VAIDYANATHAN KALAIVANI,CHENNAI vs. PCIT, CHENNAI

You are, therefore, requested to show cause as to why the assessment order passed u/s 143(3) of the Income-tax Act, 1961 on 13/08/2021 for the A.Y.2019-20 should not be treated as erroneous and prejudicial to the Interest of Revenue and revised u/s 263 of the Income-tax Act, 1961. In this context, you may file your written submissions through e-mail id (chennai.pcit3@incometax.gov.in) on or before 24.02.2023. If you desire you may appear in person before the undersigned on the above date at 11.30 AM. On failure to do so, it will be presumed that you have no objection to the proposal for revision and the proceedings will be finalized on merits as per law’’.

The assessee replied to the above show-cause notice dated 15.02.2023, stating that the ld. Assessing Officer in original assessment proceedings examined this issue of receipt of Rs.3,00,00,000/- as compensation towards termination of her services from her employees. ‘1. The assessee begs to submit the following explanation for the show cause notice issued under section 263 dated: 15 February, 2023 in ITBA/REV/F/REV1/2022- 23/1049779258(1) for the kind consideration of the Commissioner: 2. The order of assessment sought to be revised was passed u/s 143(3) on 13.08.2021 by the Assessing Officer, National Faceless Assessment Centre, Delhi. The Assessing Officer while passing the order had issued notice u/s 143(2) dated: 31.3.2021 intimating that the assessee's case was selected for complete scrutiny with the following identified issues: i. Salary Income ii. Refund Claim iii. Other Income Reported in Schedule A-OI not Credited to P&L Account 3. A copy of the notice u's 143(2) is enclosed herewith as Annexure 1. The Assessing Officer had also issued notice u/s 142(1) on 20/05/2021 in ITBA/AST/F/142(1)/ 2021-22/1033005949(1) calling for various particulars. A copy of the notice u/s 142(1) is enclosed as Annexure II.

The assessee has responded to the notice u/s 143(2) on 12.04.2021 and furnished the following details and documents: Sl.No Particulars Remarks 1 Detailed Submission narrating the facts of the case 2 Annexure 1 Order of termination issued by the company from employment dated 24.03.2014 and also the letter dated 25.04.2014 communicating the compensation paid of Rs.7,62,126/-(Net payable after all deductions was Rs.6,08,549/-) in connection with termination of employment 3 Annexure 2 Form 16 and ITR V where the assessee had offered the salary as well as the compensation received in connection with termination of employment. 4 Annexure 3 A copy of the order of the Hon'ble Madras High Court dated 23.04.2018 settling the dispute between the assessee and the company. 5 Annexure 4 The copy of the ITR Form for the AY 2019- 20 where the assessee has reported the amount of Rs.3 crores in Part A Of Other Information in page 12 and 13 and under point No. 5 (e) by disclosing that the assessee had considered the said compensation of Rs.3,00,00,000/- as Capital Receipt and not treated as salary and accordingly claimed the Tax deducted of Rs.1,03,85,100/- as refund. 6 Annexure 5 Note forming part of Form 3CD, where the tax auditor had reported the facts and

"The assessee was working with a company by name M/s Trimble Information Technologies India P Ltd (formerly known as At Road software services India P Ltd) for about 14 years since 15.09.2000 at senior management level 2. On 21.03.2014, the Management Team compelled to submit assessee's resignation without assigning any reasons TAX DEPAN 3. It was a great injustice to an honest employee who had worked for more than 14 years for company and hence the assessee revoked her resignation on 22.03.2014, the next day 4. But, on seeing assessee's revocation, the company had issued an order of termination from employment on 24.03.2014 and also paid a compensation of Rs. 7.62, 126/- (Net payable after all deductions was Rs. 6,08,549/-) vide their letter dated 25th April 2014 5. The said compensation received by the assessee in connection with termination of her employment was already included and admitted in the return of income filed for the AY 2014-15 6. On account of the Company illegally and forcefully terminating the assesssee without any reasons and without considering her 14 continuous years of service as also undergoing a great mental agony before the team members and junior colleagues in the company the assessee preferred an appeal u/s 41(2) of the Tamil Nadu Shops and Establishments Act, 1947 asking to reinstate her. 7. On hearing the entire plea, the Special Deputy Commissioner of Labour, Chennai, passed a speaking order in T.SE No. 1/4/2014, dated 2nd day of April, 2014, wherein the Special Deputy Commissioner, had set aside the order of termination issued by the company dated 24.03.2014 and consequently directed the company to reinstate the assessee in service with full back wages, continuity of service and all other attended benefits, awarded cost and rendered justice. 8. The company fought the said appeal and the Appellate Authority, after hearing both sides, had passed order dated 27.03.2017 in TSE Appeal No. 1/4/2014 setting aside the order of termination and directed the company to reinstate the assessee into service with continuity of service and attendant benefits.

After hearing the company side and also the counter filed by the assessee, the Hon'ble High Court directed the company and the assessee to settle the issue through mutual talks and accordingly referred the matter to the Mediation and Conciliation Centre where no finality was reached.

