Compensation awarded by court for wrongful termination

I am a senior citizen 70 years old and have been fighting case in court with my employer for wrongful termination from last 12 years.Recently settlement took place and the court awarded me compensation ( not salary ) . Kindly let me know whether the compensation is taxable or not.

If yes according to IT laws it is revenue or capital receipt.

Your reply will be highly appreciated as am in great need.
Asked 1 year ago in Income Tax from Mumbai, Maharashtra
In my view Sir in the present case the compensation received is a revenue receipt and is taxable as per the income Tax Act,1961. But if it is not part of salary then you have to consider it under income from other sources. You can as well deduct all the expenses incurred by you in fighting the case in court. The remaining amount is taxable.

Shyam Sunder Modani
CA, Hyderabad
955 Answers
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It is a capital receipt and no tax is applicable. It is in the nature of compensation for a loss.
Shashank Surana
CA, Chennai
60 Answers
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As per section 17 of the IT Act ,The term salary includes profit in lieu of or in addition to salary . Further section 17(3 ) defines the profit in lieu of salary . As per  clause (i) , the amount of any compensastion due to or rreceived by the assessee from his employer or former employer or in connection with the termination of his employment or the modification of the terms and condition relating thereto . Thus this compensastion will be covered under the term salary.  This is revenue receipt and taxable on due or receipt which ever is earlier .The relief can be claimed under section 10(10B) or 10(10C).
Prakash Sinha
CA, Delhi
112 Answers
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It depends on the facts of the case. If compensation received is towards loss of employment, it would amount to Capital receipt and hence, no income tax is payable. 
On the other hand, if the compensation is towards notice pay (as per terms of employment), it would be a revenue receipt and thus liable to tax.
Anil Bedi
CA, New Delhi
10 Answers
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U/s 17(3)(i) of the Income Tax Act, " Profits in lieu of salary" includes the amount of compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment ...".  

In your case, the compensation awarded by the Court comes under the purview of definition of "Profits in lieu of Salary' as mentioned above. Thus the amount of compensation awarded by the Court will, prima facie, be the income chargeable to tax under the head "Salaries".

However, a meaningful conclusion can be arrived only after reading the Court Order to understand the facts and the rationale followed by the Court. If the compensation is received, for instance, for reasons other than the employer and employee relationship, even though it is received from the employer for wrongful termination of your employment.  if it is so, then we can perhaps examine whether such compensation is taxable under the head " Income from other sources" or even consider as capital receipt. If it is income from other sources, your expenses  on litigation can be claimed as expenditure. If it is a capital receipt, it may not be taxable. 
B Vijaya Kumar
CA, Hyderabad
290 Answers
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Compensation received is in lieu of “Salary”. As per basis of charge of salary i.e. Section 15, the amount received by or on behalf or employer or former employer shall be chargeable under the head “Salaries.”
•	As per Section 17(1)(iv) Salary includes profits in lieu of Salary.

•	As per Section 17(3)(i) Profits in lieu of salary includes the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modifications of the terms and conditions relating thereto.
From the above discussion it is clear that, compensation received from former employer is taxable under the head “Salaries.”
The question that you may have in your mind must be that the compensation has been awarded by the court and hence has nothing to do with salary and therefore a capital receipt.
In this case, one needs to go into the details of the judgement. Most probably, the court must have calculated the salary that you would have received had you not been terminated from the employment.
Thus, it is only the quantum of the compensation that has been decided by the court but the same will come from employer himself. In case, the amount of compensation includes cost for the mental harassment that you must have faced in the last 12 years then, only to such extent it may be treated as “Capital Receipt” and hence can be excluded from the income. The cost of the case (legal expenses etc.) awarded to you if any, can be treated as “Income From Other Sources” against which you can claim the actual expenses incurred by you.
Assuming that the compensation received by you is taxable under the head “Salaries” you can still claim relief as per Rule 21A(4) if compensation is received after rendering continuous service for not less than 3 years and the unexpired portion of the term of employment is also not less than 3 years.
Termination of employment may be due to any reasons resignation or dismissal or compulsory retirement, superannuation or even voluntary retirement.
Refer State Bank of Travancore v. Central Board of Direct Taxes [2006] 151 Taxman 140(Ker.) – CIT v. M. Raman [2002] 120 Taxman 338 (Mad.).
Sagar Jayawant
CA, Thane
27 Answers
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Before I can answer, is it possible for you to share that portion of the judgement which has awarded the compensation. I would like to see whether they have compensated for the lost salary or it is a lump sum compensation without reference to salary.

