TMI Blog2008 (4) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral Union Project Services (P.) Ltd. In terms of the appointment letter dated 8-6-2000, the assessee took up the above job. Thus, he was in employment of HTCGU from 1-6-2000 till 31-1-2001. On 31-1-2001, the assessee resigned. HTCGU accepted the resignation and offered the ex gratia payment by mentioning as under : "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 payment of Rs. 35,00,000." The assessee was asked to explain as to why the said sum be not considered as income under the head salary . The assessee submitted that voluntary payments made by an employer on account of personal consideration and for the reasons unconnected with employment cannot be regarded as profits in lieu of salary under section 17(3) of the Act. The Assessing Officer held that the amount of compensation has been received in connection with termination of his employment. The assessee got vested right to receive the payment as it was already mutually agreed between the assessee and his employer. He acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the impugned amounts to the assessee, vide letter dated 25-1-2001, only after the tendering of resignation by the assessee, though such resignation was effective from a later date, which is even evident from the extracts of letter which grants the payment - "further to your resignation.....". The aforesaid would show that the ex gratia payment was not a condition precedent to the employee resigning from services, or agreed prior thereto. Merely because payment was to be received on resignation would not change the character of the payment being voluntary in nature, granted by HTCGU suo moto in its own discretion, without any vested right of the assessee to claim the same under the employment contract. The Courts in the following cases have held that voluntary payments made by the employer to the employee, without any right vested in the employee enforceable at law, is in the nature of capital receipt, not exigible to tax as salary : 1. Mahesh Anantrai Pattani v. CIT [1961] 41 ITR 481 (SC) 2. CIT v. L.W. Russel [1964] 53 ITR 91 (SC) 3. Lachman Das v. CIT [1980] 124 ITR 706 (Delhi) 4. Sewal Singh Ajit Singh v. CIT [1980] 126 ITR 732 (Punj. Har.) 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is Managing Director and incharge of the affairs. Thus, the assessee is to dictate its own term so as to give a nomenclature that the payment was voluntary. However, it is established fact that the assessee agreed during the course of employment itself to receive the sum of Rs. 35 lakhs. Even the company, who has made the payment has deducted tax thereon by treating the same as chargeable under the head salary . Thus, there is no ambiguity in the mind of the company. He also relied upon the decision of Bombay High Court in the case of J.K. Helene Curtis Ltd. v. CIT [1999] 236 ITR 403 . 6. We have carefully considered relevant facts, arguments advanced and various decisions cited. The term salary is defined in section 17(1) of the Act to include, inter alia, profits in lieu of salary. Section 17(3) of the Act, as it stood during the relevant assessment year, defines "profits in lieu of salary" to include : "( i )the amount of any compensation due to or 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; ( ii )any payment (o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d acceptance of the resignation of the appellant in this regard is misplaced, since in terms of the employment contract, there was no question of the appellant claiming the aforesaid amount as a right and HTCGU being under an obligation to make payment of the same. The aforesaid letter only confirms in writing the verbal offer made by the employer to pay ex gratia amount of Rs. 35 lakhs, which was agreed to by the appellant. The appellant has no discretion in this regard. The aforesaid amount was not paid for any past services rendered by the appellant and was purely discretionary the appellant would have had no remedy against HTCGU had it decided not to make payment of the above amount, unlike in a case where such amount were related to the services rendered by the appellant in which case the appellant could have taken legal action against HTCGU for payment of the above amount. The fact that the said amount became payable on 25-1-2001, i.e., while the appellant was still in service, considering that the appellant resigned only with effect from 1-2-2001, is of no relevance since HTCGU decided to pay the said amount only after the appellant had tendered his resignation, though s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not perquisites allowed to the employee by the employer or amounts due to him from the employer within the meaning of section 7(1) of the Explanations thereof. ****** It takes in perquisites given in cash or in kind or in money or money s worth and also amenities which are not convertible into money. It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein." The Delhi High Court in the case of Lachman Das ( supra ) held voluntary payments made by the employer out of personal sympathetic reasons to be not taxable in the hands of the employees as profit in lieu of salary. In that case, the assessee-employees received compensation from their employer for loss of movable assets in Pakistan at the time of partition. The Court while holding the payment to be not taxable in the hands of the employees, observed as under : "..... that the payments made to the assessee had no relation to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. ( the employer ) on his retirement an amount of Rs. 5 lakhs as ex gratia which was claimed as not taxable in the return of income. It was submitted before the tax authorities that ex gratia was not payable to him either as per his terms of appointment with the company or under any other contract and the same was paid gratuitously/voluntary-ily on ad hoc basis. Further, it was submitted, the said payment could not be treated as profit in lieu of salary and as such the same is not liable to tax. The Assessing Officer treated the aforesaid amount as taxable. The assessee filed appeal before CIT(A). The CIT(A) set aside the matter to the file of the Assessing Officer against which the assessee as well as Department went before the Tribunal. The Tribunal on the aforesaid facts held as under : "We have carefully considered the rival submissions and we hold that in view of the authorities cited by the learned counsel, the ex gratia payment of Rs. 5 lakhs is not liable to income-tax. This disposes off the ground No. 1 in the assessee s appeal as also the Department s appeal." In a subsequent decision, in the case of CIT v. J. Visalakshi [1994] 206 ITR 531, the Madras H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sure of the employer, voluntarily and gratuitously, without the appellant having a vested right thereto. The Assessing Officer has sought to distinguish the aforesaid decision on the ground that the appellant had the right to receive the ex gratia amount pursuant to the discussion with the employer at the time of tendering the resignation and the payment was not voluntary. As stated hereinabove, the appellant at no time acquired any vested right to receive the above payment, which was made voluntarily and at the discretion of the employer. Whether the assessee agreed to receive ex gratia during or subsequent to employment is not relevant. What is relevant is whether the assessee received the sum as was due to him in connection with termination of his employment. The words in connection with the termination of his employment signifies as to whether the assessee is in his right as an employee entitled to receive the sum on termination of employment. If answer is in positive, the same is taxable but if otherwise, not. The resignation of the appellant was not contingent upon receiving the ex gratia amount of Rs. 35 lakhs. On the appellant putting in his papers, indicating his i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of voluntary retirement or resignation. It would be downright erroneous, wrong and had construction to read into the provision that which its plain language does not state. The intention of the Legislature in not including the instant situation within the ambit of the section was explicitly manifest in the syntax chosen ....." [Emphasis supplied] 11. The existing provisions of section 17(3) of the Act were felt not adequate to cover situations like the present one. It is for that reason that clause ( iii ) was inserted in the said section by the Finance Act, 2001 with effect from 1-4-2002 to bring to tax such payments. Section 17(3)( iii ) of the Act reads as under : "( iii ) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person (A)before his joining any employment with that person; or (B)after cessation of his employment with that person." Clause ( iii ) of sub-section (3) of section 17 of the Act has inserted with effect from 1-4-2002, which covers and brings to tax any amount due to or received whether either in lump sum or otherwise by any assessee from any person either before his joining any employment with that per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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