Ex-Gratia Payment Received on Voluntary Retirement Not Taxable as “Profit in Lieu of Salary”: ITAT Deletes Addition [Read Order]

The Pune bench of the Income Tax Appellate Tribunal (ITAT) has held that the ex-gratia payment received by the employee on voluntary retirement cannot be taxed as “Profit in lieu of Salary” under section 17(3)(iii) of the Income Tax Act, 1961.

The assessee, Mr Mahadev Vasant Dhangekar has taken voluntary retirement from Racold Thermo Private Limited Pune. In the relevant year, the assessee received Rs. 47,21,154/- from the company as Ex-Gratia and from this amount claimed Rs. 5,00,000/- u/s 10(10C) VRS compensation/Termination of service and balance remaining amount of Rs. 42,21,154 from Ex-Gratia taken as capital receipt.

The Assessing Officer observed that the employer had deducted the TDS on the said amount of payment made. Dismissing the claim of the assessee, the AO observed that if the employer intended to treat the payment as voluntary “ex-gratia” payment given out of sweet will as an appreciation of the employer the same letter would have been given at the time of voluntary retirement of the employee and no TDS would have been deducted on the said payment and also the payment would not have been included in form No. 16 given to the assessee by the employer. Accordingly, the AO held that the amount is taxable under section 17(3)(iii) of the Income Tax Act, 1961.

Shri R.S. Syal, Vice President and Shri Partha Sarathi Chaudhury (JM) allowed the claim of the assessee holding that the amount was received by the assessee after cessation of his employment with the employer company.

“In the normal course, section 17(3)(iii) of the Act would apply and the payment would be covered within the definition of profit in lieu of salary as brought out by the department. However, in this case, the letter which has been issued by the employer clearly stated that the payment of the amount has been made voluntarily to the assessee and is not compensation. This letter has not been doubted by the department. Neither, the ld. A.O nor the NFAC conducted any independent inquiry regarding the veracity of this letter and none of the authorities have held this letter issued by the employer to the assessee as bogus.”

Deleting the addition, the ITAT held that “without establishing the letter as non-genuine or without examining the sanctity of the payment made simply invoking the provisions of the Act for making addition is not appropriate for a quasi-judicial authority. The revenue should have verified and examined the genuineness of the letter which was produced by the assessee wherein the employer had stated that it is a voluntary payment made as per appreciation for the employee without entering into this exercise simply invoking the provision of the Act is not legally tenable and takes the colour of arbitrariness. The ld. D.R. could not produce any documents/evidence on record to show that the payment received from the employer nor voluntary in nature or that the payment was coupled with some legal obligation on the part of the employer to pay to the employee. No such facts were produced before us. We are of the considered view, therefore, in this case, when the employer itself stated that the payment has been made voluntarily by them out of appreciation for the employee thus falls outside the rigours of section 17(3)(iii) of the Act.”

The assessee was represented by Shri Akshay Chhajed & Shri Rupesh Munawat and Shri Ramnath P. Murkunde appeared for the department.

To Read the full text of the Order CLICK HERE

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