Suryaji Shriram Patekar Vs ACIT (ITAT Mumbai)
Held that employee is eligible for relief u/s 89 on one-time lumpsum ex-gratia amounts payable by the employer as such compensation received is treated as salary received in advance.
Facts- The assessee e-filed his ROI on 30/07/2017 declaring a total income of Rs.58,37,970/-. Subsequently, the assessee filed revised ROI on 22/05/2018 declaring total income of Rs.58,59,880/-. The return was processed u/s 143(1) and thereafter the case was selected for scrutiny. Notice u/s 143(2) was issued on 09-08-2018. Notices u/s 142(1), along with questionnaire were issued from time to time owing to change of incumbent of office and the same were served on the assessee. All the notices have been issued electronically to the assessee and the response of the assessee has also been received electronically.
The submissions made by the assessee electronically have been examined. The case has been selected for limited scrutiny to examine the issue – relief u/s 89.
The assessee has submitted Form 10E in support of his claim of relief u/s 89(1), along with copy of Form 16 issued by the employer, Century Textiles and Industries Ltd who shut down its Worli Textile Mill unit in 2008. Around 6,300 of its 6600 of the mill workers opted for the voluntary retirement scheme, however 275 workers had opposed the closure of the mill. The assessee is one of the 275 who did not opt for the VRS scheme declared by the Company on 13/11/2006.
Notably, the Labour Commissioner and Municipal Corporation imposed certain conditions on the company to safeguard the interest of the 275 workers who had not opted for VRS. Subsequently, individual employees and the company entered into the supplementary agreement and the company agreed to compute the total compensation payable by the company till they attain 63 years of age accordingly in the case of the assessee it was determined to be at Rs.58,59,880/-. The company after considering that these are one-time lumpsum ex-gratia amounts payable to the employee and settled the same after deducting the TDS as per the provision u/s. 192 of the Act.
The AO made an assessment under section 143(3) assessing a total income at Rs. 58,59,880/-. The A.O. allowed relief u/s 89 (1) only to the tune of Rs. 2,97,711/- under Rule 21A (1)(c) by treating the amount received as compensation for termination of service and by spreading over the amount received over a period of last three years. CIT(A) confirmed the assessment. Aggrieved, the assessee filed appeal before ITAT.
Conclusion- The operative portion of the order of this Tribunal in ITA No.1841/Mum/2021 dated 22/04/2022 states that On careful consideration of the facts on record we observe that even though the textile unit was closed on 2008 and assessee has refused to agree the voluntary retirement scheme offered by the company and under protest assessee and similar employees managed to get compensation through Labour Commissioner and as per the directions of the Labour Commissioner, as agreed by the company, the assessee was awarded the compensation for the remaining period of service till the age of 63 years. The basis of compensation calculated by the company and the company also treated the one-time compensation as a salary paid in advance and deducted the TDS on the same, clearly indicates that the compensation received by the assessee is only salary received in advance not as termination compensation even though this was paid in lumpsum as ex-gratia in one go.
Based on Supreme Court judgement in the case of V.D. Talwar V. CIT it is held that we are inclined to treat the compensation received by the assessee as only salary received in advance. Therefore, we direct the Assessing Officer to allow the claim of the assessee u/s. 89 r.w. Rule 21A of I.T. Rules. Accordingly, the appeal filed by the assessee is allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal in ITA No.2095/Mum/2021 for A.Y.2017-18 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-46, Mumbai in appeal No.CIT(A)-46, Mumbai/10364/2019-20 dated 20/09/2021 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 26/12/2019 by the ld. Asst. Commissioner of Income Tax-Circle-34(3), Mumbai (hereinafter referred to as ld. AO).
2. The grounds raised by the assessee are as under:-
“1. On facts, in circumstances of the case and in law, the National Faceless Appeal Centre (NFAC) erred in confirming relief of Rs.2,97,711/- allowed by learned A.O. under section 89(1) of the I.T. Act, 1961 read wit Rule 24A(1)(c).
2. On facts, in circumstances of the case and in law, the National Faceless Appeal Centre (NFAC) ought to have allowed relief under section 89(1) read with Rule 21A(1)(a) amounting to Rs.15,96,688/-.
3. The appellant craves leave to add, alter, modify or delete any of the above Grounds of Appeal.”
3. We have heard rival submissions and perused the materials available on record. The assessee e-filed his return of income on 30/07/2017 declaring a total income of Rs.58,37,970/-. Subsequently, the assessee filed revised return of income on 22/05/2018 declaring total income of Rs.58,59,880/-. The return was processed u/s 143(1) of the IT Act, 1961 and thereafter the case was selected for scrutiny. Notice u/s 143(2) was issued on 09-08-2018. Notices u/s 142(1), along with questionnaire were issued from time to time owing to change of incumbent of office and the same were served on the assessee. All the notices have been issued electronically to the assessee and the response of the assessee has also been received electronically.
