of the expression 'compensation'. By a majority view, the Court has observed, "that 'compensation' in Explanation 2to section 7(1) of the Income-tax Act does not mean compensation which is payable or compellable at law. Compensation for loss of employment is a well known term. It means a payment to the holder of an office as compensation for being deprived of profits to which as between himself and his employer he would, but for an act of deprivation by his employer or some third party such as the Legislature, have been entitled." Proceeding further, the Court has observed : "That if the object of the payment was not related to the relation between the employer and the employee, it would not fall within the expression "profit received in lieu of salary" in Explanation 2 to section 7(1)." Even the dissenting note expressed by Justice Raghubar Dayal ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 17(1) of the Act covers any kind of remuneration received by or due to the employee irrespective of the fact that the payment is received during the period of employment or at the termination of employment. Terminal payments are not actually remu-neration for services rendered but are in the nature of compensation for the termination of employment. Such payments, in order to bring them within the tax net, have been given the character of "profits in lieu of salary" and are included in the salary income of the employee by virtue of section 17(1)(iv) of the Act. The expression "profits in lieu of salary" has to be understood as comprehending not only such things as they signify to their nature and import but also those things which the interpretation clause declares that they shall include. This expression cannot be under- stood to mean only such things, which the definition or interpretation clause declares that they shall include. 28. Section 17(3)(i) of the Act treats the amount of any compensation due to or received by an employee from his employer or former employer at or in connection with the termination of his employment as "profits in lieu of salary" and brings it with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ekar, has noticed the meaning of the expression 'termination' and in that, has observed that "termination of service" is broadly classified into those imposed by way of punishment and those which are not dismissal and removal are terminations. 'Termination' simpliciter refers to a termination in terms of the contract, otherwise than by way of punishment/penalty/ retrenchment. Another situation which is envisaged in the sub-section is, that, though the employee may continue with his employer, the terms and conditions of service may be rearranged or modified and under the modified terms and conditions, the employee may be paid a lump sum in consideration of the remuneration payable to him during the subsequent years of service being reduced. The lump sum so received by way of compensation would be regarded as profits in lieu of salary and would be taxable. In order to constitute the receipt of compensation as 'profits in lieu of salary' it must come from the employer or former employer. If the receipt or receipts happens to come from an outsider, it would not be covered by the term profits in lieu of salary. At this stage, it may be useful to refer some of the case laws referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order of the Tribunal in holding that the amount received by the assessee is taxable as salary. . . ." (p. 828) In Re. CIT v. G.V. Venugopal [2005] 273 ITR 3071, the Madras High Court has stated : "The word "salary" as defined in section 17 of the Act includes any profit in lieu of salary, which has been defined in section 17(3) of the Act to include any amount of compensation due or received by the assessee from his employer or former employer in connection with the termination of his employment. Hence, payment under the Voluntary Retirement Scheme is covered by the word "salary", which has been given a very wide definition in section 17. Since the assessee is covered by section 89, he will get both the benefits, which he has claimed for." (p. 319)" 10.4 Therefore, we agree with the view of ld. ADDL/JCIT(A)-1, Chandigarh as these severance compensation was made to the assessee at or in connection with the termination of his employment. Further the object of payment of compensation is related to the relation between the employer and the employee & therefore it will certainly fall within the expression "Profit received in lieu of Salary" as per the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and are generally not taxable, unless specified. In our Opinion considering the express provision of the Act, regarding the chargeability of the same, we find that there is no infirmity in the action of the authorities below in charging the alleged severance compensation of Rs. 19,45,734/- as salary. Further we humbly feel that the coordinate Bench had not considered the observations of the Apex Court in the case of Commissioner of Income tax v. E.D. Sheppard (cited supra) with regard to "Profit received in lieu of Salary" in Explanation 2 to section 7(1) of the 1922 Act. [corresponding to section 17(3)(i) of the 1961 Act.]. The co-ordinate ITAT bench had followed the decision of the Hon'ble Gujrat High Court where as we are bound by the observations as made by the Hon'ble Jurisdictional High Court of Karnataka which were reproduced above for ease of reference. 10.5 In view of the above we find no infirmity in the order of the ld. ADDL/JCIT(A)-1, Chandigarh in concluding that as severance compensation was made to the assessee at or in connection with the termination of his employment, it will fall within the expression "Profit received in lieu of Salary" as per the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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