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Facts
The assessee, a salaried employee, received severance pay of Rs. 30,86,974/- from Monsanto India Limited upon cessation of employment. The Assessing Officer treated this amount as salary income under Section 17 of the Income Tax Act, 1961.
Held
The Tribunal restored the issue to the file of the Assessing Officer to adjudicate afresh in light of the appointment letter, considering it as additional evidence. The AO is directed to decide the issue as per fact and law after providing an opportunity of being heard to the assessee.
Key Issues
Whether the severance pay received by the assessee on cessation of employment is to be treated as capital receipt or as salary income under Section 17 of the Income Tax Act, 1961.
Sections Cited
17, 17(3)
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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 11.09.2024 of the Ld. CIT(A) / NFAC, relating to assessment year 2018-19.
Facts of the case, in brief, are that the assessee is a Resident Indian and salaried employee. During the year under consideration the assessee has earned salary income from Monsanto India Limited of Rs.55,54,015/- and Syngenta India Limited of Rs.9,37,481/-. The assessee has also received severance pay of Rs.30,86,974/-, leave encashment of Rs.1,27,718/- and gratuity amount of Rs.4,04,758/- which is exempt from tax. The case was selected for complete scrutiny assessment under the E-assessment Scheme, 2019 on the following issues:
S.No. Issues i. Salary Income ii. Refund Claim
During the course of assessment proceedings the Assessing Officer asked the assessee to explain as to why the severance amount of Rs.30,86,974/- received from Monsanto India Limited upon cessation of employment should not be brought to tax. The assessee in response to the same submitted that the same was received on the basis of resignation letter to Monsanto India Limited on 18.08.2017 which was accepted by the said company and the assessee was relieved from the services vide letter dated 31.08.2017. It was argued that the severance amount of Rs.30,86,974/- received from Monsanto India Limited is a type of a capital receipt and not revenue receipt and therefore, it should not be taxable. For the above proposition, he relied on various decisions.
However, the Assessing Officer was not satisfied with the arguments advanced by the assesse. He noted that in assessee’s case it was a voluntary cessation of employment by the assessee and not the termination by Monsanto India Limited (company) as claimed by the assessee. Also the assessee did not lose his right of seeking job in another company in future. Further, the assessee in the instant case has joined another company (Syngenta India Limited) during the same year from where the assessee is receiving salary income. Therefore, the plea by the assessee to treat severance amount received on loss of source of income as capital receipt cannot be accepted. Rejecting the various explanations given by the assessee, the Assessing Officer brought to tax an amount of Rs.30,86,974/- being the severance amount claimed as exempt.
In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer by observing as under: “7. Through Ground of appeal No. 3, the appellant contends that Assessing Officer erred in holding an amount of Rs.30,86,974/- as unexplained Salary u/s 17 of the Income Tax Act, 1961 without appreciating the entire factual matrix and without considering the material on record in proper perspective. 7.1 I have perused the record. The moot question in appeal is whether the amount received on termination/cessation of employment is liable to be added under section 17 of the Act. This legal position is clarified by various Courts, including those relied upon by the appellant. First in order, the appellant's contentions are noted below- 7.1.1 The appellant states that the employer 'Monsanto Co-USA, engaged in the business of crop science technology, struck a 63 billion deal with 'Bayer’ in September 2016. Further, attached following links to substantiate its assertion that such takeover would lead to loss of employment- https://www.ecowatch.com/bayer-buys-monsanto-2004657068.html https://www.vox.com/2016/9/14/12916344/monsanto-bayer-merger https://www.bizjournals.com/stiouis/news/2016/01/06/monsanto-says-it-will-cut-1- 000-morejobs-local.html https://www.youtube.com/watch?v=4Zmz6xJPp2c 7.1.2 The Assessing Officer observed that the letter of acceptance of resignation produced by the appellant during the course of assessment proceedings addressed as-‘This is with reference to your letter of resignation dated 18-August-2017". In such scenario, the Assessing Officer noted that the cessation of employment was voluntary by appellant and not termination of employment by Monsanto Co-USA 7.1.3 To this, the appellant picks following statements from letter of acceptance of resignation to further assert that he was terminated by the then employer company- 1) Its clearly says in subject line "Cessation of Employment which means termination of employment. 2) In point 7 they have clearly mentioned that "upon termination of your employment 3) in point 8 of the letter they have assured that Company will keep confidential about the Cessation of Employment 4) in your notice you have referred to that I have given resignation and was accepted on 18th August 2017. Please also refer to point 1 of the letter, where the reference is made to letter of resignation dated 18th August 2017 only. No Company will pay notice period plus the severance on my same