The Hon'ble High Court in the next hearing on 15. 12. 0217 indicated to the company to reinstate the assessee into service for which the company had requested time citing the consultation time required with its management at USA. After sometime, the company categorically decided not to re-instate the assessee into employment and decided to settle the matter through a Memorandum of Settlement 12. During the mediation before the counsels for the company and the assessee, a compensation was agreed at Rs.3 Crores for settling the disputes and however, the company wanted to deduct Tax u/s 1928 of the Income Tax Act, 1961, 13. The assessee had informed the company that section 1928 of the Income Tax Act 1961 is not applicable for the present compensation payable by the Company to the assessee, as the said sum paid is not a salary or perquisite or profit in lieu of salary but was compensation for sufferings 14. However, it was suggested by the court that the company may deduct taxes by recording the objection and views raised by the assessee with respect to tax deduction at source in the Memorandum of Settlement as an abundant caution and also suggested the assessee to claim for refund of tax so deducted from the Income Tax department and take it up with the authorities of the Income Tax Department’…………..

Your assessee humbly submits that she has brought on record about the non-applicability of new provision of law to her case vide para 14 of her submission uploaded on 14.04.2021 submitted before the AO and that the AO had also already considered the said new provision of law namely clause (xi) of sub-section(2) of section 56 of the Act while completing the assessment, applied his mind and taken a particular view, which was approved by Range Head-Assessment Unit and further approved by the AO and Range Head of Review Unit.

The assessee quoted some of the case laws to express that invoking provisions of section 263 in this case does not arise as the Assessing Officer passed the order after considering the materials and submissions of the assessee. The assessee further quoted some case laws to prove that the compensation received is not taxable’’. However, the ld. PCIT was not convinced with the reply of assessee and noted as under:- ‘’29 The Special Deputy Commissioner and the Labour Commissioner ordered reinstatement with back wages. The High Court also suggested reinstatement initially and thereafter, parties came for a settlement. This clearly shows that the compensation is directly related to the period between the termination and the settlement as orders are in her favour for reinstatement with direction for payment of full back wages and all other attended benefits. After receipt of the payment, the assessee cannot claim the same as capital in nature. When the company paid to the compensation in relation to orders as above, it is the duty of Assessing Officer and the review unit to make necessary enquiries which they had failed to On this ground alone, the order is deemed to be erroneous in so far it is prejudicial to the interests of revenue in terms of clause (a) and clause (b) of Section 263 of the Income-tax Act, 1961.

As mentioned earlier, clause (xi) was inserted in Section 56(2), w.e.f. 1.4.2019 (applicable for AY 2019-20) to provide that" any compensation or other payment due to or received by any person by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto to be chargeable to tax under the head, Income from Other sources. Further clause (xviib) was inserted in section 2(24) so as to include any compensation or other payment referred to section 56(2)(xi) in the definition of income".

The amendment in the section 56(2)(xi) clearly lay down that any compensation or other payment due to or received by any person by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto". The Assessing Officer ought to have applied this provision in this case which evidently specifies that the compensation received is taxable under income from other sources. Hence, there is incorrect assumption of facts and incorrect application of law by the AO and hence, the made the order of assessment erroneous and prejudicial to the interests of the Revenue.

Since the Assessing Officer has not treated this amount as revenue and not brought the same to tax, the assessee is of the misconstrued view that the same has been verified by the Assessing Officer and hence, the order is not erroneous and prejudicial to the interest of The revenue and necessity to exercise the revisionary powers u/s 263 in the case does not arise 33. In this context, assessee's attention is drawn to the Circular No. 8 of 2018 dated 26.12.2018 Explanatory notes to the provisions of the Finance Act. 2018, explaining the provisions, states as under 13. Taxability of compensation in connection to business or employment 13.1 Before amendment by the Act, the provisions of section 28 of the Income-tax Act provided that certain types of compensation receipts shall be taxable under the head "Profits and gains of business or profession, However, the scope of this section was restrictive since it did not cover a large segment of compensation receipts in connection with business and employment, leading to base erosion and revenue loss. 13.2 Accordingly, section 28 of the Income-tax Act has been amended to provide that any compensation received or receivable, by any person, whether revenue or capital in connection with the termination or the modification of the terms and conditions of any contract relating to his business shall also be taxable under the head "Profits and gains of business or profession". Further, section 56 of the Income- tax Act has also been amended to provide that any compensation received or receivable by any person, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to his employment shall be taxable under the head "Income from other sources". Consequential amendment has also been made in clause (24) of section 2 of the Income-tax Act.

The above circular makes abundantly clear the compensation shall be taxable u/s 56(2)(x) of the Income-tax Act, 1961 from AY 2019-20 irrespective of the fact whether the receipt is capital or revenue. The assessee has failed to take this into account in her replies."The faceless Assessing Officer and the review unit have failed to look into the provisions of Section 56(2)(xi) read with section 2(24)(xviib) and also the CBDT circular No. 8 of 2018 dated 26.12.2018. Even the memorandum to the Finance Bill, 2018 explains the reasons behind the insertion of the provisions and stipulates that the compensation shall be taxable even if it is claimed as capital receipt.

