What is Ex gratia payment?
Ex Gratia is a Latin word that
means “by virtue of grace” or “by favor”. Therefore, an ex gratia payment is
voluntary because the paying party does not need to compensate the receiver. Ex
gratia meaning is a payment made out of virtue to individuals by an
organization or government for claims and damages.
Ex gratia payment definition has undergone several
changes. The general ex gratia payment definition is a type of payment made by
an organization, government, etc., to an individual for claims and damages
without acknowledging any legal obligations. Generally, ex gratia payments are
requested to fulfil such damages that do not come under any insurance policies.
For example, suppose any company is having an awful experience and want to
reduce its number of staff. In that case, they must pay legal compensation to
the employees before laying them off. If the company pays an additional amount
out of their wish, this is termed ex gratia meaning. This additional voluntary
payment is ex gratia payment.
Features of Ex gratia payment
§ Ex gratia meaning is that it is out of choice and cannot
be forced.
§ Companies provide ex gratia payment to maintain
their good public image.
§ Ex gratia meaning is free of any obligation and
admission of liability.
§ Ex gratia payments are typically made as a gesture
of goodwill or to compensate for some type of loss or hardship.
§ Ex gratia payments are voluntary and not required
by law.
§ There is no limit on ex gratia payment amount,
which entirely depends on the paying party.
§ Ex gratia payment is never fixed and varies from
one organization to another.
Ex gratia payment is different from the Bonus
Ex gratia meaning is different
from a bonus’; they are not the same thing. A bonus is paid according to the
employees’ performance in the company. According to Bonus Act, employees are
eligible for an annual bonus ranging from 8% to 20% of their salary. Ex gratia
is the additional payment made by the employer out of their goodwill. Paying
the bonus is a liability and cannot be avoided by the company.
Is Ex gratia payment taxable?
Generally, all the payments made by the employer to the employees
are subject to taxation in India. These payments come under the employment
contract. However, an ex gratia payment is an extra payment made by the
employer, and such an amount without any legal obligation is not taxable. In
other words, Ex gratia payments are not taxable in India, unless they are made
in lieu of salary or wages.
Ex gratia
payment in Covid
CBDT
prescribes procedure for claiming tax exemption in respect of any sum received
as ex-gratia, for treatment of ‘COVID-19’ or consequential death, by
Individual/ family members. [Notifications 90/2022, 91/2022 and 92/2022 dated 05.08.2022]
These Notifications were
issued in accordance with the requirements of the Finance Act 2022 relating to
the tax exemption of any amount of money received by an Individual as
reimbursement of actual expenses for COVID-19 treatment of self/ family
members. Also, any sum of money received as ex-gratia from an employer by family
members of an individual deceased due to COVID-19 has been exempted from tax
with retrospective effect from Financial Year 2019-20, subject to a Rs. 10,00,000
limit when the amount is obtained from a source other than the employer. As a
result, the CBDT has announced the procedure for seeking tax exemption on
reimbursements/ ex-gratia receipts received by individuals/ family members.
Receipt of exgratia amount by
the family member of the deceased employee on death of the employee due to COVID-19
from deceased non-relatives [Section 56(2)(x)]
Receipt of exgratia
amount (actual medical expenditure is irrelevant here) by the family member of
the deceased employee who died due to COVID-19
Full amount received is exempt from tax in the
hands of the family member of the employee if-
(a) The amount is received
within 12 months from the date of death and,
(b) subject to such conditions
as may be prescribed
Receipt of exgratia amount by the family member of the deceased individual on his death due to COVID-19 from
non-relatives [Section
56(2)(x)]
§
Receipt
of exgratia amount (actual medical expenditure is irrelevant here) by the
family member of the deceased individual who died due to COVID-19
§
Full
amount received is exempt from tax subject to maximum of Rs. 10,00,000 in
aggregate in the hands of the family member of the individual if-
(a) The amount is received within
12 months from the date of death and,
(b) subject to such conditions as
may be prescribed
CBDT Circular F. No. 200/79/2000-IT(A-I), dated 23.01.2001
Subject : Admissibility
of Ex gratia amount paid by assessees for gaining enduring benefit or advantage
under Voluntary Retirement Scheme (VRS)
It
is noticed that a number of assessees have resorted to restructuring of human
resources, financial engineering, etc. Invariably, exgratia payments are made
in order to encourage such schemes to further long-term advantage to the
assessee by way of profitability, competitiveness and also to further induction
of technology. Particular mention may be made of the Voluntary Retirement
Schemes (VRS) of the banking sector in this connection. The question arises
whether the exgratia amount is allowable as revenue expenditure. In this
connection, the primary test is to see whether any enduring benefit has
resulted to the assessees by making an expenditure. In the event, the
expenditure is laid out for acquiring or bringing into existence an asset or
advantage for the enduring benefit of the business, it is properly attributable
to capital and is of the nature of capital expenditure. If any such asset or
advantage for enduring benefit of the business is thus acquired or brought into
existence, it would be immaterial whether the source of payment was the capital
or the income of the concern or whether payment was made once and for all or
was made in instalments. While it is not ordinarily easy to evolve a fool-proof
test for ascertaining whether in a given case, expenditure is capital or
revenue, the Assessing Officers normally decide the character of expenditure on
the facts and circumstances of each case. They consider the nature and the
ordinary course of business and the objects for which the expenditure has been
laid out. Towards this purpose, the test of enduring benefit is a useful tool
in considering the exgratia amount, prima facie, as a capital expenditure. In
this view of the matter, the expenditure, as said above, is to be treated as
capital expenditure.
