In the light of the various judicial decisions of the higher authorities as mentioned below, it is observed that Top of Form

Income received by widow of deceased person who died while in Government service) as Monthly Financial Assistance from Government is not chargeable to tax whether it is received on monthly basis or lumps sum basis. It is not income as such, the receipts of financial assistance is not chargeable to tax. 

CBDT Circular No. 776, dated 08.06.1999

Subject : Taxability of ex gratia payment made by Central Government/State Government/Local Authority/Government Public Sector Undertaking – Reg.

Circular No. 573, dated 21.08.1990 provided that a lumpsum ex gratia payment made to the widow or other legal heirs of an employee, who dies while still in active service, will not be taxable as income under the Income-tax Act, 1961.

It is noted that there can be situations in which a person or his heir receives ex gratia payment from the Central Government/State Government/Local Authority/Public Sector Undertaking, consequent upon injury to the person/ death of a family member, while on duty. Such an ex gratia payment will not be liable to income-tax under the Income-tax Act, 1961.

CBDT Circular No. 573, dated 21.08.1990.

Subject: Taxability of lump sum payment made gratuitously or by way of compensation or otherwise to widow/other legal heirs of an employee

1. Clarifications have been sought from the 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 service, is taxable as income under the Income-tax Act, 1961.

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

Amount received by the assessee as legal hirer as per Rule 5 of the Haryana Compassionate Assistance to the Dependent of the Deceased Govt. Employee Rule 2006 as monthly compensation is not chargeable to tax

Assessee is a widow of late Shri Balbir Singh who passed away while in service of Haryana Govt. as lecturer. The assessee received monthly financial assistance for maintenance of her family as per rules framed by the Haryana State Govt. Assessing Officer framed order under section 143(3) read with section 147 of the Income Tax Act making an addition of Rs. 6,98,30/- on account of assistance. The issue was agitated before ld CIT (A) on the issue of reopening as well as on merits. Ld CIT (A) dismissed the appeal of the assessee on the issue of reopening and on the issue of merit he rejected the contention of the assessee that the receipt is not chargeable to tax by Circular No. 573 dated 21st August 1990 as that circular deals only with the lump sum payment. Further, the ld CIT(A) was of the view that as Haryana Govt. treated the same amount as chargeable to tax by deducting tax at source it is not an exempt receipt.. Therefore, he dismissed the appeal of the assessee on both the counts. Assessee preferred an appeal before us for these years.

HELD : We do not see any material difference between the financial assistance received by the assessee in the appeal before us as well as the receipt in question before coordinate bench in the case of DCIT v. Laxmi M Aiyar (2011) 142 TTJ 780 : 131 ITD 436 : 64 DTR 420 (ITAT Mumbai) wherein it was held that the payment in the hands of the recipient was held to be not bearing any revenue character. Accordingly he held that the payments received by the assessee was in the nature of capital and not assessable to tax and allowed the appeal of the assessee and deleted the addition made by the Assessing Officer. Therefore following the decision of the coordinate bench in the case of DCIT v. Laxmi M Aiyar (supra) and supported by the CBDT circular No. 573 dated 21.08.1980, we are of the view that financial assistance received by the assessee is a capital receipt and not chargeable to tax. Therefore we reverse the finding of the ld CIT (A) and allow appeal of the assessee in ITA No. 486/Del/2016 for AY 2008-09. ITA No. 487/Del/2016 (Assessment Year: 2009-10) and ITA No. 488/Del/2016 (Assessment Year: 2010-11) are also on the same issue of taxability of the financial assistance received by the assessee under the same scheme for these years. In view of our decision in appeal of the assessee for AY 2008-09, where in we have held that the financial assistance received by the assessee is not chargeable to tax, similarly we also hold that in these appeals for AY 2009-10 and 2010-11 the receipt of financial assistance is not chargeable to tax. (Related Assessment years : 2008-09, 2009-10 and 2010-11) – [Mahindro Devi v. ITO, Karnal – Date of Judgement : 16.05.2016 (ITAT Delhi)]

Periodicity of the payment does not make the payment chargeable to tax

Coordinate bench of ITAT in DCIT v. Laxmi M Aiyar has held that the periodicity of the payment does not make the payment chargeable to tax. The issue before the bench was whether the income received annually as wife of deceased partner is revenue receipt chargeable to tax or it is a capital receipt. Coordinate bench has held as under:-

…..The ld. CIT(A), after considering the object and purpose of payment made in the case of the present assessee vis-à-vis that in the other case noticed that in Mrs. Lakshmi M. Aiyar the case of the assessee, the firm had given assurance to the partners in order to get their attention to the affairs of the firm by ensuring continued support to their widows on their death for a period of 10 years and in the case of Mrs. Jaya Bhaskaran, it was in lieu of the right by the eldest surviving child to nominate any qualified person as partner. He held that in the case of the assessee as well as Mrs. Jaya Bhaskaran, payments were received not relating to any business done or to loss of profits and it was not for any compensation for services rendered by the assessee either individually or likely to be rendered in future. Thus, the payment in the hands of the recipient was held to be not bearing any revenue character. Accordingly he held that the payments received by the assessee was in the nature of capital and not assessable to tax and allowed the appeal of the assessee and deleted the addition made by the Assessing Officer. (Related Assessment Year : 2005-06 – [DCIT v. Laxmi M Aiyar (2011) 142 TTJ 780 : 131 ITD 436 : 64 DTR 420 (ITAT Mumbai)] 

Compassionate payment – Voluntary and discretionary – No real source of income – Is a capital receipt

It was held that it is the quality of the payment that is decisive of the character of payment and not the method of the payment or its measure, it fall within capital or revenue. The payment made by the government is undoubtedly voluntary. However, it has no origin in what might be called the real source of income. No doubt section 15(1) proviso clause (d) enables the applicant to seek payment but that is far from saying that it is a source. Further, it is a compassionate payment, for such length of period as the government may, in its discretion, order. The amounts received by the assessee during the financial years in question have to be regarded as capital receipts and, therefore, are not income within the meaning of section 2(24). – [Padmraje R. Kadambande v. CIT (1992) 195 ITR 877 : 104 CTR 129 : 62 TAXMAN 456 (SC)]    

Receipt was not taxable in the hands of the widow of the deceased – Sum of Rs. 7,402 received by the assessee from the firm, M/s. K. S. Aiyar & Co. was of capital nature and exempt from the payment of income-tax

In the case of Mrs. Jaya Bhaskaran, the tribunal while deciding the issue following the case of P. H. Divecha v. CIT (1963) 48 ITR 222 (SC) has noted that the Hon’ble Supreme Court observed that “in determining whether this payment amounts to a return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss of profits of business, the receipt in the hands of the appellant cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person, it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made……….The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period.” – [CIT v. Mrs. Jaya Bhaskaran (1987) 168 ITR 256 : 61 CTR 214 (Pat)]

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Qualification: Post Graduate
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Member Since: 12 Apr 2020 | Total Posts: 22
Born on 27 June, 1958 in Narnaul, Haryana joined Income-tax Department in the year 1983 and retired as Income Tax Officer on 30.06.2018. Have so far author of 21 books on Income Tax and also writer of his own blog https://ramduttsharma.blogspot.com/. Previlliged to be recipient of first-ever Finance View Full Profile

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