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Facts
The assessee, an individual, filed his return for AY 2019-20 offering income of Rs. 53,34,390. The case was selected for scrutiny as the assessee claimed a large refund and relief under Section 89(1). The assessee received compensation on premature cessation of employment from Pfizer Healthcare India Pvt. Ltd.
Held
The Tribunal held that the compensation received by the assessee was ex-gratia in nature, voluntary, and not in lieu of salary. Therefore, it is a capital receipt and not taxable. The CIT(A)'s decision to tax it was set aside.
Key Issues
Whether the compensation received on voluntary cessation of employment is taxable income or a capital receipt, and whether relief under Section 89 is admissible.
Sections Cited
56(2)(xi), 2(24), 89, 17(3)(i)
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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: HON’BLE SHRI MANU KUMAR GIRI & SHRI HON’BLE S.R. RAGHUNATHA
आदेश / O R D E R
PER MANU KUMAR GIRI (Judicial Member):
This appeal by the assessee is directed against order dated 15.01.2025 passed by the Ld. Commissioner of Income-tax (Appeals), NFAC Delhi [in short 'the Ld. CIT(A)'] for assessment year 2019-20.
The assessee has raised the following grounds of appeal:
“1. The learned CIT(A) has erred in understanding the provisions of Sec. 56(2)(xi) & 2(24) & has incorrectly interpreted the applicability of Subramanian Kathirsen :- 2 -: the provisions & has erred in applying Sec. 56(2)(xi) to the amounts received on premature cessation of appellant’s permanent job which was not received in any connection with the termination of his employment. The said amounts have been held to be Capital Receipt by various Tribunals & High Courts.
2. The Learned CIT(A) has erred in confirming the decision of AO treating the amounts of Rs. 27,31,026/- as Income from Other Source u/s. 56(2)(xi) & erred in denying the relief u/s 89 & has thereby erred on Facts & Law by confirming the Assessment as completed by the AO.
3. The Learned CIT(A) has erred by not considering the claim of the Appellant, of the said amounts being Capital Receipts, because the same was received only due to premature cessation of his employment & permanent loss of Source of Income. The CIT(A) has failed to attend & adjudicate the claim & has brought nothing on record to refute the claim of Capital Receipts.
4. The Learned CIT(A) has erred by not considering the jurisdictional & binding Judgement of Pune ITAT, Mumbai ITAT & other Judgment of various High Courts & of Hon’ble Supreme Court. The Learned CIT(A) has erred in not applying all the legal citations. The Learned CIT(A) was bound to consider the squarely applicable Judgements of Pune & Mumbai ITAT on the principles of binding precedence.”
Brief facts of the case are that the appellant is an Individual and have filed his Return of Income dt.23.08.2019 offering income of Rs.53,34,390/- for AY 2019-20. As per return of income, the assessee received income from salary from private limited company and loss from house property. The gross salary of the assessee during the year as declared by the assessee is Rs.60,86,946/-. The case was selected for scrutiny for the reason that assessee has claimed huge claim u/s.89(1) of the Act and also large refund claimed. The assessee is an Subramanian Kathirsen :- 3 -: employee in M/s PFIZER HEALTHCARE INDIA PVT LTD., Chennai, Tamilnadu for part of the year and later employee of M/s HIBROW HEALTHCARE PVT LTD, Kancheepuram, Tamilnadu. In the assessment order, AO disallowed tax relief u/s.89(1) of the Act of Rs.12,80,076/-.
