Compensation under Early Retirement Scheme cannot be taxed as profits in lieu of salary

Muktabai Ramesh Shelar Vs ACIT (ITAT Pune)

The Income Tax Appellate Tribunal (ITAT), Pune allowed the assessee’s appeal against the order of the Commissioner of Income Tax (Appeals), which had upheld the addition of compensation received under an Early Retirement Scheme (ERS)/Voluntary Retirement Scheme (VRS) as “profits in lieu of salary” under Section 17(3)(i) of the Income-tax Act, 1961.

The assessee, an employee of Colgate Palmolive Ltd., filed the return of income for Assessment Year (AY) 2016-17 claiming relief under Section 89 in respect of compensation received on retirement under the ERS. During limited scrutiny, the Assessing Officer (AO) held that the assessee had opted for the ERS during the relevant previous year and treated the amount received as compensation chargeable under Section 17(3)(i). The AO restricted the relief under Section 89 and disallowed the balance claim. The CIT(A) affirmed the AO’s action, following which the assessee appealed before the Tribunal.

Before the Tribunal, the assessee contended that the amount received under the ERS/VRS was a capital receipt arising from loss of employment and was not taxable as profits in lieu of salary under Section 17(3)(i). Reliance was placed on judicial precedents, including the Tribunal’s earlier decision in Maruti Keshavrao Didhore v. ACIT, where an identical issue had been decided in favour of the assessee.