Severance compensation under closure settlement treated as capital receipt, not taxable as salary, with section 89(1) relief allowed.

Compensation received on severance of employment under a voluntary settlement linked to closure of the employer's unit was treated as a capital receipt arising from loss of employment and loss of source of income. The ITAT held that such ex-gratia payment was not salary or profit in lieu of salary, and therefore was not taxable in the employee's hands. On that basis, the addition made by the revenue was deleted and relief under section 89(1) was allowed.

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Issues: Whether the compensation received on severance of employment from the employer was taxable as income or was a capital receipt not liable to tax, with consequential entitlement to relief under section 89(1).

Analysis: The compensation was paid under a voluntary settlement linked to the closure of the employer's unit and the employee's cessation from service. Following earlier Tribunal decisions in identical matters involving similarly placed employees, the payment was treated as ex-gratia in nature and not as salary or profit in lieu of salary. The receipt was held to arise from loss of employment and loss of source of income, and therefore outside the charging treatment adopted by the revenue authorities.

Conclusion: The compensation was held to be a capital receipt not taxable in the assessee's hands, and the addition was directed to be deleted. The relief claimed by the assessee was accordingly allowed.

Final Conclusion: The appeal was allowed and the assessment was set aside to the extent the impugned compensation had been brought to tax.

Ratio Decidendi: A voluntary ex-gratia payment made on cessation of employment pursuant to a settlement for closure of the employer's unit is a capital receipt arising from loss of source of income and is not taxable as salary or compensation for services.

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