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ARUNBHAI R. NAIK Versus I.T. OFFICER

2015 (10) TMI 2434 - GUJARAT HIGH COURT

Profits in lieu of salary - Taxability of amount received in accordance with the High Court Judgment under section 17(3) - Held that:- Assessee’s services came to be terminated by the order dated 6th May, 1984 under rule 44 of the relevant Service Rules after giving three months’ pay. Therefore, insofar as the obligation of the employer to pay any amount to the assessee in relation to the termination of his services, the same came to an end in view of the discharge of his services under rule 44. .....

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ee came to be terminated in terms of the rules, and the amount in question was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee in terms of the service rules. The employer, voluntarily at its discretion, agreed to pay the amount in question to the assessee with a view to bring an end to the litigation. There was no obligation cast upon the employer to make such payment and, therefore, the same would not .....

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- assessee in this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act ) has challenged the order dated 7th July, 2003 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench B in ITA No.4510/Ahd/1996. By an order dated 1st November, 2004, this appeal had been admitted on the following substantial question of law:- Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of ₹ 3,51,308/- r .....

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8th March, 1995. Since the refund was more than ₹ 1,00,000/-, the case was taken up for scrutiny. During the course of assessment, it was found that the assessee had received an amount of ₹ 3,51,308/- being ex-gratia compensation on premature cessation of his services. In the footnote of the return of income, the assessee had stated that since neither the terms of employment nor the service rules of the company provide for making ex-gratia payment, this claim as capital receipt is no .....

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d thus:- On verification it is seen that the decisions quoted by the assessee is not at all relevant to the case of the assessee. In these cases the payment was made to the employees as the unit was closed down or the business was closed. In the case of the assessee it is not compensation in lieu of salary within the meaning of Section 17(3) of the Act. The assessee s services was terminated by the company along with four other officers. In appeal, the High Court in its judgment in Letter Patent .....

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all five officers. The so called Association office Civil Suit No.MCA 358/84 pending before Civil Judge, Baroda shall stand withdrawn in terms of settlement and shall give immediate possession of the said premises. The Spl C.A.6647/85 shall stand withdrawn. The assessee s employer vide letter dated 22.3.1996 has stated that necessary assessment may kindly be carried out treating as if they have retired from the service. It is further clarified that this is not to be termed as premature cessation .....

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ee which clearly mentions that the concerned officer will be paid compensation . Hence this amount of ₹ 3,54,308/- is in the nature of compensation paid to an employee u/s.47(3) and does not get covered by section 10, 10(A), 10(B), 10(C). In view of the above, the assessee s claim that the payment is a capital receipt is not accepted and the amount is added to the total income. 3. The assessee carried the matter in appeal before the Commissioner (Appeals) who held that the amount received .....

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above referred two decisions of the Calcutta High Court wherein it was held that the amount being capital receipt is not taxable under section 17(3) of the Act. The Commissioner (Appeals) also placed reliance upon a decision of the Madras High Court in the case of R. Venketkrishna, 215 ITR 586 wherein a similar view was taken namely, that the amount of similar nature is not taxable as salary. Revenue went in appeal before the Tribunal and succeeded in relation to the addition in question. 4. Mr .....

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ule 44 of the Service Rules. It was submitted that the amount paid to the appellant pursuant to the settlement arrived at between the parties was not pursuant to any obligation on the part of the employer and hence, the provisions of section 17(3)(i) would not be attracted. In support of his submissions, the learned counsel placed reliance upon the decisions of the Calcutta High Court in the case of Commissioner of Income-Tax v. Jamini Mohan Kar and Commissioner of Income-Tax v. Ajit Kumar Bose .....

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d by the employer against the judgment of the learned Single Judge, the parties arrived at a settlement under which the amount in question was paid to the appellant. The attention of the court was drawn to the terms of settlement, which read thus:- The Concerned officer will be paid compensation equivalent to 3.33 years salary (salary means salary contained in last pay slip details of which are given herebelow) on basis of last pay and allowances drawn by officers as full and final settlement in .....

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5. M.D. Desai ₹ 8015.50 Plus professional allowances, fixed Medical reimbursement allowance, Reimbursement Salary and Suit length as per eligibility and Silver Memento if eligible. They shall be eligible for retirement benefits like Gratuity/Pension/Post retirement Medical benefits scheme as per their eligibility in this behalf. The Association of Officers shall not litigate any further in this matter. It was submitted that the mode and manner of computation of compensation under the term .....

