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Facts
The assessee received an ex-gratia amount of Rs. 28,91,094/- from M/s. Century Textiles and Industries Ltd. upon the company's closure. The assessee claimed relief under Section 89(1) of the Income-tax Act, 1961, which was disallowed by the Assessing Officer and the CIT(A). The appeal was filed with a delay of 479 days.
Held
The Tribunal, following a coordinate bench's decision in a similar case, held that the ex-gratia payment was salary received in advance and not compensation for loss of office. The assessee is entitled to relief under Section 89(1) of the Act.
Key Issues
Whether the ex-gratia payment received by the assessee is to be treated as salary in advance or compensation for loss of employment, and consequently, whether relief under Section 89(1) of the Income-tax Act is admissible.
Sections Cited
89(1), 21A(1)(c), 21A(1)(a), 234C, 244A, 17(3)(i), 192, 7, 17
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Before: SMT. BEENA PILLAI & SMT. RENU JAUHRI
Appellant by : Shri Bharat Kumar Respondent by : Ms. Usha Gaikwad Date of Hearing 14.10.2024 Date of Pronouncement 24.10.2024 आदेश / O R D E R PER RENU JAUHRI [A.M.] :- This appeal is filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai-46/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 15.03.2023 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2017-18.
The assessee has raised following grounds of appeal:
“1. On facts, in circumstances of the case and in law, the learned CIT(A) erred in confirming stand of A.O. about relief u/s.89(1) of Income Tax Act, 1961 read with Rule 21A(1) (c) amounting to Rs. 2,56,540/-.
On facts, in circumstances of the case and in law, the learned CIT(A) erred in confirming stand of A.O. about relief u/s 89(1) read with Rule 21A(1)(a) amounting to Rs. 7,11,871/- was rightly disallowed.
On facts, in circumstances of the case and in law, the learned CIT(A). erred confirming interest of Rs. 572/- u/s 234C of Income Tax Act, 1961.
On facts, in circumstances of the case and in law, the learned CIT(A) erred in confirming stand of A.O. about interest u/s 244A.”
The appeal is delayed by 479 days and the assessee has furnished an application along with the affidavit explaining the reasons and requesting for condonation of delay. It has been submitted that the assessee was employed as labourer in maintenance department of M/s. Century Textiles and Industries Ltd. drawing a salary of approximately Rs. 18,000/- per month and was not under the taxable bracket. Subsequently, the company incurred heavy losses and was shut down in 2008. The assessee received an ex-gratia amount as per the agreement dated 22.02.2010 with the company. On receipt of amount of Rs. 28,91,094/-, the assessee filed return for AY 2017-18 claiming relief u/s 89(1) of the Act. However, the Ld. AO as well as Ld. CIT(A) did not accept the claim of the assessee. The order of the Ld. CIT(A) which was passed on 15.03.2024 was not in the knowledge of the assessee as his tax matters were being handled by the tax consultant appointed by the union of employees who did not inform him. The assessee was also under depression due to loss of his job and had no resources to fight the case further. However, the present counsel helped him in filing the appeal on 03.09.2024, resulting in a delay of 479 days which was purely unintentional and due to genuine reasons. In view of the facts and circumstances of the case, we hereby condone the delay of 479 days in filing of the appeal.
The brief facts of the case are that the assessee was an employee of M/s. Century Textile and Industry Ltd. which had incurred heavy losses as a result of which its Worli textile mill unit was shut down in 2008. The company offered voluntary retirement scheme to its mill workers. However, 275 workers including the assessee did not opt for the voluntary retirement scheme declared by the company on 13.11.2006. Subsequently, as per the individual agreements between the company and the workers, the assessee was paid an ex-gratia amount of Rs. 26,43,189/-. It was stated by the company vide letter dated 18.02.2019 that the company had paid one time lumpsum ex-gratia amount to the assessee in lieu of payments till completion of 63 years of age. Since the lump sum was deemed salary paid to assessees, the company had deducted TDS as per provisions of section 192 of the Act which was duly reflected in Form 16 issued by the company for the period from 01.04.2016 to 31.03.2017. The assessee e-filed his return on 12.03.2018 declaring total income of Rs. 28,89,490/- in which the assessee made a claim for relief u/s 89(1) of the Act. The case was selected for scrutiny and the AO did not allow the assessee’s claim on the ground that the payment made to him by company was one time lumpsum ex-gratia amount which does not qualify to be treated as advance of salary under the Income-tax Act.
