2025 (10) TMI 83 - AT - Income Tax

Full and final ex gratia deemed voluntary and exempt under s.10; addition under s.17(3) deleted

ITAT, Chennai (AT) allowed the assessee's appeal and deleted the addition under s.17(3) treating a full-and-final ex-gratia payment as taxable salary. The ... Profits in lieu of salary u/s 17(3) - Addition being the ex-gratia received from assessee’s employer - Assessee claimed it as exempt income u/s10 as ex-gratia not forming part of the employment contract - CBDT circular No. 573 dated 21.08.1990. HELD THAT:- The assessee is a salaried employee in Pfizer Healthcare India Pvt. Ltd. and received full and final settlement during the financial year 2018-19 on account of closure of unit. The assessee has claimed exemption as exempt income under section 10 of the Act as ex-gratia not forming part of employment contract. However, by referring to the CBDT circular No. 573 dated 21.08.1990, the Assessing Officer disallowed the exemption of ex-gratia amount claimed by the assessee. Similar issue on identical fact was subject matter in appeal before the Pune Bench of the Tribunal in the case of Ashok Raghunathrao Kulkarni v. ITO[2024 (8) TMI 821 - ITAT PUNE] As noted that various courts have held that the payment of ex- gratia received by assessee was voluntary in nature without there being any obligation on the part of the employer to pay further amounts to the assessee in terms of any service rule and would not amount to compensation in terms of section 17(3) of the Act. Accordingly, set aside the order of the ld. CIT(A) and delete the addition made by the AO. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the petition for condonation of delay in filing the appeal should be allowed where the assessee furnished an affidavit explaining the delay and the reasons are found bonafide. 2. Whether an ex-gratia payment received by a salaried employee on cessation of employment (on account of closure of unit and full and final settlement) constitutes 'profits in lieu of salary' under section 17(3) of the Income Tax Act or is an exempt/capital receipt not taxable under that provision or otherwise. 3. Whether reliance on co-ordinate Tribunal and High Court decisions that treat similar ex-gratia payments as voluntary/capital receipts binds the adjudicating authority and requires deletion of additions made by the Assessing Officer. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay Legal framework: Procedural power to condone delay in filing appeals where sufficient cause is shown; requirement that reasons be bonafide and demonstrably prevented timely filing. Precedent treatment: Standard administrative practice and jurisprudence require examination of affidavit and submissions; if reasons are bona fide and unchallenged, delay may be condoned. Interpretation and reasoning: The Tribunal examined the affidavit and oral submissions, found the stated reasons to be bonafide and to have really prevented timely filing; both parties had opportunity to be heard. Ratio vs. Obiter: Ratio - where an appellant furnishes a credible affidavit explaining delay and the reasons are found bonafide on hearing, the Tribunal will condone delay and admit the appeal for adjudication. Conclusion: Delay of 489 days was condoned and the appeal admitted for adjudication. Issue 2 - Taxability of Ex-gratia Payment: Section 17(3) v. Capital/Exempt Receipt Legal framework: Section 17(3) taxes 'profits in lieu of salary' including compensation for termination where the amount is in lieu of salary; exemption regime under section 10 and tests for characterisation of receipts as capital, voluntary ex-gratia, or remuneration. CBDT Circular No. 573/21.08.1990 provides administrative guidance on classification of ex-gratia/compensation payments. Precedent treatment (followed/distinguished): The Tribunal relied on several coordinate Bench decisions and High Court authority which held that payments characterized as ex-gratia and voluntary, not in discharge of any employer obligation or in lieu of salary, do not fall within clause (3) of section 17. The Tribunal expressly followed a recent co-ordinate Bench decision where similar facts (employees of the same employer receiving settlement on unit closure) led to the amount being treated as capital/voluntary receipt not taxable under section 17(3). The Calcutta High Court ruling was cited to the effect that a truly voluntary ex-gratia payment, not arising from any contractual entitlement, is not 'compensation' within section 17(3). Interpretation and reasoning: The Tribunal examined the factual matrix: cessation of employment due to closure, full and final settlement, and the employer's characterization of the payment as ex-gratia. It noted absence of any service rule or contractual obligation requiring such payment; the payment was voluntary and not paid in lieu of salary or for services rendered. The Tribunal observed that where Assessing Officers in identical cases, including on reassessment, accepted similar receipts as capital and the Revenue did not challenge those conclusions, such finality undermines the basis for sustaining additions in identical cases. The Tribunal found that the CBDT circular reliance by the Assessing Officer did not mandate treating the payment as taxable where the substance and surrounding circumstances establish voluntariness/capital nature. The Tribunal also relied on reasoning that compensation implies an obligation; absent entitlement to continued service or any employer obligation beyond notice salary, the payment's character is ex-gratia/voluntary and thus outside section 17(3). Ratio vs. Obiter: Ratio - Where a payment on termination is truly ex-gratia, voluntary, and not in discharge of any pre-existing contractual obligation or in lieu of salary, it does not constitute 'profits in lieu of salary' under section 17(3) and is not taxable as such. Further, final administrative decisions in identical factual situations accepted as capital receipts and not challenged by Revenue are relevant and persuasive to dispose of identical claims. Obiter - ancillary observations on policy or broader application beyond like factual matrices (e.g., wider interpretation of CBDT circular) are not necessary for the decision. Conclusion: The addition made by the Assessing Officer treating the ex-gratia as taxable under section 17(3) was set aside. The Tribunal deleted the addition and allowed the assessee's ground, holding the ex-gratia to be voluntary/capital in nature and not profits in lieu of salary. Issue 3 - Precedential Effect of Coordinate Bench and Other Authorities Legal framework: Doctrine of precedents among coordinate Benches and weight of unchallenged final orders in identical factual situations; relevance of High Court decisions on interpretation of 'compensation' under section 17(3). Precedent treatment (followed/distinguished): The Tribunal followed a recent coordinate Bench (Pune) decision that treated similar ex-gratia receipts as capital/non-taxable; it also relied on a Calcutta High Court decision and other Tribunal decisions (including Delhi Bench) that held voluntary ex-gratia payments do not fall within section 17(3). The Tribunal treated prior AOs' acceptance of such receipts in reassessment proceedings and absence of Revenue challenge as matters giving those findings finality and persuasive effect. Interpretation and reasoning: The Tribunal reasoned that where identical factual scenarios led to acceptance of capital character by Assessing Officers and those orders attained finality (no challenge), those outcomes are relevant and persuasive for like cases. Consistent judicial pronouncements that focus on voluntariness and absence of contractual obligation reinforce the legal position that such receipts fall outside section 17(3). Ratio vs. Obiter: Ratio - Unchallenged final determinations in identical factual circumstances and binding High Court pronouncements supporting voluntariness/capital character of ex-gratia payments are valid grounds to set aside Assessing Officer's additions. Obiter - broader comments on the scope of administrative circulars where not central to the specific fact matrix. Conclusion: Reliance on coordinate Bench and High Court decisions was appropriate; such authorities supported deletion of the addition and required that the Assessing Officer accept the ex-gratia as not taxable under section 17(3). Overall Disposition Having condoned delay, and on merits concluding that the ex-gratia payment was voluntary/capital in nature and not 'profits in lieu of salary' under section 17(3), the Tribunal set aside the orders sustaining the addition and allowed the appeal by deleting the addition made by the Assessing Officer.