2022 (4) TMI 1269 - AT - Income Tax

Relief u/s. 89 - ex-gratia amount of compensation to each of the 275 employees provided they accept the closure and termination of their services without agitating the issue or obstructing the development of the entire Mill land - HELD THAT - We observed from the record that assessee is one of the employee who did not agree for the voluntary retirement scheme offered by the company and subsequently company has pledged a piece of land for the benefit of 275 employees who are not agreed for the voluntary retirement scheme compensation. Subsequently owing to the order of the Labour Commissioner and Municipal Corporation of the Greater Mumbai which imposed certain conditions on the company to safeguard the interest of the 275 workers who had not opted for voluntary retirement scheme. Subsequently individual employees and the company entered into supplementary agreement and the company agreed to compute the total compensation payable by the company till they attain 63 years of age and accordingly in the case of the assessee it was determined to be at ₹.59,15,934/-. The company after considering that these are one time lumpsum ex-gratia amount payable to the employee and settled the same after deducting the TDS as per the provision u/s. 192 - We observe from the record that company in the supplementary agreement has explained that the one time lumpsum ex-gratia amount is salary paid to the ex-employee in advance and accordingly, it has deducted tax at source in accordance with the provisions of the I.T. Act. In this regard the company also issued Form 16 to the assessee for the relevant year 2016-17. On careful consideration of the facts on record we observe that even though the textile unit was closed on 2008 and assessee has refused to agree the voluntary retirement scheme offered by the company and under protest assessee and similar employees managed to get compensation through Labour Commissioner and as per the directions of the Labour Commissioner, as agreed by the company, the assessee was awarded the compensation for the remaining period of service till the age of 63 years. The basis of compensation calculated by the company and the company also treated the one-time compensation as a salary paid in advance and deducted the TDS on the same, clearly indicates that the compensation received by the assessee is only salary received in advance not as termination compensation even though this was paid in lumpsum as ex-gratia in one go. Thus we are inclined to treat the compensation received by the assessee as only salary received in advance. Therefore, we direct the Assessing Officer to allow the claim of the assessee u/s. 89 r.w. Rule 21A of I.T. Rules. Accordingly, the appeal filed by the assessee is allowed.

Issues Involved:
1. Nature of the payment received by the assessee: whether it is "salary received in advance" or "compensation for termination of employment."
2. Eligibility for relief under Section 89(1) of the Income Tax Act, 1961.
3. Correct computation of relief under Rule 21A of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Nature of the Payment Received by the Assessee:
The primary issue in this case was to determine whether the lump sum ex-gratia amount received by the assessee should be classified as "salary received in advance" or "compensation for termination of employment." The assessee argued that the amount received was advance salary for the period 2017-18 to 2036-37 until he attained 63 years of age, and hence, it should be treated as salary. The company had deducted tax at source under Section 192 of the Income Tax Act, 1961, treating the amount as salary paid in advance.

The Assessing Officer, however, observed that the payment was a one-time lump sum ex-gratia amount and should be treated as compensation for termination of employment. The AO's view was supported by the terms of the supplementary agreement and the company's letter, which indicated that the payment was towards full and final settlement with the ex-employee.

2. Eligibility for Relief under Section 89(1):
The assessee claimed relief under Section 89(1) of the Income Tax Act, 1961, arguing that the lump sum payment created a substantial tax burden in the current financial year. The relief was claimed based on the computation of the salary spread over the future years up to 2036-37. The AO, however, restricted the relief to ?3,01,889, arguing that the payment should be treated as compensation for termination of employment, and hence, the computation should be done under Rule 21A(4) of the Income Tax Rules, 1962.

The CIT(A) sustained the view of the AO, stating that it was not possible to ascertain the actual amount of relief to be allowed under Section 89 for future years, as it would require considering the income of the assessee for each such year.

3. Correct Computation of Relief under Rule 21A:
The AO and CIT(A) both held that the correct computation of relief under Section 89 should be as per Rule 21A(4), which pertains to compensation for termination of employment. The assessee, however, argued that the payment should be treated as salary received in advance, and hence, the computation should be under Rule 21A(2).

The Tribunal, after considering the facts and submissions, observed that the company had treated the payment as salary in advance and deducted TDS accordingly. The Tribunal referred to the Supreme Court's decision in V.D. Talwar v. CIT, which held that payments made under the terms of a contract as salary in lieu of notice should be treated as salary and not compensation for loss of office.

Conclusion:
The Tribunal concluded that the lump sum ex-gratia amount received by the assessee should be treated as salary received in advance and not as compensation for termination of employment. Therefore, the assessee was entitled to relief under Section 89(1) read with Rule 21A(2) of the Income Tax Rules, 1962. The appeal filed by the assessee was allowed, and the AO was directed to allow the claim of the assessee accordingly.

Final Order:
The appeal filed by the assessee was allowed, and the AO was directed to allow the claim of the assessee under Section 89 read with Rule 21A of the Income Tax Rules, 1962. The order was pronounced in the open court on 22.04.2022.

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