Voluntary ex gratia on closure of employment is not compensation under the income-tax law and remains non-taxable.

A voluntary ex gratia payment made by an employer on closure of a unit and cessation of employment, without any contractual or statutory obligation under the service terms, is treated as outside compensation under section 17(3) of the Income-tax Act, 1961. The Tribunal's reasoning, supported by earlier decisions, was that such payment does not acquire the character of taxable compensation merely because employment has ended. The disallowance based on CBDT Circular No. 573 dated 21.08.1990 was not sustained on the facts, and the ex gratia amount was treated as not taxable under the compensation provision.

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Issues: Whether ex gratia received by the assessee from the employer on closure of the unit was exempt or otherwise not taxable, and whether it could be brought to tax as compensation under the income-tax law.

Analysis: The payment was made on cessation of employment due to closure of the unit and was found to be voluntary, without any enforceable obligation on the employer under the service terms. On the reasoning adopted from earlier Tribunal decisions and supporting judicial authorities, such ex gratia payment did not amount to compensation in terms of section 17(3) of the Income-tax Act, 1961. The disallowance based on CBDT Circular No. 573 dated 21.08.1990 was not sustained on the facts of the case.

Conclusion: The addition was not sustainable. The ex gratia amount was held to be not taxable as compensation under section 17(3) of the Income-tax Act, 1961, and the issue was decided in favour of the assessee.

Ratio Decidendi: A voluntary ex gratia payment made by the employer on cessation of employment, without any contractual or statutory obligation to pay, is not compensation falling within section 17(3) of the Income-tax Act, 1961.

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