Also I have not understood what you need to convince to company? As per my opinion, it is not a capital receipt and hence the company will deduct TDS.
 
Sagar Jayawant
CA, Thane
27 Answers
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Generally compensation can be capital receipt , however those compensation which are covered here are well included in the tax net as revenue receipt and the clause of section 17(1) related to profit in lieu of salary supports that . Please refer to the case CIT Vs Ajit 165 ITR 90, CIT Vs Jamini 176 ITR 127 , Ishwar Vs CIT 123 ITR 379 , Badami Vs CIT 240 ITR 263. 
Prakash Sinha
CA, Delhi
112 Answers
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Dear Sir,

As per your question and clarifications your income will be taxable under the head of salary because it is the case of salary in arrears but the benefits of PF, gratuity you will get as per the income tax act.

But you can get benefit of rebate u/s 89 of Income Tax Act.
Kavit Dilip Gadhia
CA, Mumbai
35 Answers
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The position of law does not get change with the above components of compensation as the prime issue was the termination of the employment  and everything thing else are incidental .  
Prakash Sinha
CA, Delhi
112 Answers
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Then it should be define for which you got the compensation and how much otherwise it will be calculated as i said above.
Kavit Dilip Gadhia
CA, Mumbai
35 Answers
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From the extract of the Court order quoted by you, you received from your employer superannuation, PF and Gratuity benefits. These are definitely to be taken under the head " Salaries". As you have received these amounts as arrears,you will be entitled to rebate u/s 89 of the Income Tax Act, which basically evens out your tax liability across the years, for which the arrears of pay  are now received. 

Apart from this, you are also entitled to receive " a lump-sum compensation in discharge of your claim in the suit". This amount also has to be paid by the employer only. Though it is a lump-sum compensation, still this amount is payable to you as a result of employer employee relationship and not otherwise. Hence, this amount should also be treated as part of salary.

You can stretch the interpretation of the Court order and the Income Tax Act and try to argue that it is a capital receipt and not a revenue receipt. However, neither your employer nor the Income Tax Department may agree to this interpretation and take the amount as your salary income. You may get into litigation resulting in appeals and counter appeals. I do not suggest this to you considering your age and cost involved. There are no case laws to my knowledge that clearly and unambiguously hold that these are capital receipts. 

As the Income tax returns filed now cannot have any attachments, you will not be able to offer any note on your computation of income, claiming that the amount of compensation is a  capital receipt on the basis of judicial decisions. In such case, you run the risk of attracting penalty for concealment, if your return is selected for scrutiny and assessed by adding back the amount claimed by you as capital receipt. 
B Vijaya Kumar
CA, Hyderabad
290 Answers
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Sir in your present case some judgements are in favour and some are considering the same as capital . I am quoting the judgements in your favour :
CIT v. Chiranji Lal Multanimal Rai Bahadur (P) Ltd. , in which the Hon'ble Punjab & Haryana High Court considered the facts that the interest awarded by the Court for loss suffered on account of deprivation of the property amounts to compensation and is not taxable and therefore, not assessable as income. In the case of G.D.A. v. Balbir Singh decided by the Hon'ble Supreme Court in Civil Appeal No. 7173 of 2003, vide order dt. 17th March, 2004, the Hon'ble Supreme Court held that the commission might also compensate for harassment/injury both mental and physical. It is not just interest on the amount invested but also compensation for the harassment and agony caused to the allottee.
Shyam Sunder Modani
CA, Hyderabad
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For that you have to produce all the details.
please meet the CA and do the working
Kavit Dilip Gadhia
CA, Mumbai
35 Answers
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Sir, in case of any query you can quote the above case laws and there shall not be any problem
Shyam Sunder Modani
CA, Hyderabad
955 Answers
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As the compensation received is a lumpsum amount across the years, the tax liability in the year of receipt of goes up because of change in slab from lower level to higher level. Hence,the income will be spread out during the years  for which such income relates to by giving relief in tax liability u/s 89. 

The income for all the years, for which you received compensation in arrears, will be recomputed by taking the original income and the compensation. This will be done for all the years. The total tax liability that is derived in this process is the tax liability that is payable for those years and the difference between the original tax liability and the revised tax liability will be considered and the excess tax liability for the current year over and above the tax liability will be allowed as rebate.

It is a complicated exercise and I suggest that you should use a standard software to compute the rebate u/s 89 to avoid errors in computation. It will be advisable to take the help of your CA and file your return.
B Vijaya Kumar
CA, Hyderabad
290 Answers
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