Income‑tax‑‑‑

‑‑‑‑Salary‑‑‑Profit in lieu of salary‑‑‑Scope of S.17(3)‑‑‑Company giving option to employees to terminate employment‑‑‑Amount received on such termination is a profit in lieu of salary ‑‑‑Encashment of leave salary is a profit in lieu of salary‑‑‑Indian Income Tax Act, 1961, S.17(3)(i).

Under the Indian Income‑tax Act, 1922, the expression "salary" was defined under section 7 of the Act and Explanation 2 to section 7 of the 1922 Act ,provided a definition of the term "profits in lieu of salary". Explanation 2 to section 7 of the 1922 Act postulated that a profit in lieu of salary must be an amount of any compensation due to or received by the assessee from the employer or former employer at or in connection with the termination of his employment whether solely as compensation for loss of employment or for any other consideration. When the Income Tax Act, 1961, was introduced in the year 1962, there is a significant omission of the words "compensation for loss of employment or for any other consideration" in section 17(3)(1) as found in Explanation 2 to section 7 of the Indian Income‑tax Act, 1922. Therefore, on the words found in clause (3)(i) of section 17 of the Act, if any compensation is received by the employee from his employer at or in connection with the termination of the employment, that would be regarded as profits in lieu of salary and liable to tax under the head "Salary".

Leave salary would be a profit in lieu of salary and therefore taxable under the provisions of clause (3) of section 17 of the Act. It is fairly clear that the leave salary and allowances are not paid outside the terms of the employment and the encashment of the unavailed leave arose only because of the employment and the amount was received by the assessee from the employer. Therefore, there can be no dispute that the amount received as encashment of the leave salary would be a profit in lieu of salary even within the meaning of sub‑clause (ii) of clause (3) of section 17 of the Act.

The assessee was employed by a company. The company offered an opportunity to all its employees who had more than one year of service to receive a special payment subject to‑the condition that they should leave the company. The assessee exercised his option to leave the company and the assessee was entitled to receive a total sum of Rs.1,56,200 as compensation. The said compensation‑ was payable in three equal instalments in different years. The assessee received the sum of Rs.52,200 as his first instalment and similar payments were made as the second and third instalments during the succeeding years. The assessee also received another sum of Rs.23,990 as salary in lieu of vacation for 91 days. The Income‑tax Officer during the course of the assessment proceedings for the year 1977‑78 brought to tax both the amounts. The Tribunal held that the payment under the voluntary separation programme was taxable but that the amount received in lieu of vacation was not taxable being a capital receipt. On a reference:

Held, (i) that the Tribunal was right in holding that the amount of Rs.52,200 received by the assessee as payment under the "voluntary separation programme" from the company was liable to be included in the assessee's total income for the assessment year 1977‑78.

CIT v. Ajit Kumar Bose (1987) 165 ITR 90 (Cal.) distinguished.

(11) that the sum of Rs.23,990 received as encashment of the leave salary would be a profit in lieu of salary and, therefore, taxable as salary.

CIT v. N.B. Tendolkar (1996) 221 ITR 268 (Mad.) fol.

All. India Defence Accounts Association In re: (1989) 175 ITR 494 (All.); CIT v. J. Visalakshi (1994) 206 ITR 531 (Mad.);. CIT v. Jamini Mohan Kar (1989) 176 ITR 127 (Cal.); Guff (W.A.) v. CIT (1957) 31 ITR 826 (Bom.); Krishna Murthy (M.) v. CIT (1985) 152 ITR 163 (AP); Patil Vijaykumar v. Union of India (1985) 151 ITR 48 (Kar.) and Shailendra Kumar v. Union of India (1989) 175 ITR 494 (All.) ref.

R. Balasubramanian for the Assessee.

C.V. Rajan for the Commissioner.

JUDGMENT

N.V. BALASUBRAMANIAN, J.‑‑‑This is a combined reference both at the instance of the assessee and at the instance of the Revenue. The Income‑tax Appellate Tribunal has stated a case and referred the following questions of law under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act); for our opinion for the assessment year 1977‑78.

Question of law at the instance of the assessee:

"Whether, on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal was right in holding that the amount of Rs.52,200 received by the applicant as payment under the "voluntary separation programme" from I.B.M. World Trade Corporation was liable to be included in the applicant's total income for the assessment year 1977‑78?"

Question‑of law at the instance of the Revenue:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the sum of Rs.23,990 the amount received in lieu of vacation at the time of the assessee leaving his service with I.B.M. World Trade Corporation is a capital receipt and therefore not taxable in the hands of the assessee?"