CBDT Circular No. 776,
, Dated 08.06.1999
Subject : Taxability
of ex gratia payment made by Central Government/State Government/Local Authority/Government
Public Sector Undertaking to heirs of employee on his death, etc.
Circular No. 573, F. No.
200/115/90-ITA-I, dated 21.08.1990 provided
that a lump sum ex gratia payment made, to the widow or other legal heirs of an
employee, who dies while still in active service, will not be taxable as income
under the Income-tax Act, 1961.
It
is noted that there can be situations in which a person or his heir receives ex
gratia payment from the Central Government/State Government/Local
Authority/Public Sector Undertaking, consequent upon injury to the person/death
of a family member, while on duty. Such an ex gratia payment will not be liable
to income-tax under the Income-tax Act, 1961.
CBDT
Circular No. 385 [F. No. 316/35/81-WT], Dated 03.07.1984
Subject : Whether properties left in erstwhile east Pakistan
after Indo-Pak Conflict of 1965 and relief granted in the form of Exgratia grant
and as such asset includible in net wealth
The
Board have considered taxation under the Wealth-tax Act of assessees in India
in respect of their properties left in erstwhile East Pakistan after Indo-Pak
conflict of 1965 and the relief granted to them in respect of such properties
in the form of exgratia grant from the Consolidated Fund of India and have
decided as under :
The
value of the properties left behind in East Pakistan by persons who had
migrated to India, and which vested in the Custodian of Enemy Property in
Pakistan, cannot be assessed to wealth-tax in India in the hands of such
persons.
The
ad hoc interim relief granted by the Government of India in the form of
exgratia grant from the Consolidated Fund of India cannot be assessed to
wealth-tax as there is no legally enforceable claim to such relief.
Assessee
had received Rs. 47.21 lakhs from his erstwhile company as ex gratia and a
letter had been issued by employer which clearly stated that payment of amount
had been made voluntarily to assessee and was not compensation, Assessing Officer
without establishing letter as non-genuine could not have invoked provisions of
section 17(3)(iii) for making addition
ITAT
Pune held that payment made voluntarily by the employer out of appreciation for
the employee falls outside the rigours of Section 17(3)(iii) of the Income Tax
Act.
Assessee
has taken voluntary retirement from Racold Thermo (P) Ltd. Pune during the year
under consideration. Thereafter the assessee has started trading business of
Industrial consumable supply in the name of M/s. Laxmi Enterprises. Assessee
received Rs. 47,21,154/- from the company as Ex-Gratia and from this amount
claimed Rs. 5,00,000/- under section 10(10C) VRS compensation/Termination of
service and balance remaining amount of Rs. 42,21,154 from Ex-Gratia taken as
capital receipt. Assessing Officer taxed amount of Rs. 42,21,154 under section
17(3)(iii) by treating it as additional compensation received by assessee from
his employer as profit in lieu of salary under section 17(3)(iii). However, a
letter had been issued by employer which clearly stated that payment of amount
had been made voluntarily to assessee and was not compensation. This letter had
not been doubted by department. No independent inquiry regarding veracity of
this letter had been conducted and none of authorities had held this letter
issued by employer to assessee as bogus. Without establishing letter as
non-genuine or without examining sanctity of payment made, simply invoking
provisions of Act for making addition was not appropriate for a quasi-judicial
authority. When employer itself stated that payment had been made voluntarily
by them out of appreciation for employee, it fell outside rigours of section
17(3)(iii). Therefore, Assessing Officer
was to be directed to delete addition from hands of assessee. [In favour of
assessee] (Related Assessment year : 2018-19) – [Mahadev Vasant Dhangekar v. ACIT,
NFAC (2023) 149 taxmann.com 170 (ITAT Pune)]
Assessee a retired professional
cricketer received ex-gratia payment from BCCI which was claimed as capital
receipt not chargeable to tax and Assessing Officer brought said sum to tax
under section 56(2)(vii) without ascertaining whether registration of BCCI was
restored under section 12AA for relevant assessment year or not, in such a case
matter was to be remanded to Assessing Officer
Assessee was a retired professional
cricketer who received ex-gratia payment as one-time benefit from
BCCI and claimed same as capital receipt not liable to be taxed. Assessing
Officer held that said sum would be taxable under section 56(2)(vii) on ground
that BCCI did not have registration under section 12AA. He, thus, made
additions in income of assessee. Commissioner (Appeal) upheld said additions
and further held that said sum was liable to be taxed under section 28(iv). Assessee
contended that registration of BCCI under section 12AA was restored by Mumbai
Bench of Tribunal for relevant assessment year. Since assessee was paid ex-gratia amount
for having played cricket for his country and assessee being a retired
cricketer, prima facie, section 28(iv) would not be applicable. Matter was to
be remanded back to Assessing Officer to examine whether BCCI was having
registration under section 12AA for relevant assessment year and if satisfied
said amount would not be taxable under section 56(2)(vii). [Matter remanded] (Related
Assessment year : 2013-14) – [Sunil Bandacharya Joshi v. DCIT (2022) 194 ITD
725 : 137 taxmann.com 343 (ITAT Bangalore)]
Supreme Court guidelines for payment of ex gratia of Rs 50,000 to families of those who died due to Covid-19
(ii)
that the deaths occurring within 30 days from the
date of testing or from the date of being clinically determined as a Covid-19
case shall be treated as “Deaths due to Covid-19”, even if the death takes
place outside the hospital/in-patient facility;
(iii)
also, the Covid-19 case while admitted in the
hospital/in-patient facility and who continued to be admitted beyond 30 days
and died subsequently shall also be treated as a Covid-19 death;
(iv)
Covid-19 cases which are not resolved and have died
either in the hospital settings or at home, and where a Medical Certificate of
Cause of Death (MCCD) in Form 4 & 4A has been issued to the registering
authority, as required under Section 10 of the Registration of Birth &
Death (RBD) Act, 1969, shall also be treated as Covid-19 death. However, it is
observed and made clear that irrespective of the cause of death mentioned in
the death certificate, if a family member satisfies the eligibility criteria
mentioned in paragraphs 11(i) to 11(iv) as above shall also be entitled to the
ex-gratia payment of Rs. 50,000/- on production of requisite documents as
observed hereinabove, and no State shall deny the ex-gratia payment of Rs.