Ld. CIT(A) also upheld the order of the Ld. AO after holding that the amount received by the assessee is compensation and is required to be taxed u/s 17(3)(i) of the Act. Aggrieved with the said order, the assessee is before us.
We have heard the rival submissions. Ld. AR has vehemently argued that the assessee is entitled to relief u/s 89(1) of the Act while the Ld. DR relied upon the orders of the lower authorities. In this regard, Ld. AR has brought to our notice the decision of the co-ordinate bench in respect of another employee Shri Rajesh Shantara Chavan of the same company viz. M/s. Century Textile & Industry Ltd. who was paid compensation (along with the assessee) and the relief claimed u/ 89(1) was allowed in the case of Rajesh Shantaram Chavan v/s ACIT (2022) 141 taxmann.com 513 (Mumbai-Trib.) 7. On perusal of the order of the co-ordinate bench, we find that the facts of the case are identical to the case of the assessee and the co-ordinate bench has allowed the relief claimed u/s 89(1) of the Act, after consideration of the facts and circumstances of lump sum payment made to these employees. Relevant portion of the decision is reproduced below: “16. Considered the rival submissions and material placed on record, we observed from the record that assessee is one of the employee who did not agree for the voluntary retirement scheme offered by the company and subsequently company has pledged a piece of land for the benefit of 275 employees who are not agreed for the voluntary retirement scheme compensation. Subsequently owing to the order of the Labour Commissioner and Municipal Corporation of the Greater Mumbai which imposed certain conditions on the company to safeguard the interest of the 275 workers who had not opted for voluntary retirement scheme.
Subsequently individual employees and the company entered into supplementary agreement and the company agreed to compute the total compensation payable by the company till they attain 63 years of age and accordingly in the case of the assessee it was determined to be at Rs. 59,61,483/-. The company after considering that these are one time lumpsum ex-gratia amount payable to the employee and settled the same after deducting the TDS as per the provision u/s. 192 of the Act. We observe from the record that company in the supplementary agreement has explained that the one time lumpsum ex-gratia amount is salary paid to the ex-employee in advance and accordingly, it has deducted tax at source in accordance with the provisions of the LT. Act.
In this regard the company also issued Form 16 to the assessee for the relevant year 2016-17. On careful consideration of the facts on record we observe that even though the textile unit was closed on 2008 and assessee has refused to agree the voluntary retirement scheme offered by the company and under protest assessee and similar employees managed to get compensation through Labour Commissioner and as per the directions of the Labour Commissioner, as agreed by the company, the assessee was awarded the compensation for the remaining period of service till the age of 63 years. The basis of compensation calculated by the company and the company also treated the one-time compensation as a salary paid in advance and deducted the TDS on the same, clearly indicates that the compensation received by the assessee is only salary received in advance not as termination compensation even though this was paid in lumpsum as ex-gratia in one go.
As brought to our notice by the counsel for the assessee the case of V.D. Talwar (supra) the Hon'ble Supreme Court held as under: - Learned counsel for the appellant has then relied on Duff (H. M. Inspector of Taxes) v. Barlow [1942] 10 ITR (Suppl.) 157. That was also a case where the parties agreed that the arrangement arrived at between them should subsist up to 1945 though no exact percentage of the remuneration payable was fixed. The arrangement however was brought to an end prematurely in November 1937 and in consideration of his premature termination some remuneration was paid for services up to November, 1937 and a sum of pound 4,000 was paid as compensation for the loss of the employee's right to future remuneration under the earlier agreement of 1935. In these circumstances it was held that the sum of pound 94,000 was received by the respondent of that case not under the contract of employment nor as remuneration for services rendered or to be rendered but as compensation for giving up a right to remuneration. We are unable to see how that decision is of any help to the appellant in the present case. It seems clear to us that in the present case the appellant has surrendered no rights under the contract; what has been paid to him has been paid under the terms of contract and as salary which he would have earned if twelve months' notice had been given to him. As no notice was given he was treated as though he was in service and entitled to salary for twelve months and that was what was paid to him. It is difficult to see how such payment can be treated as compensation for loss of office.