4. The assessee preferred an appeal before the CIT(A) who decided as under:
“6. Decision: I have carefully considered the facts of case, contention of the appellant and order passed by LAO against which appeal has been preferred. 6.1 The basic facts of the case are that the appellant filed a return of income on 28.03.2019, declaring total income of Rs.53,34,390/-. In the said return of income, the appellant had shown the compensation received from his employer on severance of employment as income. The appellant further claimed a relief of Rs.12,80,076 /-u/s.89(1) on account of, salary received in advance as compensation from his company, Pfizer. The AO has disallowed the claim u/s. 89(1) of Rs.12,80,076/-. Aggrieved with the said disallowance, the asssessee is in appeal. 6.2 The appellant is an ex-employee of M/s. Pfizer Healthcare India Pvt. Ltd., Aurangabad, Maharashtra. Due to significant long term business loss, Pfizer India intended to exit the plant at Aurangabad. The company introduced a scheme called Pfizer Healthcare India Pvt. Ltd. Financial Scheme providing a beneficial settlement to all permanent employees of the plant. Accordingly, they informed the employees about their intention to shut down the business and also that they were desirous of providing a beneficial settlement to all permanent employees of the Plant. As per the scheme, if the employees opted to retire voluntarily from their employment they would be paid an attractive financial package so that the cessation of the employment could be as free of conflict as possible. It was further stated that compensation under the scheme, on acceptance of the employees application, would be paid as follows:-
Subramanian Kathirsen :- 4 -:
1. The employee would be paid compensation equivalent to the lesser or the following, subject to a minimum of (six) month' wages drawn by the employee. 2. 75 (seventy-five) days' wages for every year of service with the company; 3. Wages for the remaining months of service with the company till the attainment of retirement age of 58 years. 4. In addition, the employee would also be entitled to receive payment in lieu of notice amounting to 90 days of month gross salary ("Notice Pay"). The amount paid, as above, shall be referred to as "Compensation". In addition to the above compensation, there were other incentives in the scheme namely, Early Bird Incentive and Group incentives encouraging large number of the employees to participate together in the scheme. The appellant opted for the scheme and received total compensation of Rs.53,34,390/-. In the return of income filed, the appellant has accepted the compensation received as income. The only contention of the appellant before the AO was that since the compensation is in the nature of salary received in advance, deduction u/s. 89(1) of Rs. 12,80,076/- should be allowed. This claim of the appellant was negated by the AO. Before the CIT(A), the assessee also raised an alternative claim that the compensation received is capital receipt. Assessee during the course of present proceedings submitted that the compensation received is on account of loss of source of income. Therefore, in the nature of capital receipt which is not liable to be taxed. Assessee further submitted before the Ld.CIT(A) that :
1. 1. The appellant was not terminated from service and therefore, 56(2)(xi) wo would not apply.
2. There is no retrenchment of the appellant by his former employer, Pfizer.
3. The appellant resigned from his services voluntarily and therefore no termination of employment was there.
Subramanian Kathirsen :- 5 -:
The compensation received is a capital receipt not liable to be taxed. However, the Ld.CIT(A) rejected the argument of the assesse and held that it is a capital receipt taxable u/s. 2(24)(x)(ivb) r.w.s. 56(2)(xi) as clarified in the explanation note to the Finance Act, 2018.”
Now the assessee is in appeal before us.
5. At the outset, the Ld. Counsel for the assessee submitted that in the case of different employees of Pfizer Healthcare Pvt. Ltd., the different Tribunals have held that the compensation received is ex- gratia payment is not taxable being capital in nature. He cited following case laws:- dated 17.09.2024, SMC-Pune – Atul Shashikant Garbhe Vz ITO, Ward-1(1), Aurangabad. b. dated 17.09.2024, SMC-Pune – Prasad vijaykumar Kulkarni Vs ITO, Ward-1(1), Aurangabad. c. ITA No.1111/PUN/2024 dated 27.09.2024, Pune – Shri Parvez Mukhtar Khan Vs The ITO, Ward-1(1), Maharashtra d. ITA No.798/PUN/2024 dated 28.01.2025, Pune – Shrikant Anantrao Zori Vs ITO, Ward-1(1), Aurangabad e. ITA No.1159/PUN/2023 dated 03.04.2025, Pune – Godavari Vijay Kulkarni Vs ITO, Ward-1(1), Aurangabad. f. ITA No.456/PUN/2024 dated 22.05.2025, Pune – Parna Vasudevaiah Vs ITO Ward-1(1), Aurangabad.
