COMMISSIONR OF INCOME TAX vs. DEEPAK VERMA

Whether Reporters of Local newspapers may be allowed to see the Judgment?

To be referred to the Reporter or not?

Whether the Judgment should be reported in the Digest?

On the same day, with the consent of the learned counsel for the parties, arguments were also finally heard. The genesis, in formulation of the aforesaid question, lies in the following facts:

The respondent is an individual who filed his income tax return f h 200 02 2 th l 200 d l i hi 2010:DHC:4538-DB

It is the common case of the parties that Section 17 (3) (iii) of 2010:DHC:4538-DB

Chapter-IV deals with computation of total income from salaries. It starts with Section 14 which enumerates various heads of income. The first among them is „salaries‟. Section A of Chapter-IV, which consists of Section 15 to 17, deals with computation of income under the head „Salaries‟. Section 15 of the Act enumerates various kinds of receipts by employees which are treated as income chargeable to income tax under this head. It includes not only the „salary‟ simplicitor but also the perquisites etc. as well. Section 16 of the Act permits certain deductions from the income chargeable under this head. Section 17 of the Act defines three important terms namely „salary‟, „perquisites‟ and „profits in lieu of salary‟. Sub Section (1) of Section 17 of the Act defines certain payments which are included in the term „salary‟. These are wages, pension, gratuity, any fees, commission as well as perquisites or profits in lieu of or in addition to any salary or wages. Sub section (2) specifies various components of the „perquisite‟. Here we are concerned with sub Section (3) which gives the meaning to the expression „profits in lieu of salary‟. If the payment received falls under this expression, it has to be treated as salary and would be chargeable to tax under Section 15 of the Act. Sub Section (3) reads as under:- “(3) “profits in lieu of salary” includes- (i) The amount of any compensation due to or 2010:DHC:4538-DB

It is the common case of the parties that Clause (ii) does not apply. Further, though Clause (iii) would squarely cover the nature of payment received by the assessee, that did not exist in the relevant assessment year and was incorporated only w.e.f. 1st April, 2002.Therefore, this provision is not applicable either. For this reason, attempt of the Revenue is to bring the payment within the fold of clause (i) of the Act.

As pointed out above, the Assessing Officer held the view that the aforesaid amount of „compensation‟ had been received by the assessee from his employer in connection with the termination of his employment and, therefore, it falls within the ambit of Clause (i) and is exigible to tax. The case of the assessee on the other hand is, 2010:DHC:4538-DB

Before discussing the nature of the payment received by the assessee, we deem it proper to point out the distinction between Clause (i) and Clause (iii) of sub Section (3) of Section 17 of the Act. Sub Clause (B) of clause (iii) enumerates that when any „amount‟ is due or received after cession of the employment it is treated as „profits in lieu of salary‟. The expression used here is “amount‟. Therefore, when an amount is received by an employer whether due or not, on the cession of the employment from the employer, this partakes the character of „salary‟ and is chargeable to tax. In contra distinction sub clause (i) uses the expression “compensation” (rather than “amount”). Therefore, under clause (i), in order to characterize a particular payment received from the employer, on termination of the employment, as „profits in lieu of salary‟, it has necessarily to be shown that this amount is due or received as „compensation‟.

The word „compensation‟ is not defined under the Income Tax Act. Therefore, one has to take into consideration the ordinary connotation of this expression in common parlance. The Oxford Dictionary of English language gives the following meaning to the word „compensation‟:- (i) Something awarded to compensate for loss, suffering, or injury. (ii) Something that compensates for an undesirable state of affairs. (iii) The action or process of compensation.”

It is clear from the above that when the payment is to be received as „compensation‟, the employee would have right to received such a payment. If the employee has no right, it cannot be treated as „compensation‟. It is for this reason that if the payment is made as ex-gratia or voluntary by an employer out of his own sweet will and not conditioned by any legal duty or legal obligation, whether on sympathetic reasons or otherwise, such payment is not to be treated as „profits in lieu of salary‟ under clause (i). We have the 2010:DHC:4538-DB 1265 ITR 90 held that the ex-gratia payment made at the time of retirement of the employee was not taxable as „profits in lieu of salary‟ as the payment was totally voluntary and not sanctioned by the terms of employment. The employee could claim no vested right in the same, since the amount was paid at the discretion of the employer.

Having regard to this legal position, we have to decide as to whether payment of Rs.35 lacs received by the assessee on cessation of his employment was a voluntary payment given by the employer or it was in the nature of „compensation‟.

The controversy revolves round the meaning which is to be given to the words contained in the letter dated 25th January, 2001 issued by the employer of the assessee. Based on the language of that letter, the Assessing Officer has framed the opinion that the amount of Rs. 35 lacs offered was in the nature of compensation. On the other hand, that very letter has been interpreted by the ITAT to hold that it conveys ex-gratia payment. We reproduce the exact words of the said letter:- “Further to your resignation, I am writing to confirm the exceptional final payments to be made to you and which we have verbally agreed. The management in its discretion has decided that you will receive an exceptional and one off ex-gratia 2010:DHC:4538-DB

The Assessing Officer has laid thrust on the words “which we have verbally agreed” and from this, he inferred that since there were mutual discussions between the employer and the assessee on the question of what final payment was to be made, it could not be treated as ex-gratia payment. More so, when even TDS was deducted by the employer on this amount. The CIT (A) accepting this view of the Assessing Officer gave additional reason, viz., though the assessee had no vested right in the said amount earlier, but because of the discussion between the employer and the assessee, the right to receive came into existence when a written understanding was reached. The Tribunal, however, negatived this reasoning of the authorities below observing that the words “which we have verbally agreed” only imply that employer volunteered to pay the “exceptional” amount by way of “ex-gratia” at its “discretion” and the assessee accepted the gratuitous sum offered by the employer. The discussion of the Tribunal on this aspect goes as under:- “The impugned payment (s) were made by HTCGU suo-moto, in its own discretion, voluntarily, without any right vested in the assessee under the contract of employment. The payment was not made to compensate the assessee for the services rendered as an employee, the assessee would have had no remedy against HTCGU had it decided not to make payment of the above amount. The words –“which we have verbally agreed…” only implies that the employer volunteered to pay the exception amount by way of ex-gratia and the assessee accepted the gratuitous offer from the employer, merely because the payment was decided to be made by the employer on 25.1.2001, immediately before the cession of services of the assessee w.e.f. 1.2.2001, also does not lead to the conclusion that payment was to compensate the assessee for services rendered. It is nobody‟s case that the salary received by the assessee was not fair 2010:DHC:4538-DB

We are inclined to agree with the aforesaid approach of the Tribunal. The connotation to the word “compensation” which needs to be given has already been highlighted above. It has to be in the nature of something awarded to compensate for loss, suffering or injury. When translated in the context of employment, it would imply monetary and non-monetary amount to be given to the employee in return of some services rendered by him. Inherent in this would be the obligation of the employer to pay some amount to the employee to “compensate” him. This would also mean that the employee gets vested right to get such an amount.

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 2010:DHC:4538-DB

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. For this reason, 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. 21. 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. Consequently, appeal of the revenue is dismissed. (A.K. SIKRI) JUDGE