2024 (10) TMI 260 - AT - Income Tax

Nature of receipt - severance payment or other termination-related compensation Addition as profits in lieu of salary u/s. 17(3) v/s non-taxable capital receipt - as per DR severance compensation was rightly treated as profits in lieu of salary under Section 17(3) as the amount was paid due to the termination of employment - whether a severance payment or other termination-related compensation is subject to tax as salary income or can be treated as a non-taxable capital receipt? - HELD THAT - Section 56(2)(xi), introduced w.e.f. 1st April 2019, deals with compensation received or receivable in connection with the termination or modification of terms of employment contracts. However, this amendment applies to assessment years starting from AY 2019-20 onwards. Since the current assessment year is AY 2018-19, the amendment has no bearing on the current case. We are of the considered opinion that the severance compensation received by the assessee is a capital receipt, not chargeable to tax u/s 17(3). The order of the CIT(A) is set aside, and the addition made by the AO is deleted. Given that the addition u/s 17(3) of the Act is being set aside, the consequential levy of interest under Sections 234A/B/C/D of the Act and the initiation of penalty proceedings under Section 270A do not survive. Appeal of the assessee is allowed.

Summary

Issues:
1. Whether the compensation received by the assessee constitutes a capital receipt or profits in lieu of salary under Section 17(3) of the Income-tax Act, 1961 for the Assessment Year 2018-19.
2. Whether the delay in filing the appeal should be condoned.

Analysis:

Issue 1: Compensation Nature - Capital Receipt or Profits in Lieu of Salary
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) (CIT(A)) confirming the addition of Rs. 15,50,905/- as "profits in lieu of salary" under Section 17(3) of the Act. The compensation in question was received by the assessee due to termination of employment following an acquisition. The CIT(A) and the Assessing Officer treated it as "profits in lieu of salary" under Section 17(3)(i) of the Act. The assessee contended that the compensation was a capital receipt not chargeable to tax, supported by judicial precedents. The Tribunal analyzed the facts, submissions, and precedents presented. It was noted that the compensation was voluntary, related to redundancy, and not tied to past services. Relying on judicial precedents, the Tribunal held that such voluntary severance payments are capital receipts and not taxable as salary income. The severance payment was deemed a capital receipt, not taxable under Section 17(3) of the Act. The Tribunal set aside the CIT(A)'s order and deleted the addition made by the Assessing Officer.

Issue 2: Condonation of Delay
The assessee filed an affidavit explaining a one-day delay in filing the appeal due to a clerical oversight. The Departmental Representative did not object to condoning the delay. The Tribunal, satisfied that the delay was unintentional, condoned the delay and proceeded to adjudicate the appeal on merits.

In conclusion, the Tribunal allowed the appeal, holding that the compensation received by the assessee was a capital receipt and not taxable under Section 17(3) of the Act. The delay in filing the appeal was condoned, and the consequential levy of interest and penalty proceedings were set aside.