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Compensation for resigning is eligible for tax benefit U/s. 10(10B) as Retrenchment Compensation

Right now we are dealing with an employee who is giving up his source of livelihood under the threat of dislocation, and the hyper technical interpretations based on technicalities about the wordings in the settlement deed, signed by him under these compelling circumstances, is being taken as the understanding about assessee’ s actual conduct;

Vishnu Mohan T Nair Vs. ITO (ITAT Ahmedabad)

Expression ‘retrenchment’ covers termination of service by the employer for any reason whatsoever except (i) as a punishment inflicted by disciplinary action in accordance with the law and (ii) covered by the negative list appended to the definition of ‘retrenchment’. It is not, it cannot be, the case of the revenue that the termination of service is covered by these two clauses. As a matter of fact, case of the revenue is that there is no termination at all as it is a resignation by the employee which has been accepted by the employer and the reliance is placed on the documentation in settlement documents. Such a plea is only fit to be noted and rejected.

Here is a settlement and for a consideration that the assessee has quit employment, and the assessee’s leaving the employment is dependent upon the payment being made by the employer. Resignation is a voluntary and unilateral act; there cannot be a resignation by the employee on payment of a compensation by the employer. Wordings of the arrangements apart, such an arrangement is de facto as also in the eyes of law an arrangement for termination of employment on payment of compensation.

Lets recapitulate the basic facts of this case again. Here is a Vadodara based employee who is transferred to Mumbai and the employee considers such a transfer as an alternation to the terms of employment. He fights this transfer order tooth and nail and even wins the first round of litigation before the Tribunal. The matter does not end there. His employer, obviously with much better resources at his disposal, carries the matter before Honorable High Court. The litigation drags on at Ahmedabad now and with the kind of resources that his employer has his commands and there is every possibility that it will go on for long time. Damocles sword still hangs on his head and four years have passed on since he was transferred to Mumbai.

It is in this backdrop that the employer makes him an offer, which obviously he accepts, that in case the assessee is ready to leave the employment, in addition to all his normal terminal dues, he gets Rs 6,50,000 as ex gratia compensation. In simple words, it is an offer for termination of his employment by the employer with an additional payment of Rs 6,50,0000. In our humble understanding, this is nothing but an offer of termination of employment with an ex gratia payment of Rs 6,50,000- an offer eventually accepted by the assessee.

With all our regards to the findings of the authorities below, we are not inclined to accept this arrangement is a resignation by the employee. As for the emphasis placed on the clause, in the settlement deed, to the effect that ‘the respondent shall, upon receiving the ex gratia amount stand resigned from the post as it stands at the present day, without entering in to dispute whether he would be considered to have resigned from Vadodara or Mumbai”, as we have said before, nothing really turns on this clause as what is to be seen as the factual and legal import of the arrangement rather than the wordings employed therein.

In any case, once we come to the conclusion, on an appreciation of all the relevant factors- including the terms of settlement deed, that it is de facto termination of employment, on payment of agreed compensation, this observation cannot be picked up in isolation and treated as entire arrangements. While on this subject, it is also useful to take note of Hon’ble Supreme Court’s judgment in the case of Mahendra Singh Dhantwal Vs Hindustan Motors Ltd [(1985) 152 ITR 68 (SC)] wherein compensation in lieu of reinstatement was treated as eligible for retrenchment compensation under section 10(10B). To us, the takeaway from this judgment seems to be that it is not the form but the substance that matters so far definition of retrenchment compensation is concerned.

Right now we are dealing with an employee who is giving up his source of livelihood under the threat of dislocation, and the hyper technical interpretations based on technicalities about the wordings in the settlement deed, signed by him under these compelling circumstances, is being taken as the understanding about assessee’ s actual conduct; that is too pedantic an approach and it cannot meet our approval. Let us also not forget that while taking calls on these issues, which deal with employees in the lower rung of hierarchy, we must not be too pedantic or hyper technical in approach. We have to be pragmatic in approach and we must give full effect to the true intent of the public welfare provisions. To us, the arrangement in question is nothing but a termination of employment with the offer of compensation. Viewed thus, the payment in question cannot be anything but a retrenchment compensation.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

1. This appeal calls into question correctness of the order dated 3rd February 2014 passed by the CIT(A) in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the assessment year 2008-09.

2. When this appeal was called out for hearing, learned counsel for the assessee submitted that the short grievance that she would like to press, in this appeal, is against learned CIT(A)’s holding that, on the facts and in the circumstances of the case, the assessee is not entitled to exemption of Rs 5,00,000 under section 10(10B) of the Act.