day resignation and release from duty. It was just to complete paper work they asked me to sign on the resignation paper same day on termination 7.2 On perusal of material available on record, my observations are noted below- The observation of Assessing Officer is correct in holding that cessation of employment is voluntary by the appellant and not on termination by the employer-Monsanto. This is evident from the letter of acceptance of resignation and the relevant extracts are reproduced below- 1. This is with reference to your letter of resignation dated 18-August-2017 2.... Accordingly, the Company hereby waives the balance notice days' requirement prescribed under Clause 16 of the Monsanto Service Rules ("Service Rules") 3. All monies due to you from the Company, Including monies in lieu of any unused holiday entitlement outstanding at your leaving date, as well as additional ex-gratia payment, will be paid to you as a part of your final payment..." There is nothing on record to indicate that the cessation of employment was not voluntary. It is hard to understand that why any company will ask a terminated employee (as claimed) to sign resignation papers In case of termination on account of future company takeover. 7.3 Further, the appellant has placed reliance on catena of judicial decisions, which suggest that severance pay or ex-gratia paid on termination of employee is not chargeable to tax under section 17 of the Act and is capital receipt. The same is found to be true. But the facts in present case are not similar to those in the cases relied upon by the appellant. The crux of the decisions relied upon by the appellant is that if the compensation for termination of services of an employee is paid voluntarily, It would not form part of salary. But if the compensation is payable on the basis of terms of employment, it would constitute profit in lieu of service (supra) and, hence, form part of the salary. 7.4 In the present case, the appellant has failed to prove that the amount paid to him was voluntary in nature and not compensatory or under legal obligation. The appellant failed to produce terms of employment or service rules of Monsanto to further corroborate his assertions. The appellant did not produce any confirmation letter from his then employer to substantiate that the said payment was not due to him as salary, but was voluntarily paid as 'severance pay' out of sweet will. 7.5 Further, the legal provision laid down by clause (1) and (iii) of section 17(3) is iterated herein for better reference-
"(3) "profits in lieu of salary" includes (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 or the modification of the terms and conditions relating thereto; (ii) Any payment (other than any payment referred to in clause (10) (clause (10A) clause (10B), clause (11) clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or Interest on such contributions or any sum received under a Keyman Insurance policy including the sum allocated by way of bonus on such policy. Explanation. For the purposes of this sub-clause, the expression "keyman insurance policy" shall have the meaning assigned to it in clause (10D) of section 10; (iii) Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person:ー (A) Before his joining any employment with that person, or (B) After cessation of his employment with that person." 7.6 Further, Hon'ble Delhi High Court has largely clarified the intent of legislature in this regard in the case of CIT vs. Deepak Verma- Though sub-clause (iii) squarely covered the nature of payment received by the assessee, that did not exist in the relevant assessment year and was incorporated only with effect from 1-4-2002. Therefore, that provision was not applicable to the Instant case. For that reason, attempt of the revenue was to bring the payment within the fold of sub-clause (1). [Para 9] There is a distinction between sub-clause (i) and sub-clause (iii) of clause (3) of section 17. Item (B) of sub-clause (iii) enumerates that when any 'amount' is due or is received after cessation of the employment, it is treated as 'profit in lieu of salary'. The expression used here is 'amount'. Therefore, when an amount is received by an employee whether due or not, on the cessation of the employment, from the employer, this partakes the character of 'salary and is chargeable to tax. In contradistinction, sub-clause (1) uses the expression 'compensation' (rather than 'amount'). Therefore, under sub-clause (1), in order to characterize a particular payment received from the employer, on termination of the employment, as 'profit in lieu of salary', it has necessarily to be shown that this amount is due or is received as 'compensation' [Para 11]
