Sudhakar Ratan Shanker Gautam Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that the severance compensation received by the employee is a capital receipt and the same is not chargeable to tax under Section 17(3) of the Income-tax Act, 1961.
Facts- The assessee, an individual, was employed with You First Money Express Private Limited, which was subsequently acquired by Ebix Money Express Private Limited. Following this acquisition, the assessee’s employment was terminated on 26th October 2017, and he received a severance compensation of Rs.15,50,905/- which was claimed as a capital receipt not chargeable to tax in the return of income filed for AY 2018-19.
AO, in the order dated 19/01/2021, treated this amount as “profits in lieu of salary” u/s. 17(3) of the Act, and added it to the total income of the assessee, leading to an assessed income of Rs.22,80,695/-. CIT(A) confirmed the addition. Being aggrieved, the present appeal is filed.
Conclusion- Under Section 17(3), “profits in lieu of salary” is a key provision that seeks to tax certain payments received by an employee in connection with the termination of employment. On the other hand, capital receipts, especially in the context of employment, typically relate to compensation for the loss of a source of income and are generally not taxable, unless specified. This distinction is critical in determining whether a severance payment or other termination-related compensation is subject to tax as salary income or can be treated as a non-taxable capital receipt. Section 56(2)(xi), introduced w.e.f. 1st April 2019, deals with compensation received or receivable in connection with the termination or modification of terms of employment contracts. However, this amendment applies to assessment years starting from AY 2019-20 onwards. Since the current assessment year is AY 2018-19, the amendment has no bearing on the current case.