In view of the above amendment in the Act which is effective from 01/04/2019, the claim of the assessee that compensation received by the assessee is capital in nature will not after the taxability of the amount under the head "Income from other sources u/s 56(2)(xi) of the Income-tax Act, 1961. The faceless Assessing Officer and also the review unit failed to Bring the amount of compensation received under the provisions of Section 56(2)(xi) of the Act, 1961 and thereby adopted incorrect application of law and allowed the relief without Inquiring into the claim, and the Assessing Officer passed the order and hence, the order passed u/s 143(3) r.w.s. 144B of the Income-tax Act, 1961 is erroneous in so far as it is prejudicial to the interest of revenue in terms of clause (a) and clause (b) of Explanation 210 Section 263 of the Act.

The order passed by the FAO is erroneous in so far it is prejudicial to the interest of revenue in terms of the principles laid down the Hon'ble Supreme Court Judgement in the case of Malabar Industrial Co. Ltd. vs CIT(2000) reported in 109 Taxman 66/243 ITR 83(SC) 37. The assessee quoted many case laws none of which has application to facts of the case especially with reference to the provisions of Section 56(2)(xi) and also since the income even capital receipt is taxable under this provision. The case laws in fact support the provision for taxing the income under this section. 38. It is clearly seen and as admitted by the assessee it is related to the termination in service and therefore, section 56(2)(xi) squarely applicable in this case. 39. In view of the above, the order of the Assessing Officer dated 13/08/2021 is deemed to be erroneous in so far prejudicial to the interests of revenue in terms clause (a) and clause (b) of Explanation (2) to section 263 of the Income-tax Act. 1961. Therefore, invoking the powers of Section 263 of the Income-tax Act, 1961, I hold that the amount of Rs.3,00,00,000 received by the 56(2)(xi) of the Income-tax Act, 1961.

Therefore, the order of the Assessing Officer passed u/s 143(3) r.w.s. 144B of the Income-tax Act, 1961 dated 13/08/2021 vide DIN ITBA/AST/S/143(3)/2021-22/1034848923(1) is enhanced and the Assessing Officer is directed to give effect to this order and issue demand notice to the assessee accordingly as per law.

The order is passed accordingly’’. Aggrieved, assessee is in appeal before the Tribunal.

We have heard rival contentions and gone through the facts and circumstances of the case and paper book containing pages (1-220). Before us, the ld. Counsel for the assessee drew our attention to the paper book filed by the assessee and page 13, clause 5(e) of ITR 3, page 69 (note with respect to reporting of capital receipt in clause 16 (e) in form 3CD in respect of notice u/s.143(2) of the Act dated 31.03.2021). Reply to notice dated 31.03.2021, page no.106-107, notice u/s. 142(1) clause 6, page No.110-114 reply to notice u/s.142(1), Page No.214-219 order sheet for the assessment proceedings completed u/s.143(3) r.w.s.144B etc and contended that in original assessment ld. Assessing Officer has looked into all such documents and considered all submissions thereafter only passed assessment order dated 13.8.2021. Hence order is not erroneous, so far it is prejudicial to the Revenue.

Per contra, ld. Departmental Representative Shri. Niay Baran Som, - CIT contended that enquiring into claim includes the inquiry of law also. The ld. Assessing Officer was well aware of the provisions of Section 263 and circumstances and under which assessment order would be termed as Revneue, despite knowing ld. Assessing Officer has passed crypt order. He further contended that the ld. Assessing Officer has not dealt the issue of compensation of Rs.3,00,00,000/- with the relevant provisions of law viz; amended provisions of Section 28, Section 56 and Sect 2(24) of the Act which has effect from 01.4.2019 and are applicable to assessment year 2019-20 and subsequent years. He further argued that the ld. Ld. Assessing Officer even failed to consider circular No.8/2018 (F.No.370142/07/2018-TPL) dated 26.12.2018 which enumerates Explanatory Notes to the provisions of the Finance Act, 2018 hence also violated the clause (c) of Explanation 2 to Section 263 of the Act, and referred to Circular 8/2018 (supra) as under:- ‘’13. Taxability of compensation in connection to business or employment 13.1 Before amendment by the Act, the provisions of section 28 of the Income-tax Act provided that certain types of compensation receipts shall be taxable under the head "Profits and gains of business or profession". However, the scope of this section was restrictive since it did not cover a large segment of compensation receipts in connection with business and employment, leading to base erosion and revenue loss. 13.2 Accordingly, section 28 of the Income-tax Act has been amended to provide that a compensation received or receivable, by any person, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to his business shall also be taxable under the head "Profits and gains of business or profession". Further, section 56 of the Income-tax Act has also been amended to provide that any compensation received or receivable by any person, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to his employment shall be taxable under the head "Income from other sources". Consequential amendment has also been made in clause (24) of section 2 of the Income-tax Act.

In result, appeal of the assessee stands dismissed. Order pronounced in open court on 28th day of October, 2024 at Chennai.