50,000/- on the ground that in the death certificate the cause of death is not
mentioned as “Died due to Covid-19”;
(v)
all concerned hospitals where the patient was
admitted and given treatment shall provide all the necessary documents of
treatment etc. to the family member of the deceased, as and when demanded, and
if any hospital and/or the place where the deceased had taken treatment refuses
to furnish such documents, it will be open for the Grievance Redressal
Committee to call for such information and the concerned hospital/institution
where the deceased was admitted shall have to furnish such particulars as
required for the purpose of establishing that the death was due to Covid-19;
(vi)
a family member of the deceased who committed
suicide within 30 days from being diagnosed as Covid-19 positive shall also be
entitled to avail the financial help/ex-gratia assistance of Rs. 50,000/- as
granted under the SDRF in accordance with the guidelines dated 11.09.2021
issued by the NDMA under Section 12(iii) of DMA, 2005, as directed hereinabove;
(vii)
if any family member/kin of the deceased died due
to Covid0-19 has any grievance with respect to non-receipt of the ex-gratia
payment of Rs. 50,000/-, it will be open for the aggrieved claimant to approach
the Grievance Redressal Committee constituted as observed hereinabove, and the
Grievance Redressal Committee shall examine the contemporaneous medical record
of the deceased patient, and take a decision within a period of 30 days from
approaching the said Grievance Redressal Committee and as observed hereinabove
such Grievance Redressal Committee shall have powers to call for the
details/documents from the concerned hospital/hospitals from where the deceased
took the treatment;
(viii)
all endeavours shall be made by the District
Disaster Management Authority/District Administration and even the Grievance
Redressal Committee to avoid any technicalities and all concerned authority
shall act as a helping hand, so as to wipe off the tears of those who have
suffered due to loss of a family member died due to Covid-19;
(ix)
it is further directed that in cases of the death
certifications already issued and any family member of the deceased is
aggrieved by the cause of death mentioned in the death certificate already
issued, it will be open for the aggrieved person to move the appropriate authority
who issued the death certificate and/or registering authority and on production
of the necessary documents as observed hereinabove, including production of
documents, such as, positive RT-PCR/ Molecular Tests/ RAT OR clinically
determined through investigations in a hospital/ in-patient facility by a
treating physician, while admitted in the hospital/ in-patient facility, the
concerned authority shall modify/amend such death certificates. If the person
is still aggrieved, it will be open for the aggrieved person to approach the
Grievance Redressal Committee constituted as hereinabove and the concerned
registering authority shall ratify/amend the death certificate as directed by
the Grievance Redressal Committee.
The National
Disaster Management Authority (NDMA), Ministry of Health and Family Welfare,
Union of India are directed to issue guidelines to the concerned States/Union
Territories incorporating the directions issued hereinabove which shall be
binding to all the States/Union Territories. – [Gaurav Kumar Bansal v. Union
of India and others - Miscellaneous Application No. 1120 of 2021 - Date of
Judgement : 04.10.2021 (SC)]
Ex-Gratia
Payment to prematurely retiring despite absence of Scheme allowable
Brief facts
relating to the issue are that the Assessing Officer was of the view that in
the absence of any scheme formulated by the assessee bank, the amount paid as
ex-gratia to prematurely retiring employees was not to be allowed as deduction.
The case of assessee on the other hand, was that the said payment was made in
recognition of long term and meritorious services of the employees. The
assessee had claimed the said expenditure as ex-gratia payment as in the nature
of profits and in lieu of salary, and on the same, TDS was also deducted.
