1. The assessee is a retired employee of Getz Bros. & Co., Inc. After rendering 36 years of services, he retired. On his retirement, the employer-company paid him Rs. 63,000, made up of Rs. 30,000 by way of gratuity for these 36 years of service and ex gratia payment of Rs. 33,000. By a letter, dated 18-5-1978, of the said company, the above break-up was made known.
2. For the assessment year under appeal, the assessee filed a return of income showing his salary at Rs. 16,120 and claimed an exemption on the entire amount of Rs. 63,000 received from the employer. For the gratuity of Rs. 30,000, his claim was that it was exempt under Section 10(70) of the Income-tax Act, 1961 ("the Act"). For the ex gratia payment of Rs. 33,000, his claim was that it was received in appreciation of the long and loyal services rendered, and that it was a casual and non-recurring receipt and, hence, exempt under the Act. The ITO, on verification of the assessee's claim, found that two things made him disagree with the assessee's contention. One was that the letter of the employer, dated 18-5-1978, referred to above, stated that the gratuity for 36 years of service, at the rate of half of month's salary for each year, came to Rs. 39,600 and since the gratuity was exempt only up to Rs. 30,000, the excess amount was taxable. The balance of Rs. 9,600 was treated as ex gratia payment and included in Rs. 33,000 meaning, thereby, that the ex gratia payment of Rs. 33,000 was not totally ex gratia but included a portion of the taxable amount, camouflaged as ex gratia, to benefit the assessee, and could not, therefore, be ex gratia, but given with a design. The second was that the employer deducted tax even in respect of the ex gratia payment. It was, therefore, concluded that the ex gratia payment paid to the assessee was for the services rendered by the assessee and could not be treated as casual payment. Thus, the ex gratia payment of Rs. 33,000 was brought to tax.
3. Aggrieved, the assessee preferred an appeal to the AAC but was unable to convince him of his cause. The AAC, agreeing with the ITO's opinion, confirmed the inclusion of the ex gratia payment as taxable income. He relied upon the provisions of Section 17(3)(ii) of the Act and held that the amount received was profit in lieu of salary. He further found that "profit in lieu of salary" will not include a sum of money received as a personal gift but it would include money received in appreciation of services rendered. For this view, he relied upon a decision of the Supreme Court in the case of Mahesh Anantrai Pattani v.CIT  41 ITR 481. Since, in this case, the asssssee admitted that the payment was made for long and loyal services rendered, he felt that this amount could be regarded as profit in lieu of salary.
4. It was against this decision of the AAC that the present appeal is directed.
5. After taking into consideration the relevant law on the subject, the facts found by the authorities below and the lack of evidence on crucial points, we are not inclined to agree with the contentions raised on behalf of the assessee. As rightly pointed out by the ITO, in his order, the letter given by the employer showed a desire, on its part, to help the assessee in avoiding payment of tax, earned on the excess gratuity amount, by adopting a simple expedient of treating the excess gratuity over Rs. 30,000 as ex gratia. This, thus, indicated that the entire ex gratia payment of Rs. 33,000, was really not ex gratia payment but at least a part of it was paid towards gratuity, disguised as ex gratia, which, if paid as gratuity, would have been taxed. Now, coming to the balance of ex gratia payment, the law is very clear on the subject that, if an ex gratia payment received by an employee from an employer is in the nature of a gift, it does not fall within the scope of the taxation net. This was so stated in a Circular No. F 35/1/65-IT, dated 5-11-1965 issued by the CBDT. This means that there must be evidence to show that the ex gratia payment was received by way of gift or by way of testimonial on personal grounds. There is no evidence, except the version of the assessee, that the amount was paid by the employer by way of a gift in appreciation of the personal qualities or as a testimonial. "Salary" within the meaning of Section 15 of the Act includes salary, fees, wages, perquisites or profits arising from an office or employment of profit, i.e., by way of remuneration for the services even though such payments may be voluntary, except that it does not include a mere gift or a personal testimonial made to him on personal grounds and not by way of payment for services-Sir Richards Henn-Collins MR. in Herbert v. Mcquade  4 TC 489, laid down the test thus : whether, from the stand point of the person who receives an amount, it accrues to him by virtue of his office If it does, it does not matter whether it was voluntary or whether it was compulsory on the part of the persons who paid it. Thus, it eventually turns down to a question of evidence, whether the assessee received the ex gratia payment as a gift for his personal qualities de hors his employment or received it even if voluntarily, for his long and loyal past services. If it is the former, it is exempt from taxation, but if it is the latter, it falls within the definition of Section 1l(3)(ii) which provides : (ii) any payment other than any payment referred to in Clause (10), Clause (10A), Clause (11B), 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 superannuation fund) to the extent to which it does not consist of contributions by the assessee or interest on such contributions.
