The clause (iii) of the section 17(3)
According to clause (iii) of Section 17(3), profits or benefits in lieu of salary” includes:
(A) Any amount due to and/or received by any person from any person before he joins any employment offer with that person;
(B) Or after the cessation of employment offer with that person.
Whenever an income is to be computed in terms of ‘Salaries’, being an employee is must. Income must come out of employment, present or past. Unless you are an ’employee’ of an employer, the income or amount received from the employment will not be taxed under the head ‘Salaries’.
In other words, section 17(3)(iii) can be understood as Amount or income received by employee for losing his employment offer is considered as a capital receipt, ans it is neither taxable as salary or as other sources.
Recently this controversy arose in the case of Pritam Das Narang (Delhi high court).
Facts of this case:
In the terms of employment offer, the assessee was working as CEO for ACEE (M/s ACEE Enterprises). It was not possible for ACEE enterprises to take employee on board just because of sudden changes in its business plan. Therefore the ACEE had to pay compensation of Rs. 1.95 crores to the employee as a one-time payment for the non-commencement of job as proposed.
Such compensation had not been offered to tax by the assessee. The claim of assessee was rejected by the Assessing Officer on the basis that under the clause (iii) Section 17(3) received by the assessee of any amount from any person prior to joining of assessee with that person was taxable.
According to the view of the Assessing Officer, the condition of pre-existing relationship between employee and employer was done away by using of the words “by an Assessee from a person” and these words were introduced by the Income Tax Finance Act, 2001.
In this instant the prospective employer had never been served by the assessee for receiving compensation for non-commencement of job. Therefore, the pre-existence of employee- employer relationship had been never satisfied in both of the cases. Thus, a compensation received because of non-commencement of job is considered as a capital receipt (will not be taxable).
Decisions of Delhi High Court:
- Compensation is not taxable as profits in the lieu of salary
- Compensation is not taxable as an income from some other sources