Law: Income Tax Act, 1961

Section: 17,17(3)(1)

Income-tax--Salary---Profit in lieu of salary---Scope of S.17(3)---Company giving option to employees to terminate employment---Amount received on such termination is a profit in lieu of salary ---Encashment of leave salary is a profit in lieu of salary---Indian Income Tax Act, 1961, S.17(3)(i). Under the Indian Income-tax Act, 1922, the expression "salary" was defined under section 7 of the Act and Explanation 2 to section 7 of the 1922 Act ,provided a definition of the term "profits in lieu of salary". Explanation 2 to section 7 of the 1922 Act postulated that a profit in lieu of salary must be an amount of any compensation due to or received by the assessee from the employer or former employer at or in connection with the termination of his employment whether solely as compensation for loss of employment or for any other consideration. When the Income Tax Act, 1961, was introduced in the year 1962, there is a significant omission of the words "compensation for loss of employment or for any other consideration" in section 17(3)(1) as found in Explanation 2 to section 7 of the Indian Income-tax Act, 1922. Therefore, on the words found in clause (3)(i) of section 17 of the Act, if any compensation is received by the employee from his employer at or in connection with the termination of the employment, that would be regarded as profits in lieu of salary and liable to tax under the head "Salary". Leave salary would be a profit in lieu of salary and therefore taxable under the provisions of clause (3) of section 17 of the Act. It is fairly clear that the leave salary and allowances are not paid outside the terms of the employment and the encashment of the unavailed leave arose only because of the employment and the amount was received by the assessee from the employer. Therefore, there can be no dispute that the amount received as encashment of the leave salary would be a profit in lieu of salary even within the meaning of sub-clause (ii) of clause (3) of section 17 of the Act. The assessee was employed by a company. The company offered an opportunity to all its employees who had more than one year of service to receive a special payment subject to-the condition…

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