A company withdrew my job offer before I joined and paid me compensation. Is that taxable as salary?
No. The Delhi High Court held that s.17(3)(iii) presupposes an employment, that is a relationship of employer and employee between the payer and the recipient. Where the offer was withdrawn before the employment began, no such relationship ever existed, and the amount paid for non-commencement of employment was a capital receipt, not taxable as profits in lieu of salary or as income from other sources.
Decided by the High Court (S. Muralidhar J and Vibhu Bakhru J) on 2015-09-16, reported as ITA 203/2014 (Delhi High Court); assessment year 2008-09. No law report citation appears on the copy read.. It bears on section 17(3), section 17(3)(iii) of the Income Tax Act 1961, in Salary & Perquisites and Capital Gains Exemptions matters.
Payments of this kind almost always arrive with tax deducted at source, which is what triggers the notice. The employer's deduction does not decide the character of the receipt. This judgment gives the individual a clear, recent High Court answer, and it also confirms that the credit for the tax deducted stays with the recipient even though the underlying amount is not taxable.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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On 10 January 2007 the assessee signed an employment agreement with M/s ACEE Enterprises to serve as its Chief Executive Officer, the employment to commence on 1 July 2007. In May 2007 the company withdrew the offer because its business plans had changed. The assessee sought compensation for the opportunities he had given up. On 25 August 2007 the company paid him Rs 1,95,00,000 as a one-time payment for non-commencement of employment, and deducted tax at source of Rs 22,09,350. The Assessing Officer brought the sum to tax as profits in lieu of salary under s.17(3)(iii). The Commissioner (Appeals) and the Tribunal deleted the addition, treating it as a capital receipt in the hands of a prospective employee. The Revenue appealed, and the Court framed questions on the taxability of the sum and on the credit allowed for the tax deducted.
The appeal was dismissed. Section 17(3)(iii) presupposes the existence of an employment, that is a relationship of employer and employee between the person making the payment and the assessee. The employment here never commenced, so the amount received for its non-commencement was a capital receipt and was not taxable as profits in lieu of salary (para 14). The credit for the tax deducted at source was left undisturbed.
The Court refused to read the words 'from any person' in s.17(3)(iii) disjunctively. Those words have to be read with sub-clause (A), 'before his joining any employment with that person', and sub-clause (B), which speaks of an amount received 'after cessation of his employment'. Both sub-clauses proceed on the footing that there is an employer and employee relationship between the payer and the recipient. Reading the opening words in isolation would overlook that essential facet of the provision (para 14). Since the offer had been withdrawn before the employment began, the relationship never came into existence and the payment fell outside the sub-clause altogether; the Revenue's alternative case that it was taxable as income from other sources was also rejected.
In other words, Section 17 (3) (iii) (A) pre-supposes the existence of an employment, i.e., a relationship of employee and employer between the Assessee and the person who makes the payment of "any amount" in terms of Section 17 (3) (iii) of the Act.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that s.17(3)(iii) presupposes an employment, that is a relationship of employer and employee between the payer and the recipient. Where the offer was withdrawn before the employment began, no such relationship ever existed, and the amount paid for non-commencement of employment was a capital receipt, not taxable as profits in lieu of salary or as income from other sources. This was decided by the High Court (S. Muralidhar J and Vibhu Bakhru J) and bears on section 17(3), section 17(3)(iii) of the Income Tax Act 1961. It is reported as ITA 203/2014 (Delhi High Court); assessment year 2008-09. No law report citation appears on the copy read.. Payments of this kind almost always arrive with tax deducted at source, which is what triggers the notice. The employer's deduction does not decide the character of the receipt. This judgment gives the individual a clear, recent High Court answer, and it also confirms that the credit for the tax deducted stays with the recipient even though the underlying amount is not taxable. If it applies to you, the first step is this: Fix the date the employment was to begin and the date the offer was withdrawn. The whole case turns on the payment being for an employment that never commenced.
