2023 (11) TMI 79 - AT - Income Tax

Rectification of mistake - nature of receipt - income received towards severance of employment - one time compensation received by the assessee from his employers towards Cessation and termination of his employment - amount not separately shown as exempt income - whether was a capital receipt and hence not chargeable to tax? - rectification was rejected by AO on the ground that the amount was not bifurcated by the assessee in the return of income - Whether order passed u/s. 143(1) of the Act could not have been rectified u/s. 154 of the Act since there was no mistake apparent from the record ? HELD THAT - As on identical set of facts, in the case of Arunbhai R.Naik vs. ITO 2015 (10) TMI 2434 - GUJARAT HIGH COURT held that where ex-gratia compensation paid to the assessee on his discharge was very voluntary in nature, it would not amount to compensation in terms of section 17(3)(i) of the Act. In the instant facts, we observe that on perusal of the terms of employment letter of the assessee, the aforesaid amount paid to the assessee as compensation towards discharge of his services was voluntary in nature, as is evident in the terms of employment. Accordingly, in our considered opinion, the case of the assessee was directly covered in his favour by case of Arunbhai R. Naik(supra). Thus severance compensation received by the assessee on voluntary basis towards termination of employment from his employers is a capital receipt and, hence, not taxable in the hands of the assessee. Further, even the Department has not contested the claim of the assessee that the aforesaid amount is not taxable in the hands of the assessee as his income. The same should not have been taxed in the hands of the assessee as his taxable income and the same was liable to be deleted u/s. 154 of the Act. Decided in favour of assessee.

Summary

Issues Involved:

1. Adjustment to total income.
2. Mistake apparent on record under section 143(1).
3. Taxability of voluntary severance pay/ex-gratia.
4. Violation of principles of natural justice.

Summary:

Issue 1: Adjustment to Total Income

The assessee contested the adjustment made to their total income by the Income-tax Officer (ITO), which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) did not consider the explanation provided by the assessee regarding the adjustments.

Issue 2: Mistake Apparent on Record

The assessee argued that the total income processed under section 143(1) was a mistake apparent on record, which should have been rectified under section 154. The CIT(A) held that the order passed by the Assessing Officer (AO) was proper and there was no mistake apparent from the record. The CIT(A) noted that the assessee did not bifurcate the income shown under the head "Salary" into regular salary and one-time payment, thus the return did not warrant any adjustment under section 143(1).

Issue 3: Taxability of Voluntary Severance Pay/Ex-Gratia

The assessee received a severance compensation of Rs. 46,19,364 due to the termination of employment, which they claimed as a capital receipt and not taxable. The CIT(A) held that the voluntary ex-gratia received by the assessee is taxable under section 17(3)(i) of the Act. The CIT(A) emphasized that new claims involving verification of new facts are outside the scope of section 154.

Issue 4: Violation of Principles of Natural Justice

The assessee claimed that the CIT(A) violated principles of natural justice by not providing an opportunity for a personal hearing and failing to consider the submissions properly. The CIT(A) was criticized for not appreciating the detailed submissions made by the assessee.

Conclusion:

The appeal was dismissed by the CIT(A), who upheld the AO's decision to reject the rectification application. The CIT(A) cited that the rectification under section 154 was not permissible as it involved new claims and facts requiring verification beyond the original jurisdiction of section 143(1).

Tribunal's Decision:

The Tribunal observed that the severance compensation received by the assessee was a capital receipt and not taxable, referencing several judicial precedents including the Hon'ble Gujarat High Court's decision in Arunbhai R. Naik vs. ITO. The Tribunal noted that the Department did not contest the non-taxability of the severance pay. The Tribunal concluded that the rectification application should have been allowed and the severance compensation should not have been taxed.

Final Order:

The appeal of the assessee was allowed, and the Tribunal directed the deletion of the severance compensation from the taxable income under section 154 of the Act.