However, the Assessing Officer disallowed the said expenses in view of section 35DDA
of the Act and also held that they were not allowed as deduction under section
37(1) of the Act. The CIT(A) allowed the claim of assessee following the order
of Tribunal in the case of another bank. Where the assessee in recognition of
the services provided to its retiring employees make certain ex- gratia
payments in recognition of their services, which are not based on any scheme or
instruction formulated by the employer assessee, then the same partakes the
nature of profit in lieu of salary. The relationship between the assessee and
retiring employees was admittedly as of employer and employee and the
remuneration paid to such employees is part of the salary due to the said
employee. Even the ex-gratia payment made by the assessee over and above the remuneration
due to the employees partakes the character of profits in lieu of salary to
such employee and is duly allowable as an expenditure in the hands of the
assessee under section 37(1) of the Act. (Related Assessment year : 2013-14) – [DCIT v. Prathamik Shikshak Sahakari Bank Ltd. - Appeal Number : ITA No.1307/PUN/2017 Date
of Judgement : 19.08.2019 (ITAT Pune)]
Ex-gratia’
from employer for settling industrial dispute eligible for retrenchment
compensation exemption under section 10(10B)
Ahmedabad ITAT adopts pragmatic approach in
interpreting ‘public welfare’ provisions, holds that the ex-gratia compensation
received by assessee-employee during Assessment year 2008-09 in terms of
settlement with the employer amounts to ‘retrenchment compensation’ and is
eligible for exemption under section 10(10B) in principle, remands matter back
to Assessing Officer for determining the quantum of exemption;
Assessee-employee had invoked provisions of Industrial Disputes Act 1947
against his employer for his transfer from Vadodara to Mumbai, and after losing
the case before the Industrial Tribunal, the employer agreed to an ‘out-of-court’
settlement under which employee received Rs. 6.5 lakhs as ‘ex-gratia’;
Observing High Court order taking a note of the ‘out-of-court’ settlement &
modifying Industrial Tribunal order, ITAT rejects Revenue's claim that the
amount was a mere ‘ex-gratia’ and rules that amount is in the nature of
compensation under the Industrial Disputes Act, 1947; Further rejects Revenue's
stand that it was a case of ‘resignation’ and not retrenchment, ITAT refutes ‘hyper-technical
interpretation’ of the wordings in the settlement deed and noting the conduct
and employee’s surrounding circumstances, holds that employee’s termination
falls within the definition of ‘retrenchment’ under Industrial Disputes Act;
ITAT, therefore, concludes that the twin conditions for claiming exemption under
section 10(10B), viz. (i) compensation must be received under the Industrial
Dispute Act 1947, and (ii) it has to be paid at the time of retrenchment, are
satisfied. - [Vishnu Mohan T Nair v. ITO [TS-4-ITAT-2018(Ahd)] – Date of Judgement :
02.01.2018 (ITAT Ahmedabad)]
Ex gratia payment made voluntary by an employee is not taxable as “profit in lieu of salary” Assessee was an employee of company ‘G’. He was discharged from service under relevant rule of service Rules after giving three months’ pay. Assessee also received certain amount as ex-gratia compensation on premature cessation of his services. Assessing Officer took a view that compensation so received was to be taxed under section 17(3) as ‘profits in lieu of salary’. Tribunal confirmed order passed by Assessing Officer. Since payment of ex-gratia compensation was voluntary in nature without there being any obligation on part of employer to pay any further amount to assessee in terms of service rules, it would not amount to compensation in terms of section 17(3)(i). Therefore, impugned addition was to be deleted. [In favour of assessee] (Related Assessment year : 1994-95) – [Arunbhai R. Naik v. ITO (2015) 379 ITR 511 : 64 taxmann.com 216 : (2016) 284 CTR 284 : 236 Taxman 190 (Guj.)]
Under sub-clause (i) of section 17(3), in order to characterize 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 ‘compensation’ - If payment is made as exgratia or voluntary by an employer out of his own sweet will and is not conditioned by any legal duty or legal obligation, either on sympathetic grounds or otherwise, such payment is not to be treated as ‘profit in lieu of salary’ under sub-clause (i)
The
assessee had received from his employer certain amount in addition to normal
benefits at the time of his retirement. Though the employer had deducted the
tax at source on that amount, yet the assessee claimed that the said amount was
not exigible to tax being an exgratia payment which was outside the scope and
ambit of section 17(3). The Assessing Officer, however, noted that the said
amount was given to the assessee after discussion between him and his employer
as revealed from the letter dated 25.01.2001 of the employer in that behalf
and, therefore, the payment was made as 'compensation' for his services and,
thus, was liable to tax under section 17(3)(i). The opinion of the Assessing
Officer was confirmed by the Commissioner (Appeals). The Tribunal, however, set
aside that view and deleted the addition holding that it was not chargeable to
tax under section 17(3)(i) as ‘profit in lieu of salary’. On the revenue's
appeal:
Held
: There is a distinction between sub-clause (i) and sub-clause (iii ) of clause
(3) of section 17. Item (B) of sub-clause (iii) enumerates that when any
'amount' is due or is received after cessation of the employment, it is treated
as ‘profit in lieu of salary’. The expression used here is ‘amount’. Therefore,
when an amount is received by an employee whether due or not, on the cessation
of the employment, from the employer, this partakes the character of ‘salary’
and is chargeable to tax. In contradistinction, sub-clause (i) uses the
expression ‘compensation’ (rather than ‘amount’). Therefore, under sub-clause
(i), in order to characterize 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'.
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 exgratia 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).
Having
regard to this legal position, it had to be decided as to whether the payment
received by the assessee on cessation of his employment was a voluntary payment
given by the employer or it was in the nature of ‘compensation’.
