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The Tax Publishers Arunbhai R. Naik v. ITO [Tax Appeal No. 23 of 2004, dt. 12-10-2015] : 2015 TaxPub(DT) 4377 (Guj-HC) Non-obligated Ex gratia on premature cessation of services -- whether taxable? *Facts:* Assessee was prematurely terminated by his employer. Employee assessee won the case in court challenging the termination. During pendency of judicial proceedings, employer opted for settlement and paid a lump sum to end dispute. Assessing officer held it as taxable payment. Commissioner (Appeals) reversed the same, ITAT upheld views of the assessing officer holding it to fall under section 17(3) as compensation from employer to employee thus is taxable. On further appeal - Held by the high court that the payment was voluntary without any obligation post employment termination and was compensation thus is not taxable in favour of the assessee. The payment was done to end to litigation via settlement, such amount arising out of any non-contractual obligation is not taxable as salary in its extended definition as well. *Author's Note:* The court treated it as non-contractual while employer-employee relationship itself exists only through a contractual relationship. Recently in Avantor Performance Materials India Limited v. CIT, ITA No. 24/2014/assessment year 2008-09/Dated 4-1-2016/Himachal Pradesh High Court held that compensation consequential to a contractual obligation is taxable. Perhaps the employer was not obligated to pay the same is what made the court decide it as non-taxable.

The Tax Publishers

Arunbhai R. Naik v. ITO [Tax Appeal No. 23 of 2004, dt. 12-10-2015] : 2015 TaxPub(DT) 4377 (Guj-HC)

Non-obligated Ex gratia on premature cessation of services -- whether taxable?

Facts:

Assessee was prematurely terminated by his employer. Employee assessee won the case in court challenging the termination. During pendency of judicial proceedings, employer opted for settlement and paid a lump sum to end dispute. Assessing officer held it as taxable payment. Commissioner (Appeals) reversed the same, ITAT upheld views of the assessing officer holding it to fall under section 17(3) as compensation from employer to employee thus is taxable. On further appeal -

Held by the high court that the payment was voluntary without any obligation post employment termination and was compensation thus is not taxable in favour of the assessee.

The payment was done to end to litigation via settlement, such amount arising out of any non-contractual obligation is not taxable as salary in its extended definition as well.

Author's Note: The court treated it as non-contractual while employer-employee relationship itself exists only through a contractual relationship. Recently in Avantor Performance Materials India Limited v. CIT, ITA No. 24/2014/assessment year 2008-09/Dated 4-1-2016/Himachal Pradesh High Court held that compensation consequential to a contractual obligation is taxable. Perhaps the employer was not obligated to pay the same is what made the court decide it as non-taxable.