Income Tax Appellate Tribunal (ITAT), Ahmedabad bench last week ruled that the amount received by an employee from an employer as a retrenchment compensation while settling an industrial dispute would be eligible for exemption under section 10(10B) of the Income Tax Act 1961.
In the instant case, the assessee was the former employee of a Vadodara based company and the assessee had taken up employment in the company through the formal terms and conditions of the company. During the year 2003, he was transferred out of Vadodara and was asked to join at Mumbai and The costs of proceedings before the Industrial Tribunal were awarded to the assessee amounting to Rs. 5,00,000. The assessee claimed the exemption for the said amount under section 10(10B) of the Act.
During the course of assessment proceedings, the Assessing Officer (AO) denied the claim of the assessee. He was of the view that it was an ex gratia payment and not a compensation and while analyzing the documents and records it has found that the status of the employee was a resigned employee and not a retrenched employee.
Aggrieved by the assessee was on appeal before the tribunal by challenging the denial of the AO against the exemption claimed by the assessee.
After considering the rival submissions of both the parties the tribunal bench comprising of Judicial Member S S Godara and Accountant Member Pramod Kumar held that section 10 (10B) of the Income Tax Act 1961 defines the amount eligible for exemption under this provisions as “any compensation received by a workman under the Industrial Disputes Act, 1947 (14 of 1947), or under any other Act or Rules, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise, at the time of his retrenchment”. Clearly, therefore, an eligible amount has to be in the nature of, inter alia, compensation under the Industrial Dispute Act 1947, and it has to be paid at the time of retrenchment of an employee.
“To us, the takeaway from this judgment seems to be that it is not the form but the substance that matters so far the definition of retrenchment compensation is concerned. Right now we are dealing with an employee who is giving up his source of livelihood under the threat of dislocation, and the hyper-technical interpretations based on technicalities about the wording in the settlement deed, signed by him under these compelling circumstances, is being taken as the understanding about assessee’s actual conduct; that is too pedantic an approach and it cannot meet our approval,” the bench said.
The division bench further observed that while considering the available documents and records it is very clear that the assessee was a retrenched employee and not a resigned employee and the said amount was retrenchment compensation. It was also said that the assessee has satisfied all the conditions which were mentioned in the aforesaid section; hence he would be eligible for exemption.
Before concluding, the bench added that “in our considered view, the conditions of section 10(10B), so far as eligibility for exemption is concerned, is satisfied. That, however, is not the end of the matter. As regards the amount eligible for exemption under section 10(10B), it is specifically provided in the aforesaid section that the amount eligible for exemption will be the least of (i) actual amount received by the assessee; (ii) the amount specified by Central Government i.e. Rs.5,00,000; and (iii) an amount calculated in accordance with the provisions of clause (b) of Section 25F of the Industrial Disputes Act, 1947 i.e. 15 day’s average pay for every completed years of services or part thereof in excess of 6 months. One of the important restrictions on the amount eligible for exemption under section 10(10B) is that it should not exceed fifteen days’ average pay for every completed year of services or part thereof in excess of six months.”
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