It
has to be in the nature of something awarded to compensate for the loss,
suffering or injury. When translated in the context of employment, it would
imply monetary and non-monetary amount to be given to the employee in return of
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. This would
also mean that the employee gets vested right in him to get such an amount.
In
the instant case, all dues admissible to the assessee on his resignation were
otherwise paid by the employer to him. Therefore, whatever terminal dues,
including earned salary, etc., which were payable to the assessee in terms of
contract or otherwise were paid to him. In addition, the employer agreed to pay
‘in its discretion’ certain amount as an ‘exceptionable’ and 'one off exgratia
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
exgratia. It, therefore, clearly partook the character of voluntary payment and
could not be termed as a payment by way of ‘compensation’.
In
fact, the Legislature wanted such type of payments also to be treated as income
at the hands of the employees/persons and to tax them. For that reason,
sub-clause (iii) was inserted in section 17(3). This also implies that such a
payment was not taxable before this amendment was carried out by inserting
sub-clause (iii) with effect from 01.04.2002. Insofar as the assessee was
concerned, the receipt of that payment by him would not be covered under
sub-clause (i) of clause (3) of section 17. (Related Assessment year : 2001-02)
- [CIT v. Deepak Verma (2011) 339 ITR 475 : (2010) 236 CTR 213 : 194 Taxman
265 : 7 taxmann.com 53 (Del.)]
Assessee
was granted retirement benefits and was paid a sum of Rs. 22 lakhs by company
after two months of his resignation - Assessee treated said amount as exgratia
payment, voluntarily paid by employer without being under any obligation to pay
same and, hence, claimed this amount as exempt from tax - Assessing Officer
rejected assessee’s claim and taxed said amount under section 17(3)(i) - Since
said payment had been made just after two months from relinquishment of job,
payment was closely associated with employment of assessee and, therefore,
Assessing Officer had rightly taxed that payment under section 17(3)(i)
Assessee
was working as a sales manager in a company. He had resigned from the company
on 1-5-1996. The company granted retire- ment benefits to the assessee and paid
a sum of Rs. 22 lakhs to him on 22.07.1996. The assessee treated the said
amount as exgratia payment voluntarily paid by the employer, without being under
any obligation to pay the same and, hence, claimed that amount as exempt from
tax. The Assessing Officer rejected the assessee’s claim and taxed the said
amount under section 17(3)(i). On appeal, the Commissioner (Appeals) upheld the
impugned order. On second appeal :
Held
: The employer of the assessee treated the payment of Rs. 22 lakhs as business
expenses and claimed the deduction. Thus, the receipt of Rs. 22 lakhs was
straight away associated with the employment of the assessee. Had there not
been any relationship between the assessee and the company, as of employer and
employee, then the assessee would have not received any such payment. The
expression ‘profit in lieu of salary’ as defined in sub-clause (i) of clause
(3) of section 17 would take this payment in its embrace, because it includes
the amount in compensation due to or received by the assessee from an employer
or former employer at or in connection with termination of his employment or
the modification of the terms and conditions relating to employment. The
assessee had tried to restrict the meaning of ‘profit in lieu of salary’ as
relating to compensation only on termination of the service, but the
termination referred to in section 17(3)(i) would mean relinquishment of the
job, either voluntarily, resignation or on attaining the superannuation. The
said payment had been made just after two months from relinquishment of the
job. Therefore, it was closely associated with the employment. Therefore, the
lower authorities had rightly taxed that amount. Hence, the appeal was to be
dismissed. [In favour of revenue] (Related Assessment year : 1997-98) – [Sam
Patel v. ITO (2007) 11 SOT 566 (ITAT Mumbai)]
On
completion of his contract of service with company, assessee received certain
amount as exgratia payment from company on understanding that he would not
engage himself directly or indirectly in business activities which were
competitive to company and also would not join any service in similar type of
trade - Amount received by assessee was not a profit in lieu of salary but
capital receipt in lieu of profit earning source and, therefore, was not
exigible to tax
The
assessee was a technical expert and was appointed as Vice-President (Works) for
looking after manufacturing operations of a company. On completion of his
contract of services with the company, an exgratia payment was made to him by
the company on the understanding that he would not divulge the technology
secrets of company to any one nor would use them for setting up a competitive
business anywhere in India and also would not join for next 2 years any
business activity which was competitive in nature. The Assessing Officer was of
the view that the receipt was nothing else but compensation received on account
of loss of employment and for not disclosing the trade secrets known to the
assessee. He, accordingly, held that the compensation received by the assessee
partook of the character of revenue receipt taxable under section 17(3) as
profit in lieu of salary. On appeal, the Commissioner (Appeals) treated the
said receipt as capital receipt and deleted the addition made by the Assessing
Officer. On revenue’s appeal :
Held
: In the instant case, from the facts available on record, it was abundantly
clear that the assessee received compensation in consideration of his agreement
and undertaking not to engage himself, directly or indirectly, in the business
activities which were competitive to the company and also not to join any
service in the similar type of trade. Thus, the amount received was not a
profit in lieu of salary but capital receipt in lieu of profit-earning source.
