Law:

Section:

Section 17 of the Income-tax Act, 1961 - Salaries - Profit in lieu of salary (Ex-gratia compensation) - Assessment year 1994-95 - 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 - Whether 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) - Held, yes - Whether, therefore, impugned addition was to be deleted - Held, yes [Paras 11 and 12] [In favour of assessee] FACTS â–  The assessee was an employee of company 'G'. He was discharged from service under relevant rule of Service Rules after giving three month's pay. Further, as per settlement agreement between the parties, the assessee received certain amount as ex-gratia compensation on premature cessation of his services. â–  The Assessing Officer took a view that compensation so received was to be taxed under section 17(3) as 'profits in lieu of salary'. â–  The Tribunal confirmed the order passed by Assessing Officer. â–  On appeal: HELD â–  The assessee's services came to be terminated under rule 44 of the relevant service rules after giving three months' pay. Therefore, insofar as the obligation of the employer to pay any amount to the assessee in relation to the termination of his services, the same came to an end in view of the discharge of his services under rule 44. While the assessee succeeded in the writ petition filed by him, the letters patent appeal preferred by the employer came to be allowed. Therefore, the discharge of the assessee's services by the employer attained finality. However, during the pendency of the letters patent appeal, the assessee and the employer arrived at a settlement, in terms…

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