The assessee was employed by I.B.M. World Trade Corporation, a multi national company. On November 1, 1976, I.B.M. World Trade Corporation, New Delhi, addressed letters to all its employees stating that it had to reduce its operation in India because of the requirement of the Government of India for diluting its ownership with Indian capital. Therefore, it was of the view that its workload declined significantly in several areas of the business of the company and the company expected that there would be further decline in the business until its business position under the Foreign Exchange Regulation Act was resolved. The company therefore, felt that it was unable to provide the challenging work environment and prospects for career growth which was normal for the said company to its employees in every area of the business. Therefore, the company offered an opportunity to ail its employees who had served more than one year of service to receive a special payment subject to a condition that they should leave the company. It is a voluntary programme so that the employees, if they wish to follow other pursuits or start new careers may have the chance to do so with the assistance of the company. The special payment that was offered was measured on the basis that it would provide a minimum of six months salary for the first year of service plus 1‑1/2 months base salary for each additional year of service. It was also provided in the letter that the maximum payment under the programme would be 30 months base salary. The assessee exercised his option to leave the company and the assessee was entitled to receive a total sum of Rs.1,56,200 as compensation by virtue of his acceptance of the offer of the I.B.M. World Trade Corporation. The said compensation was payable in three equal instalments in different years. The assessee received the sum of Rs.52,200 as his first instalment and similarly payments were made as second and third instalments during the succeeding years. The, assessee also received another sum of Rs.23,990 as salary in lieu of vacation for 91 days. The Income‑tax Officer during the course of the assessment proceedings for the assessment year 1977‑78 brought to tax both the amounts. The Appellate Assistant Commissioner, on appeal by the assessee, also held that the assessee would be liable to tax on both the amounts in view of the provisions of clause (3) of section 17 of the Income Tax Act, 1961 (hereinafter to be referred to "the Act"). In other words, he upheld the order of the Income‑tax Officer laying the tax on both the amounts. The Appellate Tribunal, on further appeal by the assessee, also reached the same conclusion. As regards the taxability of the amount of Rs:52,200 the Appellate Tribunal held that there was a termination of employment and in connection with the termination of the employment the amount was received as compensation and, therefore, the amount received should be regarded as profit in lieu of salary within the meaning of sub‑clause (i) of clause (3) of section 17 of the Act. The Tribunal, however, took the view that the sum of Rs.23,990 received by the assessee was received in lieu of the vacation. Following its earlier order in I.T.A No. 348 (Mds.) of 1978‑79, dated March 31, 1980, the Tribunal held that it was a cash compensation for not having availed of the right of vacation and, therefore, the amount received was not taxable. As a result, the assessee as well as the Revenue have come before us by way of reference on the questions of law set out above.

We presently take up the assessee's reference. Mr. R. Balasubramanian, learned counsel for the assessee, submitted that the payment received by the assessee was in connection with the termination of the employment of the assessee for the reason that the employer had scaled down its business, and hence the amount received is a capital receipt and cannot be regarded as profit in lieu of salary. According to him, the termination of employment arose only because of the intended closure of the business, and since it is for the loss of the office, it should be regarded as a capital receipt. He strongly placed reliance on a decision of the Bombay High Court in the case of W. A. Guff v. CIT (1957) 31 ITR 826, a decision of this Court in the case of CIT v. J. Visalakshi (1994) 206 ITR 531 and two decisions of the Calcutta High Court in the cases of CIT v. Ajit Kumar Bose (1987) 165 ITR 90 and CIT v. Jamini Mohan Kar (1989) 176 ITR 127. He therefore, submitted that the amount was paid by the employer voluntarily and there was no obligation on the part of the employer to pay the amount and hence, the amount received by the assessee cannot be regarded as a profit in lieu of the salary.

Mr. C.V. Rajan, learned counsel for the Revenue, on the other hand, submitted that it may be due to closure of the business or due to scaling down of the business of the company, the company might have made an offer to all of its employees to receive special payment, if they desired to exercise the option, but the fact remains that the assessee has exercised his option and has chosen to leave the company and at that point of time, the termination of the employment of the assessee arose when the employer accepted the offer of the assessee, Hence, the assessee on the basis of the letter, dated November 1, 1976, was entitled to receive the special payment and when the assessee agreed to receive the amount, there was an obligation on the part of the employer to pay the amount and the employer was obliged to pay the compensation to the assessee in exercising his option and, hence, according to learned counsel for the Revenue, the compensation received would come within the purview of sub‑clause (i) of clause ,3 of?? the Act. He also submitted that the amount cannot be regard as ex gratia payment and it is not the case of the assessee before the Assessing Officer or before the Appellate Assistant Commissioner of even before the Appellate Tribunal that it was an ex gratia payment. He therefore submitted that the Tribunal has come to the correct conclusion in holding that the as amount was taxable as profit in lieu of the salary.