3. The issue in appeal lies in a narrow compass of facts. The assessee before us is a former employee of a Vadodara based company. The assessee had taken up employment in this company in terms of the appointment letter dated 25thOctober 1990, and this employment was confirmed vide letter dated 26thMarch 1991. It appears that on 21st July 2003, he was transferred out of Vadodara and was asked to join at Mumbai. This transfer, on the peculiar facts of this case, was considered, by the assessee, to be a change in his service condition- a plea which was upheld by the Industrial Tribunal. In its order dated 28th October 2004, the Industrial Tribunal, inter alia, held as follows:

“From the perusal of transfer order, it is abundantly clear that the opponent company has altered the service conditions applicable to the complainant immediately before the commencement of dispute raised in reference (IT) No 6/2003. In this view of the matter, I am of the opinion that opponent company has committed breach of section 33 of the Industrial Dispute act, 1947, and, therefore, the transfer order is quashed and set aside”

4. The costs of proceedings before the Industrial Tribunal were also awarded to the assessee, and quantified at Rs 5,000. The order so passed by the Industrial Tribunal was challenged, by the assessee’s employer, before Honorable Gujarat High Court. On 16thMarch 2005, it appears, certain interim arrangements were approved by Hon’ble High Court. However, when the matter came up for final hearing on 25th June 2007, Honorable High Court was informed that “both the parties arrived at settlement dated 21st April 2007 wherein ex gratia amount is directed to be paid to the respondent at Rs 6,50,000” and the assessee ceases to be in employment of the said employer. Honorable High Court also noted the submission of the employer’s counsel that “amount of provident fund, gratuity, leave encashment and other service benefits, which are available to the respondent will be paid by the petitioner (i.e. the employer) within a period of three weeks from the date of receiving the copy of this order”. All these facts and submissions were taken on record, and, as noted by Honorable High Court, “order passed by the Tribunal was modified to that extent”. It was in this backdrop that the assessee was paid Rs 6,50,000, as an ex gratia amount by the employer, at the point of time of leaving the employment.

5. The assessee claimed exemption under section 10(10B) in respect of the above ex gratia amount that he received. This amount was treated as compensation at the time of retrenchment of the assessee. The Assessing Officer, declined the claim, on the ground that it was (a) an ex gratia payment and not a compensation; and (b) the status of the employee, in terms of the documentation on record, was of a resigned employee and not a retrenched Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. While declining the claim of the assessee, learned CI(A) observed as follows:

“6.3 I have carefully considered the facts and circumstances of the case, the observations of the AO, the submissions of the assessee, material available on record and the judicial pronouncements on the subject. From the perusal of the orders of Industrial Tribunal and Honorable Gujarat High Court, it is clear that the whole dispute before them was on account of assessee’s transfer to Mumbai from Vadodara and not on account of retrenchment of the assessee, as claimed by the assessee. Para 1 of the order dated 28.10.2004 of Industrial Tribunal clearly states that, the complaint was filed, “praying that he should not be transferred to Mumbai. “There was no reference to retrenchment in this order and whole of the order deals with her transfer to Mumbai and not the issue of retrenchment. After the above referred order of the Industrial Tribunal was delivered, assessee’s employer filed a case in Honorable Gujarat High Court, challenging the award passed by the Industrial Tribunal with reference to assessee’s transfer and not with reference to her retrenchment or compensation thereof. The A/R has claimed in para 4.4 (b) of his submission that at this stage, he was terminated, but there is absolutely no evidence of the same. The records do not show that the assessee was ever retrenched/terminated at this stage. This assertion of the A/R is factually incorrect. In para 4.4(c) of his submission, the A/R has also submitted that the Industrial Tribunal had “accepted the plea of the appellant and passed an order after hearing both the parties, to reinstate him and award cost.” Similar factually incorrect assertion has also been made in para 4.5 of assessee’s submission. Even this assertion of the A/R is factually incorrect and amounts to misrepresentation. The assessee’s only plea before the Industrial Tribunal was for quashing her transfer order to Mumbai and “reinstatement” was never an issue before the Tribunal. In the circumstances, the Tribunal could never have and did in fact never, pass an order for assessee’s “reinstatement” as claimed. The operative portion of the Industrial Tribunal’s order dated 28.10.2004 reads as under-

“Transfer order dated 21.0 7.03 passed by the opponent ACNielsen ORG-MARG Pvt Ltd. is here by quashed and set aside.” ‘This order does not deliberate or adjudicate on the issue of “reinstatement” as claimed by A/R.

