2024 (9) TMI 1718 - AT - Income Tax

Characterization of receipts - ex-gratia payments received - amount received by the assessee from Pfizer company should be treated as a capital receipt or as profits in lieu of salary u/s 17(3) - HELD THAT - Similar issue decided by us in the case of Ashok Raghunathrao Kulkarni 2024 (8) TMI 821 - ITAT PUNE wherein the amount received from Pfizer company as ex-gratia was held to be not taxable. Thus we hold that the amount received as ex-gratia is not taxable being capital in nature - Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The primary legal issue considered in this judgment was whether the amount of Rs. 20,41,068/- received by the assessee from Pfizer company should be treated as a capital receipt or as profits in lieu of salary under section 17(3) of the Income Tax Act, 1961. The related question was whether the assessee was entitled to relief under section 89 of the Act.

ISSUE-WISE DETAILED ANALYSIS

1. Classification of the Amount Received: Capital Receipt vs. Profits in Lieu of Salary

Relevant Legal Framework and Precedents: The legal framework revolves around section 17(3) of the Income Tax Act, which defines "profits in lieu of salary" and section 89, which provides relief for salary received in advance or arrears. The Tribunal considered precedents where similar payments were treated as capital receipts, not taxable as salary.

Court's Interpretation and Reasoning: The Tribunal analyzed the nature of the payment received by the assessee. It was argued that the payment was ex-gratia and voluntary, not arising from any obligation under employment terms. The Tribunal referred to its previous decision in a similar case (Ashok Raghunathrao Kulkarni vs. ITO) where such payments were classified as capital receipts.

Key Evidence and Findings: The Tribunal noted that the payment was made under a voluntary retirement scheme (VRS) offered by Pfizer, which the assessee opted for. The assessee claimed that the payment was not compensation for services rendered but a capital receipt due to the premature termination of employment.

Application of Law to Facts: The Tribunal applied the principles established in prior judgments, determining that since the payment was voluntary and not linked to any service obligation, it should be treated as a capital receipt. The Tribunal also considered the treatment of similar payments in other cases involving Pfizer employees, where such amounts were accepted as capital receipts.

Treatment of Competing Arguments: The Tribunal addressed the department's argument that the payment was compensation under section 17(3). However, it found that the payment's voluntary nature and lack of obligation under employment terms supported its classification as a capital receipt.

Conclusions: The Tribunal concluded that the amount received by the assessee was a capital receipt and not taxable as salary under section 17(3). Consequently, the addition made by the Assessing Officer was deleted.

2. Entitlement to Relief under Section 89

Relevant Legal Framework and Precedents: Section 89 provides relief for salary received in advance or arrears. The Tribunal considered whether this section applied to the payment received by the assessee.

Court's Interpretation and Reasoning: Given the Tribunal's conclusion that the payment was a capital receipt, it determined that section 89 relief was not applicable, as the payment did not constitute salary income.

Key Evidence and Findings: The Tribunal's analysis of the payment's nature as a capital receipt precluded the applicability of section 89.

Application of Law to Facts: Since the payment was not considered salary, the Tribunal found no basis for granting relief under section 89.

Treatment of Competing Arguments: The Tribunal did not specifically address competing arguments regarding section 89, as its determination on the nature of the payment rendered such arguments moot.

Conclusions: The Tribunal concluded that section 89 relief was not applicable due to the payment's classification as a capital receipt.

SIGNIFICANT HOLDINGS

The Tribunal held that the amount of Rs. 20,41,068/- received by the assessee from Pfizer was a capital receipt and not taxable as salary under section 17(3) of the Income Tax Act. This decision was based on the voluntary nature of the payment and the absence of any service obligation. The Tribunal's decision followed its previous ruling in a similar case involving another Pfizer employee.

Verbatim Quotes of Crucial Legal Reasoning:

"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."

Core Principles Established:

The Tribunal established that voluntary payments made by an employer, not linked to any service obligation, are capital receipts and not taxable as salary under section 17(3).

Final Determinations on Each Issue:

The Tribunal directed the Assessing Officer to delete the addition of Rs. 20,41,068/- to the assessee's income. The grounds raised by the assessee were allowed, and the appeal was decided in favor of the assessee.