VRS compensation exemption under section 10(10B) allowed for both installments despite staggered payment schedule

ITAT Chandigarh allowed the assessee's appeal regarding exemption under section 10(10B) for VRS compensation. The assessee received compensation in two installments under a voluntary retirement scheme. While CIT(A) allowed exemption for the first installment, it was denied for the second installment. ITAT held this distinction unjustified, noting the assessee hadn't received salary for months and the VRS was effectively a retrenchment scheme. Following precedent in Sarabjit Singh case, ITAT deleted the disallowance and granted exemption for both installments.

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1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered by the Tribunal in this appeal are:

• Whether the compensation received by the Assessee under the BSNL Retirement Scheme 2019 (referred to as a Voluntary Retirement Scheme or VRS) qualifies for exemption under Section 10(10B) of the Income Tax Act, 1961;
• Whether the exemption under Section 10(10B) is limited to Rs. 5,00,000/- as held by the Assessing Officer and CIT(A), on the ground that the scheme was voluntary and not compulsory as per the second proviso to Section 10(10B);
• Whether the entire compensation amounting to Rs. 30,17,000/- received by the Assessee should be exempted as retrenchment compensation, despite the scheme being labeled as voluntary;
• Whether the denial of exemption for the second installment of compensation under the scheme was justified when exemption was allowed for the first installment;
• Whether the scheme, although termed voluntary, was in fact a retrenchment scheme in disguise, given the financial distress of BSNL and the practical compulsion on employees to accept it;
• Applicability and interpretation of relevant judicial precedents and earlier orders of the Tribunal and High Courts on similar facts concerning exemption under Section 10(10B).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Qualification of Compensation under BSNL Retirement Scheme 2019 for exemption under Section 10(10B)

The legal framework centers on Section 10(10B) of the Income Tax Act, which exempts compensation received by an employee on voluntary retirement from tax, subject to certain conditions and provisos. The second proviso to Section 10(10B) restricts exemption to Rs. 5,00,000/- where the scheme is voluntary and not compulsory.

The Assessing Officer disallowed exemption for Rs. 25,17,000/- of the total Rs. 30,17,000/- received, contending that the scheme was voluntary and hence exemption was capped at Rs. 5,00,000/-. The CIT(A) upheld this view.

The Assessee's counsel argued that despite the nomenclature of "Voluntary Retirement Scheme," the scheme was effectively a retrenchment scheme necessitated by BSNL's financial losses, non-payment of salaries, and technological obsolescence of employees. The scheme was approved by the Central Government as part of a revival plan for BSNL and MTNL, aimed at reducing employee costs. The counsel contended that the compensation should be treated as retrenchment compensation and fully exempt under Section 10(10B).

The Tribunal examined the revival scheme dated 29.12.2019 and noted the Cabinet approval and the circular issued by BSNL inviting options for retirement under the scheme. The Tribunal observed that the scheme was designed to reduce surplus employees and was not a voluntary option in the true sense but a forced retrenchment in the guise of VRS.

The Tribunal relied on the earlier appellate order of the CIT(A) for the assessment year 2020-21, where exemption was allowed for the first installment of compensation received under the scheme. The CIT(A) had referred to the decision of the Hon'ble Madras High Court in a similar case, which was upheld by the Supreme Court by dismissal of the Special Leave Petition, thus attaining finality. The Tribunal also relied on the jurisdictional ITAT Chandigarh Bench's decision dated 20.09.2023, which held that such matters need not be litigated further.

Issue 2: Limitation of exemption to Rs. 5,00,000/- under the second proviso to Section 10(10B)

The Assessing Officer and CIT(A) restricted exemption to Rs. 5,00,000/- on the basis that the scheme was voluntary and not compulsory, invoking the second proviso to Section 10(10B). The Assessee challenged this limitation arguing that the scheme was effectively compulsory due to the financial and operational conditions prevailing in BSNL.

The Tribunal rejected the mechanical application of the second proviso, emphasizing the substance over form approach. It held that the scheme, though labeled voluntary, was in reality a retrenchment scheme approved by the Central Government as part of a revival plan, and employees had no genuine choice given the non-payment of salaries and technological changes.

The Tribunal's reasoning was supported by the fact that the first installment of compensation was allowed exemption in the previous year, and there was no justification to deny exemption for the second installment on the same grounds. This interpretation aligns with the principle that tax laws should be construed to reflect the true nature of transactions rather than their nomenclature.

Issue 3: Exemption of the second installment of compensation

The Assessing Officer disallowed exemption for the second installment of compensation received in the financial year 2020-21. The Tribunal found this disallowance unjustified, especially since exemption was allowed for the first installment under identical circumstances.

The Tribunal noted that the Assessee had not been paid salary for several months, compelling acceptance of the scheme. The second installment was part of the same compensation package and should be treated consistently.

The Tribunal referred to a coordinate bench decision in the case of an employee similarly situated, where compensation received on termination due to retrenchment was held to be a capital receipt and exempt from tax. The Tribunal observed that the amount was paid considering length of service, salary, age, and other factors, and was compensation for loss of job rather than income.

Issue 4: Treatment of competing arguments and application of precedents

The Tribunal carefully considered the Assessing Officer's strict interpretation of the second proviso and the Assessee's argument on the true nature of the scheme. It gave due weight to judicial precedents including:

• The Hon'ble Madras High Court decision upholding exemption under Section 10(10B) for similar schemes;
• The jurisdictional ITAT Chandigarh Bench order dated 20.09.2023, which emphasized finality of the issue;
• The co-ordinate Bench decision dated 06.04.2019 that treated compensation on retrenchment as exempt capital receipt;
• Consistency in treatment of installments of compensation under the same scheme.

The Tribunal rejected the Assessing Officer's contention that the scheme was purely voluntary and the consequent capping of exemption, holding that the substance of the scheme was retrenchment and the compensation was rightly exempt in full.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Respectfully following the decision of the Jurisdictional Hon'ble ITAT, the A.O is directed to allow compensation received by the appellant at the time of VRS as exempt income u/s 10(10B) of the Act."

"When the claim of the Assessee relating to the first installment has been accepted by the Ld. CIT(A), there was no question to reject the claim of the Assessee in relation to second installment of compensation received by the Assessee."

"The amount received by the Assessee was, in fact, the compensation on account of retrenchment."

"The said amount was just a capital receipt in the hands of the assessee. In fact, no part of amount received by the assessee is taxable."

"Such matters need not be litigated any further."

Core principles established include:

• The true nature of a retirement scheme must be examined beyond its nomenclature; a scheme termed voluntary may be compulsory in effect, especially in cases of financial distress and operational necessity;
• Compensation received under a retrenchment or compulsory retirement scheme approved by the Central Government qualifies for exemption under Section 10(10B) in full, not limited by the second proviso when the scheme is not genuinely voluntary;
• Consistency in treatment of installments of compensation under the same scheme is required;
• Compensation for retrenchment is a capital receipt and not taxable as income;
• Judicial precedents and prior Tribunal orders on identical facts are binding and promote finality in litigation.

Final determinations:

• The exemption under Section 10(10B) is allowed for the entire compensation of Rs. 30,17,000/- received under the BSNL Retirement Scheme 2019;
• The second proviso limiting exemption to Rs. 5,00,000/- is not applicable as the scheme was effectively a retrenchment scheme;
• The disallowance of exemption for the second installment of compensation is set aside;
• The Assessing Officer is directed to delete the impugned disallowance and allow full exemption under Section 10(10B).

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