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Income tax

Harsha (Manager) (34 Points)

18 February 2017

One of my friends has received from a software company (equivalent to 1-year salary) as compensation upon termination of his contract as an employee as a sign off compensation/for the loss of his work and in consideration of his long time association with the company. The company has deducted the TDS along with the last month salary.

Now, I'm contending that the above lump sum amount received is to be treated as Capital receipts and hence not taxable.

Please provide your inputs/comments

Also, refer the case law "Sharda Sinha" Vs CIT -Delhi, High court Delhi

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5 Replies

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (160332 Points)
Replied 19 February 2017

The matter differs from case to case. If the loss to employee can be proved as capital loss, exemption can be claimed. The Delhi HC in CIT v. Deepak Verma (2010) 194 TAXMAN 265, held that severance payments made by an employer would not be treated as ‘profits in lieu of salary’ and hence, not taxable for AY 2001-02.

However, the Delhi HC in that case observed that the “salary” definition at that relevant time was not adequate to cover severance payments. The court specifically pointed out that the amendments vide Finance Act, 2002 with effect from April 1, 2002 will however bring within the tax net severance payments as well. The Delhi HC observed that in fact, the Legislature wanted such type of payments to be treated as income in the hands of employees/ persons and to tax them.

In fact, it was for the same reason that the said amendment was inserted in the IT Act.

Harsha (Manager) (34 Points)
Replied 19 February 2017

Thank you, sir. "If the loss to an employee can be proved as a capital loss, the exemption can be claimed". How to prove the same?. Yes sir, by virtue of section 17(3)(i), any compensation due to or received by an assessee from his employer in connection with the termination of his employment is taxable as profit in lieu of salary.

Also, whether the exemption can be claimed under section 10(10B)?

lower of the below

1.Actual amount received

2.Rs.5,00,000/-

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (160332 Points)
Replied 20 February 2017

""If the loss to an employee can be proved as a capital loss, the exemption can be claimed". How to prove the same?."

Depends upon terms or situation under which the employee gets termination. e.g. condition of not pursuing job for certain period, or in the same field etc. etc.

"whether the exemption can be claimed under section 10(10B)? " Yes, if it retrenchment compensation.