Taxability of Lump sum Payments or Monthly Financial Assistance

“Lump sum Payments or Monthly Financial Assistance made gratuitously or by way of compensation or otherwise to window / other legal heirs of employee after his death is taxable or not ”

As per circular no 573 dated 21th Aug 1990

1. Clarification have been sought from Central Board of direct Taxes Whether a lump sum payment made gratuitously or by way of compensation or otherwise to the widow or other legal heirs of an employee , who dies while still in active services , is taxable as income under the Income Tax Act 1961.

2. This issue has been examined by Board and it is clarified that any such lump sum payment will not be taxable as income under the aforesaid Act.

As per this circular only lump sum payment received by widow or other legal heirs of an employee, who dies while still in active services is exempt from tax.

No clarity on monthly financial assistance received by the widow of employee who died during his job. Circular stated above does not deal with monthly payment received but only lump sum payments.

Assessee is in receipts of financial assistance on death of her husband under the Scheme of Compensation Assistance on dependents of deceased Govt employee Rules 2006. According to that rules the object is to assist the family of the deceased Govt employee Group C & Group D category which helps such families in tiding over emergent situation resulting from the loss of bread earner while is regular services by giving financial assistance. According to Rules 5 of the Income Tax Rules on death of Govt .employee his family will continue to receive financial assistance of a sum equal to the pay and other allowances last drawn by the employee in the normal course for specified time. According to rules 8 the families will have the option to opt for ex gratia grant provided in Rules 2003 or 2005 in views of the monthly financial assistance under the Scheme.

Now the issue is whether monthly financial assistance is exempt from tax or not, it is revenue receipts or capital receipts, for lumps sum payment clarification by the board that it will not be taxable.

Lower authorities refused to give benefit of this circular to the Assessee because it is related only to lumps sum payment not with monthly payment.

As per definition of Income u/s 2(24) of the Income Tax Act which includes several

receipts and on reading of various clauses relating to receipts chargeable  to tax as income we, do not find and distinction of lump sum payment or periodic payment drawn therein under any of the clauses. Further the periodicity of payment cannot determine the taxability of the same. Its true nature of that payment which decides its taxability.

As per decision of Hon’ble Supreme Court of India in case of Padmraje R.Kadambande Vs. CIT 195 ITR 877 SC where it is held that it is the quality of payment that is decisive of the character of payment and not the method of the payment or its measure, it fall with in capital or revenue.

Bench of ITAT in DCIT Vs Laxmi M Aiyar has held that periodicity of the payment does not make the payment chargeable to tax.

In Income Tax Appeallate Tribunal – Delhi Bench A & Accountant Member ITA 486/Del/2016, 2008-09 ITA 487/Del/2016  2009-10,ITA No 488/Del/2016 2010-11  Smt. Mahindro Devi Karnal vs A.O Ward No 2 Karnal give their decision that regards must be had only to the nature and quality of payment. It is compensation. The payment made by the Govt is undoubtedly voluntary. However is has no origin in what might be called a real source of income. Further it is compensation payment or such period as the Govt may in its discretion. Hence the amount received by the assessee is capital receipts and therefore are not income with in the meaning of Section 2(24)

So Financial assistance received by the assessee is not chargeable to tax whether it is received on monthly basis or lumps sum basis. It is not income. No tax is thereon. The receipts of financial assistance is not chargeable to tax.