TMI Blog2000 (6) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... d ₹ 1 lakh each in appreciation of personal attributes and qualities, which were over and above his legal dues and claimed the amount for the two assessment years as exempt from tax in view of the Supreme Court decision in the case of CIT vs. K.K. Roy (1972) 84 ITR 701(SC) and that of the Calcutta High Court in the case of CIT vs. Ajitkumar Bose (1986) 52 CTR (Cal) 250: (1987) 167 ITR 90(Cal). The assessee had tendered his resignation from the company on 6th April, 1989, which was acknowledged on 7th April, 1989, by Harry Patel, managing director of the company, in which regrets were expressed in accepting the resignation w.e.f. 6th May, 1989, and it was also stated in the said letter as under : In recognition of your past 17 years service with the company as finance director and secretary and alternate director on the Board from November, 1981 to May, 1986 and in appreciation of your personal qualities and attributes, management is pleased to approve special ex gratia payments which shall become due and payable on dates specified below : ₹ 1 Lakh on 5th May, 1989 ₹ 1 Lakh on 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the real motive behind the said payment was to reward the assessee for his past long meritorious services and the true and basic character of the receipt is not ex gratia but profit in lieu of salary. He further held that the company in its books of account treated the payment as ex gratia and recorded the payment as remuneration to employees and incorporated the said amounts in the salary certificates issued and deductions under ss. 16(i), 80CC, 80CCA, etc. were granted by the company out of the said receipt and the resultant has been subjected to tax deduction at source. He referred particularly to the salary certificate issued by the company for the second instalment of ₹ 1 lakh in which the assessee had received, nothing else but only the second instalment of ₹ 1 lakh and the same was subjected to deduction under s. 16(i) of ₹ 12,000 and the resultant of ₹ 88,000 was further subjected to deduction of ₹ 4,000 under s. 80CCA. On the net balance, deduction of tax at source to the extent of ₹ 7,000 was made. On the basis of this treatment to the receipt of the assessee accorded by the employer, the learned CIT(A) came to the conclusion t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial ex gratia, which is an act of self-convenience and has no bearing upon the real character of the receipt. He also observed that if the assessee did not have any right to receive, he could not have used the words except the second instalment . This right was, in his opinion, borne out of the employer-employee relationship and in respect of the services of the assessee. From the contents of the second receipt dt. 5th May, 1990, the learned CIT(A) observed that the assessee further confirmed that the receipt is a full and final settlement and satisfaction of all dues in respect of my services with the company and I hereby acknowledge that I have no claim of any nature whatever against the company in respect of or arising out of my said services . The learned CIT(A) observed that by issuing this receipt, the assessee granted freedom to the company from the bondage of its obligation to pay the assessee the said amount of ₹ 2 lakhs, a bondage which emerged from Shri Harry Patel's letter dt. 7th April, 1989, addressed to the assessee. Taking into account all surrounding circumstances and facts of the case, the learned CIT(A) held that the receipt in question is a direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... always consisted of professionals and all of them had spoken to me quite often of the manner in which the company benefitted from a trusted man like you in the most difficult times. It was a rare display of total loyalty and sincerity. I had the same experience after I took over as managing director. The learned counsel for the assessee relied on the decision of the High Court of Justice (Chancery Division) in the case of Bridges (H.M. Inspector of Taxes) vs. Bearsley 37 Tax Cases 289, in which the headnote reads as under : Income-tax. Schedule E'Shares in company transferred to director' Whether profits of office. The respondents were at the material times respectively managing director and a director of a limited company which they had served for many years in those and other capacities. They had greatly helped in building up the business and in running it when it had become established. Most of the shares in the company were held in trust, under the will of the former principal shareholder (who died in 1936), for his widow during her life and thereafter for his two sons in equal shares absolutely. The respondents wished to have a fairly substantial hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pay anything to the assessee in connection with termination of his employment otherwise than salary for notice period. The payment made by the employer over and above the dues was ex gratia and totally voluntary. The payment does not amount to compensation which implied an obligation to pay. Accordingly, it was held that the amount received by the employee was not profit in lieu of salary. He also relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Jamini Mohan Kar (1989) 176 ITR 127(Cal) wherein also a similar view was taken. The learned counsel for the assessee submitted that the amount paid cannot be called as payment for deprivation of any right. He also referred to the decision of the Tribunal, Mumbai Bench 'A', in the case of ITO vs. Shri Anilkumar Rudra in ITA No. 8975/Bom/1990, dt. 12th Oct., 1998 in which it was held that amounts received after superannuation had nothing to do with the employment and so they are not in the nature of compensation received by the assessee or in connection with the termination of employment or the modifications of the terms and conditions relating to his employment and as such cannot be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been clearly spelt out that the payment is being made in appreciation of personal qualities and attributes, as special ex gratia payment, which has been approved by the management also. It was not only the managing director's decision but had the approval of the management. So it cannot be said that the managing director termed the payment as special ex gratia payment. It was basically the personal loyalty of the assessee towards the management which in English proverb is termed as A friend in need is a friend indeed , which prompted the management to make this payment and this had no relation to the services rendered by virtue of the agreement of employment. This amount is not paid by virtue of the employment but only a voluntary payment by the management recognising the loyalty and sincerity of the assessee towards the company. In the case of Cooper Blakistan (1907) Tax Cases 347 (CAL), it was held that payment in appreciation of personal qualities is not taxable as salary. Similarly, in the case of Benyon vs. Thorpe (1928) 14 Tax Cases 1 it was held that a payment made as a gift in appreciation of personality and character of the employee is not taxable as salary. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been held by the Hon'ble Bombay High Court that the test in such cases is to find out if the sum is paid to the assessee in respect of his services and accrues to him by virtue of his office. If the amount is paid to a person as a personal gift for his personal qualities as a token of personal esteem and veneration, the receipt cannot be subjected to tax. Accordingly, we hold that the amount of ₹ 1,00,000 each received by the assessee in the two assessment years under consideration is not taxable as compensation as contemplated under s. 17(3) as profit in lieu of salary and hold that this is a capital receipt in the hands of the assessee. 9. The assessee has taken one more ground in the asst. yr. 1991-92 with regard to levy of interest under s. 220(2) amounting to ₹ 2,715 which the learned CIT(A) had not decided. No such interest has been levied in the assessment order and, therefore, the learned CIT(A) rightly did not entertain this ground. The learned counsel for the assessee did not press this ground at the time of hearing. Accordingly, it is dismissed as not pressed. 10. In the result, the appeal for the asst. yr. 1990-91 is allowed and that for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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