TaxTMI 
TaxTMI 
2026 (7) TMI 1296
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....19-20, the assessee received Rs. 54,64,480/- as a full and final settlement on account of his voluntary retirement from his employment with Pfizer India pursuant to Pfizer Healthcare India Private Limited Finance Scheme for employees at Aurangabad, 2019 ("Scheme") which was framed by the company and offered to the assessee due to closure of its plant at Aurangabad. The assessee claimed the said amount as advance salary for the remaining service period and sought relief u/s. 89 of the Act. The Ld. Assessing Officer ("AO") noted that the payment was made under a Voluntary Retirement Scheme (VRS), which is ineligible for claiming relief u/s. 89 of the Act. The Ld. AO further observed certain errors in the assessee's tax computation in Form 10E, where no tax was calculated for the future years. After recomputing, the Ld. AO restricted the relief claimed u/s. 89 of the Act to Rs. 12,82,510/- as against Rs. 18,28,958/- claimed by the assessee in his return of income for AY 2019-20 and accordingly completed the assessment vide his order dated 20.09.2021 passed u/s. 143(3) r.w.s. 144B of the Act. 3. Aggrieved, the assessee filed an appeal before the Ld. CIT(A)/NFAC. During the appellate....
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....amount of Rs. 54,64,480/- received is salary in advance. The Assessing Officer (AO) observed that full and final settlement amount received as Ex-Gratia (Severance Pay) of Rs. 54,64,480/- (Rs.53,52,775/-) is advance salary in respect of the balance period of service. However, the Assessing, Officer recomputed the relief claimed by the appellant u/s. 89 of the Act at Rs. 12,82,510/- based on his observation that basic exemption limit and deduction u/s. VIA cannot be allowed twice in computing relief u/s. 89 of the Act. Accordingly, in the assessment order passed u/s. 143(3) r.w.s. 1448 of the Income Tax Act, 1961 dated 20/09/2021 the total income of the appellant as returned was accepted and relief or Rs. 12,82,510/- was allowed u/s. 89 of the Act. 6.3 During the course of appellate proceedings in initial submission made the appellant has stated that during assessment proceedings he has withdrawn the claim of relief u/s. 89 of the Act made in ITR & computation and alternatively requested the AO to treat/consider the amount received as Ex-Gratia (Severance Pay) of Rs. 54,64,480/- (Rs. 53,52,775/-) as Capital Receipts. The appellant has stated that the amounts received in ter....
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.... the jurisdictional Hon'ble Pune ITAT in the cases of Ashok Raghunathrao Kulkarni in 117/PUN/2024 dated 12.08.2024, Prasad Vijaykumar Kulkarni in 850/PUN/2024 dated 17/09/2024 and Atul Shashikant Garbhe in 863/PUN/2024 dated 17/09/2024 which are cases of Co-employees and the Hon'ble ITAT has accepted the claim of Capital receipts and instructed the AO to delete the additions made u/s. 17(3) of the Act. 6.3.3 The appellant was given hearing notice on 25/06/2025 for enhancement of income by proposing to bring to tax the amount of compensation received of Rs. 54,64,480/- (Rs. 53,52,775/-) under the head 'Income from Other Sources' as per provisions of section 56(2)(xi) of the Income Tax Act, 1961. In reply to the above the appellant has submitted that as per the terms of the Settlement Scheme of the Company there is no termination of employment of the appellant and therefore the provisions of section 56(2)(xi) of the Act are not applicable. The appellant has also again stated that the claim of Capital Receipts has been accepted by various ITAT & High Courts and cited the judgments in the case of ITO vs. Avirook Sen Delhi ITAT - 161 Taxmann.com 462, Mahadev Dha....