We have carefully considered the submissions of learned counsel for the assessee and learned counsel for the Revenue. Before considering the rival submissions, it is necessary to notice the relevant provision of the Act. Section 15 of the Act deals with the charge to income‑tax on income falling under "salaries". Section 16 provides for deduction from salaries and section 17 defines the expression, salary and under clause (1) of section 17, salary includes wages, any annuity or, pension, any gratuity, any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. The expression, "profits in lieu of salary" is defined in clause (3) of section 17 of the Act. Clause (3) of section 17 of the Act reads as under:

"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:

(ii)??????? any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuating fund), to the extent which it does not consist of contributions by the assessee or interest on such contributions: "

The provision of sub‑clause (i) of clause (3) of section 17 of the Act, in our opinion, includes within its ambit, any compensation due to or received by the assessee from his employer at or in connection with the termination of his employment in our view, the said provision makes it clear that any compensation received at or in connection with the termination of the employment will be treated as a profit in lieu of salary and therefore, taxable under the head "Salary". .

It is also relevant to notice the legislative history behind the provision of clause (3) of section 17 of the Act. Under the Indian Income‑tax " 1922, the expression "salary" was defined under section 7 of the said Act and Explanation 2 to section 7 of the 1922 Act provided a definition of the term, "profits in lieu of salary". The said Explanation 2 to section 7 of the 1922 Act postulates that a profit in lieu of salary must be an amount of any compensation due to or received by the assessee from the employer or former employer at or in connection with the termination of his employment whether solely as compensation for loss of employment or for any other consideration. When the Income Tax Act, 1961, was introduced in the year 1962, there is a significant omission of the words, compensation for loss of employment or for any other consideration as found in Explanation 2 .to section 7 of the Indian Income‑tax Act, 1922, in sub‑clause (i) of clause (3) of section 17 of the Act.

The Bombay High Court in W.A. Guff v. CIT (1957) 31 ITR 826, had an occasion to consider the provisions of section 7 of the 1922 Act and it considered Explanation 2 before the amendment of 1955 and the Bombay High Court held that the expression, "compensation for loss of employment" used in Explanation 2 to section 7 of the Indian Income‑tax Act, 1922, refers to any payment made whether under a legal liability or voluntarily to compensate or act as a solatium for loss of employment suffered by an employee. The present Act has significantly omitted the expression, "compensation for loss of employment" when "profit in lieu of salary" is defined in clause (3) of section 17 of the Act. Therefore, on the words found in clause (3) of section 17 of the Act, if any compensation is received by the employee from his employer at or in connection with the termination of the employment, that would be regarded as profits in lieu of salary and liable to tax under the head "Salary". In view of the specific. statutory provision, it not necessary to consider other decisions relied upon by learned counsel for the assessee. However, since those decisions are brought before us, it is necessary for us to deal with these case laws also.

The decision of this Court in the case of CIT v. J. Visalakshi? (1994) 206 ITR 531, cannot be said to in any way support the case of the assessee. This Court, in that case, while considering the provisions of sub‑clause (i) of clause (3) of section 17 of the Act held that the expression, "termination" found in clause (3) of section 17 of the .Act should receive a wider meaning and this Court also held that the word 'termination' cannot be confined only to the cases of voluntary retirement or superannuation, but includes cases like resignation, dismissal or compulsory retirement as well. Admittedly, in the instant case, the assessee exercised the right of option to leave the service of the company and on the acceptance of the offer of the employer by the assessee; the services of the assessee to the company were terminated. Therefore, it is a case of termination of employment within the meaning of sub‑clause (i) of clause (3) of section 17 of the Act. Mr. R. Balasubramanian learned counsel for the assessee‑contended that the decision of this Court in Visalakshi's case (1994) 206 ITR 531 (Mad.), has held that the compensation would be a capital receipt. A careful reading of the decision in Visalakshi's case (1994) 206 ITR 531 Mad.) shows that this Court has not decided that the amount received would be a capital receipt, but observed that if the amount does not fall within the meaning of clause (3) of section 17 of the Act, it cannot be construed as an income assessable under the Act as it would be regarded only as a capital receipt. From the above observation, it cannot be deduced that this Court has held that the said compensation would not fall within the scope of clause (3) of section 17 of the Act. The decision of this Court in Visalakshi's case (1994) 206 ITR 531, far from supporting the case of the assessee, really supports the case of the Revenue.

