2022 (4) TMI 1179 - AT - Income Tax

Claim of the assessee u/s. 89 r.w. Rule 21A of I.T. Rules - compensation received by the assessee as only salary received in advance - payments made to the employees are in the nature of the lumpsum ex-gratia payments - why the amount received should not be treated as compensation on termination of employment? - HELD THAT - As 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. 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. 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 I.T. 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. Respectfully following the above said decision and the ratio laid down in V.D. Talwar 1963 (3) TMI 48 - SUPREME COURT we are inclined to treat the compensation received by the assessee as only salary received in advance. Therefore, we direct the AO to allow the claim of the assessee u/s. 89 r.w. Rule 21A of I.T. Rules. Accordingly, the appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Determination of the nature of the payment received by the assessee - whether it is "advance salary" or "compensation on termination of employment."
2. Computation of relief under Section 89(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Determination of the Nature of Payment:
The primary issue revolves around whether the lump sum ex-gratia payment received by the assessee should be treated as "advance salary" or "compensation on termination of employment." The assessee, an ex-employee of a company, received a one-time lump sum payment as per a supplementary agreement dated 25/11/2016. The company had earlier shut down its Worli Textile Mill Unit in 2008, and the assessee, along with 275 other employees, did not opt for the voluntary retirement scheme. Instead, these employees entered into individual agreements with the company, which included a clause that they would receive monthly payments until they reached 63 years of age. The company later offered a lump sum payment in lieu of these monthly payments, which was accepted by the assessee.

The assessee argued that this lump sum payment constituted "advance salary" for the period from 2017-18 to 2036-37, while the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] treated it as "compensation on termination of employment." The AO referred to the company's letter and the supplementary agreement, which described the payment as a one-time lump sum ex-gratia amount deemed as "salary" paid in advance. However, the AO concluded that the payment was compensation in connection with the termination of employment, falling under Section 17(3)(i) of the Income Tax Act, 1961, which defines "profits in lieu of salary."

2. Computation of Relief under Section 89(1):
The second issue pertains to the computation of relief under Section 89(1) of the Income Tax Act, 1961. The assessee claimed relief under Sub-rule (2) of Rule 21A of the Income Tax Rules, 1962, which pertains to arrears or advance of salary. The assessee spread the lump sum amount over the years from 2017-18 to 2036-37 and computed the relief accordingly. However, the AO and CIT(A) computed the relief under Sub-rule (4) of Rule 21A, which pertains to compensation on termination of employment. This resulted in a significantly lower relief amount for the assessee.

The appellate tribunal considered the facts and submissions, including the company's treatment of the payment as "salary" and the issuance of Form 16 certifying the deduction of tax at source. The tribunal also reviewed the relevant case law, including the Supreme Court decision in V.D. Talwar v. CIT, which supported the assessee's position that the payment should be treated as "salary" rather than compensation for loss of employment.

Conclusion:
The tribunal concluded that the lump sum payment received by the assessee should be treated as "salary received in advance" and not as "compensation on termination of employment." Consequently, the tribunal directed the AO to recompute the relief under Section 89(1) as per Sub-rule (2) of Rule 21A, allowing the assessee's claim. The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 22.04.2022.