The present case is similar to the two cases of Henry v. Arthur Foster and Henry v. Joseph Foster [1932] 16 Tax Cas. 605 and Henry's Case (supra) and different from the case of Hunter v. Dewhurst (supra). In the first two cases the respondents were directors of a limited company. They had no written contracts of services with the company but Article 109 of the company's articles provided that in the event of any director who held office for not less than five years, dying or resigning or ceasing to hold office for any cause other than misconduct, bankruptcy, lunacy or incompetence, the company should pay to him or his representatives by way of compensation for loss of office a sum equal to the total remuneration received by him in the preceding five years. The respondents resigned office as director in these two cases and received from the company as "compensation" a payment calculated in accordance with Article 109. It was held by the Court of Appeal that the payment constituted a profit of the office of Director and was properly assessable to income-tax. Lord Hanworth, M. R. said at page 629: "Now it is argued that those sums which became payable under the terms recorded in article 109 were compensation for the loss of office. Is that the substance of the matter? When a man has died he is not compensated for the loss of his life if he resigns voluntarily', why should he be paid compensation for the loss of his office? It would seem as if those words were put in in view of the possibility thereunder of escaping the charge to tax; but, as I have said, we, have got to look at the substance of the matter, and the substance of this payment is this: It is contemplated as a part of the remuneration of the Director payable to him, and estimated according to his service during a certain time, and in addition to the amount paid to him under clause 104, there shall be estimated a sum which is to fall to be paid to him under clause 109." Lawrence L. J. said at page 632: "In my judgment, the determining factor in the present case is that the payment to the Respondent whatever the parties may have chosen to call it was a payment which the company had contracted to make to him as part of his remuneration for his services as a director. It is true that payment of this part of his remuneration was deferred until his death or retirement or cesser of office, and that in the articles it is called "compensation for loss of office." It is, however, a sum agreed to be paid in consideration of the Respondent accepting and serving in the office of Director, and consequently is a sum paid byway of remuneration for his services as Director.' It seems to us that the same principle should apply in the present case. What has been paid to the appellant is his salary in lieu of notice. If that is the true position then the amount paid is taxable under 5.7 of the Indian Income tax Act, 1922. It is not compensation for loss of employment within the meaning of Explanation 2 thereto."
Respectfully following the above said decision and the ratio laid down by the Hon'ble Supreme Court in the above case, we are inclined to treat the compensation received by the assessee as only salary received in advance. Therefore, we direct the Assessing Officer to allow the claim of the assessee u/s. 89 r.w. rule 21A of 1.T. Rules. Accordingly, the appeal filed by the assessee is allowed.”
Since the facts of both the cases are identical, therefore, respectfully following the decision of the co-ordinate bench, we hereby hold that the assessee is entitled to relief u/s 89(1) of the Act in respect of lumpsum payment received for the employer. The order of the Ld. CIT(A) is set aside and the AO is directed to allow the relief claimed by the assessee u/s 89(1) r.w. Rule 21 A.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 24.10.2024.
Sd/- Sd/- BEENA PILLAI RENU JAUHRI (न्यातयक सदस्य/JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)
Place: म ुंबई/Mumbai दिनाुंक /Date 24.10.2024 अननकेत स ुंह राजपूत/ स्टेनो आदेश की प्रतितलति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, 4. Mumbai 5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar)
आयकर अिीलीय अतिकरण/ ITAT, Bench, Mumbai.