On 10 January 2007 the assessee signed an employment agreement with M/s ACEE Enterprises to serve as its Chief Executive Officer, the employment to commence on 1 July 2007. In May 2007 the company withdrew the offer because its business plans had changed. The assessee sought compensation for the opportunities he had given up. On 25 August 2007 the company paid him Rs 1,95,00,000 as a one-time payment for non-commencement of employment, and deducted tax at source of Rs 22,09,350. The Assessing Officer brought the sum to tax as profits in lieu of salary under s.17(3)(iii). The Commissioner (Appeals) and the Tribunal deleted the addition, treating it as a capital receipt in the hands of a prospective employee. The Revenue appealed, and the Court framed questions on the taxability of the sum and on the credit allowed for the tax deducted. The matter was decided on 2015-09-16 by the High Court (S. Muralidhar J and Vibhu Bakhru J). On those facts the High Court held as follows. The appeal was dismissed. Section 17(3)(iii) presupposes the existence of an employment, that is a relationship of employer and employee between the person making the payment and the assessee. The employment here never commenced, so the amount received for its non-commencement was a capital receipt and was not taxable as profits in lieu of salary (para 14). The credit for the tax deducted at source was left undisturbed.
The Court refused to read the words 'from any person' in s.17(3)(iii) disjunctively. Those words have to be read with sub-clause (A), 'before his joining any employment with that person', and sub-clause (B), which speaks of an amount received 'after cessation of his employment'. Both sub-clauses proceed on the footing that there is an employer and employee relationship between the payer and the recipient. Reading the opening words in isolation would overlook that essential facet of the provision (para 14). Since the offer had been withdrawn before the employment began, the relationship never came into existence and the payment fell outside the sub-clause altogether; the Revenue's alternative case that it was taxable as income from other sources was also rejected. In the words reproduced by the source cited on this page: "In other words, Section 17 (3) (iii) (A) pre-supposes the existence of an employment, i.e., a relationship of employee and employer between the Assessee and the person who makes the payment of "any amount" in terms of Section 17 (3) (iii) of the Act."
It was decided by the High Court on 2015-09-16 and is reported as ITA 203/2014 (Delhi High Court); assessment year 2008-09. No law report citation appears on the copy read.. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 17(3), section 17(3)(iii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed. Section 17(3)(iii) presupposes the existence of an employment, that is a relationship of employer and employee between the person making the payment and the assessee. The employment here never commenced, so the amount received for its non-commencement was a capital receipt and was not taxable as profits in lieu of salary (para 14). The credit for the tax deducted at source was left undisturbed. It arises in Salary & Perquisites and Capital Gains Exemptions matters, on section 17(3), section 17(3)(iii) of the Income Tax Act 1961, and was decided by S. Muralidhar J and Vibhu Bakhru J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep the appointment letter, the withdrawal communication and the letter or agreement under which the payment was made; the description of the payment in that document matters. If tax was deducted at source, disclose the receipt and the deduction in the return and claim the credit, treating the sum as a capital receipt rather than salary. The Court upheld the credit here. Do not extend this to a payment from an employer you actually worked for. Once there is or has been an employment, compensation connected with its termination falls squarely inside s.17(3)(i). If the officer relies on the words 'from any person' in s.17(3)(iii), point to paragraph 14: those words are read with sub-clause (A) and still require an employment relationship.
Validity check could not be completed. Later treatment was not searched. No amendment to s.17(3)(iii) affecting the reasoning was identified. The decision is narrow: it turns on the employment never having commenced, and it does not touch payments made by an actual or former employer, which s.17(3)(i) brings to tax. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The date on the copy read is 16 September 2015; an online digest of the same decision gives 16 October 2015. The date printed next to the judges' names on the Indian Kanoon copy is SEPTEMBER 16, 2015, and that is the date used here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed. Section 17(3)(iii) presupposes the existence of an employment, that is a relationship of employer and employee between the person making the payment and the assessee. The employment here never commenced, so the amount received for its non-commencement was a capital receipt and was not taxable as profits in lieu of salary (para 14). The credit for the tax deducted at source was left undisturbed.
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