ATUL SHASHIKANT GARBHE ,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 27.07.2019 declaring total income at Rs.82,35,540/-. 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 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.69,24,655/- as profit in lieu of salary by observing as under: “4 After considering the submissions made by the assessee and the provisions of Income Tax Act, it is clear that any additional compensation/severance received by an employee from employer taxed as "Profit in lieu of salary" under Section 17(3) of Income Tax Act. Therefore, any compensation due to or received by a person from his employer in connection with termination of his employment is taxable as salary in the hands of the employee at the applicable slab rates. The tax treatment is the same if assessee receives ex gratia payment on account of shutting down of company. Hence, the amount received by the assesses to the tune of Rs.69,24,655/- is, at best, treated as profit in lieu of salary. The assessee has not mentioned under which section of the I.T. Act the amount received is to be treated for his purpose 4.1 So far as the case laws relied upon by the assessee, it is stated that they ate applicable to the period prior to the insertion of Clause (iii) inserted in Section 17(3) by the Finance Act 2001 w.e.f 1st April, 2002. 5. Section 17(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 (108), clause (11), clause (12) clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer of 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 (100) of section 10, (iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person- (A) before his joining any employment with that person, or (B) after cessation of his employment with that person.

In view of the above discussion, relief claimed by the assessee under Section 89 is disallowed as claimed in ITR. Penalty proceedings under Section 270A of the IT Act are being initiated separately for under-reporting of income on account of claiming wrong relief under section 89 of the I.T.Act thereby reducing the tax liability which resulted issuance of refund. Total income of the assessee is recomputed as under: Income declared as per Return Rs.82,35,540/- Income Assessed Rs.82,35,540/- 7. Assessed at Rs.82,35,540/- under Section 143(3) of the I.T.Act, 1961. Issue Demand Notice and Challan along with necessary documents. Charge interest under Section 234A, 2348 and 234C as per the provisions of Income Tax Act. Initiate penalty proceedings under Section 270A of the I.T.Act, 1961 as stated in para 6 above.”

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: “1. The Learned CIT(A) has erred on Facts & Law & has not adjudicated the most important de crucial Ground of Appeal of the said amounts being claimed as Capital Receipts, in an appropriate & judicious manner. The Learned CIT(A) has erred & has failed in taking up the said Ground legally & has not considered & has not commented on any Submissions, Explanations & Legal Judgements. The Learned CIT(A) has failed to adhere to the main Ground hence the Appeal should be restored back to the Hon'ble CIT(A) for adjudication of the Ground of Capital Receipts.

The Learned CIT(A) has erred in confirming the AO's ascertaining incorrect perspective of Form 10E, Form 16 & has thus erred in not granting relief u/s 89.

The Learned CIT(A) has erred in confirming the AO's failure 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)(i) & 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.

The Learned CIT(A) has erred in confirming AO's non consideration 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.

The Learned CIT(A) has erred in confirming the AO's non acceptance of 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.

The Learned CIT(A) has erred in confirming the AO's assessment which has been completed on an unbalanced 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 being a quasi-judicial officer.

The Appellant Craves Leave to add, Alter, or amend any of the Grounds of the Appeal, before or during hearing of the Appeal.

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.” 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.”

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.69,24,655/- 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.