O/TAXAP/23/2004 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO.23 of 2004 FOR APPROVAL AND SIGNATURE: HONOURABLE MS. JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE A.G.URAIZEE 1 Whether Reporters of Local Papers may be allowed to see judgment? 2 To be referred to Reporter or not? 3 Whether their Lordships wish to see fair copy of judgment? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India or any order made thereunder? ARUNBHAI R. NAIK....Appellant(s) Versus I.T. OFFICER....Opponent(s) Appearance: MR JP SHAH, ADVOCATE with MR MANISH J SHAH, ADVOCATE for Appellant(s) No.1 MR KM PARIKH, ADVOCATE for Opponent(s) No.1 CORAM: HONOURABLE MS. JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE A.G.URAIZEE Date : 12/10/2015 ORAL JUDGMENT (PER : HONOURABLE MS. JUSTICE HARSHA DEVANI) 1. appellant assessee in this appeal under Page 1 of 14 HC-NIC Page 1 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT section 260A of Income Tax Act, 1961 (hereinafter referred to as Act ) has challenged order dated 7th July, 2003 passed by Income Tax Appellate Tribunal, Ahmedabad Bench B in ITA No.4510/Ahd/1996. By order dated 1 st November, 2004, this appeal had been admitted on following substantial question of law:- Whether on facts and in circumstances of case, Tribunal was right in law in holding that amount of Rs.3,51,308/- received by appellant in accordance with High Court Judgment, was income liable to tax under section 17(3) of I.T. Act, 1961? 2. assessment year is 1994-95 and relevant accounting period is year that ended on 31st March, 1994. assessee, who is assessed in status of individual, filed return of income on 30th June, 2004 showing total income of Rs.1,32,430/-. return was processed under section 143(1)(a) of Act granting refund of Rs.1,88,550/- on 28th March, 1995. Since refund was more than Rs.1,00,000/-, case was taken up for scrutiny. During course of assessment, it was found that assessee had received amount of Rs.3,51,308/- being ex-gratia compensation on premature cessation of his services. In footnote of return of income, assessee had stated that since neither terms of employment nor service rules of company provide for making ex-gratia payment, this claim as capital receipt is not liable to tax as same is not paid as retrenchment compensation either under labour laws or under terms of employment. In support of his submissions, assessee had placed reliance upon decisions of Calcutta High Court in case of Commissioner of Income- Page 2 of 14 HC-NIC Page 2 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT Tax v. Jamini Mohan Kar, (1989) 176 ITR 127 (Cal.) and Commissioner of Income-Tax v. Ajit Kumar Bose, (1987) 165 ITR 90 (Cal.). Assessing Officer after considering submissions advanced on behalf of assessee, held thus:- On verification it is seen that decisions quoted by assessee is not at all relevant to case of assessee. In these cases payment was made to employees as unit was closed down or business was closed. In case of assessee it is not compensation in lieu of salary within meaning of Section 17(3) of Act. assessee s services was terminated by company along with four other officers. In appeal, High Court in its judgment in Letter Patent Appeal No.375 of 1985 with Civil Application No.3962 of 1985, it is stated that since parties have arrived at agreement appeal is allowed in terms of agreement arrived at between parties. agreement are as under: 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 here below) on basis of last pay and allowances drawn by officers as full and final settlement in respect of all five officers. 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 said premises. Spl C.A.6647/85 shall stand withdrawn. 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 service. It is further clarified that this is not to be termed as premature cessation as Court has considered it as deemed retirement which is recorded in judgment . But Court s order clearly mention that assessee will be deemed to have retired from service, and they shall be eligible for retirement benefits like gratuity/pension/post retirement medical benefits scheme as per their eligibility in this behalf. Hence, deemed retirement is only for ensuring that assessee receives retirement benefits. Court s Page 3 of 14 HC-NIC Page 3 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT order also refers to agreement between GSFC and assessee which clearly mentions that concerned officer will be paid compensation . Hence this amount of Rs.3,54,308/- is in nature of compensation paid to employee u/s.47(3) and does not get covered by section 10, 10(A), 10(B), 10(C). In view of above, assessee s claim that payment is capital receipt is not accepted and amount is added to total income. 3. assessee carried matter in appeal before Commissioner (Appeals) who held that amount received by appellant was not taxable and deleted addition made by Assessing Officer. According to Commissioner (Appeals), employer of appellant offered to give compensation of Rs.3,51,308/- in case where he voluntarily retired from service, which appellant accepted. said amount was paid de hors any contract of employment and was paid voluntarily and was paid as compensation for premature termination of employment. Commissioner (Appeals) placed reliance upon above referred two decisions of Calcutta High Court wherein it was held that amount being capital receipt is not taxable under section 17(3) of Act. Commissioner (Appeals) also placed reliance upon decision of Madras High Court in case of R. Venketkrishna, 215 ITR 586 wherein similar view was taken namely, that amount of similar nature is not taxable as salary. Revenue went in appeal before Tribunal and succeeded in relation to addition in question. 