Subramanian Kathirsen :- 6 -:
The ld. Counsel also filed list of 89 assessees’, decided by the different A.O, wherein A.O has accepted the claim of capital receipt.
6. The ld. DR relied upon the impugned order and pleaded for the dismissal of the appeal of the assessee. The ld. DR has not disputed the decisions of the Tribunal referred supra by the assessee.
We have heard the rival submissions and perused the orders of the authorities below and orders of the different benches of the Tribunal on this issue. We find that the issue in question is squarely covered by the orders of the different benches of the Tribunal. The Pune bench of Tribunal in the case of dated 17.09.2024, SMC-Pune – Atul Shashikant Garbhe Vz ITO, Ward-1(1), Aurangabad has held as under:
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us. We find subsequent to the hearing of this appeal, another appeal under identical facts and circumstances has been decided by us in the case of Ashok Raghunathrao Kulkarni vs. ITO vide order dated 12.08.2024 wherein the amount received from Pfizer company as ex-gratia was held to be not taxable. The relevant observations of the Tribunal from para 23 onwards read as under:
Subramanian Kathirsen :- 7 -:
“23. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case rejected the claim of relief u/s 89 of the Act of Rs.18,74,899/- on income of Rs.57,12,674/- treating the same as income u/s 17(3) of the Act. We find the CIT(A) / NFAC upheld the action of the Assessing Officer, reasons of which are already reproduced in the preceding paragraphs. The CIT(A) / NFAC also rejected the alternate claim of the assessee that such amount being a capital receipt cannot be brought to tax. It is the submission of the Ld. Counsel for the assessee that in case of various other employees who have received similar compensation, the same has been accepted as capital receipt by the respective AOs in re-assessment proceedings and no addition has been made. Further, various Co-ordinate Benches of the Tribunal in similarly placed employees have also treated such compensation received on termination of service as capital in nature and not falling u/s 17(3) of the Act.
We find the Assessing Officer in the case of Sharad D. Magar, who also resigned voluntarily from service of Pfizer Healthcare India Pvt. Ltd., Aurangabad has accepted the compensation received at Rs.30,49,176/- as capital in nature by observing as under: “Brief facts of the case: The assessee, Shri Sharad Daulatrao Magar, having PAN: ASHPM1986C, an salaried individual, had filed ITR-1 u/s. 139(1) for AY 2019-20 on 29.07.2019 declaring total income of Rs.32,03,150/-. Further, Rs.35,54,140/- was shown as Gross Salary. The assessee was employee of M/s Pfizer Healthcare India Pvt Ltd, Aurangabad during FY2018-19. The company launched VRS beneficial to the employees on planned closure of its unit. The assessee voluntarily resigned from service w.e.f 08.02.2019 and received compensation and out of that compensation he claimed Rs.30,49,176/- being salary claimed in Advance as exempt u/s 89 from taxation in his ITR u/s 139(1) of the Act. ……..
Subramanian Kathirsen :- 8 -:
The submissions made by the assessee have been examined. As the assessee has submitted corroborative and binding judicial pronouncements in support of his claim that the amount of Rs.30,49,176/- received by him from his employer at the time of cessation of his employment due to closure of the manufacturing unit was a capital receipt, not subject to tax. The assessee has also placed reliance on various case laws, in support of his above claim, and court has held as under "The amounts received were due to loss of employment & not recurring in nature & are not paid in lieu of any salary hence it does not come under the preview of sec. 17(3)(i) as amount of compensation. The said amounts have not been paid against any services of the assessee. Hence the same is not compensation as contemplated under the provisions of sec. 17(3)(i)." As the various courts have allowed the claim that the amount received at the time of cessation of his employment due to closure of the manufacturing unit as capital receipt during assessment proceedings in the cases referred by the assessee, the AO's has duly accepted the above claims of the respective assessee, which are very similar cases as that of the assessee’s instant case. Hence, the reopened assessment proceedings in the case of the assessee, is hereby proposed to be completed by accepting the income returned by the assessee in response to 148.” 25. In the remaining cases also, the respective AOs have treated such compensation as capital in nature. We, therefore, find merit in the arguments of the Ld. Counsel for the assessee that when the concerned AOs after reopening of the assessment have treated such compensation as capital in nature and the Revenue has not challenged the same and which has attained finality since no 263 proceedings have been initiated, therefore, the assessee’s case being identical to the facts of the other employees of Pfizer Healthcare India Pvt. Ltd., the CIT(A) / NFAC is not justified in sustaining the addition made by the Assessing Officer. 26. We further find the Hon’ble Calcutta High Court in the case of CIT vs. Ajit Kumar Bose (supra) has observed as under: “4. The amount in question was received by the assessee from his employer. It was received by him in connection with the termination of his service. But the Subramanian Kathirsen :- 9 -:
question still remains whether it was compensation. Since it was received by the assessee in connection with the termination of his employment, the term "compensation" would be referable to that event. In other words, it is to be seen whether the amount was paid as compensation for the termination or in lieu of the termination of the employment.
