PRASAD VIJAYKUMR KULKARNI ,AURANGABAD vs. INCOME TAX OFFICER WARD 1(1), AURANGABAD, AURANGABAD

Facts of the case in brief, are that the assessee is an individual and filed his return of income on 07.08.2019 declaring total income at Rs.66,05,280/-. The case was selected for scrutiny and statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) were issued and served on the assessee, in response to which the AR of the assessee appeared and filed the requisite details. During the course of assessment proceedings the Assessing Officer noted that the assessee has claimed deduction of Rs.20,41,068/- u/s 89 of the Act. However, at the time of assessment proceedings, the assessee submitted that the amount received from Pfizer company are in the nature of ex-gratia payments voluntarily and hence did not fall under the definition of profits received in lieu of salary and therefore asked the Assessing Officer to permit him to withdraw the claim of deduction u/s 89 and treat the amount received from Pfizer as capital receipt and complete the assessment.

However, the Assessing Officer did not accept the above contention of the assessee and treated the amount of Rs.20,41,068/- as profit in lieu of salary by observing as under: “10. From the above para it is clear that employer had offered the financial package to the employees in the event of employees opting to retire voluntary from their employment. The assessee had opted the said scheme and, therefore, had received the amount as compensation (termed as attractive financial package) in accordance with the scheme of VRS. But, counsel of the assessee said that this was not compensation of VRS amount and has requested to consider the amount received as advance salary. Thus, the department asked him to furnish is written reply by 21.09.2021 and video conferencing was over. In response, assessee has filed the same reply which was filed by him on 07.09.2021 and no fresh facts or documents were submitted. However, reply of the assessee is discussed hereunder point wise: 10.1 Para 1 though not put any number given under the head objecting the proposed variation is general in nature and does not need any comment. 10.2 In the next para, the assessee has levied false allegation on the department saying that the department was passing assessment order in his case speedily. Since, the case is a time barring one therefore, blame of the assessee is not justified. However, the same is ignored 10.3 The submissions of the assessee in the coming paras have been numbered. Para 1 has been the heading as per your point no. 2. In this para, it has been suggested that the employer, in form 16 had not shown that the said payment had not been given on account of voluntary retirement scheme. The department does not know as to how the company has not mentioned in form 16 about amount given on account of VRS. However, from para (iii) & (iv) of the scheme offered by the company it is very clear that voluntary retirement scheme was offered by the company and assessee had opted for the same. Para (iv) of the scheme has already been reproduced above and was shown to the assessee's counsel during the course of video conferencing. Para (iii) is also reproduced below: "The Company is desirous of providing a beneficial settlement to all permanent employees of the Plant. Towards this objective, the Company has taken a decision to offer a financial scheme to its permanent employees at the Plant, on the terms and conditions set out below. The Scheme (as hereinafter defined) is purely voluntary and it is for each such employee to decide whether or not to opt for the same." 10.4 In the remaining contents of this para no. 1 captioned as per your point no. 2,the assessee has tried to justify his claim by taking wrong stands of hence, it is clear now, the assessee got the advance salary not the VRS of 10(10)(C)". Though it is very clear from paras (iii) & (iv) of the scheme of voluntary retirement offered by the company to the assessed and also to other employees, yet assessee has tried to justify his claim by repeating the same submitting again and again i.e, the amount received was not on account of VRS compensation but it was advance salary. 10.5 The para captioned Advance Salary for relief u/s 89 has been numbered as para no.2. In this para, the assessee has stated that the amount received by him on which addition has been made was "Wages for the remaining months of service with the company till the attainment of retirement age of 58 years. To justify this submission the assessee has relied on annexure II of the scheme. On perusal of annexure II, it is revealed that heading of annexure II, which is "Compensation and other dues payable to the Employee". Thus it is apparent from the heading itself that the amount received by the assessee was compensation on account of taking voluntary retirement scheme offered by the employer. Besides, in FULL AND FINAL SETTLEMENT COMPUTATION SHEET also, which has been submitted by the assessee himself during the course of assessment proceedings, there are compensation details and calculations thereof under the heading scheme compensation. 10.6 The remaining contents of this para no. 2 of assessee's reply cannot be considered as assessee wants to obtain relief u/s 89 which is not allowable under the provisions of the IT Act, 1961. Further, assessee has requested to consider his submission due to plant closed down (permanent loss of income) and give him justice as he had lost his job now he is jobless and sitting at home. The department is bound to act upon the contents of IT Act, 1961 and cannot, in any way give relief to any assessee on compassionate grounds owing to assessee's being jobless. 10.7 Para no. 3 of assessee's submission has been caption as Rectification u/s 154. Submission put forth in this para has no connection with assessment proceedings, hence not considered. 10.8 Para no. 4 has been captioned as Capital Receipts. In this para the assessee has submitted that it was not at all obligatory on part of the company to compensate the employee for the balance period of his service. It is further stated

In appeal, the CIT(A) / NFAC upheld the action of the Assessing Officer.

Aggrieved with such order of CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds: “

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: “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. ……..

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.”

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.

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.”

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.”

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.20,41,068/- 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.

In the result, the appeal filed by the assessee is allowed.