Therefore, the amount received against the restrictive covenant was not
exigible to tax. The amount received was neither a remuneration nor reward or
return for the services rendered by the assessee but it was to restrain him
from joining any employment in a similar business or to establish a similar
type of business to avoid competition or conflict with the existing business of
company in which the assessee was working as the Head and Vice President of the
manufacturing unit and was having access to confidential technology.
The
assessee had not received any of the items mentioned in section 17 during his
employment. It was only a compensation given to him to restrain him from joining
any service of similar nature or doing similar type of business. So, it could
not be said that the compensation received by the assessee was profit in lieu
of salary.
Therefore,
the Commissioner (Appeals) was justified in treating the compensation received
by the assessee for acting in accordance with the restrictive covenant of
agreement between him and the company, as a capital receipt not chargeable to
tax. There was no infirmity in the order of the Commissioner (Appeals) on that
issue. In the result, the appeal of the department was to be dismissed. [In
favour of assessee] (Related Assessment year : 1996-97) – [ACIT v. Tarun
Kumar Ghai (2006) 99 TTJ 1240 (2005) 97 ITD 517 (ITAT Chandigarh)]
Assessee,
a qualified chartered accountant, was employed as director (Finance) and served
the company in various capacities for 17 years and on his resignation he
received Rs. 2 lakhs as exgratia payment in recognition and appreciation of his
personal qualities and attributes as acknowledge in the letter of the MD of the
company amount received by the assessee was not taxable as compensation as
contemplated under section 17(3) as profit in lieu of salary and was a capital
receipt in his hands
Assessee,
a qualified chartered accountant, was employed as director (Finance) and served
the company in various capacities for 17 years. On his resignation he received
Rs. 2,00,000 as exgratia payment in recognition and appreciation of his
personal qualities and attributes as acknowledge in the letter of the MD of the
company. The question was whether such payment was taxable as profit in lieu of
salary as held by the Assessing Officer.
Held
that the concerned letter had been written by the managing director of the
company on the very next day of the registration letter of the assessee. In
this letter it had been clearly spelt out that the payment was being made in
appreciation of personal qualities and attributes, as special exgratia payment,
which had been approved by the management also. It was not only the managing
director’s decision but had the approval of the management. so it could not be
said that the managing director termed the payment as special ex-gratia
payment. This amount was not paid by virtue of the employment but only as a
voluntary payment by the management recognising the loyalty and sincerity of
the assessee towards the company.
There
was no evidence on record for the Commissioner (Appeals) to come to the
conclusion that the real motive behind the said payment was to reward the
assessee for his past long meritorious service and the basic character of the
receipt was not exgratia but profit in lieu of salary. The only reasons for
coming to this conclusion by the Commissioner (Appeals) was the treatment
accorded to the payment in the books of account of the company.
For
determining the true nature of payment it was to be seen (i) whether there was
any liability to make the payment, (ii) whether or not the assessee had any
legal enforceable right against the company for claiming this payment, and
(iii) whether or not the amount had been paid as compensation. The unilateral
commitment made by the management without any requirement of the same being
accepted by the assessee, as he had already tendered his registration on 06.04.1989,
would not make the payment enforceable in law. Thus, the amount received by the
assessee in the two assessment years under consideration was not taxable as
compensation as contemplated under section 17(3) as profit in lieu of salary
and this was a capital receipt in the hands of the assessee. [In favour of
assessee] (Related Assessment years : 1990-91 and 1991-92) – [ASPY B. Talati
v. ITO (2002) 75 TTJ 106 (ITAT Mumbai)]
The Central Board of Direct Taxes
announced a Scheme for grant of rewards to officers and staff of the Income-tax
Department. The Scheme postulated the grant of reward under four heads as
follows : 2(a) Reward for disposal under summary assessment scheme; 2(b) Reward
for scrutiny wards; 2(c) Reward for search and seizure work; 2(d) Reward for best
officers at Tribunal. The Scheme provided that the Competent Committee would
decide the manner in which the reward due would be shared between the eligible
officers and staff and that the reward would be purely an exgratia payment and
the Competent Committee’s discretion would be final.
In respect of an assessee, a search
had been carried out in July, 1982 resulting in seizure of assets and number of
incriminating documents. Assistant Director (Investigation) prepared an
appraisal report and for-warded the same to the Assessing Officer, the
respondent, along with the seized material. Thereafter, the Assessing Officer
completed the assess-ment. The total additional income brought to tax after
giving effect to the order of the Tribunal was over Rs. 12 lakhs. The Assessing
Officer claimed reward under rule 2(b) of the Reward Scheme. The Committee did
not find him fit for reward. The Assessing Officer filed an application under
section 14 of the Administrative Tribunal Act challenging the denial of the
claim. The Tribunal allowed the application of the Assessing Officer. On appeal
:
Held : Assessment was made on the
basis of the seized material and appraisal report of the Investigation Wing and
the Competent Committee, whose discretion was final, was of the opinion that
there was no contribution made by the respondent and he was not found fit for
grant of reward under rule 2(b) of the 1985 Scheme. Undoubtedly, the case came
before the respondent as the Assessing Officer after search and seizure
operation and if, on those facts, the Committee decided that the respondent was
not entitled to the grant of reward, the discretion of the Committee could not
be faulted with. Clearly the Tribunal’s decision was wholly unsustainable.