Now, the payment received by an assessee from an employer or a former employer becomes taxable as "profit in lieu of salary", irrespective of the fact how the former employer or the present employer persuaded himself to make the payment. The assessee has not been able to produce any material to show, even by implication or inference, that the ex gratia sum in question was received by him, by way of gift. The claim of the assessee is that this receipt was a casual and non-recurring receipt exempt under Section 10(3). In order that a receipt is casual, it must be produced by chance or be accidental or fortuitous, coming at uncertain times and not being capable of being calculated on, or to put it differently, unsettled and there should be no anticipation or expectation. The most important characteristic of casual income is, thus, that it must be produced by pure chance. The ex gratia payment in this case, received by the assessee from his employer, does not appear to be the result of any chance. There was nothing to show that it was totally unexpected, in the sense that the assessee had not been anticipating it. It is also not clear whether other employees retiring along with the assessee, either prior to or after his retirement, have not received such payment. Had there been a practice of paying the ex gratia payment by the employer, as a reward for rendering of loyal services, then the past loyal services would become a qualification, entitling the assessee to receive the ex gratia payment. In that sense, it could be said that it is expected, calculated or at least anticipated and not the result of any chance. Apart from lack of evidence, we are unable to see any casual-ness in the receipt. It is for this reason, that we are unable to agree that this payment could be said to be the result of any chance or that it is casual. This appears to be a receipt which was not totally unforeseen and unanticipated. The expression "non-recurring" means that it does not repeat or occur more than once. "Non-recurring" also means that there was no claim, or right, of the assessee to expect its recurrence. For exemption under Section 10(3) to be available to the assessee, the receipt must be both, casual and non-recurring. We have seen that the receipt in no sense of the term could be described as casual, nor it was uniform and nor it could be said to be the result of an expectation because of the fact that the employer, by converting a part of the gratuity into the ex gratia payment, shows a design on its part and the assessee to convert what was otherwise payable as gratuity into the ex gratia payment. Since a design and expectation can be perceived and since it is not shown that the assessee is the only person who received it, not on account of his past and loyal services, but purely by way of generosity of the employer, a gift for personal qualities, it is not possible to accept the view that this receipt is casual and of nonrecurring nature. What is more, the employer has stated that the ex gratia payment has been made for the loyal services rendered by the assessee. The rendering of loyal services, which necessitated the payment, was interpreted by the assessee as a receipt of casual and non-recurring nature. It is non-recurring because the assessee retired from service. It is a well-settled proposition of law that payment made by former employer for past loyal services is profits in lieu of salary liable to be taxed as such.
6. We are, therefore, of the opinion that the view taken by the AAC is not incorrect and the ex gratia payment has been rightly taxed.
7. In judging the issue, it is also relevant that when the employer was deducting tax on the entire sum of Rs. 63,000, it was in the contemplation of the employer and the employee that the ex gratia payment had become the subject of taxation. The ITO was, therefore, justified in relying upon this circumstance in arriving at the conclusion he did.