EXEMPTION UNDER SECTION 10(10B) OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Section 10(10B) of the Income Tax Act, 1961 provides that in computing the total income of a previous year of any person any compensation received by a workman-

• under the Industrial Disputes Act, 1947, or
• under any other Act or Rules, orders or notifications issued there under or
• under any standing orders or
• under any award, contract of service or otherwise,

at the time of his retrenchment.  The amount exempt under this clause shall not exceed-

• an amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947 (14 of 1947); or
• such amount, not being less than fifty thousand rupees, as the Central Government may, by notification in the Official Gazette, specify in this behalf,

whichever is less. This shall not apply in respect of any compensation received by a workman in accordance with any scheme which the Central Government may, having regard to the need for extending special protection to the workmen in the undertaking to which such scheme applies and other relevant circumstances approve in this behalf.

For the purposes of this section-

• compensation received by a workman at the time of the closing down of the undertaking in which he is employed shall be deemed to be compensation received at the time of his retrenchment ;
• compensation received by a workman, at the time of the transfer (whether by agreement or by operation of law) of the ownership or management of the undertaking in which he is employed from the employer in relation to that undertaking to a new employer, shall be deemed to be compensation received at the time of his retrenchment if-

• the service of the workman has been interrupted by such transfer ; or
• the terms and conditions of service applicable to the workman after such transfer are in any way less favorable to the workman than those applicable to him immediately before the transfer ; or
•  the new employer is, under the terms of such transfer or otherwise, legally not liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer;

In ‘Vishnu Mohan T. Nair V. Income Tax Officer’ – 2018 (1) TMI 324 - ITAT AHMEDABAD the assessee is a former employee of a Vadodara based company.  He had taken up employment in the company in terms of appointment letter dated 25.10.1990. His employment was confirmed on 26.03.1991.  On 21.07.2003 he was transferred to Mumbai. The assessee considered this transfer to be a change in his service condition.  His plea was upheld by the Industrial Tribunal.  The Industrial Tribunal held that the opponent company has altered the service conditions applicable to the complainant immediately before the commencement of dispute.  The Industrial Tribunal further held that the opponent company has committed breach of Section 33 of the Industrial Disputes Act, 1974 and therefore the Tribunal set aside the transfer order of the assessee.

The employer challenged the order of the Tribunal before the High Court. In the meantime both arrived at a settlement wherein ex-gratia amount is directed to be paid to the assessee at ₹ 6.5 lakhs and the assessee ceased to be in employment of the said employer.   The assessee was paid ₹ 6.5 lakhs as an ex-gratia amount by the employer, at the point of time of leaving the employment.

The assessee claimed exemption under section 10(10B) of the Income Tax Act in respect of the above ex gratia amount he received.  The Assessing Officer declaimed the claim of the assessee on the following grounds-

• The payment received by the assessee is an ex-gratia payment and not a compensation;
• The status of the employee in terms of the document on record was of a resigned employee and not a retrenched employee.

The assessee filed appeal before the Commissioner (Appeals).  The Commissioner (Appeals) held that the whole dispute before them was on account of assessee’s transfer to Mumbai from Vadodara and not on account of retrenchment of the assessee. There was no reference in the order of the Industrial Tribunal about retrenchment.  The employer also filed a case before the High Court challenging the order of the Industrial Tribunal with reference to the assessee’s transfer and not with reference to the retrenchment or compensation. The Industrial Tribunal or the High Court never granted any compensation or monetary award to the assessee.  The amount ₹ 6.5 lakhs was received by him as ex-gratia as a result of out of court settlement of the dispute with his employer. The services were only terminated after the assessee received the said ex-gratia payment of ₹ 6.5 lakhs. The payment is voluntary as a result of a private settlement. This does not have the character of retrenchment compensation. The assessee was not retrenched but had deemed to have resigned after receiving ex-gratia payment.  The Commissioner (Appeals) held that the payment received by the assessee from his employer was in the nature of ex-gratia payment and does not have the character of retrenchment compensation.  The Commissioner (Appeals) dismissed the appeal filed by the assessee.

Aggrieved against the order of Commissioner (Appeals), the assessee filed appeal before the Appellate Tribunal. The Tribunal analyzed the provisions of section 10(10B) of the Act. Section 10(10B) of the Act defines the amount eligible for exemption under this provisions as ‘any compensation received by a workman under the Industrial Disputes Act, 1947 or under any other Act or Rules, orders or notifications issued there under or under any standing orders or under any award, contract or service or otherwise, at the time of retrenchment.  Therefore an eligible amount has to be in the nature of compensation under the Industrial Dispute Act and it has to be paid at the time of retrenchment of an employee.  The Tribunal observed that the order passed by the Tribunal was admittedly under the Industrial Disputes Act, 1947 and once it is held that the said order stands modified so as to take into account the payment of ₹ 6.5 lakhs by the employer, the said payment cannot but be treated as a compensation under the Industrial Disputes Act, 1947. Thus the first limb of section 10(10B) of the Act is satisfied. The next question then is whether the said compensation can be said to have been paid at the time of retrenchment.

The Tribunal relied on Supreme Court judgment in ‘Mahindra Singh Dhantwal V. Hindustan Motors Limited’ –1984 (9) TMI 1 - SUPREME Court, it was held wherein compensation in lieu of reinstatement was treated as eligible for retrenchment compensation.  In this case the employee is giving up his source of livelihood under the threat of dislocation and the hyper technical interpretations based on technicalities about the wordings in the settlement deed, signed by him under these compelling circumstances, is being taken as the understanding about the assessee’s actual conduct; that is too pedantic an approach and it cannot meet our approval.

This problem is to be approached pragmatically and to give full effect to the true intent of the public welfare provisions. The question is nothing but a termination of employment with the offer of compensation. Thus the payment in question cannot be anything but retrenchment compensation.  The Tribunal allowed the appeal.

Discussions to this article

[MohamedSheikIbrahim KaderSahib]

Does the proposed amendment in Section 28 in Finance Bill, 2018 prevents a tax payer from exemption under section 10(10B)?

If so, is it applicable only for FY18-19 income?

[MohamedSheikIbrahim KaderSahib]

The following news talks about the amendment. https://economictimes.indiatimes.com/news/economy/policy/sacked-staff-to-now-pay-tax-on-compensation/articleshow/62761330.cms

[DR.MARIAPPAN GOVINDARAJAN]

The amendment will take effect from 01.04.2019 only.

[MohamedSheikIbrahim KaderSahib]

Thank you Sir.