Case Law Details
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.
The Tribunal noted that in Maruti Keshavrao Didhore, it had followed its earlier decision in Shrikant Anantrao Zori, which in turn relied on several decisions of coordinate Benches and the judgment of the Calcutta High Court in CIT v. Ajit Kumar Bose. Those decisions held that ex gratia payments made voluntarily by an employer, without any contractual or statutory obligation, do not constitute “compensation” within the meaning of Section 17(3)(i). The Tribunal also referred to the Delhi Bench decision in ITO v. Avirook Sen, which held that voluntary ex gratia payments made on cessation of employment do not amount to compensation taxable under Section 17(3)(i).
The Tribunal further observed that, in several reassessment proceedings involving similarly placed employees of Pfizer Healthcare India Pvt. Ltd., the Assessing Officers had accepted identical payments received on cessation of employment as capital receipts and had not treated them as taxable under Section 17(3)(i). Those assessments had attained finality, and no contrary material had been produced by the Revenue.
Following the judicial precedents and in the absence of any contrary material from the Revenue, the Tribunal held that the issue was covered in favour of the assessee. It observed that the facts and legal position were identical to those considered in the earlier decisions. Accordingly, it set aside the order of the CIT(A) and directed the Assessing Officer to delete the addition made by treating the ERS/VRS compensation as profits in lieu of salary under Section 17(3)(i). The assessee’s appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT PUNE
The assessee has filed the appeal against the order of the ACIT/JCIT(A), Panaji passed u/sec 143(3) and 250 of the Income Tax Act. The assessee has raised the grounds of appeal challenging the order of the CIT(A) sustaining the addition of compensation received as profit in lieu of salary u/sec 17(3)(i) of the Act made by the assessing officer.
2. The brief facts of the case are that, the assessee is an employee of Colgate Palmolive Ltd. and has earned income from salary and income from other sources. The assessee has filed return of income for the Assessment Year 2016-17 disclosing a total income of Rs. 31,91,060/- and the return of income was processed u/sec 143(1) of the Act. Subsequently, the case was select for the limited scrutiny under the CASS for claiming large relief u/sec. 89 of the Act. The Assesseing Officer( A.0 )has issued notice u/sec. 143(2) &142(1) of the Act. In response to the notice, the assessee has filed the detailed submissions substantiating the claim. The A.0 find that the assessee has claimed the relief U/sec 89 of the Act as he has taken a voluntary retirement from Colgate Palmolive (India) Ltd. in the previous year and the assessee has filed documents explaining that the assessee has not opted for voluntarily retirement and also filed the various documents and submissions. Whereas, the AO has dealt on the provisions of Section 89 of the Act and observed that the assessee has opted for ERS during the previous year 2016-17 and the payment received by the assessee is a compensation and the relief has to be claimed u/sec89 r.w.r21A(1)(c) of the Act and has restricted the claim u/sec 89 of the Act to Rs. 2,55,337/- and disallowed the relief to the extent of Rs.5,93,468/- and passed the order u/sec143(3) of the Act dated 16.12.2018.
3. Aggrieved by the order of the Assessing Officer, the assessee has filed an appeal before the CIT(A) whereas the CIT(A) has considered the grounds of appeal, submissions of the assessee and findings of the AO but sustained the action of the .AO and dismissed the assessee’s appeal. Aggrieved by the order of the CIT(A), the assessee has filed the appeal before the Hon’ble Tribunal.
4. At the time of hearing, the Ld.AR submitted that the CIT(A) has erred in overlooking the submissions and provisions of the Act. Further the Ld.AR mentioned that the assessee has received compensation under the ERS/VRS Scheme from his employer at the time of retirement is in the nature of capital receipt and exempt from tax. and not chargeable to tax under profit in lieu of the salary u/sec 17(3)(i) of the Act. The Ld.AR substantiated the submissions with the judicial decisions and prayed for allowing the appeal .Per Contra, the Ld. DR relied on the order of the CIT(A).
