2024 (9) TMI 1717 - AT - Income Tax

Characterization of receipts - amount received by the assessee from Pfizer as ex-gratia payment - HELD THAT -Since the facts of the instant case are identical to the facts of the case already decided in the case of Ashok Raghunathrao Kulkarni 2024 (8) TMI 821 - ITAT PUNE we hold that the amount received as ex-gratia is not taxable being capital in nature. Accordingly the same is directed to be deleted. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

- Whether the amount of Rs. 69,24,655/- received by the assessee from Pfizer as ex-gratia payment should be treated as a capital receipt or as "profit in lieu of salary" under Section 17(3) of the Income Tax Act, 1961.

- Whether the assessee is entitled to relief under Section 89 of the Income Tax Act, 1961, for the amount received.

- Whether the penalty proceedings under Section 270A for under-reporting of income are justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Ex-gratia Payment

Relevant legal framework and precedents:

The legal framework involves Section 17(3) of the Income Tax Act, 1961, which defines "profits in lieu of salary" to include compensation received by an employee in connection with the termination of employment. The Finance Act 2001 inserted Clause (iii) into Section 17(3), effective from April 1, 2002, expanding the scope of what constitutes "profits in lieu of salary."

Court's interpretation and reasoning:

The Tribunal analyzed whether the ex-gratia payment received by the assessee from Pfizer was taxable as "profits in lieu of salary" or as a capital receipt. The Tribunal referred to prior decisions, including a similar case involving Pfizer, where such payments were treated as capital receipts and not taxable under Section 17(3).

Key evidence and findings:

The Tribunal considered the nature of the payment, noting that it was ex-gratia and voluntary, without any obligation under the employment contract. The payment was made in the context of the company's shutdown and was not linked to any service rendered by the assessee.

Application of law to facts:

The Tribunal applied the principles from previous cases, including the decision in Ashok Raghunathrao Kulkarni vs. ITO, where similar payments were deemed capital in nature. The Tribunal also referenced the case of Sharad D. Magar, where the compensation was accepted as capital receipt due to its voluntary nature.

Treatment of competing arguments:

The Tribunal addressed the Department's argument that the payment should be classified as "profits in lieu of salary" by emphasizing the voluntary nature of the payment and the absence of any obligation to pay under the employment contract.

Conclusions:

The Tribunal concluded that the ex-gratia payment of Rs. 69,24,655/- is not taxable as it is a capital receipt, following the precedent set in similar cases.

Issue 2: Entitlement to Relief under Section 89

Relevant legal framework and precedents:

Section 89 of the Income Tax Act provides relief for salary received in arrears or in advance. The assessee initially claimed relief under this section but later sought to withdraw the claim, arguing that the payment was a capital receipt.

Court's interpretation and reasoning:

The Tribunal did not delve deeply into the Section 89 relief since it determined the payment was a capital receipt and not taxable as salary income. Thus, the question of relief under Section 89 became moot.

Conclusions:

The Tribunal's decision to classify the payment as a capital receipt negated the need for relief under Section 89.

Issue 3: Penalty Proceedings under Section 270A

Relevant legal framework and precedents:

Section 270A of the Income Tax Act deals with penalties for under-reporting and misreporting of income. The Assessing Officer initiated penalty proceedings due to the assessee's claim under Section 89.

Court's interpretation and reasoning:

Given the Tribunal's decision that the payment was a capital receipt, the basis for the penalty under Section 270A was undermined. The Tribunal's findings suggested that there was no under-reporting of income, as the payment was not taxable.

Conclusions:

The Tribunal's ruling on the nature of the payment effectively nullified the justification for penalty proceedings under Section 270A.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"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."

Core principles established:

The Tribunal reaffirmed the principle that ex-gratia payments made voluntarily by an employer, without any contractual obligation, are not taxable as "profits in lieu of salary" under Section 17(3) and should be treated as capital receipts.

Final determinations on each issue:

- The ex-gratia payment of Rs. 69,24,655/- received by the assessee is a capital receipt and not taxable under Section 17(3).

- Relief under Section 89 is not applicable as the payment is not taxable as salary income.

- Penalty proceedings under Section 270A for under-reporting of income are not justified based on the Tribunal's findings.