Tribunal rules in favor of assessee on tax deduction issue and ex-employee payments

The Tribunal dismissed the appeal filed by the Assessing Officer and allowed the cross-objection of the assessee. It held that the assessee was not to be treated as an assessee in default for non-deduction of tax at source under section 192 of the Income Tax Act. The Tribunal also determined that the payments made to ex-employees did not constitute "profits in lieu of salary" under section 17(3)(iii) of the Act. The order was pronounced on 15th February 2017.

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Issues Involved:
1. Whether the assessee is to be treated as an assessee in default (A-I-D) for non-deduction of tax at source under section 192 of the Income Tax Act.
2. Nature of the payment made to the ex-employees—whether it constitutes "profits in lieu of salary" under section 17(3)(iii) of the Income Tax Act.

Detailed Analysis:

Issue 1: Assessee in Default (A-I-D) for Non-Deduction of Tax at Source

The Assessing Officer (AO) issued a show cause notice to the assessee for not deducting tax at source on payments made to five ex-employees, treating the assessee as an A-I-D under sections 201(1) and 201(1A) of the Income Tax Act. The AO raised a demand of Rs. 32,00,725, comprising Rs. 25.60 lakhs as tax and Rs. 6.40 lakhs as interest.

The First Appellate Authority (FAA) held that the settlement with the ex-employees was without the prior approval of the head office and that the amount was forcibly recovered from the assessee. The FAA concluded that the provisions of section 192 were not applicable as the payments were not made under the head salaries. The FAA noted that the tax liability had been discharged by the ex-employees and that the assessee was under a bona fide belief that the payment was capital compensation, not taxable in the hands of the recipients. Consequently, the FAA deleted the entire demand raised by the AO.

Upon appeal, it was found that the assessee had retrenched 59 employees, with five entering into an agreement with the regional office. The High Court ordered the recovery of dues, leading to the attachment of the assessee's bank account. The Tribunal concluded that there was no employer-employee relationship at the time of payment and that the ex-employees had already paid taxes on the amounts received. Therefore, the assessee could not be treated as an A-I-D.

Issue 2: Nature of Payment—Profits in Lieu of Salary

The AO argued that the payments made to the ex-employees were assessable under the head "income from salary" and thus required tax deduction at source. The FAA, however, determined that the payments were not related to past services but were made to avoid litigation, and therefore, were not in the nature of salary or profits in lieu of salary.

The Tribunal referred to the case of Arun Bhai R. Naik, where it was held that the amount paid in terms of a settlement without any obligation on the part of the employer does not constitute "compensation" as envisaged under section 17(3)(i) of the Act. The Tribunal emphasized that the payment must be due or received as compensation, implying an obligation of the employer and a vested right of the employee, which was not present in this case.

The Tribunal concluded that the payments were made to avoid litigation and were not compensation for services rendered. Thus, the payments did not fall within the ambit of "profits in lieu of salary" under section 17(3)(i). The Tribunal upheld the FAA's order, deciding that the assessee could not be treated as an A-I-D.

Conclusion:

The appeal filed by the AO was dismissed, and the cross-objection (CO) of the assessee was allowed statistically. The Tribunal pronounced that the assessee was not to be treated as an A-I-D, and the payments did not constitute "profits in lieu of salary." The order was pronounced in the open court on 15th February 2017.

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