1The question we are called upon to answer in this R.C. is :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 10,500 paid to the assessee by his employer as an ex gratia payment is liable to be taxed under the head 'Salary' under S.17 of the Income Tax Act ?"

2It has come to be referred to this court in the following circumstances :- V. R. Ganti, the assessee, was an employee of Anglo French Drug Co. (Eastern) Ltd., Bombay, for short ("the employer"). On the ground of ill health he chose to resign the job by tendering his resignation on November 6, 1981. While accepting the resignation, with effect from December 6, 1981, the employer paid to the assessee an amount of Rs. 10,500 (being salary for four months) as ex gratia in addition to the terminal benefits to which he has entitled under law. This amount was assessed to tax under S.17(3)(ii) of the Income Tax Act by the Income Tax Officer, in the order of assessment dated December 16, 1982. Challenging the correctness of the said order of assessment, the assessee went in appeal before the Appellate Assistant Commissioner of Income Tax who, by his order dated April 30, 1984, allowed the appeal holding that the said amount was not taxable. Aggrieved by the said order of the appellate authority, the Revenue went in appeal before the Income Tax Appellate Tribunal. On March 30, 1985, the Tribunal set aside the order of the appellate authority and restored the order of the Income Tax Officer holding that the said amount was taxable as compensation for loss of employment under S.17(3)(i) of the Income Tax Act . On the application of the assessee under S.256(1) of the Income Tax Act , the Tribunal referred the aforementioned question for the opinion of this court.

3Mr. Y. Ratnakar, learned counsel for the assessee, vehemently contended that Rs. 10,500 were paid to the assessee as ex gratia; he had no right to receive the same as it was over and above the terminal benefits to which he was entitled; therefore, it must be treated as a personal gift to the assessee and as such it might be held to be not taxable in law.

4Mr. S. R. Ashok, learned standing counsel for the Income Tax Department, submitted that the amounts paid to a person by his employer or former employer would be taxable under clause (i) or clause (ii) of sub-s.(3) of S.17 of the Income Tax Act and that the Income Tax Appellate Tribunal was right in holding the amount in question taxable.

5In this case, though the Income Tax Officer accepted, that the amount of Rs. 10,500 was paid as ex gratia yet he taxed the same under S.17(3)(ii) being of the view that it partook of the character of profits in lieu of salary. The Appellate Assistant Commissioner pointed out that the phrase "any payment" in clause (ii) of S.17(3) did not include all amounts paid by the employer or former employer but would include only such payments which were made as remuneration for past services. He formulated the test thus : "whether the amount was in the nature of remuneration for the services of the employee by way of voluntary gift or was it merely a case of personal gift having been induced by the loyal services of the employee ?" He noted there is no evidence except the letter of the employer dated November 6, 1981, accepting the resignation of the employee to ascertain the nature of payment and on an interpretation of that letter he came to the conclusion that the long service of the employee induced the payment of the amount which was ex gratia as a gift without being intended as remuneration, so the amount was not taxable. The Income Tax Appellate Tribunal, having interpreted the said letter of the employer, recorded that the employee could not lay any claim to the amount in question under the contract of service and in that sense, it was "ex gratia" and it was "extra compensation" for loss of employment and was taxable under S.17(3)(i).

6S.17(3) of the Income Tax Act defines the expression "profits in lieu

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