Even on the question of
jurisdiction the matter was outside the purview of the Tribunal. Under section
14, the Tribunal has jurisdiction, power and authority in relation to 'service
matters'. Service matters include remuneration (including allowances), pension
and other retirement benefits. The reward amount was purely exgratia payment.
It was difficult to treat it as a condition of service. Further, it was
difficult to comprehend how such exgratia payment could be treated as
remuneration of the kind postulated under the Act. For the foregoing reasons,
the order of the Tribunal was to be set aside. - [Secretary, Central Board
of Direct Taxes v. B. Shyam Sundar (2001) 118 Taxman 457 (SC)]
Assessee,
a contractor, had done some extra work which was not in contract - Disputes
arose between parties which were referred to arbitrator who awarded payment for
additional work and pre-award and post- award interest on amount payable -
Assessing Officer assessed entire amount as business income - Amount of
interest awarded was not an ex-gratia payment but was attributable and
incidental to contract business carried on by assessee and was, therefore,
assessable as business income
The
assessee, a contractor, had certain dispute with the Government of Orissa for
which it had executed a project. It claimed that it had to carry out certain
work over and above the items stipulated in the agreement and, therefore,
demanded payment therefor, along with interest. The matter was ultimately
decided by an arbitrator who gave an award for additional payment along with
interest including pendente lite interest for the period from the date of claim
to the date of award. The assessee claimed that the interest received was not
liable to tax as the same was neither under a statute nor under a contract but
was only on an ex-gratia basis. The Assessing Officer rejected the assessee’s
claim and brought the interest amount to tax. On appeal, the first appellate
authority accepted the assessee’s claim. On the revenue’s appeal, the Tribunal
affirmed the order of the first appellate authority. On reference :
Held
: In view of the decision of the Supreme Court in CIT v. Govinda Choudhary
& Sons (1993) 203 ITR 881 (SC), it was to be held in the instant case
that the receipt of pre-award and post-award interest was a revenue receipt
attributable and incidental to the business carried on by the assessee and it
bore the same character of receipts payment of which it was otherwise entitled
to under the contract. The disputed amount of interest was only an accretion to
the assessee’s receipts from the contract business. The Tribunal was not legally
correct in taking the view that the sum received as interest by the assessee
was an ex-gratia payment which was not liable to tax. [In favour of revenue] (Related
Assessment year : 1977-78) – [CIT v. Malik Construction Co. (1999) 238 ITR
450 : 106 Taxman 175 (All.)]
Due
to ill-health assessee resigned job - His employer paid in token of his long
service four months salary as exgratia addition to normal dues -
Assessee claimed that said amount was personal gift in appreciation of his
personal qualities and, therefore, was not liable to tax - In view excerpts of
letter granting exgratia and finding of Tribunal being that amount in
question was paid not as a personal gift or testimony but for his past service
qua employee, same was taxable under section 17(3)(i)
The
amount of compensation due to an assessee-employee as a right under any
statute, award or contract of employment or received by him from his employer
or former employer at or in connection with the termination of his employment
or the modification of the terms and conditions thereof irrespective of his
entitlement to receive the same, is now included within the meaning of the
expression 'profits in lieu of salary' under sub-clause (i) of clause (3) of
section 17. This clause takes in its fold amounts paid by way of compensation
in connection with the termination of the employment or the modification of the
terms and conditions relating thereto.
in
the instant case, having regard to the contents of the said letter of the
employer and facts of the case, the amount in question had not been paid by way
of compensation for there had been neither termination of the employment nor
any modification of the terms and conditions of the employment by the employer;
so the amount could not properly be brought to tax under clause (i). Clause
(ii) takes in its fold any payment, other than those expected therein, which is
due or received by an assessee from an employer or a former employer or from a
provident or other fund to the extent to which it does not consist of
contributions by the assessee or interest on such contributions. This does not
cover payment of amount from approved superannuation fund. The clause 'any
payment received by an assessee from an employer or a former employer' is wide
enough to catch all the payments of the nature paid to the assessee. But then
will any sum paid by the employer/former employer to the employee at or after
the termination of services on the occasion of the marriage of the employee or
for an act of gallantry or for any piece of literature, art or any sum paid for
good performance in a cricket test or football match, fall within the ambit of
that clause? The answer to such questions would depend upon whether the amount
was paid by the employer or the former employer to the employee qua employee
for something done as employee or in his capacity other than that of an
employee as a personal gift for appreciation of his quality of intrepidity,
writing, sportsmanship and the like. In the former situation it would be
taxable but in the latter it would not be taxable.
The
finding recorded by the Tribunal was that it had not been shown that the amount
was given because of any other relationship, past or otherwise, as between the
employer and employee. The excerpt of the letter accepting the resignation
showed that from the point of employee the amount was received by him in token
of his long service, exgratia as four months extra salary in addition to normal
dues. This suggested that the amount was paid to the assessee not as personal
gift or testimony but for his past services as an employee and supported the
finding recorded by the Tribunal.
