1. This departmental appeal arises out of the order of the AAC Vishakhapatnam for the assessment year 1982-83.
2. The assessee was an employee of the Anglo French Drug. Co. (Eastern) Ltd. For reasons of health, he chose to retire voluntarily by giving a month's notice. It was accepted by his employer in the following words : We acknowledge receipt of your letter dated November 6, 1981 tendering your resignation from the services of the company on grounds of ill-health.
We hereby accept your resignation with regret with effect from the closing hours of December 6, 1981. There will, however, be no need for you to work from the date of receipt of this letter to the date of your resignation. You will be paid your salary and allowances up to this period, if applicable.
In token of your long service with the company, we shall pay you, as a special case, four months' extra salary as an ex gratia payment in addition to your normal dues.
He also received gratuity as a terminal benefit and availed exemption to the extent authorised by law. Rs. 10,500 being four months salary (extra salary as an ex gratia) was brought to tax purportedly under Section 17(3)(ii) of the Income-tax Act, 1961 ('the Act'). The first appellate authority was, however, of the view that it is possible for employees to receive amounts outside the terms of the contract in an altogether different capacity. He cited the decision of the Delhi High Court in the case of Lachhman Dass v. CIT  124 ITR 706. He also cited the decision of the Supreme Court in the case of Mahesh Anantrai Pattani v. CIT  41 ITR 481, where the payment received from a former employer was considered not taxable. Since this amount was described as ex gratia and was also given as a special case, he was of the view that it cannot be considered as a normal incidence of contract of service and could not be brought to tax. He cited the passage from the decision of the Supreme Court in the case of K.P. Varghese v. ITO  131 ITR 597 for the proposition that even 'violence' to the language of the statute would be justified where the intention is obviously different. In the departmental appeal, it is represented that the fact that it is described as ex gratia cannot help the taxpayer, as long as the amount falls under Section 17(3)(ii), which deals with certain receipts as income as profit in lieu of salary. It was stated that the decision in the Delhi High Court is altogether on different facts. He claimed that the letter itself clearly shows that the payment was 'in token of your long service with the company' which phrase according to the learned departmental representative, clinched the departmental case in its favour. He tried to distinguish the cases cited in the order of the first appellate authority. The learned representative for the assessee as well as the assessee were present.
It was pointed out that the payment was not contractual. It was not even given to other employees. It was given as a special case in special consideration in view of the individual qualities of the employee and not because of his character as an employee. The words 'special case' and 'ex gratia' should clearly justify the view of the first appellate authority. 'Long service with the company' is merely mentioned and has also been taken as a token. He further claimed that the letter dated 6-11-1981 from the employer accepted the resignation, but only thereafter mentioned the ex gratia payment which clearly shows that the relationship as employer and employee ceased to exist. The learned departmental representative in reply, pointed out that the relationship continued till the assessee's period of service (though he was not assigned any duties during the notice period) till 6-12-1981.
He further pointed out that Section 17(3) would cover even a former employer.
3. We have carefully considered the records as well as the arguments.
The amount is no doubt not contractual. The assessee had no right to expect this amount. He could not have enforced before it was promised.
In this sense, it is ex gratia. It is also not a payment immediately referable to services rendered by the assessee Hence, it does not have income character in the ordinary sense. It is a compensation for loss of employment. It would ordinarily be a capital receipt. But having found that it is not salary in the normal sense and that its being a compensation for loss of employment would constitute the payment into a capital one, we cannot overlook the fact that the ITO has assessed it as salary not because it is salary in the ordinary sense, but because in his opinion, it is salary under Section 17(3)(ii). Section 17(3) reads as under : (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 aformer 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 which contributions.
The ITO tried to bring this amount under Section 17(3)00. because it is in wider terms than Section 17(3)(i). Actually, since it is a compensation voluntarily offered by his employer and received by the assessee 'in connec0tion with termination of his employment' has to be treated under Section 17(3)(j) only. No doubt, the word 'voluntary' is absent. But that is not a condition for invoking this sub-section. If it takes the character of compensation whether paid voluntarily or not, we are of the view that Section 17(3)0) gets automatically attracted.
