Income Tax Exemption On The Voluntarily Payment Made By The Employer To The Employee Out Of Appreciation: ITAT

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has held that the payment has been made voluntarily by them out of appreciation for the employee and thus falls outside the rigours of Section 17(3)(iii) of the Income Tax Act.

The two-member bench of R.S. Syal (Vice President) and Partha Sarathi Chaudhury (Judicial Member) has observed that the department could not produce any documents or evidence on record to show that the payment received from the employer was coupled with some legal obligation on the part of the employer to pay the employee.

The assessee/appellant has taken voluntary retirement from Racold Thermo Private Limited, Pune. The assessee has started trading in the business of industrial consumable supply under the name of M/s. Laxmi Enterprises. The assessee received Rs. 47,21,154/- from the company as Ex-Gratia and, from this amount, claimed Rs. 5,00,000 as VRS compensation/termination of service and the balance remaining of Rs. 42,21,154 from Ex-Gratia taken as a capital receipt.

When the matter went before the NFAC, it upheld the findings of the AO by observing that the employer had deducted the TDS on the amount of payment made. The amount of Rs. 42,21,154/- was included in the salary as per Form No. 16 submitted by the assessee. The NFAC also observed that the letter submitted by the assessee stating that the payment received was voluntarily given by the employer had been issued to the assessee only after the case was taken up for scrutiny and notices u/s 143(2) and 143(1) were issued to the assessee.

If the employer intended to treat the payment as a voluntary "ex-gratia‟ payment given out of good will as an appreciation of the employer, the same letter would have been given at the time of the employee's voluntary retirement and no TDS would have been deducted. The payment would not have been included in Form No. 16 given to the assessee by the employer if the payment was voluntary "ex-gratia‟. The letter was signed by the Vice President (Human Resources), whereas Form No. 16 had been signed by the Asstt. General Manager of the company. The amount was brought within the purview of taxation under Section 17(3)(iii) of the Income-tax Act of 1961.

As per section 17(3)(iii) of the Income-tax Act, 1961, any payment received, whether in lump sum or otherwise, by an assessee from any person after cessation of his employment with that person is also considered as profit in lieu of salary and is to be brought to tax accordingly, being inclusively defined as per the Act.

The tribunal noted that the letter that had been issued by the employer clearly stated that the payment of the amount had been made voluntarily to the assessee and was not compensation.

The tribunal set aside the order of the NFAC and directed the A.O. to delete the addition from the hands of the assessee.

Case Title: Mahadev Vasant Dhangekar Versus The Asstt. CIT, NFAC, Delhi

Citation: ITA No. 472/PUN/2022

Date: 03-04-2023

Counsel For Appellant: kshay Chhajed, Rupesh Munawat

Counsel For Respondent: Ramnath P. Murkunde

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