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TMI Blog2012 (6) TMI 347X X X X Extracts X X X X X X X X Extracts X X X X ..... e, disallowing a sum of Rs. 5,600 as perquisite being free food provided by the employer. 4. On the facts and circumstances of the case, the Ld. CIT(A)II, Pune erred in confirming the ad hoc disallowance out of the following expenses incurred by the assessee i. Telephone expenses: 5000 ii. Entertainment Expenses: 6000 iii. Repair & Maintenance: 2,200 iv. Membership Fees: 2,000 2. Relevant facts of the case are that the assessee is an individual, a retired Civil Engineer from Indian Army and filed the return of income declaring an income of Rs. 1,62,720. During the year, the assessee received a sum of Rs.7.5 lakhs from Royal Bombay Yacht Club (RBYC), where the assessee was employed as a Secretary of the club, a post retirement employment. The assessee termed it as an ex-gratia received from the club and therefore, assessee is of the opinion that the said amount is not a taxable receipt in view of its capital nature and also in view of the voluntary nature in making the payment of Rs. 7.5 lakhs by the employer. For taxing the said amount, the Assessing Officer issued a notice u/s 148 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Copy of the complaint filed by the assessee in Bombay City Civil Court at Bombay. 3. Further, the Assessing Officer mentioned that the assessee terms the said payment of Rs. 7.5 lakhs as ex-gratia paid voluntarily to the assessee and it is not a compensation. After analysing the background of the facts and examining the documents supplied by the assessee and gathered by the Assessing Officer from the club directly out of his investigations, AO came to the conclusion that the said amount is not an ex-gratia payment and in fact it is a compensation paid as a part of the agreement between the club and the terminated employee-assessee. AO relied on the various documents i.e., letters of the offer of appointment, termination agreement, letters of the club written to the AO during the re-assessment proceedings etc. The Assessing Officer is of the opinion that in the given facts of the case, such payments fall in the ambit of the provisions of section 17(3)(i) of the Act and the said sub-section relates to 'profits in lieu of salary'. AO also distinguished certain decisions relied upon by the assessee before invoking said provisions of clause (i) of section 17(3) of the Act. Finally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee made various submissions and cited certain decisions. The counsel argued stating that sub-clause (i) of sec. 17(3) of the Act refers to the expressions i.e., 'any compensation', relying on certain decisions relating to the said expression, ld. Counsel mentioned that it indicates and implies an obligation, which is not the case of the assessee. In this regard, she argued stating that the receipt of the amount of Rs.7.5 lakhs in this case is not out of any obligation. Therefore, the same is outside the scope of the expression 'compensation' and therefore outside the scope of clause (i) of sec. 17(3) of the Act. Further, she referred to the letter dt.27-5-1999 to demonstrate that the necessity of a club to enter into a contract of employment which was never materialised and therefore the said amount of Rs. 7.5 lakhs is outside the scope of the salaries head of income. Relying on contents of para 4 at page-3 of the paper book, which is a letter dt. 18-7-2000, which is a termination letter, the counsel argued stating that it is clearly and expressly an ex-gratia amount and therefore it is exempt from tax under the head salary income. Further, the ld. counsel for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersonal request, the sum is being paid. The sum that is agreed to be paid is Rs. 63,714 as salary relating to the dues upto the date of his termination which also in their view was not payable. This amount is offered as salary by the appellant. Para 4 of the letter states that there has been amicable settlement between the parties and therefore a further sum is agreed to be paid as ex gratia. This clearly spells out the scope of this payment that it is paid voluntarily. Without prejudice, even if it is treated as compensation for settling the disputes, the payment would be a payment for settlement of all allegations and claims by the appellant. The appellant had filed a police complaint for forcibly removing the appellant from the club premises. The appellant therefore had withdrawn the criminal charge against the club for which the amount was paid and not for services rendered or that would have been rendered. Further the payment can also be considered to be paid towards breach of contract with the employer. In both the eventualities, the payment cannot be said to bearing out of any terms of employment with the employer. In such case the payment can be said to have made for withdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated .... refers to quid pro quo arrangements as has to agree to do certain things in lieu of the receipt of Rs. 7.5 lakhs. He listed out the things to be done at the end of the assessee. Referring to page 4 of the paper book filed by the assessee, Ld. DR referred to the usage of expression by the club i.e., 'terminal compensation' as evident from various pages of the paper book. Further, referring to page 6 of the paper book, learned departmental representative read out paragraphs 2 to 5 to make out that the aid impugned amount is a compensation and are a severance package. The said amount is equivalent of 25 months salary for the period from 1-6-2000 to 31-5-2002. As per the learned DR it is a terminal compensation which is a part of the salary and that the said amount are chargeable to TDS provisions of sec. 19 of the Act. He demonstrated the making of TDS, amounting to Rs.2.6 lakhs at the time of payment to the assessee. Further, the learned DR demonstrated how the judgments cited by the counsel for the assessee are distinguishable and, therefore, are inapplicable to the facts of the instant case. FINDING OF THE TRIBUNAL 8. We have heard both the parties, perused the orders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r one. 10. On the other hand, the case of the revenue is that the said sum of Rs. 7.5 lakhs is not an ex-gratia payment and on the contrary it is a compensation/profits in lieu of the salary. The said amount is paid as part of the agreement between the parties vide the Termination letter dated July 2000. The club terminated his services prematurely at the end of the first year i.e., May, 2000 due to incompatibilities, which was not accepted by the assessee. Club tried to vacate the service accommodation in possession of the assessee and in return, the assessee took the matter to the police and the court. Finally, to get rid of