3.1. The submissions made by the assessee electronically have been examined. The case has been selected for limited scrutiny to examine the issue – relief u/s 89. The relevant details on this issue have been called for and placed on record. The assessee has submitted Form 10E in support of his claim of relief u/s 89(1), along with copy of Form 16 issued by the employer, Century Textiles and Industries Ltd. A note regarding the background of the case has also been submitted, which is summarized as under.
3.2. M/s Century Textiles and Industries Limited, hereafter referred to as the ‘Company’, after incurring heavy losses shut down its Worli Textile Mill unit in 2008. Around 6,300 of its 6600 of the mill workers opted for the voluntary retirement scheme, however 275 workers had opposed the closure of the mill. The assessee is one of the 275 who did not opt for the VRS scheme declared by the Company on 13/11/2006.
3.3. The Company, in its application to the Labour Commissioner inter-alia offered to pay an ex-gratia amount of compensation to each of the balance 275 employees, provided they accept the closure and termination of their services without agitating the issue or obstructing the development of the entire mill land. The company offered to earmark a piece of land admeasuring 1.08 acres out of the total mill land which would not be developed or otherwise dealt with till the entire amount of all the employees have been paid.
3.4. The said application was decided by the Labour Commissioner vide his order dated 11.01.2008 granting permission to the Company to close down its textile mill unit at Worli. Accordingly, by notice dated 12/1/2008, the unit was closed down and the services of all the 275 employees terminated w.e.f 12/1/2008. The Government of Maharashtra vide letter No.TPB-4308/317/CR/182/08/UD011 dated 30/9/2008 addressed to the Municipal Corporation of Greater Mumbai imposed the following conditions on the Company, to Safeguard the interests of the 275 workers who had not opted for VRS:
i. The plot measuring 1.08 acres was to be reserved for the 275 ex-workers till the last of these workers completes the age of 63 years and till then the plot cannot be sold or developed.
ii. If the Company fails to effect ex-gratia payment to the ex-workers as per the provisions of its undertakings, the Company would not be entitled to sell or develop the said pilot.
3.5. Accordingly, the ex-workers barring a few, entered into individual agreements with the Company confirming the terms and conditions specified above. As per the terms of agreement, between the Company and the individual workers, it was specifically agreed that each of the 275 ex-workmen would be paid an ex-gratia amount per month on the condition that they would not obstruct the development of the entire mill land (except 1.08 acres of land). By the agreement, the ex-worker accepted the closure of the mill and also accepted his consequent termination of service and also agreed that the assessee be treated as left employment and has given up his right of employment. Clause 7 of the agreement also specified that any time in the future, if the second party, ie, the individual worker, decided to accept a lump sum amount in lieu of the amount agreed to be paid, then both parties would be free to settle the same mutually.
3.6. The company entered into a Supplementary Agreement dated 21-112016 individually with the ex-workers with the aim of settling the matter forever whereby, each ex-worker agreed to accept a lump sum amount in lieu of the remaining years of service upto 63 years of age. As per the terms of the agreement, the assessee has agreed to fore-go all rights, title or interest in the earmarked land of 1.08 acres and the Company shall continue to be the absolute owner of the earmarked land. The Company also confirmed that the payment of one time lump sum ex-gratia amount was towards full and final settlement and no claim would lie against any remuneration, compensation, ex-gratia or any other benefits.
3.7. In accordance with the Supplementary agreement dated 06-01-2017, the Company has computed the total dues payable by the Company to the assessee till he attains 63 years of age to be Rs, 57,75,006/-. The company has paid the ‘one time lump-sum ex-gratia amount’ of Rs.57,75,006/- which include TDS Rs.16,30,453/- as per the provisions of Section 192 of the Income Tax Act, 1961. The Company in the said agreement has explained that the onetime lump sum ex-gratia amount is deemed ‘salary’ paid to an ex-employee in advance within the meaning of the provisions of the income Tax Act, 1961, it has therefore, deducted tax at source in accordance with the relevant provisions of the Income Tax Act, 1961, as stated above. Form 16 has been duly issued to the assessee by the Company for the relevant F.Y 2016-17 certifying deduction of tax.
