Recently, in ITO v. Kuwait Airways Corporation, the Income Tax Appellate Tribunal (ITAT), Mumbai bench held that the amount paid to ex-employees under settlement cannot be held as ‘profit in lieu of salary’ under section 17(3)(i) of the Income Tax Act.
While completing assessment against the assessee, the Assessing Officer found that assessee had paid an amount of Rs.78.50 lakhs without deducting any tax to five of its ex-employees during the year under consideration.The assessee claimed that the payment was made to five employees, who filed petition against the assessee before the High Court in connection with their retrenchment. The assessee paid the disputed amount to these employees under settlement to avoid litigation. Without considering the objections, the AO completed assessment by holding that the payments made to the five employees were there legitimate dues, that same had to be treated as profit in view of salary.
The bench noted that the Collector attached the bank account of the assessee upon the direction of the High Court and recovered the amount, that there was no occasion for it to deduct the taxes. It was further noted that the employees had paid taxes on the amounts received from the assessee. Furthermore, by the time FAA was deciding the appeal assessment of the ex-employees was also over. Therefore, there was a substantial time gap between the retrenchment and the attachment of the bank account of the assessee.
“Here,two things are noticeable first the assessee had not made any payment to its ex employees.Section 17(3)(iii)of the Act presupposes the existence of an employment i.e.,a relationship of employee and employer between the assessee and the person who makes the payment of “any amount” in terms of section 17(3)(iii)of the Act.So,the words in section 17(3)(iii) cannot be read distinctively to overlook the essential facet of the provision,the existence of employment i. e.,a relationship of employer and employee between the person who makes the payment of the amount and the assessee. In the case before us,the essential fact is missing.There was no employer-employee relationship between the assessee and the ex-employees.Secondly the ex-employees had paid the due taxes on the disputed amount.The assessee had claimed that it was under the bonafide belief that the amount received by the ex-employees was capital receipt.”
Dismissing the appeal filed by the Revenue, the bench said “Under clause (i) of section 17(3) of the Act, in order to characterise a particular payment received from the employer, on termination of the employment, as “profits in lieu of salary”, it has necessarily to be shown that this amount is due or received as “compensation”. The word “compensation” is not defined under the Act. Therefore, one has to take into consideration the ordinary connotation of this expression in common parlance. It has to be in the nature of something awarded to compensate for loss, suffering or injury. When translated in the context of employment, it would imply a monetary and non-monetary amount to be given to the employee in return for some services rendered by him. Inherent in this would be the obligation of the employer to pay some amount to the employee to “compensate” him. It would also mean that the employee gets a vested right to get such an amount. In the case under consideration there the ex employee did not get vested right to receive the amounts in question. A settlement was arrived at to avoid litigation-there was no obligation on part of the employer to pay some amount to the employees to compensate them.”
Read the full text of the order below.
