2024 (8) TMI 821 - AT - Income Tax

Denial of relief u/s 89 - compensation received on termination of service - Profits in Lieu of Salary or capital receipt - as submitted to be treated as capital in nature and not falling u/s 17(3) - assessee/ employee resigned voluntarily from service of Pfizer Healthcare India Pvt. Ltd., Aurangabad has accepted the compensation received as capital in nature - HELD THAT - We find merit in the arguments of assessee that when the concerned AOs after reopening of the assessment have treated such compensation as capital in nature and the Revenue has not challenged the same and which has attained finality since no 263 proceedings have been initiated, therefore, the assessee s case being identical to the facts of the other employees of Pfizer Healthcare India Pvt. Ltd., the CIT(A) / NFAC is not justified in sustaining the addition made by the Assessing Officer. See ITO vs. Avirook Sen 2024 (4) TMI 548 - ITAT DELHI wherein held 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. The impugned addition was rightly deleted by the Ld. CIT(A). Thus 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. We, therefore, set aside the order of the CIT(A) / NFAC and direct the Assessing Officer to delete the addition. The grounds raised by the assessee are accordingly allowed.

Summary

Issues Involved:
1. Opportunity for making further legal submissions.
2. Treatment of amounts as Profits in Lieu of Salary.
3. Nature of amounts received under the Settlement Scheme.
4. Classification of amounts as Capital Receipts.
5. Consideration of binding judgments and precedents.

Detailed Analysis:

1. Opportunity for Making Further Legal Submissions:
The appellant argued that the CIT(A) erred by not providing sufficient and reasonable opportunity to make further legal submissions. The CIT(A) issued a single notice and passed the order immediately after receiving written submissions, thus debarring the appellant from making additional crucial legal submissions.

2. Treatment of Amounts as Profits in Lieu of Salary:
The CIT(A) confirmed the decision of the Assessing Officer (AO) treating the amounts of Rs. 18,74,899/- as Profits in Lieu of Salary and denying relief under section 89. The AO noted that the assessee received compensation and other dues totaling Rs. 57,12,674/-, which included Ex-gratia (Severance pay), incentives, EL encashment, Notice pay, etc. The AO treated these payments as additional compensation/severance pay taxable under section 17(3) of the Income Tax Act, 1961, and disallowed the tax relief claimed under section 89.

3. Nature of Amounts Received Under the Settlement Scheme:
The appellant contended that the amounts received from the company under the Settlement Scheme 2019 were not compensation as envisaged under section 17(3). The scheme was voluntary, and the amounts were paid without any obligation or entitlement. The CIT(A) failed to consider the letter from the company submitted during the appellate proceedings, which stated that the amounts were paid voluntarily.

4. Classification of Amounts as Capital Receipts:
The appellant claimed that the amounts should be considered Capital Receipts as they were received due to the premature cessation of employment and permanent loss of the source of income. The CIT(A) did not address this claim and brought nothing on record to refute it. The appellant cited various judgments supporting the classification of such amounts as Capital Receipts.

5. Consideration of Binding Judgments and Precedents:
The appellant argued that the CIT(A) ignored binding judgments from Pune ITAT, Mumbai ITAT, and various High Courts, including the Honorable Supreme Court. The CIT(A) brushed aside these legal citations, holding them not applicable, despite the principle of binding precedence.

Tribunal's Findings:

Opportunity for Making Further Legal Submissions:
The Tribunal noted that the CIT(A) did not provide adequate opportunity for the appellant to make further legal submissions, which was essential for a fair hearing.

Treatment of Amounts as Profits in Lieu of Salary:
The Tribunal found that the AO and CIT(A) erred in treating the amounts as Profits in Lieu of Salary under section 17(3). The Tribunal referred to various judgments, including CIT vs. Ajit Kumar Bose (Calcutta High Court) and ITO vs. Avirook Sen (Delhi Tribunal), which held that ex-gratia payments made voluntarily without any obligation do not constitute compensation under section 17(3).

Nature of Amounts Received Under the Settlement Scheme:
The Tribunal agreed with the appellant that the amounts received under the Settlement Scheme were voluntary and not compensation as envisaged under section 17(3). The Tribunal emphasized that the scheme was voluntary, and the payments were made without any obligation from the employer.

Classification of Amounts as Capital Receipts:
The Tribunal found merit in the appellant's claim that the amounts should be classified as Capital Receipts. The Tribunal noted that in similar cases involving other employees of Pfizer Healthcare India Pvt. Ltd., the respective AOs treated such compensation as capital in nature. The Tribunal also referred to the decision of the Pune Bench of the Tribunal in Mahadev Vasant Dhangekar vs. ACIT, which supported the appellant's claim.

Consideration of Binding Judgments and Precedents:
The Tribunal criticized the CIT(A) for ignoring binding judgments and precedents. The Tribunal emphasized the principle of binding precedence and cited various judgments supporting the appellant's case.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition. The appeal filed by the assessee was allowed, and the grounds raised by the appellant were accepted. The order was pronounced in the open court on 12th August 2024.