the problem, the club entered into a written agreement vide the said letter of the termination dated July 2000. According to the said letter the Club agree to pay the salary for the rest of the period of contract period of 3 years i.e., upto May, 2002 and quantified the sum i.e., equivalent of 25 months salary and fixed the same at Rs.7.5 lakhs as payable to the employee. Finally, the termination letter dt. 18-7-2000 was served on the employee as per the agreement and requested the assessee to sign this letter in token of his acceptance of the agreement, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the litigation between the employer and the employee, (ii) assessee's request of compensation, (iii) assessee obligation to vacate the premises and withdraw other claims and counter claims, (iv) payment of Rs. 7.5 lakhs etc. III. LETTER OF THE CLUB WRITTEN TO THE AO Royal Bombay Yacht Club The employer Club informed the AO confirming the existence of the severance between the employee and the club and payment of salary of Rs. 7.5 lakhs for the period from 1.6.2000 to 31.5.2002 i.e., the balance period of the 3 years of employment initially agreed by the parties and the mode of computation of the said sum i.e., equalent of 25 months salary. The club informed that it is an ex gratia but subjected to TDS and accordingly deducted TDS of Rs. 2.6 lakhs u/s 192 of the Act. 12. From the above extracts, it is evident that the offer of employment of the assessee as Secretary by the club with the terms and conditions is beyond any dispute. From the letter of termination or agreement dated 18th July, 2000, it is decipherable that the assessee accepted the offer and worked for the period from May 1999 to July 2000 (more than one year). From the other letter of the Club dated July 2006 addre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and further, the expressively worded agreement-cum-termination letter dated 18th July 2000, we are of the opinion, there exists obligations on part of the assessee and therefore, the said sum cannot be termed ex-gratia payment as it is not a voluntary payment. The said amount cannot be called ex gratia for other reason that the said amount is apparently towards the salary for the unserved period of the three years of the employment and thus, it is not paid to the assessee as a gratitude towards services rendered by the assessee. In fact, in our opinion, it is paid for not receiving the services of the employee for the rest of the period of the employment and also to get rid of the employee-specific-problems to the club and its management. Thus, it is not a voluntary payment. Therefore, the payment constitutes 'compensation' within the meaning of the provisions of section 17(3)(i) of the Act. B. Whether the provisions of sec. l7(1)(i) of Act are applicable: Section 17(3) deals with the provisions relating to the profits in lieu of salary. Clause (i) of the said sub-section (3) is relevant here and the same read as follows. "(3) profits in lieu of salary includes- (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, there is no contract or exit clause and therefore, the the said decision has no application to the facts of this case and hence, distinguishable on facts. (b) G.N. Badami's case (supra): "Assessee-employee having exercised the right of option to leave the service of employer company by receiving compensation, it was a case of termination of employment and compensation would be taxable as profits in lieu of salary u/s 17(3)(i)" This is the decision pronounced in favour of the revenue in the factual matrix of that case where the employee who preferred to exit the employee after receiving the compensation. Tribunal held the same as compensation taxable u/s 17(3)(i) of the Act. As this judgment of the Madras High Court distinguished the judgment in the case of Ajit Kumar Bose (supra) and the same is in favour of the revenue. In our opinion, this citation helps the revenue more than the assessee. (c) D.N. Bhalla's case (supra): "Amount paid to employee on termination of his services not in accordance with terms of employment but in accordance with terms of an agreement whereby assessee agreed to give up the objection against the termination notice is capital receipt." This is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in dispute for payment of any ex-gratia to the assessee and thus, no contractual obligation to pay the same. Therefore, in the instant case, there is no case for gratitude towards the employee, who turned out to be litigant and the problem shooter for the Club and who failed to complete the service term of three years successfully. Normally the ex-gratia is paid on successful completion of a minimum period of service as per the employment contract. There is no such contract in this case. Therefore, the payment made in this case cannot be said to be for gratitude of services. Ex-gratia (Latin) is defined to mean as 'payment done from a sense of moral obligation rather than because of any legal requirements' (source: Oxford dictionary). Ex-gratia is paid when there is no obligation or liability to pay and is paid out of kindness and voluntarily and not out of litigation, duty of the employer or as compensation. Ex-gratia is paid always over and above the salary and not in lieu of the salary. In the instant case, the sum of Rs. 7.5 lakhs paid undoubtedly is the sum equivalent of 25 months' salary. Which employer, who is dissatisfied with his employee, shall pay ex-gratia to an emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisite being free food provided by the employer, Ld Counsel relied on the submission made before the lower authorities. On perusal of the paragraphs 5, 5.1 and 5.2 of the impugned order, we find that the assessee has undisputedly availed the said perquisite and therefore attracted the provisions of rule 37(iii) relating to free meal provided by the club-employer. Therefore, we are of the view that the said order of the CIT(A) does not call for any interference on this issue. Accordingly, ground no. 3 is dismissed. 18. Other disallowances - Assessee's failure to file Evidences: Regarding the decision of the CIT(A) in confirming the addition of disallowance out of the following expenses incurred by the assessee namely Telephone expenses : Rs. 5000; Entertainment Expenses: Rs. 6000; Repair & Maintenance : Rs. 2,200; Membership Fees: Rs. 2,000, we find that the relevant discussion is given in paras 6 and 6.1 of the impugned order. Essentially, the AO and CIT(A) made disallowances in the claims for want of evidences. The assessee could not demonstrate the genuineness of the claims either during the assessment proceedings or in first appellate proceedings. Assessee could not improve his ..... X X X X Extracts X X X X X X X X Extracts X X X X
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