It
was difficult to conclude that the amount was paid as a personal gift in
appreciation of personal qualities of the assessee. Therefore, the amount would
be taxable and had been rightly held to be so by the Tribunal. [In favour of
revenue] (Related Assessment year : 1982-83) – [V.R. Ganti v. CIT (1995) 216
ITR 48 : 127 CTR 273 : 82 Taxman 37 (AP)]
Assessee tea company made exgratia payments to employees in addition to statutory bonus - Payments were made in terms of agreement for maintenance of industrial peace and for maintaining production in pursuance of memoranda of settlement between assessee and its employees on one hand and between industry and workmen of tea industry on other - Such payments were in nature of additional wages and allowable as business expenditure
Assessee-company
was a grower and manufacturer of tea. In the assessment years 1981-82 and
1984-85 the ITO disallowed the amount of Rs. 51,778 claimed by the assessee as
exgratia payment which was in addition to payment of bonus at the rate of 8.33
per cent, by treating the amount as bonus. On appeal, the Commissioner
(Appeals) deleted the said addition. On appeal by the revenue, the Tribunal
held that the memoranda of settlement with the employees/workmen provided for
payment of exgratia, only and "what was paid was not bonus and that
section 34 of the Payment of Bonus Act, 1965, was not applicable to the said
memoranda. The Tribunal further held that the said exgratia payments were
allowable under section 37. On reference:
Held
: On a consideration of the terms and conditions of the settlement, it was
evident that, for the purpose of maintenance of industrial peace and
maintaining production, the said memoranda of settlement had been arrived at.
The first one between the assessee and its employees and the second one between
the industry and the workmen of the tea industry. The payment which had been
agreed to be made was in addition to the statutory bonus and not in the nature
of profit-sharing bonus. Mere use of the expression ‘bonus’ will not render it
a bonus if it is otherwise clear that what is paid is not bonus but incentive
wages. The Payment of Bonus Act does not prevent the payment of additional
wages to the employees.
On
the facts and in the circumstances of the case and on an interpretation of the
agreements in question, the Tribunal came to a correct conclusion that in this
case the payment was not made by way of bonus. The employer had to make such
payments exgratia or otherwise in view of the settlement made either by the
employer or because of the settlement by and between the industry as a whole
and the workmen of the industry. The employer could not but fulfil the
commitment in terms of such settlement. Under the terms and conditions of the
settlement the bonus had been provided separately. Thus, the additional payment
partook of the character of additional wages or emoluments and these were in
fact exgratia and not bonus as it was understood. Such payment was to be
allowed as deduction under section 37. Hence, the Tribunal’s order was to be
upheld. [In favour of the assessee] (Related Assessment years : 1981-82 and 1984-85) – [CIT v. Rahimia
Lands & Tea Co. (P) Ltd. (1992) 197 ITR 310 : (1993) 69 Taxman 300 (Cal.)
Assessee-firm
executed a contract and subsequently a dispute arose in respect of payment,
which was referred to arbitrator - Arbitrator awarded certain amount along with
certain amount on account of interest - Amount of interest so awarded was in
nature of exgratia payment not assessable as income in hands of assessee
Assessee-firm
had executed some contract and subsequently at the instance of the parties the
dispute arising out of the aforesaid contract relating to the payment, was
referred to the arbitration in which an award on certain amount was made along
with certain amount towards interest. The ITO treated the interest amount as
awarded by the arbitrator as income of the assessee: On appeal, the
Commissioner (Appeals) deleted addition. On second appeal by the revenue, the
Tribunal upheld the order of the Commissioner (Appeals). On reference:
It
has been held by this Court in Govinda Choudhury & Sons v. CIT (1977) 109
ITR 497, that award by an arbitrator relating to interest is in the nature of
exgratia payment and, therefore, cannot be treated as income exigible to tax.
We take the same view in the present case and hold that in view of the law
prevailing at the relevant time payment of interest could not have been taken
as income and, therefore, we answer the question referred to us in favour of
the assessee and against the department. – [CIT v. B.P.R. Construction (1991)
191 ITR 492 : (1992) 102 ITR 280 : 60 Taxman 40 (Orissa)]
On
termination of service of assessee, payment of ex-gratia amount made by employer
was totally voluntary and was not compensation which implied some sort of
obligation to pay - Therefore, ex-gratia amount received by employee was not
profits in lieu of salary within meaning of section 17(3) and, as such, was not
taxable as income
Assessee’s
services were terminated and he was paid three month’s salary in lieu of
notice. He was also paid certain amount as exgratia. The assessee claimed
exemption in respect of exgratia amount on the ground that it was a capital
receipt. The ITO, however, held that the amount in question was compensation
received in connection with the termination of the employment and was,
therefore, assessable as salary in terms of section 17(3) (i). On second appeal
the Tribunal held that the amount of ex-gratia payment was not includible in
total income of the assessee. On reference:
Held
: This Court in the case of CIT v. Ajit K. Bose (1987) 165 ITR 90 (Cal.)
held that the payment made by the employer was exgratia and totally voluntary
and was not compensation which implied some sort of obligation to pay.
Therefore, the amount received by the employee was not profits in lieu of
salary within the meaning of section 17(3) of the Act and, as such, was not
taxable as income. The facts being identical, the said decree governed instant
case also. In view of aforesaid, the Tribunal was right in holding that the
amount of ex-gratia payment was not includible in the total income of the
assessee. [In favour of the assessee] (Related Assessment year : 1970-71) – [CIT
v. Jamini Mohan Kar (1989) 176 ITR 127 (Cal.)]
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