When the payment is to be received as 'compensation', the employee would have a right to receive such a payment. If the employee has no right, it cannot be treated as a 'compensation'. It is for this reason that if the payment is made as ex gratia or voluntary by an employer out of his own sweet will and is not conditioned by any legal duty or legal obligation, whether on sympathetic reasons or otherwise, such payment is not to be treated as 'profit in lieu of salary' under sub-clause (i). [Para 14] Having regard to this legal position, it had to be decided as to whether the payment received by the assessee on cessation of his employment was a voluntary payment given by the employer or it was in the nature of 'compensation'. [Para 15] It has to be in the nature of something awarded to compensate for the loss, suffering or injury. When translated in the context of employment, it would imply monetary and non-monetary amount to be given to the employee in return of some services rendered by him. Inherent in this would be the obligation of the employer to pay some amount to the employee to 'compensate’ him. This would also mean that the employee gets vested right in him to get such an amount [Para 18] In the instant case, all dues admissible to the assessee on his resignation were otherwise paid by the employer to him. Therefore, whatever terminal dues, including earned salary, etc., which were payable to the assessee in terms of contract or otherwise were paid to him. In addition, the employer agreed to pay 'in its discretion' certain amount as an 'exceptionable' and 'one off ex gratia payment. It was very clearly stated in the letter of the employer that management had agreed to pay that amount in its discretion. It was not compelled by any obligation to pay that amount which would assume the nature of any 'compensation'. The amount was also described as not only exceptionable but ex gratia. It, therefore, clearly partook the character of voluntary payment and could not be termed as a payment by way of 'compensation [Para 19] In fact, the Legislature wanted such type of payments also to be treated as income at the hands of the employees/persons and to tax them. For that reason, sub-clause (iii) was inserted in section 17(3). This also implies that such a payment was not taxable before this amendment was carried out by inserting sub-clause (iii) with effect from 1-4-2002. [Para 20] Though the facts in this case lead to a decision in favour of assessee, however, the facts of present case are clearly different and distinguishable. The present case is of AY 2018-2019, when sub-clause (iii) was operative and in effect. In that scenario, the amount received by employee as compensation, for loss of employment after cessation of employment would be chargeable to tax as held by Hon'ble High Court above. Further, the appellant in present case is not able to prove that his then employer paid the impugned amount 'on its discretion'. Unlike the case of Deepak Verma, the letter does not make any mention of severance pay on its discretion. On such set of facts, it cannot be held that the employer did not pay the said amount under legal obligation.
7.7 Accordingly, I concur with the view adopted by the Assessing Officer and the ground of appeal is accordingly dismissed. 8. In the result, the appeal is dismissed.”
Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds:
1. The Learned CIT(A) has erred in confirming the decision of AO treating the amounts of Rs.30,86,974/- as Profits in Lieu of Salary & erred in denying the claim of Capital Receipts & has thereby erred on Farts & Law by confirming the Assessment as completed by the AΟ.
2. The Learned CIT(A) has erred in not addressing the stand taken by the Appellant of the amounts received from the Co. as per the Cessation of employment & they were not compensation as envisaged u/s. 17(3), ignoring the Fact that due to closure of the Co. the said amounts were paid voluntarily by the Co. The Learned CIT(A) has further erred in understanding the Appellant's Service Rules & other related Documents & has failed to ascertain that the said amounts were paid de hors of any contract, paid without any obligation & without any entitlement of the Appellant. The learned CIT(A) has not considered the letter from the Co. submitted before him in the course of Appellate proceedings, stating the fundamentals & nature of the amounts paid to be voluntary.
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 Calcutta, Delhi, Gujarat High Court & other Judgment of various High Courts. The Learned CIT(A) has just brushed aside all the legal citation by holding that the same are not applicable. The Learned CIT(A) was bond to consider the squarely applicable Judgements of Delhi & Gujarat ITAT on the principles of binding precedence.
5. The Appellant Craves Leave to add, Alter, or amend any of the Grounds of the Appeal, before or during hearing of the Appeal.
