Salary – Section 17(3) – A. Y. 1994-95 – Premature termination of service in terms of service rules – Payment of sum by employer to employee voluntarily with a view to bring an end to litigation – No obligation on employer to make such payment – Payment not compensation – Not profits in lieu of salary – Not liable to tax

The assessee was discharged from his services. Against the order of termination, he preferred an appeal to the higher authority in the company but did not succeed. In writ petition filed by the assessee the Single Judge directed reinstatement of his services. During the pendency of the appeal preferred by the employer against the order of the single judge, the assessee and the employer arrived at a settlement, in terms whereof, the amount was to be computed in the manner stated therein and was to be paid to the assessee. The assessee claimed that the amount of Rs. 3,51,308/- so received was capital receipt and was not liable to tax. The Assessing Officer did not accept the claim and the amount was added to the total income. The Tribunal held that the amount was taxable u/s. 17(3) of the Income-tax Act, 1961.

On appeal by the assessee, the Gujarat High Court reversed the decision of the Tribunal and held as under:

“i) The services of the assessee were terminated in terms of the service rules and the amount 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 with a view to bring an end to the litigation.

ii) There was obligation upon the employer to make such payment and, therefore, the amount would not take the character of compensation as envisaged u/s. 17(3)(i). The amount would, therefore, not fall within the ambit of the expression “profits in lieu of salary” as contemplated u/s. 17(3)(i). The Tribunal was, therefore, not justified in holding that the amount of Rs. 3,51,308 received by the appellant pursuant to the judgment of the High Court was income liable to tax u/s. 17(3) of the Act.”