Tribunal classifies ex-gratia payment as advance salary, grants relief

The Tribunal determined that the lump sum ex-gratia payment received by the assessee should be classified as "salary received in advance" rather than "compensation for termination of employment." Consequently, the assessee was deemed eligible for relief under Section 89(1) read with Rule 21A(2) of the Income Tax Rules, 1962. The appeal was allowed, directing the Assessing Officer to grant the relief accordingly.

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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 Rs. 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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