Section 17(3)

Section 17(3) — the law in short

What the courts have decided on section 17(3), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Hosur Bata Employees Union v Principal Chief Commissioner of Income Tax High CourtCuts both waysValidity unconfirmed
  My clients settled a wage dispute and took VRS and compensation for loss of future salary in two instalments. The company deducted TDS on the whole amount without giving s.89 relief. Can we make the employer refund it?
  No — not from the employer. The Madras High Court held that the employer cannot be found at fault for deducting tax at source in the absence of an application in Form 10E under Rule 21A, because s.192(2A) is what obliges the employer to compute and give s.89 relief and it operates only on the particulars the employee furnishes. The Court's remedy was to direct the employees to file returns under s.139(1) within thirty days and the Income Tax Officer to process them under s.143(1) and refund within two months.
• CIT v Pritam Das Narang High CourtHelps taxpayerValidity unconfirmed
  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 Where the offer was withdrawn before the employment began, no such relationship ever existed, and the amount paid for non-commencement of employment was a capital receipt, not taxable as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.
• CIT v Deepak Verma High CourtHelps taxpayerSuperseded by amendment
  My employer gave me a lump sum on top of my normal dues when I resigned, described in the letter as a one-off ex gratia. The officer says it is profits in lieu of salary. Is it?
  Not under s.17(3)(i), because clause (i) taxes 'compensation' and a payment the employer makes voluntarily, in its own discretion, with no vested right in the employee, is not compensation. But do not stop there: the Delhi High Court reached that result only because the assessment year was 2001-02, and it said in terms that s.17(3)(iii), inserted with effect from 1 April 2002, 'would squarely cover the nature of payment received by the assessee'. For AY 2002-03 onwards an ex gratia received after cessation of employment is taxable as salary.
• CIT v Smt. Rani Shankar Mishra High CourtHelps taxpayerValidity unconfirmed
  I received a settlement from a foreign state employer for a job I applied for but was never given. The officer says s.17(3)(iii) taxes anything received before joining employment. Does it reach me?
  No. Section 17(3)(iii) presupposes an employment with the person paying: sub-clause (A) covers the period before the assessee joins that employment and sub-clause (B) the period after it ceases. Where there never was and never could have been an employer-employee relationship, the receipt is not profits in lieu of salary at all, and compensation for having been denied the job is a capital receipt.
• CIT v Nagesh Devidas Kulkarni High CourtHelps taxpayerSuperseded by amendment
  I took voluntary retirement. Can I claim both the s.10(10C) exemption and s.89 relief on the balance?
  Only for assessment years up to 2009-10. The Bombay High Court held that a voluntary retirement payment is compensation received in connection with the termination of employment and so is 'profits in lieu of salary' under s.17(3), and that relief under s.89 was therefore available on the amount taxed over and above the Rs 5,00,000 exempted by s.10(10C). That was the position for the year before the Court, assessment year 2002-03. From assessment year 2010-11 the two are alternatives by statute: the proviso to s.89 and the third proviso to s.10(10C), both inserted by the Finance (No. 2) Act, 2009 with effect from 1 April 2010, mean that claiming the s.10(10C) exemption bars s.89 relief on the same receipt, and that taking s.89 relief forfeits the exemption — not only for that year but 'in relation to such, or any other, assessment year'. What survives of this decision is its holding that a voluntary retirement payment is 'profits in lieu of salary' under s.17(3).
• CIT v G.V. Venugopal High CourtHelps taxpayerSuperseded by amendment
  I took VRS from a bank and claimed the Rs 5 lakh exemption under section 10(10C). Can I also claim spread-over relief under section 89(1) on the balance?
  Yes, for the years this judgment governs. The Madras High Court held that exemption under section 10(10C) up to Rs 5 lakh and relief under section 89(1) on the balance VRS compensation are two separate benefits, and nothing in the Act barred taking both. The second proviso to section 10(10C) only stops a second exemption under that clause in another assessment year; it says nothing about section 89(1). VRS compensation is a profit in lieu of salary under section 17(3), so section 89(1) applies to it. The Department's appeal was dismissed.
• SAIL DSP VR Employees Association 1998 v Union of India High CourtCuts both ways
  My VRS compensation is being paid to me in instalments over ten years. Does the section 10(10C) exemption still apply, or is it lost once the payments cross into later years?
  It still applies. The Calcutta High Court held that the whole compensation became due when the employee was released under the scheme and was chargeable under section 15(a) at that point, whether paid or not. Spreading the payment over ten years does not turn the later instalments into salary of those later years, so the second proviso to section 10(10C) is not attracted. The exemption up to Rs 5 lakh runs on the compensation component alone. Terminal benefits paid under the same scheme, such as gratuity and leave encashment, are not part of the amount received on voluntary retirement and are not covered.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.