5. We heard the rival submissions and perused the material on record. The sole matrix of the disputed issue envisaged by the Ld.AR that the CIT(A) has erred in sustaining the action of the AO treating the amount of compensation received under the ERS/VRS Scheme from his employer is chargeable to tax under profit in lieu of the salary u/sec17(3)(i) of the Act. We find the Hon’ble Tribunal in the case of Maruti Keshavrao Didhore VS ACIT, Circle-1, Aurangabad (I.T.A. No. 449/PUN/2024 for A.Y. 2016-17 dated 22.05.2025 has dealt on the similar issue at Para 8 to 13 of the order and allowed the claim of the assessee read as under:-
“8. We have heard Ld. Representatives of the parties and perused the material on record and paper book(s) filed on behalf of the assessee. The facts of the case are not in dispute. The Ld. AO has not accepted the claim of the assessee that the impugned amount is in the nature of capital receipts received by the assessee on loss of employment and not taxable as compensation received on termination of service under the provisions of sec 17(3)(i) of the Act. The Addl/JCIT(A) has upheld the action of the Ld. AO observing that the claim that the receipt is capital in nature and exempt from tax is untenable as it is proven to be a severance compensation paid at the time of ERS/ VRS to the assessee which is squarely covered by the provisions of section 17(3)(i) of the Act, for the reasons reproduced in the paragraph(s) above. Before us, the Ld. AR has submitted that the issue “whether the amount received by the assessee under VRS scheme is in the nature of capital receipt and not profit in lieu of salary” has been decided by the Co-ordinate Bench of the Pune Tribunal in favour of the assessee in the case of Shrikant Anantrao Zori (supra) under the identical set of facts. The Ld. DR has not objected to the above contention of the Ld. AR has also not brought on record any contrary material to refute the submission of the Ld. AR.
9. We have perused the order of the Pune Tribunal in the case of Shrikant Anantrao Zori (supra) and find that the Tribunal in turn relying on various other decisions of the Coordinated Bench(es) of the Tribunal including the decision in the case of Mahadev Vasant Dhangekar (supra) as well as the decision of the Hon’ble Calcutta High Court, has decided the impugned issue in favour of the assessee under the similar set of facts. The relevant observations and findings of the Tribunal in the said order are reproduced below:-
“8. We have heard the Ld. Representatives of the parties and perused the material on record. The facts are not in dispute. Admittedly, the assessee was a salaried employed of Pfizer Healthcare India Private Limited, Aurangabad during the AY 2020-21 and was covered by the Financial Scheme 2019 of the company for employees at Aurangabad. We have perused the order of the Tribunal in the case of Ashok Raghunathrao Kulkarni (supra) wherein the Tribunal has set aside the order of Ld. CIT(A)/ NFAC and directed the Ld. AO to delete the impugned addition. The relevant findings and observations of the Tribunal in the case of Ashok Raghunathrao Kulkarni (supra) is as under:
“12. The Ld. Counsel for the assessee referred to the Financial Scheme for the employees at Aurangabad of Pfizer Healthcare India Pvt. Ltd., copy of which is placed at pages 73 to 83 of the paper book and drew the attention of the Bench to the following clauses:
“I. PREAMBLE
i. Pfizer Healthcare India Private Limited (the “Company”) has decided to cease manufacturing in its plant located at Plot No L8 (part), L-9 & Gut Nos 36, 37, 38, MIDC, Waluj, Aurangabad – 431136 (“Plant”) with the intention to exit the Plant due to significant long term loss of product demand.
ii. The above decision is bona fide and has been made after an extensive and careful evaluation. The employees of the Plant have been informed of this decision and reasons thereof
iii. The Company is desirous of providing a beneficial settlement to all permanent employees of the Plant. Towards this objective, the Company has taken a decision to offer a financial scheme to its permanent employees at the Plant, on the terms and conditions set out below. The Scheme (as hereinafter defined) is 10 ITA.No.449/ PUN./ 2024 (Maruti Keshavrao Didhore) purely voluntary and it is for each such employee to decide whether or not to opt for the same.
iv. In the event the employees opt to retire voluntarily from their employment with the Company in accordance with the Scheme, their last day of employment with the Company will be February 8, 2019, (unless mutually agreed otherwise in writing) and they will be paid an attractive financial package on the terms and conditions set out below. Those employees who do not opt for the Scheme (as hereinafter defined), will be paid only statutory or contractual dues payable on cessation of employment, provided they are eligible for the same.”