The letter issued by the employer dated July 3, 1969, stated that the amount was being paid ex gratia. There is nothing to indicate that the assessee was entitled to continue in the employment of the company up to any particular age. Under the conditions of service, his services were liable to be terminated on giving three months' notice without assigning any reason. Under the circumstances, it cannot be said that the assessee was entitled to remain in service for any period longer after the requisite notice has been given or that the employer was under any obligation to pay anything to the assessee in connection with the termination of his employment other than the salary for the period of notice. Under the circumstances, in its true nature and character, the payment was ex gratia, that is to say, totally voluntary; it was not compensation which implies some sort of an obligation to pay.
6. In this view, it cannot be said that the amount in question was profits in lieu of salary within the meaning of Clause (3) of Section 17. It was not taxable as such. The finding of the Tribunal that the amount was a capital receipt or that it was payment of a casual and non-recurring nature was in the circumstances not necessary. We, hence, do not express any opinion on it.
7. The question of law referred to us in this case, namely : "Whether, on the facts and in the circumstances of the case, the amount of Rs. 24,933 received by the assessee could be treated as income under the charging section or under the section dealing with the computation of income of the assessee ?" 8. is answered in the negative, in favour of the assessee and against the Department.”
Subramanian Kathirsen :- 10 -:
We find the Delhi Bench of the Tribunal in the case of ITO vs. Avirook Sen (supra) at para 12 of the order has observed as under: “12. As the payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of employer to pay further amount to assessee in terms of any service rule. it would not amount to compensation in terms of section 17(3)(i) of the Act. The impugned addition was rightly deleted by the Ld. CIT(A). The aforesaid point is accordingly determined against the revenue department. The appeal is accordingly not sustainable as we don't find any error of law or fact in the impugned order passed by Ld. CIT(A). The department appeal is liable to be dismissed.”
The various other decisions relied on by the Ld. Counsel for the assessee placed in the paper book support his case to the proposition that the payment of ex-gratia compensation received by the assessee was voluntary in nature without there being any obligation on the part of the employer to pay further amounts to the assessee in terms of any service rule and therefore, would not amount to compensation in terms of section 17(3) of the Act. We, therefore, set aside the order of the CIT(A) / NFAC and direct the Assessing Officer to delete the addition. The grounds raised
by the assessee are accordingly allowed.”
7. Since the facts of the instant case are identical to the facts of the case already decided by the Tribunal in the case of Ashok Raghunathrao Kulkarni vs. ITO (supra) (to which both of us are parties), therefore, respectfully following the same, we hold that the amount of Rs.69,24,655/- received as ex-gratia is not taxable being capital in nature. Accordingly, the same is directed to be deleted. The grounds raised by the assessee are accordingly allowed.
8. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on 17th September, 2024.”
Subramanian Kathirsen :- 11 -:
Hence, respectfully following the order of Pune Bench of Tribunal referred supra, we hold that the ex-gratia amount received by the assessee being capital in nature and cannot be added in the taxable income. We do so. The grounds raised by the assessee are accordingly allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on 02nd day of September, 2025 at Chennai.