4. Mr. J.P. Shah, learned counsel for appellant invited attention to provisions of section 17(3) of Act to submit that amount paid to appellant would fall within Page 4 of 14 HC-NIC Page 4 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT ambit of clause (i) of section 17(3) of Act only if same were paid by employer to discharge any obligation cast upon him. According to learned counsel, insofar as obligation of employer is concerned, same stood discharged when appellant s services came to be terminated by resorting to rule 44 of Service Rules. It was submitted that amount paid to appellant pursuant to settlement arrived at between parties was not pursuant to any obligation on part of employer and hence, provisions of section 17(3)(i) would not be attracted. In support of his submissions, learned counsel placed reliance upon decisions of Calcutta High Court in case of Commissioner of Income-Tax v. Jamini Mohan Kar and Commissioner of Income-Tax v. Ajit Kumar Bose (supra) as well as decision of Delhi High Court in case of Commissioner of Income-Tax v. Deepak Verma, (2011) 339 ITR 475 (Del.). 5. On other hand, Mr. K.M. Parikh, learned senior standing counsel for respondent, submitted that after his termination under rule 44 of Service Rules, appellant challenged premature termination of his services before this High Court and succeeded before learned Single Judge. During pendency of letters patent appeal preferred by employer against judgment of learned Single Judge, parties arrived at settlement under which amount in question was paid to appellant. attention of court was drawn to terms of settlement, which read thus:- Concerned officer will be paid compensation Page 5 of 14 HC-NIC Page 5 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT equivalent to 3.33 years salary (salary means salary contained in last pay slip details of which are given here- below) on basis of last pay and allowances drawn by officers as full and final settlement in respect of all five officers. 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 said premises. Spl. C.A.6647/85 shall stand withdrawn. amount of compensation as agreed shall be payable within one month from date of judgment. 1. B.D. Patel Rs.9081.50 per month, 2. A.R. Naik Rs.11087.50 3. J.N. Desai Rs.8639.50 4. A.M. Mehta Rs.9053.50 5. M.D. Desai Rs.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. Association of Officers shall not litigate any further in this matter. It was submitted that mode and manner of computation of compensation under terms of settlement is clearly indicative of fact that compensation was to be paid in connection with termination of employment of appellant and squarely falls within ambit of section 17(3) of Act. Reference was made to letter dated 1st March, 1994 of employer, wherein it is stated that payment of compensation including terminal benefits as may be Page 6 of 14 HC-NIC Page 6 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT payable according to his eligibility are enclosed therewith. It was submitted that above letter clearly shows that appellant was discharged from his services in terms of rule 44 and compensation was paid to him in connection with termination of employment which is, therefore, liable to be taxed under section 17(3) of Act. It was, accordingly, urged that impugned order passed by Tribunal being in consonance with provisions of section 17(3) of Act, appeal deserves to be dismissed. 6. Before adverting to merits of case, reference may be made to certain relevant facts as noticed by Tribunal. appointment letter of assessee is dated 12th January, 1971 Clause 4 of which read as under:- 4. You shall be on probation for initial period of six months from date of your joining service under company, which may be extended at discretion of company to enable you to achieve expected standard of work performance. During period of probation your services can be terminated forthwith and without assigning any reasons. It is further provided that in event of such termination you will not be entitled to compensation except as provided for in service rules. At end of such period of probation or extended period of probation, as case may be, you may be either a. confirmed in services of company; or b. if your work performance does not reach expected standard, your services may be discontinued. assessee s services were terminated by discharge letter dated 6.5.1984 which reads as under:- Page 7 of 14 HC-NIC Page 7 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT 1. You are hereby discharged from services of company with immediate effect under Rule 44 of Company s Service Rules by payment of 3 months basic pay and DA in lieu of 3 months notice. 2. If there are any dues payable by you to company, your 3 months basic pay and DA will be adjusted against such dues. You are hereby requested to clear dues payable you to company. 