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Facts
The assessee, an employee of Pfizer Healthcare India Pvt. Ltd., received an ex-gratia payment upon termination of service. The Assessing Officer treated this as salary income and denied relief under Section 89 of the Income Tax Act. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the ex-gratia payment received by the assessee was in the nature of capital receipt and not taxable as income. This decision was based on previous judgments of the Tribunal dealing with similar cases of Pfizer employees.
Key Issues
Whether the ex-gratia amount received by the assessee on termination of employment is taxable as income or is a capital receipt. Whether the assessee is entitled to relief under Section 89 of the Income Tax Act.
Sections Cited
89, 143(2), 142(1), 17(3), 10(10C), 139(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI R. K. PANDA & SHRI VINAY BHAMORE
This appeal filed by the assessee is directed against the order dated 08.09.2023 of the Ld. CIT(A) / NFAC, Delhi relating to assessment year 2019-20.
This is the second round of appeal before the Tribunal.
This appeal was earlier dismissed by the Tribunal vide 12.03.2024. The assessee filed an appeal before the Hon‟ble Bombay High Court and the Hon‟ble High Court vide Writ Petition No.17572 of 2024, order dated 04.02.2025 set aside the order of the Tribunal and restored the issue to the file of the Tribunal by observing as under:
“21. At the very outset in our view this is a case where the violation of the settled principles of natural justice is not just apparent but real, palpable and clearly visible. The petitioner is deprived of an opportunity to present its case not only before the respondent no. 2 but also subsequently before the ITAT. In not affording a reasonable opportunity to the petitioner to present its case had perpetuated from the ex-parte order passed by respondent no. 2 which in our opinion was not noticed by the ITAT in passing the impugned order.
It is not disputed that the jurisdictional assessing officer, i.e., respondent no. 2 under the faceless regime passed an ex-parte assessment order, without affording an opportunity to the petitioner of being heard. Thus, evaluation of assessment of the petitioner's income and rejecting the submissions of the petitioner was undertaken also ought to have been appropriately undertaken by following the natural rules of fairness adhering to the principles of natural justice and such infirmity at least should have been addressed by the ITAT in passing the impugned order.
A perusal of the impugned order of the ITAT makes it clear that it proceeded to deal with the case of the petitioner on merits as is evident from paragraph 5 of its order. The petitioner submitted that considering the fact that the order impugned before the ITAT itself was passed by respondent no. 2 was passed ex- parte, it would be just and WP 17572-2024 - 4.02.2025.doc proper for the ITAT to remand the matter to respondent no. 2 for passing orders on merits, after considering submissions of the petitioner. Also, the written submissions being tendered on behalf of the petitioner before the ITAT on 12 March 2024 the same appear to have not being considered in the impugned order being passed by the Tribunal. We may refer to a judgment of the Supreme Court in the case of Delhi Transport Corporation v. DTC Mazdoor Union.1 The Supreme Court inter alia held that Article 14 guarantees a right of hearing to a person who is adversely affected by an administrative order. The principle of audi alteram partem is a part of Article 14 of the Constitution of India. In light of such decision, the petitioner ought to have been granted an opportunity of being heard which, partakes the characteristic of the fundamental right under Article 14 of the Constitution of India.
24. In the facts and circumstances of the given case, it will be apposite to refer to a decision of the Supreme Court in the case of Commissioner of Income Tax Madras v. Chenniyappa Mudiliar.2 The Supreme Court in interpreting the section 33(4) of the Income Tax Act, 1922 has held that the appellate tribunal was bound to give a proper decision on question of fact as well as law, which can only be done if the appeal is disposed off on merits and not dismissed owing to the absence of the appellant. There is no escape from the conclusion that under the said provision, the appellate tribunal had to dispose 1 AIR 1999 SC 564 2 1969 1 SCC 591 WP 17572-2024 - 4.02.2025.doc off the appeal on merits which could not have been done by dismissing the appeal summarily for default of appearance. The principles laid down in the said decision would squarely apply to the facts and circumstances of the present case, in as much as the petitioner was neither heard nor were his written submissions placed before the ITAT, considered.
