Ex-gratia Payment by a Ltd. Co. to legal heir of employee

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Dhaval Vohera (Querist)
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27 October 2009 A Ltd. Co. is considering to make lump sum / ex-gratia pymt. to the legal heir of the employee on the death of employee after one year of death. The employee had died in an accident while going for attending the meeting outside.
I want to know, what will be the tax consequence in the hands of legal heir of the employee on receipt of such lump sum payment. Will it be exempt under Income Tax? If so, under which section, will it get exempt?

Further, whether such lump sum pymt. will be allowed to the company as an deductible expense?

CA SANJAY MUKHERJEE

CA SANJAY MUKHERJEE (Expert)
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27 October 2009 Check these

http://www.taxworry.com/2007/10/are-gratuity-leave-salary-received-by.html

http://www.incometaxindia.gov.in/publications/7_Tax_Benefits_for_Pensioners/Chapter4.asp#Gratuities

"Therefore, thumb rule is that whatever govt. or local authority employees or his /her legal heir gets is exempt.In all other cases whether employee or his legal heir , maximum tax free is Rs 3.5 Lakhs.

However, the ITAT, Madras held in case of Smt. L.K. Thangammal v. Third Income-tax Officer 1 ITD 762 , held that the gratuity received by legal heir is not taxable in the hand of legal heir. The Tribunal held ...."

CA SANJAY MUKHERJEE

CA SANJAY MUKHERJEE (Expert)
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27 October 2009 Moreover it would be an allowable expenditure. Check this

http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2009ITAct/%5B1999%5D239ITR0429(Mad).htm

"Considering the development in law in the payment of family pension, the Gujarat High Court in CIT v. Laxmi Cement Distributors Pvt. Ltd. [1976] 104 ITR 711 held as follows (headnote):

"The payment of family pension or gratuity to the dependants of a deceased employee is now a recognised concept in the field of employment and it has received statutory recognition. It cannot any longer be treated as a bounty or a philanthropic gesture actuated by compassionate objective. Even if such payment is not provided for by any scheme or contract of employment or otherwise, a demand for the same could still be raised by way of an industrial dispute by employees governed by labour legislation and such demand may well be accepted in the course of an industrial adjudication having regard to the paying capacity of the employer and other relevant circumstances. If a prudent employer, conscious of the new trend and ethos, voluntarily makes such payment in order to avoid such dispute and to buy industrial peace and contentment amongst workers, it could certainly be treated as having been made on the ground of commercial expediency."

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Dhaval Vohera

Dhaval Vohera (Querist)
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28 October 2009 Thanks for reply.
But Circular NO. 573 dated 21-8-1990 specifies for exemption of ex-gratia payment in the hands of the legal heirs of the employee who dies while "active in service".
Can anybody clarify What does the word "active in service" has for this purpose?

Does it mean he should be in continuation of job or does it have a restricted meaning like the death occurred because he was in job like accident in factory.