2018 (1) TMI 324 - AT - Income Tax

Eligibility for exemption u/s 10(10B) - ex gratia amount received by the employer, at the point of time of leaving the employment - treated as compensation at the time of retrenchment ? - Held that - Right now we are dealing with an employee who is giving up his source of livelihood under the threat of dislocation, and the hyper technical interpretations based on technicalities about the wordings in the settlement deed, signed by him under these compelling circumstances, is being taken as the understanding about assessee s actual conduct; that is too pedantic an approach and it cannot meet our approval. Let us also not forget that while taking calls on these issues, which deal with employees in the lower rung of hierarchy, we must not be too pedantic or hyper technical in approach. We have to be pragmatic in approach and we must give full effect to the true intent of the public welfare provisions. To us, the arrangement in question is nothing but a termination of employment with the offer of compensation. Viewed thus, the payment in question cannot be anything but a retrenchment compensation. The conditions of section 10(10B), so far as eligibility for exemption is concerned, is satisfied. That, however, is not the end of the matter. As regards the amount eligible for exemption under section 10(10B), it is specifically provided in the aforesaid section that the amount eligible for exemption will be the least of (i) actual amount received by the assessee; (ii) the amount specified by Central Government i.e. ₹ 5,00,000; and (iii) an amount calculated in accordance with the provisions of clause (b) of Section 25F of the Industrial Disputes Act, 1947 i.e. 15 day s average pay for every completed years of services or part thereof in excess of 6 months. One of the important restrictions on the amount eligible for exemption under section 10(10B) is that it should not exceed fifteen days average pay for every completed years of services or part thereof in excess of six months This aspect of the matter has not been examined at all. We, therefore, uphold the claim in principle but remit the matter to the file of the AO for examination of the quantification part in the light of the above observation. With these directions, the appeal is allowed in principle but remitted to the file of the Assessing Officer for limited verification as above.

Summary

Issues Involved:
1. Eligibility for exemption under section 10(10B) of the Income Tax Act, 1961.
2. Nature of the payment received by the assessee (whether it is ex gratia or retrenchment compensation).
3. Determination of the amount eligible for exemption under section 10(10B).

Issue-wise Detailed Analysis:

1. Eligibility for exemption under section 10(10B) of the Income Tax Act, 1961:
The primary issue is whether the amount received by the assessee qualifies for exemption under section 10(10B) of the Income Tax Act, 1961. Section 10(10B) specifies that any compensation received by a workman under the Industrial Disputes Act, 1947, or any other relevant legislation, at the time of retrenchment, is eligible for exemption. The Tribunal noted that the amount of ?6,50,000 was paid as part of a settlement and was acknowledged by the Hon’ble High Court as modifying the order of the Industrial Tribunal. This modification implies that the payment was recognized under the Industrial Disputes Act, satisfying the first condition of section 10(10B).

2. Nature of the payment received by the assessee:
The Assessing Officer and the CIT(A) argued that the payment was ex gratia and not retrenchment compensation, and that the assessee had resigned rather than being retrenched. However, the Tribunal rejected this view, emphasizing that the settlement was essentially an arrangement for the termination of employment with compensation. The Tribunal clarified that resignation is a voluntary act, whereas the payment in question was contingent upon the termination of employment, thus qualifying as retrenchment compensation. The Tribunal also referred to the Supreme Court’s judgment in Mahendra Singh Dhantwal Vs Hindustan Motors Ltd, which supports the view that compensation in lieu of reinstatement can be considered retrenchment compensation.

3. Determination of the amount eligible for exemption under section 10(10B):
While the Tribunal upheld the principle that the payment qualified for exemption, it highlighted that the actual amount eligible for exemption must be calculated according to the specific limits set by section 10(10B). These limits include the lesser of the actual amount received, ?5,00,000, or an amount calculated based on 15 days’ average pay for each completed year of service. The Tribunal noted that this calculation had not been performed and thus remitted the matter to the Assessing Officer to verify the correct quantification of the exempt amount.

Conclusion:
The Tribunal concluded that the payment received by the assessee qualifies as retrenchment compensation under section 10(10B) and is eligible for exemption. However, the exact amount eligible for exemption must be determined based on the statutory limits, and this task was remitted to the Assessing Officer for proper verification. The appeal was thus allowed in principle, subject to the quantification of the exempt amount.