Severance compensation linked to termination of employment was held taxable as profits in lieu of salary, not a capital receipt.

Severance compensation received on cessation of employment was treated as taxable profits in lieu of salary because it fell within the express scope of section 17(3)(iii), which covers amounts received from an employer or former employer after employment ends. The earlier view treating such compensation as a capital receipt was distinguished as applying to the pre-amendment position, while the post-01.04.2002 language of the provision materially widened the charge. As the payment was linked to termination of employment and there was no evidence that it was gratuitous or outside the employment nexus, the receipt was held taxable and not a capital receipt exempt from tax.

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Issues: Whether severance compensation received on cessation of employment is taxable as profits in lieu of salary under section 17(3)(iii) of the Income-tax Act, 1961, or is a capital receipt not chargeable to tax.

Analysis: The amount received by the assessee arose on cessation of employment and fell within the express language of section 17(3)(iii), which includes any amount received from an employer or former employer after cessation of employment. The earlier line of authority treating severance compensation as a capital receipt was distinguished as relating to a pre-amendment period, whereas the statutory position after insertion of clause (iii) with effect from 01.04.2002 materially expanded the scope of profits in lieu of salary. In the absence of evidence showing that the payment was gratuitous or outside the employment nexus, and in view of the finding that the payment was linked to the termination of employment, the receipt was held to be taxable.

Conclusion: The severance compensation is taxable as profits in lieu of salary under section 17(3) of the Income-tax Act, 1961 and is not a capital receipt exempt from tax.

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