Appeal allowed, Rs. 35 lakh addition deleted. Ex gratia payment capital receipt, not taxable under Income-tax Act.

The appeal was allowed, and the addition of Rs. 35 lakhs was deleted. The ex gratia payment was held to be a capital receipt, not liable to tax under section 17(3)(i) of the Income-tax Act, 1961. The levy of interest under section 234B was deemed consequential and would be adjusted based on the primary decision.

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Issues Involved:
1. Taxability of the ex gratia payment received by the assessee from the erstwhile employer under section 17(3)(i) of the Income-tax Act, 1961.
2. Levy of interest under section 234B of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of the Ex Gratia Payment:
The primary issue in this appeal is whether the ex gratia payment of Rs. 35,00,000 received by the assessee from HT-CGU Project Services (P.) Ltd. (HTCGU) is chargeable to tax under section 17(3)(i) of the Income-tax Act, 1961, as "profits in lieu of salary." The assessee contends that the payment was voluntary and not connected to the employment, while the Assessing Officer argues it was compensation for termination of employment.

The assessee was employed with Hindustan Times until 31-5-2000 and then deputed as CEO of HTCGU from 1-6-2000 to 31-1-2001. Upon resignation effective from 1-2-2001, HTCGU offered an ex gratia payment of Rs. 35,00,000. The Assessing Officer considered this amount as taxable income under the head 'salary,' asserting it was compensation for termination of employment.

The learned CIT(A) upheld the Assessing Officer's view, noting that the right to receive the amount came into existence while the assessee was still in service. However, the assessee's counsel argued that the payment was discretionary and voluntary, with no vested right under the employment contract. The counsel cited several judicial precedents, including Supreme Court and High Court decisions, to support the claim that voluntary payments without a vested right are capital receipts and not taxable as 'salary.'

The Tribunal analyzed the definition of 'salary' under section 17(1) and 'profits in lieu of salary' under section 17(3). It emphasized that 'compensation' under section 17(3)(i) implies an obligation to pay and a vested right to claim. Since the payment was ex gratia, voluntary, and at the discretion of the employer, it did not qualify as 'compensation' under section 17(3). The Tribunal noted that the assessee had no vested right to the payment, and it was not related to past services rendered. The Tribunal referred to several judicial decisions, including Mahesh Anantrai Pattani v. CIT, CIT v. L.W. Russel, and Lachman Das v. CIT, which held that voluntary payments without a vested right are capital receipts.

The Tribunal concluded that the ex gratia payment was a capital receipt, not taxable as 'profits in lieu of salary' under section 17(3)(i). It also noted that the amendment to section 17(3) to include payments received after cessation of employment, effective from 1-4-2002, did not apply to the assessment year in question.

2. Levy of Interest under Section 234B:
The Tribunal held that the levy of interest under section 234B is consequential in nature. Since the primary issue of taxability of the ex gratia payment was decided in favor of the assessee, the interest under section 234B would also be adjusted accordingly.

Conclusion:
The appeal was allowed, and the addition of Rs. 35 lakhs was deleted. The ex gratia payment was held to be a capital receipt, not liable to tax under section 17(3)(i) of the Income-tax Act, 1961. The levy of interest under section 234B was deemed consequential and would be adjusted based on the primary decision.

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