6.4 It is claimed by the assessee in para 4.3 of his submission that the said amount of Rs. 6,50,000/- was received by him under Industrial Dispute Act, is also factually incorrect. The Industrial Tribunal or Hon ‘ble Gujarat High Court never granted any compensation or monetary award to the assessee. They both only dealt with the issue of transfer of the assessee from Baroda to Mumbai. In any case, no compensation was granted by the Industrial Tribunal to the assessee, as none was sought. The said Tribunal order only quashed assessee’s transfer order to Mumbai and awarded him cost of Rs. 5,000/-. This amount of Rs. 6,50,000/- was received by him as “ex-gratia” as a result of ‘out of court’ settlement of her dispute with his employer. His services were only terminated after he received the said “ex gratia” payment of Rs. 6,50,000/- and it is not in the nature of compensation for retrenchment. The payment is voluntary and as a result of a private settlement between the assessee and his employer and does not have the character of retrenchment compensation. Even the employer, in response to Assessing Officer’s notice u/s 133(6) has clearly submitted that the nature of the payment was “ex gratia” and not “retrenchment compensation”. In any case, the employer was under no legal obligation to pay him the said sum as there was no retrenchment, as claimed.

6.5 A/R’s contention that the assessee was illegally retrenched and he had not resigned is also not borne out by the facts on record. Clause 3(c) of the agreement dated 21.04.2007, which was produced before Honorable High Court, clearly mentions that, “The respondent shall, upon receiving such ex-gratia payment, stand resigned from his post as it stands at the present day, without entering in to dispute of whether they would be considered to have resigned from Vadodara or Mumbai.” Therefore, it is apparent that the assessee was not retrenched, but had deemed to have resigned after receiving the ex-gratia payment. In any case, this issue was never before either the Industrial Tribunal or Honorable Gujarat High Court, therefore, there is no question of their having accepted the same, as claimed by the A/R in para 4.5 and 4.6 of his submission. This assertion is also factually incorrect and is misleading. Since the assessee was not retrenched, the decisions of various Courts/Tribunals, cited by the A/R, do not apply to the facts of the present case. Therefore, it is held that the sum of Rs. 6,50,0007- received by the assessee from his employer was in the nature of “ex-gratia” payment and does not have the character of retrenchment compensation. In view of this, the order of the Assessing Officer in this regard, disallowing claimed exemption u/s 10(10B) of the Act, is upheld. The assessee fails on these grounds of appeal.”

6. The assessee is not satisfied and is in further appeal before us.

7. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

8. The fundamental issue that we have to take a call on is whether or not the amount in question received by the assessee is eligible for exemption under section 10(10B). As we explore this aspect of the matter, we find that section 10 (10B) of the Income Tax Act 1961 defines the amount eligible for exemption under this provisions as “any compensation received by a workman under the Industrial Disputes Act, 1947 (14 of 1947), or under any other Act or Rules, orders or notifications issued there under or under any standing orders or under any award, contract of service or otherwise, at the time of his retrenchment”. Clearly, therefore, an eligible amount has to be in the nature of, inter alia, compensation under the Industrial Dispute Act 1947, and it has to be paid at the time of retrenchment of an employee. As for the amount being in the nature of compensation under the Industrial Disputes Act, it is evident from a plain look at Honorable High Court’s judgment dated 25thJune 2007, a copy of which is placed before us as well, that, while taking note of the payment of Rs 6,50,000 by the employer, it was observed that “order passed by the Tribunal was modified to that extent”. The order passed by the Industrial Tribunal was admittedly under the Industrial Disputes Act 1947, and once it is held that the said order stands modified so as to take into account the payment of, inter alia, payment of Rs 6,50,000 by the employer, the said payment cannot but be treated as a compensation under the Industrial Disputes Act, 1947. The first limb of Section 10(10B) is thus satisfied. The next question then is whether the said compensation can be said to have been paid at the time of retrenchment. In order to find answer to this question, we will have to take a look at the definition of expression ‘retrenchment’ under section 2(oo) of the Industrial Disputes Act. This definition is as follows:

“retrenchments” means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action but does not include-

(a) voluntary retirement of the workman; or

(b) retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or

(bb) termination of the service of the workman as a result of the non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation on that behalf contained therein; or]

(c) termination of the service of a workman on the ground of continued ill-health

