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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 ..... .2024 vide DIN Order No.ITBA/APL/S/250/2024-25/1066175812(1) for the AY 2017-18, passed u/s 250 of the Income Tax Act, 1961 (in short The Act ). 2. The assessee has raised the following grounds of appeal: 1. The intimation CPC u/s 143(1) of the Income Tax Act, 1961 dated 19-03-2019, rectification order u/s 154 of the Income Tax Act, 1961 passed by CPC dated 27-09-2019 and the appellate order u/s 250 of the Income Tax Act, 1961 dated 28/06/2024 passed the income tax authorities below, were against the facts of the case and bad in law. 2. 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounting to Rs. 8,66,071/- not given while passing intimation U/s 143(1) of the Act. 4. Aggrieved by the order of the AO passed u/s. 154 of the Act dated 27/09/2019, the assessee has preferred an appeal before the Ld.CIT(A)/NFAC. 5. The ld. ADDL/JCIT(A)-1, Chandigarh dismissed the appeal of the assessee on the ground that appellant was an employee with the company and received an amount of Rs. 19,45,734/- as compensation on termination of his employment on which tax was also deducted as per the provision of section 192 of the Act. Further, in the opinion of ld. ADDL/JCIT(A)-1, Chandigarh, these receipts 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 regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e note of section 15, Section 17(1) of the Act as well as section 17(3)(i) of the Act for the purpose of this case which reads as under: Salaries. 15. The following income shall be chargeable to income-tax under the head Salaries (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of compensation amounting to Rs. 19,45,734/-. It is also undisputed fact that the employer has deducted tax at source on the said compensation on the termination of employment as per provision of section 192 of the Act treating the compensation as a part of Salary. 10.2 We are of the considered opinion that the compensation was made to the assessee at or in connection with the termination of his employment. As held by the Apex Court in the case of Commissioner 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 ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an employee of a public sector; or any other company; or a local authority; or a cooperative society; or a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956; or an Indian Institute of Technology within the meaning of clause (4) of section 3 of the Institute of Technology Act, 1961; or any State Government; 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of by him and other payments mentioned in sub-clauses (va), (vi) and (vii ). These sub-clauses (i) to (vii) of clause (1) indicates that the Legislature intended to include in salary the specified or named amount paid to the employee in respect of the services rendered by him. Sub-clause (iv) of clause (1) provides for inclusion of four types of payments in the word salary - (i) fees, (ii) commissions, (iii) perquisites, 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 direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butions. 24. Under sub-clause (1) of section 17(3) of the Act, the amount of compensation due to or received by an assessee from his employer at or in connection with the termination of his employment is regarded as profits in lieu of salary . The key words are, any compensation due to or received by an assessee from his employer or former employer at or modification of the terms 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of terms of service or the Rules or Regulations. When a termination is made in accordance with the contractual terms or the rules, it is known as termination simpliciter . Termination from service could be by way of compulsory retirement, voluntary retirement, resignation and superannuation. 27. Salary as defined by section 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tirement or on attaining superannuation. There is no justification to confine the meaning of the word termination only to cases of either voluntary retirement or on superannuation. A Division Bench of the Karnataka High Court in the case of Management of M.S. Ramaiah Medical College and Hospital v. Dr. M. Somashekar, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with the termination of his employment. The conditions prescribed under section 17(3)(i) of the Act are fully satisfied in this case and the amount of compensation received by the assessee is liable to be treated as salary and, therefore, we are of the view that there is no error 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts, which are generally not taxable unless explicitly brought within the tax net by specific provisions of the Act but on the other hand held that capital receipts, especially in the context of employment, typically relate to compensation for the loss of a source of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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