Relief under s.89 allowed on VRS compensation; non-speaking dismissal held contrary to s.250(6), appeal restored and allowed

ITAT Pune held in favour of the assessee, overturning the disallowance of relief under s. 89 on compensation received under a voluntary retirement scheme. It found that the CIT(A) erred in dismissing the appeal for non-prosecution without a speaking order on merits, contrary to s. 250(6). Considering the assessee's reasonable cause for earlier non-compliance and following its own consistent precedents in identical VRS cases of ex-employees of the same company and scheme, the Tribunal held the amount to be eligible for relief and allowed the appeal.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the dismissal of the appeal by the first appellate authority for non-prosecution, without a speaking order on merits, was in conformity with the obligation under section 250(6) of the Income-tax Act, 1961.

1.2 Whether the lump sum amount received by the assessee under the employer's financial scheme on closure of the plant and voluntary cessation of employment is taxable as "profits in lieu of salary" under section 17(3)(i) or is a non-taxable capital receipt.

1.3 Consequentially, whether disallowance of relief claimed under section 89(1) on such amount was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Dismissal of appeal for non-prosecution and requirement of speaking order under section 250(6)

Legal framework (as discussed)

2.1 The Tribunal noted the settled legal position that the first appellate authority is required to dispose of an appeal by a speaking order on the merits of the case in compliance with section 250(6) of the Act.

Interpretation and reasoning

2.2 The assessee explained non-compliance before the appellate authority on the ground that the e-notices went into the spam folder of the e-mail account, which was supported by an affidavit. The Tribunal accepted that the assessee had shown sufficient and reasonable cause for non-compliance.

2.3 On perusal of the impugned order, the Tribunal found that the appellate authority had dismissed the appeal for want of prosecution, relying on judicial precedents, but had not adjudicated the grounds on merits and had not dealt with the issues in a speaking manner as mandated by section 250(6).

2.4 Noting that the core issue was already covered by a series of decisions of the same Bench and other Benches on identical facts, and that both sides agreed that the issue was covered, the Tribunal considered it appropriate, in the interest of justice and to avoid prolonging litigation, to itself decide the appeal on merits rather than remand.

Conclusions

2.5 The dismissal of the appeal by the first appellate authority solely for non-prosecution, without a reasoned decision on merits as required under section 250(6), was held to be unsustainable, and the order was set aside.

2.6 The Tribunal proceeded to adjudicate the appeal on merits.

Issue 2 - Taxability of lump sum received under employer's financial scheme on closure of plant: section 17(3)(i) vs capital receipt

Legal framework (as discussed)

2.7 The Assessing Officer had invoked section 17(3)(i) on the footing that the amount received under the employer's scheme on voluntary retirement in full and final settlement constituted "profits in lieu of salary," and, correlatively, held that relief under section 89(1) was not admissible in view of Rule 21A of the Income-tax Rules, 1962.

2.8 The Tribunal referred to and followed its earlier decisions on identical schemes and facts, particularly:

(a) the decision in the case of an ex-employee covered by the same financial scheme of the same employer, where compensation received on cessation of employment due to closure of the manufacturing unit was held to be a capital receipt not falling under section 17(3); and

(b) the further coordinate precedent where similar payments under the same scheme were also treated as capital receipts.

2.9 Those earlier decisions had in turn relied upon:

(a) judicial authority holding that an ex gratia payment made voluntarily without any contractual or statutory obligation of the employer, and not in discharge of a legal right of the employee, does not constitute "compensation" for purposes of section 17(3)(i) and is not "profits in lieu of salary"; and

(b) a Tribunal decision holding that voluntary or ex gratia payments made at cessation of employment, not resting on an obligation in service rules and not paid in lieu of services, are capital in nature and outside section 17(3).

Interpretation and reasoning

2.10 The Tribunal recorded that the material facts were not in dispute: the assessee was an employee of the same company; the plant was being closed; the company had floated a financial scheme offering a beneficial package to permanent employees; opting for the scheme was voluntary; there was no obligation on the employer under the service conditions to make such payment; and the payment was made on cessation of employment due to closure of operations.

2.11 The assessee's contention, consistent with the earlier coordinate bench decisions, was that:

(a) the payment was not in respect of past services nor in discharge of any contractual or statutory liability of the employer;

(b) the payment was made to compensate loss of source of income on account of closure of the employer's plant and consequent loss of employment for the remaining period of service; and

(c) such payment, being made de hors the contract of employment and on a voluntary basis, could not be characterised as "compensation" in connection with termination of employment within the meaning of section 17(3)(i).

2.12 The Tribunal noted that in a series of reassessment orders in cases of other employees of the same employer, who had received similar payments under the same scheme, the Assessing Officers themselves, after examining the judicial position, had accepted such payments as capital receipts not liable to tax and not covered by section 17(3), and such treatment had attained finality.

2.13 The Tribunal further noted that the Revenue had not produced any contrary material or authority to rebut the factual and legal position or to distinguish the present case from the earlier decisions of the Pune Bench involving the same employer and the same financial scheme.

2.14 Respectfully following the earlier binding coordinate bench decisions, and in view of the consistent departmental treatment of similarly placed employees, the Tribunal held that the amount received by the assessee under the financial scheme on cessation of employment due to closure of the plant was a capital receipt and not "profits in lieu of salary" under section 17(3)(i).

Conclusions

2.15 The amount received under the financial scheme on cessation of employment due to closure of the plant was held to be a capital receipt, not chargeable to tax and not covered by section 17(3)(i) as "profits in lieu of salary."

2.16 Consequently, the basis adopted by the Assessing Officer in treating the amount as salary income and in disallowing relief under section 89(1) was rejected.

2.17 The order of the appellate authority sustaining the assessment was set aside, and the Assessing Officer was directed to delete the addition and modify the assessment accordingly.

---