13. Referring to other terms and conditions as per clause (11), the Ld. Counsel for the assessee drew the attention of the Bench to the sub-clause (viii) of the same, which reads as under:
“(viii) All Employees who opt for voluntary retirement under the Scheme will not be entitled to any compensation or notice pay under the provisions of the Industrial Dispute Act, 1947 as their cessation from the employment constitute “resignation” and does not constitute “retrenchment” or “termination of employment” by the Company”.
14. Referring to the provisions of section 17(3) of the Act, the Ld. Counsel for the assessee submitted that the same are not applicable to the facts of the assessee, which reads as under:
“17(1). . . .
17(2). . . .
(3) “profits in lieu of salary” includes—
(i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;
(ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation.—For the purposes of this sub-clause, the expression “Keyman insurance policy” shall have the meaning assigned to it in clause (10D) of section 10;
(iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person—
(A) before his joining any employment with that person; or (B) after cessation of his employment with that person.”
15. So far as sub-clause (ii) is concerned, the Ld. Counsel for the assessee referring to the various decisions submitted that this clause is also not applicable. He submitted that the amount received 11 ITA.No.449/ PUN./ 2024 (Maruti Keshavrao Didhore) by the assessee is not a compensation but on account of loss of pay. Referring to the decision of the Hon’ble High Court of Calcutta in the case of CIT vs. Ajit Kumar Bose (1987) 165 ITR 90 (Cal), he submitted that the Hon’ble High Court has held that where the conditions of service clearly stipulated that the assessee’s services could be terminated at any time on giving three months notice and there was no obligation on the employer to pay anything to the assessee in connection with the termination, payment made ex-gratia, therefore, totally voluntary and not compensation which implies some sort of obligation to pay and cannot be taxed as profits in lieu of salary within meaning of section 17(3) of the Act. Referring to the copy of letter of probation dated 20.07.2020 he drew the attention of the Bench to column 14 of the same which reads as under:
“14. Notice Period :
During the period of probation, your employment can be terminated without any notice or assigning any reason thereof on either side. On confirmation your employment can be terminated by one month’s notice in writing or pay in lieu thereof on either side.”
16. He accordingly submitted that the decision of the Hon’ble High Court of Calcutta cited (supra) is squarely applicable to the assessee.
17. The Ld. Counsel for the assessee referring to the decision of the Pune Bench of the Tribunal in the case of Mahadev Vasant Dhangekar vs. ACIT (2023) 149 com 170 (Pune-Trib.) submitted that the Tribunal in the said decision has held that where the assessee had received Rs.47.21 lacs from the erstwhile company as ex-gratia and letter has been issued by the employer which clearly stated that payment of amount has been made voluntarily to the assessee and was not compensation without establishing letter as non-genuine or without examining sanctity of payment made simply invoking provisions of section 17(3)(iii) for making addition was not justified.
18. Referring to the decision of the Delhi Bench of the Tribunal in the case of ITO vs. Avirook Sen (2024) 161 com 462 (Delhi – Trib.), he submitted that the Tribunal in the said decision has held that where the assessee has received certain amounts as lump sum amount after his termination from the service as a settlement out of court with his employer and said payment was voluntary in nature without there being any obligation on part of employer to pay further amount to assessee in terms of any service rule, such payment would not amount to compensation in terms of section 17(3)(i).
19. Referring to the various other decisions as per case law compilation, he submitted that the amount received by the assessee cannot be termed as compensation in terms of section 17(3)(i).