The next decision that was relied upon by learned counsel for the assessee is a decision of the Calcutta High Court in the case of CIT v. Ajit Kumar Bose (1987) 165 ITR 90. A careful reading of the said decision would clearly show that the decision has no application to the facts of the case. In. that case before the Calcutta High Court, there was nothing to indicate that the assessee therein was entitled to continue in the employment of the company till he reaches the age of superannuation and under the terms and conditions of the service, his services were liable to be terminated on giving three months notice without assigning any reasons. In those circumstances, the Calcutta High Court was of the view that the assessee was not entitled to remain in service, after the expiry of the period stated in the requisite notice and there was no obligation on the part of the employer to pay anything at or in connection with the termination of the employment to him other than the salary for the period of notice. The decision of the Calcutta High Court is distinguishable because there is nothing to show on the facts of this case that the assessee was not entitled to continue in the employment of the company up to his superannuation age. The assessee has not produced or proved before the taxing authorities or before the Tribunal the conditions of service and when his services were liable to be terminated. Further, as rightly pointed out by learned counsel for the Revenue, the employer was obliged to pay compensation in connection with the termination of the employment of the assessee. Hence, there is an enforceable obligation against the employer and there is a corresponding right accrued in favour of the assessee to receive the amount. The compensation received, in our opinion, would squarely fall within the ambit of sub‑clause (i) of clause (3) of section 17 of the Act. The other decision relied upon by Mr. R. Balsubramanian, learned counsel for the assessee, in CIT v. Januni Mohan Kar (1989) 176 ITR 127 (Cal.), runs on the same lines as the case of CIT v. Ajit Kumar Bose (1987) ‑165 ITR 90 (Cal.) and it is not necessary to deal with that case separately. In our opinion, the Tribunal has come to the correct conclusion that there was a termination of the assessee's employment and the termination of the employment may be either at the instance of the assessee or at the instance of the employer but the words, "in connection with" found in sub‑clause (i) of clause (3) of section 17 of the Act are wide enough to include any compensation received in connection with the termination of the employment of the assessee. Therefore, the Tribunal has come to the correct conclusion in holding that the compensation received by the assessee in connection with the termination of his employment would be a profit in lieu of salary within the meaning of sub‑clause (i) of clause (3) of section 17 of the Act. In this view of the matter, it is not necessary to consider other reasons given by the Tribunal with reference to the taxability of the amount under sub‑clause (ii) of clause (3) of section 17 of the Act. In fine, we answer the question of law referred to us at the instance of the assessee in the affirmative and against the assessee.

1n so far as the question of law referred at the instance of the Revenue is concerned, a sum of Rs.23,990 was received by the assessee in lieu of vacation. The Income‑tax Officer brought the said sum to tax and the Appellate Assistant Commissioner held that this was an amount paid in addition to the salary and not otherwise: According to the Appellate Assistant Commissioner, the assessee instead of enjoying the vacation of 91 working days to which he was entitled, did some extra work for which he was paid a sum of Rs.23,990 and the amount received would be taxable as salary as the amount was paid for the services rendered by the assessee. The Appellate Tribunal, however held that it was a cash compensation for not having availed of the right of vacation. Therefore, the Tribunal proceeded on the basis that the amount was received by way of capital receipt. The question whether the amount received towards the leave encashment can be regarded as salary or not came up for consideration before this Court in the case of CIT v. N.B. Tendolkar (1996).221 ITR 268, wherein this Court after noticing a decision of the Andhra Pradesh High Court in Krishna Murthy (M.) v. CIT (1985) 152 ITR 163, a decision of the Karnataka High Court in Patil Vijaykumar v. Union of India (1985) 151 ITR 48 and a decision of the Allahabad High Court in All India Defence Accounts Association, In re: Shailendra Kumar v. Union of India (1989) 175 ITR 494, held that the encashment of the leave salary would be a profit in lieu of salary and therefore, taxable under the provisions of clause (3) of section 17 of the Act. It is fairly cleat' hat the leave salary and allowances are not paid outside the terms of the employment and the encashment of the unavailed leave arose only because of the employment and the amount was received by the assessee from the employer. Therefore, there can be no dispute that the amount received as encashment of the leave salary would be a profit in lieu of salary even within the meaning of sub‑clause (ii) of clause (3) of section 17 of the Act. Learned counsel for the assessee has not seriously disputed the position that the decision of this Court in N.B. Tendolkar's clase (1996) 221 ITR 268, would apply to the facts of the case. Accordingly and following the earlier decision of this Court in Tendolkar's case (1996) 221 ITR 268, we hold that the Tribunal was not correct in‑holding that the sum of Rs.23,990 was a cash compensation for not having availed of the right of vacation and, therefore, it should be treated as capital receipt. We are of the opinion that the Tribunal was not justified in holding that the amount is not taxable under the provisions of the Act. We hold that the amount received for encashment of the leave salary would he a profit in lieu of salary and, therefore, taxable as salary. Accordingly, we answer the question of law referred at the instance of the Revenue in the negative and in favour of the Revenue. However, there will be no order as to costs.

M.B.A./322/FC?????????????????????????????????????????????????????????????????????????????????? Reference answered.