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....cial Scheme is not a compensation to fall under the definition of 'profits in lieu of salary' as it is a voluntary payment by the Company and has been received on resignation and therefore does not constitute refrenchment or termination of employment. The appellant has relied on a plethora of judicial pronouncements in support of the above claim made. From the analysis of the judicial pronouncements relied upon by the appellant it is seen that in those cases the Hon'ble Courts and ITATS have held that any voluntary payment made by a company as ex-gratia and received by a person on termination owing to closure of department/company would be a 'Capital Receipt'. However, it is also important to note that all these judicial pronouncements relied upon by the appellant (except in some cases) are related to the A.Y. 2016-17, 2017-18 and 2018-19 or to an assessment year earlier to A.Y. 2019- 20. 6.4.3 By way of the Finance Act, 2018 a new Clause (xi) was inserted in sub section (2) of Section 56 of the Income Tax Act, 1961 w.e.f. 01.04.2019. The provisions of Section 56(1) of the Income Tax Act, 1961 provides that income of every kind which is not chargeable u....
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....either at the instance of the assessee or at the instance of the employer but the words, in connection with' found in sub-clause (i) of clause (3) of section 17 are wide enough to include any compensation received in connection with the termination of the employment of the assessee. Therefore, the Tribunal had come to the correct conclusion in holding that the compensation received by the assessee in connection with the termination of his employment was a profit in lieu of salary within the meaning of sub-clause (1) of clause (3) of section 17. 6.5.1 Similarly, the Hon'ble, High Court of Madras in another case of P. Arunachalam Vs CIT as reported in [2001] 117 Taxman 342 (Madras)/[2000] 241 ITR 827 (Madras) has in the case of an assessee who's services were terminated under a scheme called 'Voluntary Separation Scheme' and assessee was paid certain sum has held that the provisions of section 17(3)(1) are clear that any compensation received at or in connection with the termination of the employment by its employer, is liable to be treated as profit in lieu of salary. It is not disputed that the amount received is compensation and it was received by the ....
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....he Income Tax Act, 1961 is reproduced below for clarity: "(xi) any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto;" The provisions of clause (xi) of section 56(2) of the Act therefore provides that any compensation or other payment received by any person in connection with the termination of his employment will be chargeable to tax under head 'Income from Other Sources' and is applicable for the AY 2019-20. 6.5.4 It will be relevant to point out that the provisions of section 56(2)(xi) of the Act are similar to the provisions of section 17(3)(i) of the Act and the only difference is that it is not restricted only to the compensation but also includes other payments. Thus, the provisions of clause (xi) of section 56(2) of the Act covers not only compensation but also 'Other Payment received by a person in connection with termination of his employment. In view of above, the argument of the appellant that the amounts received of Rs. 53,52,775/- does not constitute compensation losses sign....
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....lthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019. The said clause (ix) is reproduced below for clarity: "(ix) Employees opting for the Scheme shall not raise any dispute whatsoever about their separation from the services of the Company, since such separation arises consequent upon their resignation submitted voluntarily under the Scheme." The above terms in clause (ix) clearly specifies that the separation from the Company is consequent upon resignation submitted voluntarily under the Scheme and the employees opting for the Scheme shall not raise any dispute whatsoever about their separation. 6.6.3 Further, from the application form given by the appellant opting for the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 it is seen that the appellant has voluntarily resigned from his employment with Pfizer Healthcare India Private Limited with effect from February 8, 2019. It can thus be seen that the separation of the appellant from the employment with the Company has occurred on the basis of voluntary resignation given consequent to which, the appellant has received the amount of Rs. 53....
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....ployees at Aurangabad, 2019 clearly tantamount to termination of employment. Accordingly, the receipt of amount of Rs. 53,52,775/- as per the said Financial Scheme is held to be received in connection with the termination of employment of the appellant with the said Company. 6.7 In addition to the claims made regarding compensation and termination of employment the appellant has relied on various case laws to further claim that the amount received under the said Financial Scheme of Rs. 53,52,775/- Is a capital receipt. It would therefore be appropriate to examine the said case laws cited by the appellant to see whether they are applicable in the case of the appellant. 6.7.1 The appellant has relied on the decision of ITO vs. Avirook Sen - Delhi ITAT 0-161-Taxmann.com 462. In the case before Hon'ble Delhi ITAT there was no agreement between assessee and his employer and the amount was received on account of out of court settlement. On such facts and circumstances, it was held by Hon'ble Delhi ITAT that payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of the employer to pay further amount to assessee in....
