The Ahmedabad Bench of Income Tax Appellate Tribunal(ITAT)ruled that the severance compensation of Rs. 15.5 lakhs received by the appellant-assessee was a capital receipt, not taxable under Section 17(3) of the Income Tax Act,1961,and deleted the addition made by the Assessing Officer (AO),emphasizing that the compensation was due to redundancy and unrelated to past services.
Sudhakar Ratan Shanker Gautam,the appellant-assessee,was employed with You First Money Express Private Limited, acquired by Ebix Money Express Private Limited. After his employment ended on 26th October 2017, he received severance compensation of Rs. 15,50,905, claimed as a capital receipt in his(Assessment Year) AY 2018-19 return filed on 31st August 2018, declaring a total income of Rs. 7,29,790. The return was processed under Section 143(1) on 1st May 2019.
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The AO, in the order dated 19th January 2021, treated the severance compensation as “profits in lieu of salary” under Section 17(3), which resulted in an assessed income of Rs. 22,80,695. The Commissioner of Income Tax(Appeals)[CIT(A)] upheld this decision, stating the compensation was related to termination and was taxable as “profits in lieu of salary.” It rejected the assessee’s claim of a non-taxable capital receipt and found the cited judicial precedents inapplicable.
Dissatisfied by the order of the CIT(A) the assessee appealed before the tribunal.
The tribunal noted that the assessee, employed as Zonal Business Head with You First Money Express Private Limited (later acquired by Ebix Money Express Private Limited), was terminated on 26th October 2017 due to redundancy. He received severance compensation of Rs. 18,00,000, which included notice pay, monthly CTC for October 2017, and ex-gratia.
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The key issue was whether the Rs. 15,50,905 compensation was a capital receipt or taxable as “profits in lieu of salary” under Section 17(3). The assessee claimed it was a non-taxable capital receipt due to redundancy.
The tribunal, after reviewing judicial precedents, found that severance payments made without contractual obligation were capital receipts and not taxable under Section 17(3) of the act. The compensation, paid for the loss of employment and unrelated to past services, was deemed non-taxable.
Additionally, Section 56(2)(xi), introduced from 1st April 2019, dealt with compensation in connection with employment termination, but it did not apply to the current case since the assessment year was AY 2018-19.
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The two member bench comprising T.R.Senthil Kumar(Judicial Member) and Makarand V.Mahadeokar(Accountant Member) ruled that the severance compensation of Rs. 15,50,905 was a capital receipt, not taxable under Section 17(3), and set aside the CIT(A)’s order, deleting the AO’s addition.
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