The Ld. Counsel for the assessee at the outset filed a copy of appointment letter from Monsanto India Limited which is placed at pages 6 to 7 of the paper book with a request to admit the same as an additional evidence. He submitted that this appointment letter which contains the issue regarding termination by the company or resignation by the assessee has got a bearing on the whole issue and therefore, the same should be admitted.
After hearing rival contentions, the additional evidence filed by the assessee is admitted.
The Ld. Counsel for the assessee at the outset drew the attention of the Bench to the following contents of the appointment letter which read as under: “During the employment with the company after confirmation, the company will be entitled to terminate your services without assigning any reason, by giving you 90 days notice in writing or by payment of 90 days salary in lieu of such notice. In the event you desire to leave the service of the company, you will have to give the company 90 days notice in writing or pay the company 90 days salary in lieu of such notice.”
Referring to the resignation letter filed by the assessee, copy of which is placed at page 5 of the paper book, he submitted that the resignation letter dated 18.08.2017 was accepted on the very same day by the company, copy of which is placed at pages 3 to 4 of the paper book.
Referring to the contents of the appointment letter, he submitted that as per the terms of employment, the company can terminate the services without assigning any reason by giving 90 days notice in writing or by payment of 90 days salary in lieu of such notice. In case the assessee desires to leave the service of the company, he will have to give the company 90 days notice in writing or pay the company 90 days salary in lieu of such notice. However, in the instant case neither the company has given 90 days notice nor the assessee has given 90 days notice to the company but the resignation letter was accepted on the very same day by giving severance pay to the assessee.
Referring to the following decisions, he submitted that under somewhat identical circumstances, such receipt on account of termination of employment has been treated as capital in nature: i) Maruti Keshavrao Didhore vs ITO vide for assessment year 2016-17, order dated 22.05.2025 ii) Parna Vasudevaiah vs ITO vide for assessment year 2019-20, order dated 22.05.2025 iii) Godavari Vijay Kulkarni vs ITO vide ITA No.1159/PUN/2023 for assessment year 2019-20, order dated 03.04.2025 iv) Ashok Raghunathrao Kulkarni vs ITO vide ITA No.117/PUN/2024 for assessment year 2019-20, order dated 12.08.2024 v) Prasad Vijaykumar Kulkarni vs ITO vide ITA No.850/PUN/2024 for assessment year 2019-20, order dated 17.09.2024 vi) Atul Shashikant Garbhe vs ITO vide ITA No.863/PUN/2024 for assessment year 2019-20, order dated 17.09.2024 vii) Shri Parvez Mukhtar Khan vs ITO vide ITA No.1111/PUN/2024 for assessment year 2019-20, order dated 27.09.2024 viii) Shrikant Anantrao Zori vs ITO vide ITA No.798/PUN/2024 for assessment year 2020-21, order dated 28.01.2025 ix) Mahadev Vasant Dhangekar vs. ACIT (2023) 149 taxmann.com 170 (Pune- Trib.)
The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and submitted that the severance amount was received by the assessee on account of his resignation and therefore, it cannot be treated as capital in nature and has to be considered as part of salary income as per the provisions of section 17 of the Act. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be upheld and the grounds raised by the assessee be dismissed.
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 on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case brought to tax the amount of severance pay as taxable salary u/s 17(3) of the Act as against capital receipt claimed by the assessee. We find the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer, the reasons of which have been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that in view of the terms of appointment such amount should be treated as capital in nature since neither the company has given 90 days notice which is a mandatory requirement or paid 90 days salary in lieu of such notice before termination of the services of the assessee nor the assessee has given 90 days notice for resigning from his services or paid amount of salary for 90 days in lieu of such notice to the company. Since this additional evidence was filed before the Tribunal for the first time and neither of the lower authorities had any occasion to examine this evidence, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issue afresh in light of the appointment letter. The Assessing Officer shall decide the issue as per fact and law after providing due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 30th July, 2025.
Sd/- Sd/- (ASTHA CHANDRA) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 30th July, 2025 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपीलार्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. The concerned Pr.CIT, Pune 4. DR, ITAT, ‘A’ Bench, Pune 5. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune
S.No. Details Date Initials Designation 1 Draft dictated on 29.07.2025 Sr. PS/PS 2 Draft placed before author 30.07.2025 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to the Head 9 Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order