2017 (2) TMI 902 - AT - Income Tax

TDS u/s 192 - Amount paid to Ex-empoyees - Profits in lieu of salary - Taxability of amount received under section 17(3) - retrenched of employees - assessee in default for non deduction of tds - Held that - Two things are noticeable first the assessee had not made any payment to its ex-employees. Section 17(3)(iii)of the Act presupposes the existence of an employment i. e. a relationship of employee and employer between the assessee and the person who makes the payment of any amount in terms of section 17(3)(iii)of the Act. So the words in section 17(3)(iii) cannot be read disjunctively to overlook the essential facet of the provision the existence of employment i. e. a relationship of employer and employee between the person who makes the payment of the amount and the assessee. In the case before us the essential fact is missing. There was no employer-employee relationship between the assessee and the ex-employees. Secondly the ex-employees had paid the due taxes on the disputed amount. The assessee had claimed that it was under the bonafide belief that the amount received by the ex-employees was capital receipt. The word compensation is not defined under the Act. Therefore one has to take into consideration the ordinary connotation of this expression in common parlance. 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 a monetary and non-monetary amount to be given to the employee in return for 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. It would also mean that the employee gets a vested right to get such an amount. In the case under consideration there the ex employee did not get vested right to receive the amounts in question. A settlement was arrived at to avoid litigation-there was no obligation on part of the employer to pay some amount to the employees to compensate them. Considering the peculiar facts and circumstances of the case and relying upon the case of Arun Bhai R Naik (2015 (10) TMI 2434 - GUJARAT HIGH COURT ) we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity and that the assessee could not be treated assessee in default A-I-D . So upholding his order we decide the effective ground of appeal against the AO. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessee is to be treated as an assessee in default (A-I-D) for non-deduction of tax at source under section 192 of the Income Tax Act.
2. Nature of the payment made to the ex-employees—whether it constitutes "profits in lieu of salary" under section 17(3)(iii) of the Income Tax Act.

Detailed Analysis:

Issue 1: Assessee in Default (A-I-D) for Non-Deduction of Tax at Source

The Assessing Officer (AO) issued a show cause notice to the assessee for not deducting tax at source on payments made to five ex-employees, treating the assessee as an A-I-D under sections 201(1) and 201(1A) of the Income Tax Act. The AO raised a demand of Rs. 32,00,725, comprising Rs. 25.60 lakhs as tax and Rs. 6.40 lakhs as interest.

The First Appellate Authority (FAA) held that the settlement with the ex-employees was without the prior approval of the head office and that the amount was forcibly recovered from the assessee. The FAA concluded that the provisions of section 192 were not applicable as the payments were not made under the head salaries. The FAA noted that the tax liability had been discharged by the ex-employees and that the assessee was under a bona fide belief that the payment was capital compensation, not taxable in the hands of the recipients. Consequently, the FAA deleted the entire demand raised by the AO.

Upon appeal, it was found that the assessee had retrenched 59 employees, with five entering into an agreement with the regional office. The High Court ordered the recovery of dues, leading to the attachment of the assessee's bank account. The Tribunal concluded that there was no employer-employee relationship at the time of payment and that the ex-employees had already paid taxes on the amounts received. Therefore, the assessee could not be treated as an A-I-D.

Issue 2: Nature of Payment—Profits in Lieu of Salary

The AO argued that the payments made to the ex-employees were assessable under the head "income from salary" and thus required tax deduction at source. The FAA, however, determined that the payments were not related to past services but were made to avoid litigation, and therefore, were not in the nature of salary or profits in lieu of salary.

The Tribunal referred to the case of Arun Bhai R. Naik, where it was held that the amount paid in terms of a settlement without any obligation on the part of the employer does not constitute "compensation" as envisaged under section 17(3)(i) of the Act. The Tribunal emphasized that the payment must be due or received as compensation, implying an obligation of the employer and a vested right of the employee, which was not present in this case.

The Tribunal concluded that the payments were made to avoid litigation and were not compensation for services rendered. Thus, the payments did not fall within the ambit of "profits in lieu of salary" under section 17(3)(i). The Tribunal upheld the FAA's order, deciding that the assessee could not be treated as an A-I-D.

Conclusion:

The appeal filed by the AO was dismissed, and the cross-objection (CO) of the assessee was allowed statistically. The Tribunal pronounced that the assessee was not to be treated as an A-I-D, and the payments did not constitute "profits in lieu of salary." The order was pronounced in the open court on 15th February 2017.