183. Cash equivalent of leave salary payable to legal heirs on the death of Government/non-Government employees – Whether taxable under the head “Salaries”
CLARIFICATION 1
1. In terms of para 1(iv) of O.M. No. 16(2)-E-IV(A)/73, dated 9-1-1974 issued by the Ministry of Finance, Department of Expenditure, the family of a Government servant, who dies in harness, is entitled to receive the cash equivalent of the leave salary that the deceased Government employee would have got if he had gone on earned leave. The amount is payable on the date immediately following the date of death, subject to a maximum leave salary for 120 days and subject to the reduction envisaged in rule 40(7)(a) of the Central Civil Service (Leave) Rules, 1972. The question whether the amount received by the family in these circumstances is taxable has been considered.
2. The Board have been advised that this receipt in the hands of the family is not in the nature of one from an employer to an employee. The deceased had no right or interest in this receipt. This payment is only by way of financial benefit to the family of the deceased Government servant, which would not have been due or paid had the Government servant been alive. In view thereof the amount will not be liable to income-tax.
Circular : No. 309 [F. No. 200/125/79-IT(A-I)], dated 3-7-1981.
CLARIFICATION 2
The leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.
For being taxable as salary, the payment must be due from an employer to the assessee. If the deceased officer is regarded as the assessee in respect of the proposed payment, then the amount was not due to the assessee. Firstly, this is not a payment which was due to be paid to him after his death as a matter of contractual right. Secondly, even before his death, the payment was not due to him unless and until the leave was actually taken by him.
If the legal representative of the deceased is to be taken to be the assessee, then the amount/proposed to be paid is certainly not due to him. It is an ex gratia payment on compassionate grounds in the nature of gift. Thus, the payment is not in the nature of salary.
Letter : No. 35/1/65-IT(B), dated 5-11-1965.
JUDICIAL ANALYSIS
REFERRED TO IN – The above letter was referred to in ACED v. Durga Devi Lara [1984] Taxation 75(6)-118 (Hyd. – Trib.). This was a case under the Estate Duty Act, and the question involved was whether salary equivalent of leave not availed by the deceased which was paid to the legal heirs was ‘property passing on death’ under section 5 of that Act. The Tribunal observed :
“The categorical statements are that the amount was not due to the deceased unless he took leave which he had not taken in the present case. It was also not a payment which was due to be paid after his death as a matter of contractual right. Therefore, the deceased was not possessed of any property. This is a case where property, viz., monetary equivalent of leave salary, was not in existence at a time before the death of the deceased. This being so, the question of any property passing on his death did not arise. In the Board’s circular it is also categorically stated that the payment was an ex gratia payment on compassionate grounds in the nature of a gift to the legal heirs. The learned departmental representative sought to submit that the amount may be ex gratia as far as the legal heirs were concerned but it did not imply that it partook of the same nature as far as the deceased was concerned. If the amount was due to the deceased, it could never be an ex gratia payment to the legal heirs, but it would be a legitimate due. So if the payment is ex gratia to the legal heirs, certainly it was not an amount due to the deceased.
Having come to the conclusion that there was no property of the deceased prior to his death, the question of any property passing on his death, albeit a moment after his death, insofar as leave salary in respect of leave not taken is concerned, did not arise. . . .”. (pp. 120-121)
