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Amount paid to ex-employee to avoid litigation can’t be held as “Profit in lieu of salary”

February 17, 2017[2017] 78 187 (Mumbai - Trib.)

IT: Amount paid to ex-employees under settlement is not 'profit in lieu of salary' under section 17(3)(i)

• Under clause (i) of section 17(3) of the Act, in order to characterise a particular payment received from the employer, on termination of the employment, as "profits in lieu of salary", it has necessarily to be shown that this amount is due or received as "compensation". The word "compensation" is not defined under the Act. Therefore, one has to take into consideration the ordinary connotation of this expression in common parlance. It has to be in the nature of something awarded to compensate for loss, suffering or injury. When translated in the context of employment, it would imply a monetary and non-monetary amount to be given to the employee in return for some services rendered by him. Inherent in this would be the obligation of the employer to pay some amount to the employee to "compensate" him. It would also mean that the employee gets a vested right to get such an amount. In the case under consideration there the ex employee did not get vested right to receive the amounts in question. A settlement was arrived at to avoid litigation-there was no obligation on part of the employer to pay some amount to the employees to compensate them.

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