In light of the above, we concur with the submissions of Mr. Bora in regard to the setting aside of the impugned order of the ITAT dated 12 March 2024 is concerned. We are unable to accept the submissions of Mr. Saxena for the respondent for the reasons noted above.
26. Considering the above discussion, we allow this petition in terms of prayer clause (a).
We accordingly remand the proceedings to the ITAT, i.e., respondent no. 1 for de novo hearing of the petitioner's appeal filed before it. ITAT shall after hearing the parties, pass fresh orders on merits and in accordance with law, as expeditiously as possible not later than within six weeks from the date of this order made available to the ITAT.”
Since the assessee in the meantime has expired, the Hon‟ble High Court vide order dated 13.03.2025 passed the following order: “1. By this application, the applicant has prayed that she be permitted to bring on record as the legal heir of the deceased petitioner - Vijay Shrinivasrao Kulkarni, who expired on 11 December 2024, during the pendency of this petition when the matter was closed for judgment. 2. Having perused the averments as made in the petition, it is in the interest of justice that the application is allowed. It is accordingly allowed in terms of prayer clause (b). Necessary amendments be carried out during the course of the day. 3. Consequent to the present Interim Application being allowed, the title of the judgment dated 4 February 2025 passed by us, is also required to be amended. Let the same be amended as "Vijay Shrinivasrao Kulkarni being deceased through the legal heir Smt.Godavari Vijay Kulkarni". The Judgment be accordingly corrected and be made available to the parties. 4. At this stage, we are informed that time of six weeks as granted to the Tribunal to adjudicate the proceeding is required to be extended. It is further extended for a period of six weeks. All contentions of the parties on the pending proceedings are expressly kept open.”
5. Accordingly, the case was fixed for hearing.
6. Grounds raised
by the assessee are as under:
1. The Chartered Accountant of the Appellant was unable to attend hearing dates & make appropriate submissions before the Hon'ble CIT(A) due to lack of experience & knowledge & was arranging a senior CA or Advocate to represent the Appellant before the CIT(A) this led to inadvertently missing the dates of hearing by taking adjournments. The CIT(A) passed an ex-parte Appellate order, whereby the Appellant was left unheard, without his fault. CA has affirmed the facts by submitting an Affidavit. The appellant deserves justice on the principles of natural justice hence prays for restoring back his appeal to Hon'ble CIT(A). 2 The Learned CIT(A) has erred in ascertaining correct perspective of Form 10E, Form 16 & has thus erred in not granting relief u/s 89 and CIT(A) has further erred in not giving relief u/s sec. 10(10C) when he denied relief u/s sec.
89. (Altered Ground)
3. The learned CIT(A) has erred & has failed to make any enquiries related to non-reliability of Form 10E, employer not reporting relief u/s 89 in Form 16 & the same being taxable u/s 17(3)(1) & the understanding of advance salary, thus the CIT(A) has failed & erred in defying the established principle of natural justice, reasonable opportunity & has thus completed a biased & unlawful assessment.
4. The Learned CIT(A) has erred in not considering and understanding the Financial Scheme Document and failed to arrive at the correct interpretation and the underlying intentions of the Co. towards the appellant and the need for evolving the said scheme of pre-mature retirement of all employees permanently.
5. The Learned CIT(A) has erred in not accepting the Appellant's stand of the said amount received, being Capital Receipts in nature, irrespective of the same being obligatory or not on part of the Co. & has erred in not considering that the payments were made de hors any contract of employment & was paid voluntarily & towards loss of source of income for premature termination of Appellant's employment & the Appellant was legally entitled to change the nature of his claim form Profits in lieu of Salary to the same being Capital Receipts in the course of assessment proceedings.
6. The CIT(A) has erred in completing a balanced assessment impartial of any assumptions & presumption, he is required to co-relate the factual parameters & the legal framework in tandem & decide by his wisdom & uphold rule of law, as he is being a quasi-judicial officer.
