Profits in lieu of salary [Section 17(3)] :
It includes the following:
(i) 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.
(ii) The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the modification of the terms and conditions of employment. Usually, such compensation is treated as a capital receipt. However, by
virtue of this provision, the same is treated as a revenue receipt and is chargeable as
salary.
Note: It is to be noted that merely because a payment is made by an employer to a person who is his employee does not automatically fall within the scope of the above provisions. The payment must be arising due to master-servant relationship between the payer and the payee. If it is not on that account, but due to considerations totally unconnected with employment, such payment is not profit in lieu of salary.
Example: A was an employee in a company in Pakistan. At the time of partition, he migrated to India. He suffered loss of personal movable property in Pakistan due to
partition. He applied to his employer for compensating him for such loss. Certain payments were given to him as compensation. It was held that such payments should not be taxed as ‘profit in lieu of salary‘ – Lachman Dass Vs. CIT [1980] 124 ITR 706 (Delhi).
(iii) Any payment due to or received by an assessee from his employer or former employer from a provident or other fund, to the extent to which it does not consist of employee‘s contributions or interest on such contributions.
Example: If any sum is paid to an employee from an unrecognised provident fund it is to be dealt with as follows:
(a) that part of the sum which represents the employer‘s contribution to the fund and interest thereon is taxable under salaries.
(b) that part of the sum which represents employee‘s contribution and interest thereon is not chargeable to tax since the same have already been taxed under the head ‘salaries‘ and ‘other sources‘ respectively on an yearly basis.
Note: It does not include exempt payments from superannuation fund, gratuity, commuted pension, retrenchment compensation, HRA.
(iv) Any sum received by an assessee under a Keyman Insurance policy including the sum allocated by way of bonus on such policy.
(v) Any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from any person –
(a) before joining employment with that person, or
(b) after cessation of his employment with that person.
(vi) Any other sum received by the employee from the employer.