Ex-Gratia Payments to Retiring Employees are ‘Profits in Lieu of Salary’: ITAT Pune allows Deduction [Read Order]

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While allowing deduction under Section 37(1) of Income Tax Act to the assessee, Prathamik Shikshak Sahakari Bank Ltd, the Pune bench of the ITAT held that ex-gratia payment made to the retiring employees in recognition of their services are “profits in lieu of salary” even in the absence of any VRS scheme.

Assessee claimed deduction of payment made as ex-gratia payments to prematurely retired employees. Assessee claimed that the ex-gratia payment was made to the employees in recognition of their long term and meritorious services to the bank.  However, AO denied the expenditure in the absence of formulation of any voluntary retirement scheme by the bank. Assessee claimed that the payment was in the nature of profits and in lieu of salary, on which TDS had been deducted.

Assessee failed to secure any relief form the first appellate authority and approached the Tribunal.

Before the Tribunal, assessee relied on the decision of the same bench in the case of Satara District Central Co.Op Bank Ltd. Vs. DCIT wherein it was held that “where the assessee in recognition of the services provided to its retiring employees make certain ex-gratia payments in recognition of their services, which are not based on any scheme or instruction formulated by the employer assessee, then the same partakes the nature of profit in lieu of salary. The relationship between the assessee and retiring employees was admittedly as of employer and employee and the remuneration paid to such employees is part of the salary due to the said employee. Even the ex-gratia payment made by the assessee over and above the remuneration due to the employees partakes the character of profits in lieu of salary to such employee and is duly allowable as an expenditure in the hands of the assessee under section 37(1) of the Income Tax Act

Following the above decision, the bench reversed the orders of the lower authorities and held that the ex-gratia payment made to the retiring employees in recognition of their services was profits in lieu of salary and is duly allowable as expenditure under section 37(1) of the Income Tax Act.

Read the full text of the Order below.

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