7. 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 submitted that the assessee is an employee in the capacity of General Manager with M/s. Pfizer Healthcare India Pvt. Ltd. He filed his return of income on 01.08.2019 declaring total income of Rs.57,84,740/- after claiming deduction of Rs.13,22,187/- u/s 89(1) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟). The case was selected for scrutiny under CASS to verify the “Refund Claim and Relief for arrear salary or advance salary”. Accordingly statutory notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee. From the various details furnished by the assessee, the Assessing Officer noted that the assessee is in receipt of Rs.20,62,937/- pertaining to the current year and Rs.37,21,803/- in the nature of salary received in advance. The Assessing Officer noted that the assessee has received an amount of Rs.37,21,803/- as final settlement which is in the nature of Ex-gratia. During the course of assessment proceedings the assessee argued that the amount received by him on account of termination of service is capital in nature. However, the Assessing Officer rejected the arguments of the assessee and determined the taxable income at Rs.57,84,740/-.
Since the assessee did not appear before the Ld. CIT(A) / NFAC despite number of opportunities granted, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer.
Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal.
The Ld. Counsel for the assessee at the outset filed the following five decisions of the Tribunal and submitted that under identical circumstances the Tribunal has held the amount received as compensation from his employer on account of termination of his employment service from M/s. Pfizer Healthcare India Pvt. Ltd. to be capital in nature: i) Ashok Kulkarni vs. ITO vide for assessment year 2019-20, order dated 12.08.2024 ii) Prasad Kulkarni vs. ITO vide for assessment year 2019-20, order dated 17.09.2024 iii) Atul Shashikant Garbhe vs. ITO vide ITA No.860/PUN/2024 for assessment year 2019-20, order dated 17.09.2024 iv) Parvez Khan vs. ITO vide ITA No.1111/PUN/2024 for assessment year 2019-20, order dated 27.09.2024 v) Shrikant Zori vs. ITO vide ITA No.798/PUN/2024 for assessment year 2020-21, order dated 28.01.2025
He accordingly submitted that the issue being covered by the decision of the Tribunal in favour of the assessee, the grounds raised by the assessee should be allowed.
The Ld. DR on the other hand submitted that since it is an ex-parte order of the Ld. CIT(A) / NFAC, the matter may be restored to the file of the Ld. CIT(A) / NFAC for fresh adjudication.
The Ld. Counsel for the assessee in rejoinder submitted that since the assessee has already expired and being represented by his wife as legal heir and since the issue is covered in favour of the assessee by various decisions of the Tribunal, therefore, the matter need not be restored to the file of the Ld. CIT(A) / NFAC and a decision should be taken here itself.
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 find the Assessing Officer in the instant case rejected the claim of relief u/s 89(1) of the Act of Rs.13,22,187/- on the income of Rs.61,59,739/-. A perusal of the full and final settlement calculation / computation of Rs.37,21,803/- shows that the same consist of Rs.15,37,387/- in the nature of Ex-gratia (Severance Pay), Rs.12,00,000/- as Other payments (early bird and group participation incentives), Rs.7,04,317/- as notice period payout (3 months x monthly gross considered for scheme calculation) and Rs.2,19,449/- under other earnings.
We find identical issues had come up before the Tribunal in the case of other employees of M/s. Pfizer Healthcare India Pvt. Ltd. We find the Tribunal in the case of Ashok Raghunathrao Kulkarni vs. ITO vide for assessment year 2019-20 order dated 12.08.2024 has decided the identical issue by observing as under:
“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. ……..
14. 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.
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 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.
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.” 27. 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.” 28. 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.”
Following this decision, we find the Tribunal again in the case of Prasad Vijaykumar Kulkarni vs. ITO vide for assessment year 2019-20 order dated 17.09.2024 and in the case of Atul Shashikant Garbhe vs. ITO vide for assessment year 2019-20 order dated 17.09.2024 has decided the issue in favour of the assessee by holding that the amount received as Ex-gratia is not taxable being capital in nature. Following the above decisions and in absence of any contrary material brought to our notice by Ld. DR, we hold that the Ex-gratia amount received by the assessee being capital in nature cannot be added in the taxable income. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 3rd April, 2025.
Sd/- Sd/- (VINAY BHAMORE) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 3rd April, 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, „B‟ Bench, Pune गार्ड फाईल / Guard file. 5. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune
S.No. Details Date Initials Designation 1 Draft dictated on 28.03.2025 Sr. PS/PS 2 Draft placed before author 01.04.2025 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