20. The Ld. Counsel for the assessee submitted that in case of the following employees where they have also received similar amounts from Pfizer Healthcare India Pvt. Ltd., the said amounts have not been added by the respective AOs in the reopening assessments treating the same as capital in nature……..
21. He accordingly submitted that the CIT(A) / NFAC is not justified in sustaining the addition of Rs.57,12,673/ -.
22. The Ld. DR on the other hand heavily relied on the order of CIT(A) / NFAC.
23. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case rejected the claim of relief u/s 89 of the Act of Rs.18,74,899/ – on income of Rs.57,12,674/- treating the same as income u/s 17(3) of the Act. We find the CIT(A) / NFAC upheld the action of the Assessing Officer, reasons of which are already reproduced in the preceding paragraphs. The CIT(A) / NFAC also rejected the alternate claim of the assessee that such amount being a capital receipt cannot be brought to tax. It is the submission of the Ld. Counsel for the assessee that in case of various other employees who have received similar compensation, the same has been accepted as capital receipt by the respective AOs in reassessment proceedings and no addition has been made. Further, various Co-ordinate Benches of the Tribunal in similarly placed employees have also treated such compensation received on termination of service as capital in nature and not falling u/s 17(3) of the Act.
24. We find the Assessing Officer in the case of Sharad D. Magar, who also resigned voluntarily from service of Pfizer Healthcare India Pvt. Ltd., Aurangabad has accepted the compensation received at Rs.30,49,176/ – as capital in nature by observing as under:
“Brief facts of the case:
The assessee, Shri Sharad Daulatrao Magar, having PAN: ASHPM1986C, an salaried individual, had filed ITR-1 u/s. 139(1) for AY 2019-20 on 29.07.2019 declaring total income of Rs.32,03,150/-. Further, Rs.35,54,140/- was shown as Gross Salary. The assessee was employee of M/ s Pfizer Healthcare India Pvt Ltd, Aurangabad during FY2018-19. The company launched VRS beneficial to the employees on planned closure of its unit. The assessee voluntarily resigned from service w. e. 08.02.2019 and received compensation and out of that compensation he claimed Rs.30,49,176/ – being salary claimed in Advance as exempt u/s 89 from taxation in his ITR u/s 139(1) of the Act.
…….
14. The submissions made by the assessee have been examined. As the assessee has submitted corroborative and binding judicial pronouncements in support of his claim that the amount of Rs.30,49,176/ – received by him from his employer at the time of cessation of his employment due to closure of the manufacturing unit was a capital receipt, not subject to tax. The assessee has also placed reliance on various case laws, in support of his above claim, and court has held as under “The amounts received were due to loss of employment & not recurring in nature & are not paid in lieu of any salary hence it does not come under the preview of sec. 17(3)(i) as amount of compensation. The said amounts have not been paid against any services of the assessee. Hence the same is not compensation as contemplated under the provisions of sec. 17(3)(i).” As the various courts have allowed the claim that the amount received at the time of cessation of his employment due to closure of the manufacturing unit as capital receipt during assessment proceedings in the cases referred by the assessee, the AO’s has duly accepted the above claims of the respective assessee, which are very similar cases as that of the assessee’s instant case. Hence, the reopened assessment proceedings in the case of the assessee, is hereby proposed to be completed by accepting the income returned by the assessee in response to 148.”
25. In the remaining cases also, the respective AOs have treated such compensation as capital in nature. We, therefore, find merit in the arguments of the Ld. Counsel for the assessee that when the concerned AOs after reopening of the assessment have treated such compensation as capital in nature and the Revenue has not challenged the same and which has attained finality since no 263 proceedings have been initiated, therefore, the assessee’s case being identical to the facts of the other employees of Pfizer Healthcare India Pvt. Ltd., the CIT(A) / NFAC is not justified in sustaining the addition made by the Assessing Officer. 26. We further find the Hon’ble Calcutta High Court in the case of CIT vs. Ajit Kumar Bose (supra) has observed as under:
“4. The amount in question was received by the assessee from his employer. It was received by him in connection with the termination of his service. But the question still remains whether it was compensation. Since it was received by the assessee in connection with the termination of his employment, the term “compensation” would be referable to that event. In other words, it is to be seen whether the amount was paid as compensation for the termination or in lieu of the termination of the employment.