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the appellant was discharged from his services in terms of rule 44 and compensation was paid to him in connection with the termination of employment which is, therefore, liable to be taxed under section 17(3) of the Act. It was, accordingly, urged that the impugned order passed by the Tribunal being in consonance with the provisions of section 17(3) of the Act, the appeal deserves to be dismissed. 6. Before adverting to the merits of the case, reference may be made to certain relevant facts as .....

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vided that in the event of such termination you will not be entitled to compensation except as provided for in service rules. At the end of such period of probation or extended period of probation, as the case may be, you may be either a. confirmed in the services of the company; or b. if your work performance does not reach the expected standard, your services may be discontinued. The assessee s services were terminated by discharge letter dated 6.5.1984 which reads as under:- 1. You are hereby .....

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ules dealing with the employment under which the assessee s services have been discharged reads as under:- RULE 44 DISCHARGE OR TERMINATION OF SERVICE AFTER CONFIRMATION:- After confirmation, an employee in grade I or II may be discharged from the company for sufficient reasons by the competent appointing authority, or he may leave or discontinue from the service of the company after giving three months notice in writing in that behalf or by payment of three months basic pay and Dearness Allowan .....

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ce or payment in lieu thereof in case of any employee in Grade-I and the Managing Director may waive such notice or payment in lieu thereof in case of an employee in Grade II, III or IV. A letter was written to the assessee by the employer Gujarat State Fertilizer Company Ltd. on 1st March, 1994 which reads as under:- This has reference to the settlement dated 2nd February, 1994 which is a part of the Hon ble High Court s judgment. In this connection, we are enclosing herewith the payment of com .....

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t of the employer as claimed by the assessee. The Tribunal was of the opinion that the payment is taxable within the meaning of section 17(3) of the Act which provides for inclusion of compensation received by an assessee from his employer or former employer at or in connection with the termination of his employment, as it could not be said that the payment received by the assessee was without any connection with the termination of his employment. 7. At this juncture, reference may be made to se .....

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section 15, 16 and 17 of the Act. Sub-section (3) of section 17 of the Act defines Profits in lieu of salary , and as it stood at the relevant time and to the extent the same is relevant for the present purpose, says that profits in lieu of salary includes (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. Thus, if an .....

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months notice and in addition to the pay and salary for the period of notice, paid to the assessee a sum of ₹ 24,933/-, held that there was nothing to indicate that the assessee was entitled to continue in the employment of the company up to any particular age. Under the conditions of service, his services were liable to be terminated on giving three months notice without assigning any reason. Under the circumstances, it could not be said that the assessee was entitled to remain in servic .....

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ount in question was profits in lieu of salary within the meaning of clause (3) of section 17 of the Act and was not taxable as such. In Commissioner of Income-Tax v. Jamini Mohan Kar (supra), the Calcutta High Court followed its earlier decision in the case of Commissioner of Income-Tax v. Ajit Kumar Bose. 9. The Delhi High Court in the case of Commissioner of Income-Tax v. Deepak Verma (supra) observed that the word compensation is not defined under the Income Tax Act. Therefore, one has to ta .....

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d 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). 10. This court is in agreement with the view adopted by the Calcutta High Court and the Delhi High Court in the above decisions The question that arises in the aforesaid legal backdrop is whether the payment received by the appellant - assessee from his employer was a voluntary payment given by the employer or was i .....

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lowance as in force from time to time in lieu of such notice. Against the order of termination, the assessee preferred an appeal to the higher authority in the company, but did not succeed. He, therefore, approached this court by way of a writ petition under Article 226 of the Constitution of India being Special Civil Application No.5039/1984 challenging the discharge. The said petition came to be allowed by the learned Single Judge holding that (1) the employer was a State within the meaning of .....

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d hereinabove and disposed the appeal in terms of the agreement. It is pursuant to the above agreement that the amount in question came to be paid to the appellant. 11. Thus, the assessee s services came to be terminated by the order dated 6th May, 1984 under rule 44 of the relevant Service Rules after giving three months pay. Therefore, insofar as the obligation of the employer to pay any amount to the assessee in relation to the termination of his services, the same came to an end in view of t .....

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