3. You are further requested to submit enclosed clearance for final settlement of your account. Rule 44 of company s rules dealing with employment under which assessee s services have been discharged reads as under:- RULE 44 DISCHARGE OR TERMINATION OF SERVICE AFTER CONFIRMATION:- After confirmation, employee in grade I or II may be discharged from company for sufficient reasons by competent appointing authority, or he may leave or discontinue from service of company after giving three months notice in writing in that behalf or by payment of three months basic pay and Dearness Allowance as in force from time to time in lieu of such notice employee in any other Grade may be discharged from service of company for sufficient reasons by Competent appointing authority or he may leave or discontinue from service of company, after giving month s notice in writing that behalf by payment of one month s basic pay and dearness allowance as in force from time to time in lieu of such notice, provided that Board or Personnel Committee may waive such notice or payment in lieu thereof in case of any employee in Grade-I and Managing Director may waive such notice or payment in lieu thereof in case of employee in Grade II, III or IV. letter was written to assessee by employer Gujarat State Fertilizer Company Ltd. on 1st March, 1994 which reads as under:- Page 8 of 14 HC-NIC Page 8 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT This has reference to settlement dated 2nd February, 1994 which is part of Hon ble High Court s judgment. In this connection, we are enclosing herewith payment of compensation including terminal benefits as may be payable according to your eligibility. detailed calculations are enclosed in meets and for income tax deduction, separate certificate may be obtained from company. In meantime, this is in compliance with Court order regarding payment to be made within one month from date of order. According to Tribunal, payment is not in nature of ex-gratia payment or without there being any obligation on part of employer as claimed by assessee. Tribunal was of opinion that payment is taxable within meaning of section 17(3) of Act which provides for inclusion of compensation received by assessee from his employer or former employer at or in connection with termination of his employment, as it could not be said that payment received by assessee was without any connection with termination of his employment. 7. At this juncture, reference may be made to section 2(24) of Act, which defines income as inclusive of value of any perquisite or profit in lieu of salary taxable under clause (2) and (3) of section 17 of Act. Section 15 of Act lays down as to which income shall be chargeable to income-tax under head Salaries . Section 16 provides for deductions to be made while computing income chargeable under head Salaries . Section 17 of Act defines Salary , perquisite and profits in lieu of salary for Page 9 of 14 HC-NIC Page 9 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT purposes of section 15, 16 and 17 of Act. Sub-section (3) of section 17 of Act defines Profits in lieu of salary , and as it stood at relevant time and to extent same is relevant for present purpose, says that profits in lieu of salary includes (i) amount of any compensation due to or received by assessee from his employer or former employer at or in connection with termination of his employment or modification of terms and conditions relating thereto. Thus, if any amount falls within ambit of expression Profits in lieu of salary , it has to be treated as salary and would be chargeable to tax under section 15 of Act. At this juncture, reference may be made to decisions on which reliance has been placed by learned counsel for appellant. 8. Calcutta High Court in case of Commissioner of Income-Tax v. Ajit Kumar Bose (supra) in case where employer terminated services of assessee by giving him requisite three months notice and in addition to pay and salary for period of notice, paid to assessee sum of Rs.24,933/-, held that there was nothing to indicate that assessee was entitled to continue in employment of company up to any particular age. Under conditions of service, his services were liable to be terminated on giving three months notice without assigning any reason. Under circumstances, it could not be said that assessee was entitled to remain in service for any period after requisite notice had been given or that employer was under any obligation to pay anything to assessee in connection with termination of his employment other than salary for period of notice. court was of view Page 10 of 14 HC-NIC Page 10 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT that in its true nature and character, payment was ex- gratia, that is to say, totally voluntary; it was not compensation which implies some sort of obligation to pay. court, accordingly, held that it cannot be said that amount in question was profits in lieu of salary within meaning of clause (3) of section 17 of Act and was not taxable as such. In Commissioner of Income-Tax v. Jamini Mohan Kar (supra), Calcutta High Court followed its earlier decision in case of Commissioner of Income-Tax v. Ajit Kumar Bose. 