5. The letter issued by the employer dated July 3, 1969, stated that the amount was being paid ex gratia. There is nothing to indicate that the assessee was entitled to continue in the employment of the company up to any particular age. Under the conditions of service, his services were liable to be terminated on giving three months’ notice without assigning any reason. Under the circumstances, it cannot be said that the assessee was entitled to remain in service for any period longer after the requisite notice has been given or that the employer was under any obligation to pay anything to the assessee in connection with the termination of his employment other than the salary for the period of notice. Under the circumstances, in its true nature and character, the payment was ex gratia, that is to say, totally voluntary; it was not compensation which implies some sort of an obligation to pay.
6. In this view, it cannot be said that the amount in question was profits in lieu of salary within the meaning of Clause (3) of Section 17. It was not taxable as such. The finding of the Tribunal that the amount was a capital receipt or that it was payment of a casual and non-recurring nature was in the circumstances not necessary. We, hence, do not express any opinion on it.
7. The question of law referred to us in this case, namely: “Whether, on the facts and in the circumstances of the case, the amount of Rs. 24,933 received by the assessee could be treated as income under the charging section or under the section dealing with the computation of income of the assessee ?”
8. is answered in the negative, in favour of the assessee and against the Department.”
27. We find the Delhi Bench of the Tribunal in the case of ITO vs. Avirook Sen (supra) at para 12 of the order has observed as under:
“12. As the payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of employer to pay further amount to assessee in terms of any service rule. it would not amount to compensation in terms of section 17(3)(i) of the Act. The impugned addition was rightly deleted by the Ld. CIT(A). The aforesaid point is accordingly determined against the revenue department. The appeal is accordingly not sustainable as we don’t find any error of law or fact in the impugned order passed by Ld. CIT(A). The department appeal is liable to be dismissed.”
28. The various other decisions relied on by the Ld. Counsel for the assessee placed in the paper book support his case to the proposition that the payment of ex-gratia compensation received by the assessee was voluntary in nature without there being any obligation on the part of the employer to pay further amounts to the assessee in terms of any service rule and therefore, would not amount to compensation in terms of section 17(3) of the Act. We, therefore, set aside the order of the CIT(A) / NFAC and direct the Assessing Officer to delete the addition. The grounds raised by the assessee are accordingly allowed.”
9. Respectfully following the decision in the case of Ashok Raghunathrao Kulkarni (supra) and in the absence of any contrary material brought on record by the Revenue, we set aside the order of the Ld. CIT(A)/ NFAC and direct the Ld. AO to delete the addition. Accordingly, ground Nos. 1, 2, 3, 4 and 5 are allowed.”
12. Considering the facts of the case and the legal position set out above and following the decision of the Coordinate Bench in the case of Shrikant Anantrao Zori (supra) and in absence of any objection/ any contrary material brought on record by the Revenue, we set aside the order of the Ld. CIT(A) and allow the impugned issue in favour of the assessee. The Ld. AO is directed to delete the 15 ITA.No.449/ PUN./ 2024 (Maruti Keshavrao Didhore) addition. Ground Nos.1 to 7 raised by the assessee are accordingly allowed.
13. In the result, appeal of the assessee is allowed.”
6. We considering the facts, circumstances and submissions and ratio of judicial decisions and follow the judicial precedence and accordingly, we set aside the order of the CIT(A) and direct the Assessing officer to delete the addition and we allow the grounds of appeal in favor of the assessee.
7. In the result, the appeal filed by the assessee is allowed.
Order pronounced on this day of 15th May, 2026.
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