Salary : Profit in lieu of salary : S. 17(3) : In order to characterise a particular payment received from an employer on termination of employment as ‘profit in lieu of salary’, it has necessarily to be shown that said amount is due or received as ‘compe

[CIT v. Deepak Verma,
194 Taxman 265 (Del.)]

At the time of his
retirement, the assessee had received certain payment from his employer in
addition to normal benefits. The employer had deducted the tax at source on that
amount also. In the assessment proceedings for the A.Y. 2001-02, the assessee
claimed that the said amount was not exigible to tax being an ex gratia payment
which was outside the scope and ambit of S. 17(3). The Assessing Officer held
that the said payment was made as ‘compensation’ for his services and,
therefore, was liable to tax u/s.17(3)(i). The Tribunal deleted the addition
holding that it was not chargeable to tax u/s.17(3)(i) as ‘profit in lieu of
salary’.

On appeal by the Revenue the
Delhi High Court upheld the decision of the Tribunal and held as under :

“(i) Though sub-clause
(iii) squarely covered the nature of payment received by the assessee, that
did not exist in the relevant assessment year and was incorporated only with
effect from 1-4-2002. Therefore, that provision was not applicable to the
instant case.

(ii) Under sub-clause (i),
in order to characterise a particular payment received from the employer, on
termination of the employment, as ‘profit in lieu of salary’, it has
necessarily to be shown that this amount is due or is received as
‘compensation’.

(iii) When the payment is
to be received as ‘compensation’, the employee would have a right to receive
such a payment. If the employee has no right, it cannot be treated as a
‘compensation’. It is for this reason that if the payment is made as ex gratia
or voluntary by an employer out of his own sweet will and is not conditioned
by any legal duty or legal obligation, whether on sympathetic reasons or
otherwise, such payment is not to be treated as ‘profit in lieu of salary’
under sub-clause (i).

(iv) In the instant case,
all dues admissible to the assessee on his resignation were otherwise paid by
the employer to him. In addition, the employer agreed to pay ‘in its
discretion’ certain amount as an ‘exceptionable’ and ‘one off ex gratia
payment’. It was very clearly stated in the letter of the employer that
management had agreed to pay that amount in its discretion. It was not
compelled by any obligation to pay that amount which would assume the nature
of any ‘compensation’. The amount was also described as not only exceptionable
but ex gratia. It, therefore, clearly partook the character of voluntary
payment and could not be termed as a payment by way of ‘compensation’.
Therefore, the receipt of that payment by the assessee would not be covered
under sub-clause (i) of clause (3) of S. 17.

(v) Thus, the amount received by the
assessee was not ‘profit in lieu of salary’ and, therefore, was not an income
exigible to tax.”