9. Delhi High Court in case of Commissioner of Income-Tax v. Deepak Verma (supra) observed that word compensation is not defined under Income Tax Act. Therefore, one has to take into consideration ordinary connotation of this expression in common parlance. court after referring to dictionary meaning of compensation observed that it is clear that when payment is to be received as compensation , employee would have right to receive such payment. If employee has no right, it cannot be treated as compensation . court held that it is for this reason that if payment is made ex-gratia or voluntary by employer out of his own sweet will and 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 view adopted by Calcutta High Court and Delhi High Court in above decisions question that arises in aforesaid legal backdrop is whether payment received by appellant - assessee from his employer was voluntary payment given by Page 11 of 14 HC-NIC Page 11 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT employer or was it in nature of compensation. As noticed earlier, Managing Director of Gujarat State Fertilizers Company Limited, viz., company where assessee was employed, passed order dated 6th May, 1984 discharging assessee from service under rule 44 of Service Rules which provides for discharge of employee for sufficient reasons by competent appointing authority after giving three months notice in writing in that behalf or by payment of three months basic pay and Dearness Allowance as in force from time to time in lieu of such notice. Against order of termination, assessee preferred appeal to higher authority in company, but did not succeed. He, therefore, approached this court by way of writ petition under Article 226 of Constitution of India being Special Civil Application No.5039/1984 challenging discharge. said petition came to be allowed by learned Single Judge holding that (1) employer was State within meaning of Article 12 of Constitution, and (2) order of discharge was by way of punishment and assessee was entitled to reinstatement of his services. employer challenged order in letters patent appeal before Division Bench of this court, which held that employer - Gujarat State Fertilizer Company Limited was not State or authority under Article 12 of Constitution and allowed appeal. However, court recorded agreement arrived at between parties as reproduced hereinabove and disposed appeal in terms of agreement. It is pursuant to above agreement that amount in question came to be paid to appellant. 11. Thus, assessee s services came to be terminated by order dated 6th May, 1984 under rule 44 of Page 12 of 14 HC-NIC Page 12 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT relevant Service Rules after giving three months pay. Therefore, insofar as obligation of employer to pay any amount to assessee in relation to termination of his services, same came to end in view of discharge of his services under rule 44. While assessee succeeded in writ petition filed by him, letters patent appeal preferred by employer came to be allowed. Therefore, discharge of assessee s services by employer attained finality. However, during pendency of letters patent appeal, assessee and employer arrived at settlement, in terms whereof, amount was to be computed in manner stated therein and was to be paid to assessee. Therefore, services of assessee came to be terminated in terms of rules, and amount in question was paid only in terms of settlement, without there being any obligation on part of employer to pay any further amount to assessee in terms of service rules. employer, voluntarily at its discretion, agreed to pay amount in question to assessee with view to bring end to litigation. There was no obligation cast upon employer to make such payment and, therefore, same would not take colour of compensation as envisaged under section 17(3)(i) of Act. amount in question would, therefore, not fall within ambit of expression profits in lieu of salary as contemplated under section 17(3)(i) of Act. 12. It has been contended on behalf of revenue that manner of computation of amount to be paid to appellant under settlement, reveals that same is in nature of terminal benefits on account of bringing end to services of appellant. In opinion of this court, Page 13 of 14 HC-NIC Page 13 of 14 Created On Thu Dec 24 18:30:28 IST 2015 O/TAXAP/23/2004 JUDGMENT manner of computation of amount payable to assessee in terms of settlement, would not change character of payment, inasmuch as, same being voluntary in nature and without any obligation on part of employer, would not amount to compensation in terms of section 17(3)(i) of Act. Tribunal was, therefore, not justified in holding that amount of Rs.3,51,308/- received by appellant pursuant to judgment of High Court was income liable to tax under section 17(3) of Act. 13. question stands answered accordingly, in favour of appellant assessee and against revenue. appeal is accordingly allowed. impugned order passed by Tribunal is hereby quashed and set aside and order passed by Commissioner (Appeals) deleting addition made by Assessing Officer is, hereby restored. ( Harsha Devani, j. ) ( A.G. Uraizee, J. ) hki Page 14 of 14 HC-NIC Page 14 of 14 Created On Thu Dec 24 18:30:28 IST 2015 Arunbhai R. Naik v. I.T. Officer