3.8. In the return of income for the A.Y 2017-18, the assessee has claimed relief u/s 89(1) of the Act on the compensation received by him, duly uploading Form 10E along with the ITR filed on the e-filing site. The total income declared as per revised return of income is Rs.58,59,880/-with tax of Rs.33,765. Relief u/s 89(1) of the Act has been claimed at Rs.15,96,688/-. The assessee has also submitted the computation chart of the compensation as provided by the Company. As per the computation chart, for the financial year 2016-17 relevant to Asst Year 2017-18, the assessee received monthly payment as per the terms of agreement up to the month of November, 2016, a total amount of Rs.1,60 647/- is shown to be received by him during the year. The chart also gives a year-wise break-up of the computation of the lump sum amount, on the basis of amount payable to the assessee from Financial Year 2016-17 till Financial Year 2034-35, when he attains 63 years of age.
3.9. Verification of Form 10E uploaded by the assessee reveals that the assessee has claimed relief in-Annexure 1 of the Form, which pertains to arrears or advance of salary as per Sub-rule (2) of Rule 21A of the lncome Tax Rules, 1962. In Table ‘A’ of the Annexure, the assessee has spread over the compensation received amount and claimed it to be payable in Asst Years 2017-18 to Asst Years 2035-36 by computing the tax for the future Asst Years on the basis of tax rates of Asst Year 2017-18. The relief so worked out comes to Rs.15,96.688/-, However, the computation of relief u/s 89(1) of the Act in the case of compensation on termination of employment, is as per Sub-rule (4) of Rule 21A of the lncome Tax Rules (Annexure III of Form 10E).
3.10. Rule 21A which prescribes the mode of computation of relief u/s 89(1) of the Act states that – ‘Where by reason of any portion of an assessee’s salary being paid in arrears or in advance or by reason of any portion of family pension received by an assessee being paid in arrears or, by reason of his having received in any one financial year salary for more than 12 months or a payment which under the provisions of clause (3) of Section 17 is a profit in lieu of salary, his income is assessed at rate higher than that at which would otherwise have been assessed, the relief to be granted under sub-section (1) of Section 89 shall be (a) where any portion of the assessee’s salary is received in arrears or in advance or, any portion of family pension is received by an assessee is arrears, in accordance with the provisions of Sub-rule (2); (c) where the payment is in the nature of compensation received by the assessee, from his employer or former employer at or in connection with the termination of his employment after continuous service for not less than three years and where the unexpired portion of his term of employment is also not less than three years, in accordance with the provisions of sub-rule (4);…”
3.11. The admissibility of assessee’s claim of treating the amount paid by the Company as ‘salary in advance’ or as ‘compensation on termination of employment’ would determine whether the mode of computation of relief u/s,89(1) falls under sub-rule (2) or sub-rule (4) of Rule 21A.
3.12. In order to determine the nature of payment made to the assessee notice u/s 133(6) of the Act was issued to the Company to provide the following information:-
1. Details of payment made to the assessee in F.Y 2016-17.
2. To confirm nature of payment, whether the payment is advance of salary/compensation on termination of employment.
3. In case, the payments are in the nature of advance of salary, please specify the assessment years to which such payments relate.
3.13. The Company by letter dated 18/12/2019 has given the following reply:-
1. Form 16 for the period 01/04/2016 to 31/03/2017, duly highlighting the details of ex-gratia compensation payment made to each of the above assessee and the details of the amount of Tax deducted at source (IDS) and its payment to the credit of Government treasury and attached herewith.
2. The nature of payment made to ex-workers:
The company has paid one time lump-sum-ex-gratia amount to its ex-workers, in lieu of payment till completion of his 63 years of his age. Since the above mentioned one time lump sum ex-gratia amount is deemed ‘salary’ paid to an Ex-employee in advance within the meaning of provisions of the Income tax Act, 1961, accordingly the company has deducted tax at source in accordance with the provisions of section 192 of the income Tax Act, 1961.
3. The payment refers to one time lum-sum ex-gratia amount to its ex-workers, in lieu of payment tit completion of hts 63 years of his age.
3.14. Accordingly, a show cause notice was issued to the assessee on 20/12/2019 asking him to explain why the amount received by him should not be treated as compensation on termination of employments instead of advance of salary as claimed by him.
3.15. The assessment u/s 143(3) was completed on 26/12/2019 assessing total income at Rs. 58,59,880/- as per revised return of income. However, the learned A.O. allowed relief u/s 89 (1) only to the tune of Rs. 2,97,711/- under Rule 21A (1)(c) by treating the same as compensation for termination of service and by spreading over the amount received over a period of last three years.
3.16. The various submissions of the assessee before the lower authorities were summed up by the ld. CIT(A) as under:-
