Chhaganlal Bhimabhai Dangodara Vs ITO (ITAT Ahmedabad)
The tribunal held that compensation received under the BSNL Voluntary Retirement Scheme (VRS) 2019 qualifies as retrenchment compensation and is exempt under Section 10(10B) of the Income-tax Act. The assessee, a BSNL employee, received ₹16,53,076 under a Central Government-approved scheme funded through budgetary support. The tribunal observed that the scheme was a government-driven restructuring measure aimed at manpower rationalisation and not a purely voluntary retirement scheme. It emphasized that the substance of the scheme, including lack of real voluntariness and its objective, determines its nature. Accordingly, such compensation falls within the scope of the second proviso to Section 10(10B) and is not taxable. The tribunal also allowed the claim at the appellate stage despite it not being made in the original return, treating it as a pure question of law. The assessee was held entitled to full exemption and refund of TDS.
Exemption u/s 10(10B) – retrenchment compensation paid under a government approved VRS-Whether the retrenchment compensation received by the assessee under the BSNL Voluntary Retirement Scheme 2019, approved and funded by the Central Government, is exempt from income tax under section 10(10B)
The taxability of ex-gratia or retrenchment compensation received under Government-supported restructuring schemes has already been the subject matter of detailed judicial examination and consistent Tribunal rulings. As discussed in the earlier publication, the settled legal position emerging from the statutory framework of sections 4, 5, 10(10B), 10(10C) and section 17(3) of the Income-tax Act, 1961, read with authoritative judicial precedents, is that compensation paid on account of loss of employment pursuant to Government-driven downsizing or revival schemes partakes the character of a capital receipt and, in any case, is eligible for exemption under section 10(10B) where such schemes are approved by the Central Government. The Chandigarh Benches of the Tribunal in a series of decisions including Dayal Singh v. ITO, Suresh Pal Chauhan v. ITO, Rajeshwar Sharma v. ITO, Sarabjit Singh v. ITO and Martin Ekta v. ITO have consistently held that ex-gratia payments funded through Government budgetary support and not linked to services rendered cannot be brought to tax either as salary or as profits in lieu of salary under section 17(3). Further, the Madras High Court in Hindustan Photo Film Workers’ Welfare Centre v. CIT has affirmed the principle that the true nature of the scheme must be examined on substance, and where separation is a result of financial distress or restructuring, the compensation assumes the character of retrenchment compensation notwithstanding its nomenclature as a voluntary retirement scheme.