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....y obligation to pay this amount which would assume the nature of any 'compensation'. The amount is also described as not only exceptionable but ex gratia. It, therefore, clearly partakes the character of voluntary payment and cannot be termed as payment by way of 'compensation'. It is therefore seen that the facts of the appellant's case are totally different from the case before the Hon'ble Delhi High Court and the Assessment Year involved was 2001-02. 6.7.4 The appellant has relied on the decision of Arunbhal Naik vs. ITO - Gujarat High Court-379 ITR 511 (2015). In the case before the Hon'ble Gujarat High Court the assessee was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee in terms of the services rules. The employer, voluntarily at its discretion, agreed to pay the amount in question to the assessee with a view to bring an end to the litigation. There was no obligation cast upon the employer to make such payment and, therefore, the same would not take the colour of compensation as envisaged under section 17(3)(i). The amount in question would, the....
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....Memorandum issued explaining the provision of the Finance Act, 2018.In the Memorandum explaining the provision of the Finance Act, 2018 the intention of inserting said clause (xi) in section 56(2) of the Act is explained as under: Taxability of compensation in connection to business or employment Under the existing provisions of the Act, certain types of compensation receipts are taxable as business income under section28. However, the existing provisions of clause (ii) of section 28 is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation receipts in connection with business and employment is out of the purview of taxation leading to base erosion and revenue loss. Therefore, it is proposed to amend section 28 of the Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be taxable as business income. It is further proposed that any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termina....
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....n 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 therefore, such compensation received was capital in nature and not falling u/s. 17(3) of the Act. However, from the contents of the said order of the Hon'ble Income Tax Appellate Tribunal, Pune 'A' Bench, Pune it is seen that the provisions of section 56(2)(xi) of the Income Tax Act, 1961 which were applicable for the impugned AY 2019-20, were neither brought to the notice of the Hon'ble ITAT during the appellate proceedings nor have been considered by the Hon'ble ITAT before adjudicating the issue in appeal. 6.9.2 In view of above, the observations of the Hon'ble Income Tax Appellate Tribunal, Pune 'A' Bench, Pune in the case of Ashok Raghunathrao Kulkarni dated 12/08/2024 is considered but respectfully inferred that the ratio case of the said decision cannot be applied to the case of the appellant, as it has been rendered without taking into consideration the provisions of section 56(2)(xi) of the Income Tax Act, 1961 which were applicable for AY 2019-20. Similarly, the reliance of the appellant o....
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.... & he has failed to appreciate the fact that the Appellant was not terminated. 3. The Learned CIT(A) has erred by not following & applying the Jurisdictional Judgments of various Co-employees whereby the Hon'ble Pune ITAT has held that all such amounts are not Profits in lieu of Salary & are Capital Receipts. 4. The Learned CIT(A) has erred in interpreting the definition of Termination as per the Industrial Dispute Act 1947. 5. The Learned CIT(A) has erred in following the AO who had erred in not considering and understanding the Financial Scheme Document and failed to arrive at the correct interpretation and the underlying intentions of the Co. towards the appellant and the need for evolving the said scheme of pre-mature retirement of all employees permanently. 6. The Learned CIT(A) has erred by not accepting the Appellant's stand that the said amount received being Capital Receipts in nature, irrespective of the same being obligatory or not on part of the Co. and has erred in not considering that the payments were made de hors any contract of employment & was paid voluntarily & towards loss of source of income for premature termination ....
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.... any compensation or other payment received by the assessee in connection with termination of his employment or the modification of the term and condition relating thereto is taxable as income from other sources. In the instant case in hand, the assessee has voluntarily retired as per the term of settlement entered with the employer i.e. Pfizer India and accordingly it is the case of voluntarily resignation and not termination of employment. The Ld. AR submitted that termination of employment is at the behest of the employer wherein the employer terminates the services of the employee, however, retirement is voluntarily in nature. The Ld. AR submitted that since the assessee has voluntarily retired, provisions of section 56(2)(xi) are not applicable to the facts of the present case. 5.2 Referring to sub-clause 8 of clause 11 of the Financial Scheme for Employees of Aurangabad 2019, dated 09.01.2019 ("Scheme"), the Ld. AR submitted that it is specifically provided therein that the retirement of the employees under the Scheme does not amount to retrenchment or termination of employment by the company. Thus, as per the Scheme there is no termination of employment of the assessee. ....
