Smt. Supriya Nagendla Vs ITO (ITAT Hyderabad)
Severance Compensation Pay Taxable: Post-2002 Sec.17(3)(iii) Amendment Covers All Payments on Cessation of Employment -Profits in Lieu of Salary
This appeal concerned the taxability of severance compensation of Rs.26,97,912/- received by Assessee from her employer, Monsanto Holdings Pvt. Ltd., upon cessation of employment. Assessee filed her return declaring total income of Rs.25,10,760/- but disclosed only Rs.26,58,124/- as salary, although Form 24Q reflected gross salary of Rs.61,29,902/-. During scrutiny, AO found that Assessee had treated severance compensation of Rs.26,97,912/- as exempt income. AO held that u/s 17(3), severance pay is “profits in lieu of salary” unless specifically exempt u/s 10, & therefore added the full amount, assessing income at Rs.52,08,672/. CIT(A) confirmed the addition.
Before Tribunal, Assessee argued that the severance compensation was a capital receipt arising from corporate restructuring, representing loss of employment & loss of source of income. She relied on decisions of Coordinate Benches in Sudhakar Ratan Shanker & Samik Pankajbhai Parikh, where severance compensation was treated as capital. Tribunal examined these precedents & noted that both were based on the Gujarat High Court judgment in Arunbhai R. Naik, which applied to AY 1994-95—prior to the statutory amendment brought by Finance Act, 2001. Tribunal emphasized that the insertion of sec.17(3)(iii) with effect from 01.04.2002 substantially expanded the definition of “profits in lieu of salary” to include any amount received by an employee, whether in lump sum or otherwise, after cessation of employment, unless covered by the specific exemptions u/s 10.