Even otherwise, probably Section 17(3)(n) can get attracted. The question whether it is deferred remuneration or not, an issue discussed by the first appellate authority is, in our opinion, academic. This question is not relevant as such a question is more relevant for considering employee's compensation as an economic concept rather than for tax purposes. In the facts of the case, it is a clear case of terminal benefit given by the employer without the employee asking for it or having a right to it either because of a contract or because of a scheme. Since the employer has clearly stated that it is given as a special case and ex gratia, it is clear that the employer does not wish to make this as a practice so as to give any right to any other resigning/retiring employees to similar compensation. Even so, it does not cease to be a compensation given by the employer for cessation of his employment, though such cessation has occurred due to the employee himself deciding to quit the service. It is in this context, we consider that the only question that can arise is whether the amount can be treated as a profit in lieu of salary under Section 17(3)(j) and/or (ii), though it is not salary in normal course because of the special meaning assigned to the phrase by the said section and specifically made taxable in the main part of the section. Again, it is in this context that we do not consider it necessary to discuss the case of Mahesh Anantrai Pattani (supra), where an amount of Rs. 5 lakhs given by the Maharaja of Bhavnagar was found to have been given out of his personal funds while he had served the State as the Diwan. The finding of the fact, in that case was that it was not in appreciation of services rendered, but as a personal gift for the personal qualities of the assessee and as a token of personal esteem. Hence, even if this decision were considered relevant, it is clearly distinguishable because it has not been shown that the amount was given because of any other relationship in past or otherwise as between the employer and the employee. As for the argument that an employee may receive amounts from his employer in the capacity different from employee, there could be no doubt as to the correctness of the same. In fact, it was precisely what was held by the Delhi High Court in the case of lachhmqn Dass (supra) where the employer reimbursed loss of movable assets in Pakistan belonging to the employee at the time of partition. The employee had to shift to a place of duty and had suffered pecuniary loss due to disturbances in that area. It was held that this is not a payment which can be brought under Section 17(3)(ii). The High Court found that the phrase 'any payment' does not necessarily mean that all payments of whatever kind will automatically get included. An employee may be dealing in a different capacity with his employer, say, as a consumer borrower, or a lender. But, in respect of the compensation for loss of employment, there cannot be any other capacity. The payment was ordered while the assessee was still in employment. It would have made no difference even if it was ordered after cessation of employment because the provision includes the payment from a former employer. As noted earlier, the fact that it is a voluntary payment would not also take away its character as a terminal benefit from the point of view of the employer. That would be a basis for deduction of this amount in the employer's own assessment, a claim which is allowable in law though the payment is neither statutory nor contractual as it will be a payment prompted by commercial expediency. Nature of the payment need not be different in the hands of the employee. A similar argument was raised before the Delhi High Court in the case of Lachhman Dass (supra) relied on by the assessee. But the Delhi High Court did not consider it necessary to deal with the same in the view of its conclusion in the following words : Mr. Bishamber Lal contended that the definition of profits in lieu of salary will take in only amounts which are due to an employee or which are received by him as a matter of right. It is not necessary for the purposes of this case to deal with this aspect of the matter in view of our conclusion already set out that this is j.not a payment which would fall within the definition of Section 17(3).
Even otherwise, the words 'ex gratia" only mean that there is admission of liability on the part of the person who pays the amount. In the English case Edwards v. Skyways Limit  1 WLR 349, the employer tried to wriggle out of obligation on the ground that the use of the words 'ex gratia' in promising the payment to the employee clearly showed that it was not the intention to create legal relationship. The Court did not accept this claim and stated that though the phrase meant that the payment did not constitute admission of any pre-existing liability, the payment has a legal effect and could form a binding contract which was enforceable in law. We, therefore, do not think that much could turn on this fact that the payment was described as 'ex gratia'. We do not also, therefore, consider that the fact that it was given as a special case would make any difference. The plain meaning of the phrase 'in token of long service with the company' shows that the only consideration that mattered with the employer was past services of the assessee with the company. The fact that it is a token does not mean that there was any other consideration. Even so, as stated earlier, this amount would not ordinarily partake of the character of the revenue receipt. Compensation for loss of employment was always a capital receipt. Even as late as in 1955, Explanation 2 to Section 7(1) of the Indian Income-tax Act, 1922, made it clear that only payments solely for compensation for loss of employment was not assessable, so as to bring to tax payment for past services. As pointed out by Kanga & Palkhivala in their Law and Practice of Income-tax, Vol. 1, Seventh edn., p. 138, the general principles as to the tax law on compensation have been to a very large extent superseded by the special provisions of the Act in view of Section 17(3) of the 1961 Act, whereby a compensation received even solely for loss of employment is now taxable. In the words of the learned authors again 'compensation for loss of employment is in no circumstances now a non-taxable capital receipt'. We have no doubt that there could be nothing further to be stated on the subject. Though, it prima facie appears to be hard, the scheme of the Act is now to exempt only receipts like compensation under the Industrial Disputes Act, 1947 and the Gratuity Act, 1972 up to specified limits. In other words, in view of the practice of avoidance of liability and postponement of liability on employee's remuneration by way of terminal compensation, the scheme of the Act is now to bring them to tax and exempt only what is considered a reasonable part of the same. The assessee has availed the benefit of exemption on gratuity. If there had been any unavailed part of such exemption, we could have certainly considered this payment for such set off of such unavailed relief. The assessee having fully availed the other reliefs regarding terminal benefits, we are afraid that the ITO is right and that his order should stand. It, is accordingly restored.
The order of the first appellate authority is set aside.