9. Quite clearly, the expression ‘retrenchment’ covers termination of service by the employer for any reason whatsoever except (i) as a punishment inflicted by disciplinary action in accordance with the law and (ii) covered by the negative list appended to the definition of ‘retrenchment’. It is not, it cannot be, the case of the revenue that the termination of service is covered by these two clauses. As a matter of fact, case of the revenue is that there is no termination at all as it is a resignation by the employee which has been accepted by the employer and the reliance is placed on the documentation in settlement documents. Such a plea is only fit to be noted and rejected. Here is a settlement and for a consideration that the assessee has quit employment, and the assessee’s leaving the employment is dependent upon the payment being made by the employer. Resignation is a voluntary and unilateral act; there cannot be a resignation by the employee on payment of a compensation by the employer. Wordings of the arrangements apart, such an arrangement is de facto as also in the eyes of law an arrangement for termination of employment on payment of compensation. Lets recapitulate the basic facts of this case again. Here is a Vadodara based employee who is transferred to Mumbai and the employee considers such a transfer as an alternation to the terms of employment. He fights this transfer order tooth and nail and even wins the first round of litigation before the Tribunal. The matter does not end there. His employer, obviously with much better resources at his disposal, carries the matter before Honorable High Court. The litigation drags on at Ahmedabad now and with the kind of resources that his employer has his commands and there is every possibility that it will go on for long time. Damocles sword still hangs on his head and four years have passed on since he was transferred to Mumbai. It is in this backdrop that the employer makes him an offer, which obviously he accepts, that in case the assessee is ready to leave the employment, in addition to all his normal terminal dues, he gets Rs 6,50,000 as ex gratia compensation. In simple words, it is an offer for termination of his employment by the employer with an additional payment of Rs 6,50,0000. In our humble understanding, this is nothing but an offer of termination of employment with an ex gratia payment of Rs 6,50,000- an offer eventually accepted by the assessee. With all our regards to the findings of the authorities below, we are not inclined to accept this arrangement is a resignation by the employee. As for the emphasis placed on the clause, in the settlement deed, to the effect that ‘the respondent shall, upon receiving the ex gratia amount stand resigned from the post as it stands at the present day, without entering in to dispute whether he would be considered to have resigned from Vadodara or Mumbai”, as we have said before, nothing really turns on this clause as what is to be seen as the factual and legal import of the arrangement rather than the wordings employed therein. In any case, once we come to the conclusion, on an appreciation of all the relevant factors- including the terms of settlement deed, that it is de facto termination of employment, on payment of agreed compensation, this observation cannot be picked up in isolation and treated as entire arrangements. While on this subject, it is also useful to take note of Hon’ble Supreme Court’s judgment in the case of Mahendra Singh Dhantwal Vs Hindustan Motors Ltd [(1985) 152 ITR 68 (SC)] wherein compensation in lieu of reinstatement was treated as eligible for retrenchment compensation under section 10(10B). To us, the takeaway from this judgment seems to be that it is not the form but the substance that matters so far definition of retrenchment compensation is concerned. Right now we are dealing with an employee who is giving up his source of livelihood under the threat of dislocation, and the hyper technical interpretations based on technicalities about the wordings in the settlement deed, signed by him under these compelling circumstances, is being taken as the understanding about assessee’ s actual conduct; that is too pedantic an approach and it cannot meet our approval. Let us also not forget that while taking calls on these issues, which deal with employees in the lower rung of hierarchy, we must not be too pedantic or hyper technical in approach. We have to be pragmatic in approach and we must give full effect to the true intent of the public welfare provisions. To us, the arrangement in question is nothing but a termination of employment with the offer of compensation. Viewed thus, the payment in question cannot be anything but a retrenchment compensation.

10. In our considered view, the conditions of section 10(10B), so far as eligibility for exemption is concerned, is satisfied. That, however, is not the end of the matter. As regards the amount eligible for exemption under section 10(10B), it is specifically provided in the aforesaid section that the amount eligible for exemption will be the least of (i) actual amount received by the assessee; (ii) the amount specified by Central Government i.e. Rs.5,00,000; and (iii) an amount calculated in accordance with the provisions of clause (b) of Section 25F of the Industrial Disputes Act, 1947 i.e. 15 day’s average pay for every completed years of services or part thereof in excess of 6 months. One of the important restrictions on the amount eligible for exemption under section 10(10B) is that it should not exceed fifteen days’ average pay for every completed years of services or part thereof in excess of six months This aspect of the matter has not been examined at all. We, therefore, uphold the claim in principle but remit the matter to the file of the AO for examination of the quantification part in the light of the above observation. With these directions, the appeal is allowed in principle but remitted to the file of the Assessing Officer for limited verification as above.

11. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 2nd day of January, 2018.

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