Ex-gratia VRS payment held non-taxable; arbitrary addition as profits in lieu of salary under sections 17(3)(iii), 10(10C)

ITAT Pune allowed the assessee's appeal and deleted the addition made as "profits in lieu of salary" under section 17(3)(iii) of the Act. The Tribunal held that the ex-gratia amount received from the erstwhile employer, partly claimed as exempt VRS compensation under section 10(10C) and the balance treated as capital receipt, was supported by an employer's letter stating the payment was voluntary and out of appreciation, not compensation. As the Revenue neither challenged the genuineness of this letter nor produced evidence of any legal obligation to pay, invoking section 17(3)(iii) without such inquiry was held arbitrary.

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Issues involved:
The judgment addresses multiple grounds of appeal including the perversity of the order, violation of principles of natural justice, treatment of received amount as income, taxability of payment mode, relief under section 89 of the Income Tax Act, and initiation of penalty proceedings.

Ground No.1:
The appeal challenges the order of the Commissioner of Income Tax as perverse for not considering established case laws, seeking deletion of an addition of Rs. 42,21,154.

Ground No.2:
The appeal argues that the order violated principles of natural justice by not providing justification for disregarding appellant's case laws, praying for deletion of the same addition.

Ground No.3:
Contends that the Assessing Officer erred in treating the received amount as income under the charging section or computation section, requesting deletion of the addition.

Ground No.4:
Questions the taxability of the payment mode as voluntary and not legally obligated, asserting it as a capital receipt not subject to tax, seeking deletion of the addition.

Ground No.5:
Seeks relief under section 89 of the Income Tax Act regarding the amount received by the appellant.

Ground No.6:
Challenges the initiation of penalty proceedings under section 270A, requesting the Assessing Officer to drop the penalty proceedings.

The judgment involves a case where the appellant received an amount from the employer post voluntary retirement, claiming a portion under VRS compensation and the remaining as ex-gratia. The Assessing Officer treated the balance amount as profit in lieu of salary under section 17(3)(iii) of the Income Tax Act, 1961. The National Faceless Appeal Centre upheld this decision based on the employer's deduction of TDS and inclusion of the amount in Form No. 16. However, the appellant contended that the payment was voluntary and not compensation, supported by a letter from the employer. The Tribunal found that without verifying the genuineness of the letter, invoking the Act's provisions for addition was inappropriate. As the employer confirmed the voluntary nature of the payment, the Tribunal directed the deletion of the addition, allowing the appeal.

This judgment highlights the importance of considering the voluntary nature of payments and verifying supporting documents before invoking tax provisions, ensuring fairness and adherence to legal principles in income tax assessments.

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