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.... the attention of the Bench the assessment orders passed in the case of other assessee employees of Pfizer India where they have also received similar amount from the company and the respective Assessing Officer in the reopening assessment for AY 2019-20 had show caused the assessee for making addition u/s. 56(2)(xi) of the Act, however, the said amount has not been added and assessment has been completed by the respective AO treating the same as capital in nature. In view of this, he argued that in the instant case, the amount received by the assessee from Pfizer India on his voluntarily retirement under the Scheme should therefore be treated as capital receipt and addition made by the Ld. AO and confirmed by Ld. CIT(A)/NFAC should be deleted. 6. The Ld. DR, on the other hand, strongly supported the order of the Ld. AO and the Ld. CIT(A)/NFAC. 7. We have heard the Ld. Representatives of the parties and perused the material available on record as well as the paper book(s) filed by the Ld. AR on behalf of the assessee. We have also perused various judicial precedents cited by the Ld. AR. We find that the Ld. AO has rejected the assessee's claim of relief u/s. 89 of the Act amo....
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....bserving as under: "Brief facts of the case: The assessee, Shri Sharad Daulatrao Magar, having PAN: ASHPM1986C, an salaried individual, had filed ITR-1 u/s. 139(1) for AY 2019-20 on 29.07.2019 declaring total income of Rs. 32,03,150/-. Further Rs. 35,54,140/- was shown as Gross Salary. The assessee was employee of M/s Pfizer Healthcare India Pvt Ltd, Aurangabad during FY 2018-19. The company launched VRS beneficial to the employees on planned closure of its unit. The assessee voluntarily resigned from service w.e.f 08.02.2019 and received compensation and out of that compensation he claimed Rs. 30,49,176/- being salary claimed in Advance as exempt u/s. 89 from taxation in his ITR u/s. 139(1) of the Act. ........ 14. The submissions made by the assessee have been examined. As the assessee has submitted corroborative and binding judicial pronouncements in support of his claim that the amount of Rs. 30,49,176/- received by him from his employer at the time of cessation of his employment due to closure of the manufacturing unit was a capital receipt, not subject to tax. The assessee has also placed reliance on various case laws, in support of his abo....
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....that the assessee was entitled to continue in the employment of the company up to any particular age. Under the conditions of service, his services were liable to be terminated on giving three months' notice without assigning any reason. Under the circumstances, it cannot be said that the assessee was entitled to remain in service for any period longer after the requisite notice has been given or that the employer was under any obligation to pay anything to the assessee in connection with the termination of his employment other than the salary for the period of notice. Under the circumstances, in its true nature and character, the payment was ex gratia, that is to say, totally voluntary; it was not compensation which implies some sort of an obligation to pay. 6. In this view, it cannot be said that the amount in question was profits in lieu of salary within the meaning of Clause (3) of Section 17. It was not taxable as such. The finding of the Tribunal that the amount was a capital receipt or that it was payment of a casual and non-recurring nature was in the circumstances not necessary. We, hence, do not express any opinion on it. 7. The question of law refer....
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....f provisions of section 56(2)(xi) of the Act, we find some force in the arguments advanced by the Ld. AR that the provisions of section 56(2)(xi) of the Act would not be applicable in the instant case since as per the Scheme pursuant to which the assessee has received the impugned amount, there is no termination of employment and the assessee has voluntarily retired/resigned from the company. 11. Section 56(2)(xi) of the Act reads as under: "2...[(xi) any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto.]. " 12. Now coming to relevant clause of the Scheme i.e. clause 11 (viii) (placed on page 195 of the paper book) which reads as under: "(viii) All Employees who opt for voluntary retirement under the Scheme will not be entitled to any compensation or notice pay under the provisions of the Industrial Dispute Act, 1947 as their cessation from the employment constitutes "resignation" and does not constitute "retrenchment" or "termination of employment" by the Company". 13. From the conjoint readi....