Case Law Details
Sudhakar Ratan Shanker Gautam Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that the severance compensation received by the employee is a capital receipt and the same is not chargeable to tax under Section 17(3) of the Income-tax Act, 1961.
Facts- The assessee, an individual, was employed with You First Money Express Private Limited, which was subsequently acquired by Ebix Money Express Private Limited. Following this acquisition, the assessee’s employment was terminated on 26th October 2017, and he received a severance compensation of Rs.15,50,905/- which was claimed as a capital receipt not chargeable to tax in the return of income filed for AY 2018-19.
AO, in the order dated 19/01/2021, treated this amount as “profits in lieu of salary” u/s. 17(3) of the Act, and added it to the total income of the assessee, leading to an assessed income of Rs.22,80,695/-. CIT(A) confirmed the addition. Being aggrieved, the present appeal is filed.
Conclusion- Under Section 17(3), “profits in lieu of salary” is a key provision that seeks to tax certain payments received by an employee in connection with the termination of employment. On the other hand, capital receipts, especially in the context of employment, typically relate to compensation for the loss of a source of income and are generally not taxable, unless specified. This distinction is critical in determining whether a severance payment or other termination-related compensation is subject to tax as salary income or can be treated as a non-taxable capital receipt. Section 56(2)(xi), introduced w.e.f. 1st April 2019, deals with compensation received or receivable in connection with the termination or modification of terms of employment contracts. However, this amendment applies to assessment years starting from AY 2019-20 onwards. Since the current assessment year is AY 2018-19, the amendment has no bearing on the current case.
Held that the severance compensation of Rs.15,50,905/- received by the assessee is a capital receipt, not chargeable to tax under Section 17(3) of the Income-tax Act, 1961. The order of the CIT(A) is set aside, and the addition made by the AO is deleted.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the assessee against the order dated 16/03/2024 passed by the Commissioner of Income Tax (Appeals) (hereinafter referred to as “CIT(A)”), National Faceless Appeal Centre (NFAC), Delhi, for the Assessment Year(A.Y.) 2018-19. The appeal emanates from the assessment order passed by the Assessing Officer (hereinafter referred to as “AO”) under Section 143(3) read with Sections 143(3A) and 143(3B) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), dated 19/01/2021, wherein the AO made an addition of Rs.15,50,905/- as “profits in lieu of salary” under Section 17(3) of the Act.
2. The assessee, an individual, was employed with You First Money Express Private Limited, which was subsequently acquired by Ebix Money Express Private Limited. Following this acquisition, the assessee’s employment was terminated on 26th October 2017, and he received a severance compensation of Rs.15,50,905/- which was claimed as a capital receipt not chargeable to tax in the return of income filed for AY 2018-19 on 31/08/2018. The return of income declared a total income of Rs.7,29,790/-, and the return was processed under Section 143(1) on 01/05/2019.
2.1 The AO, in the order dated 19/01/2021, treated this amount as “profits in lieu of salary” under Section 17(3) of the Act, and added it to the total income of the assessee, leading to an assessed income of Rs.22,80,695/-. The CIT(A), in confirming the addition made by the AO, relied on the provisions of Section 17(3) of the Act, which defines “profits in lieu of salary.” The CIT(A) observed that since the compensation received by the assessee was related to the termination of employment, it should be treated as “profits in lieu of salary” under Section 17(3)(i) of the Act. The CIT(A) rejected the assessee’s contention that the amount was a capital receipt, not chargeable to tax. Furthermore, 3. the CIT(A) disregarded the assessee’s reliance on various judicial precedents, stating that those rulings were not applicable to the facts of the case.
3. Aggrieved by the order of CIT(A), the assessee is in appeal before us with following grounds of appeal:
1. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in making addition of Rs.15,50,905/- as profits in lieu of salary u/s. 17(3) of the Act.2.
2. Both the lower authorities have failed to appreciate that severance compensation of Rs. 15,50,905/-received by the appellant is a capital receipt not chargeable to tax.3.
3. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.4.
4. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in levying interest u/s. 234A/B/C/D of the Act.
5. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in initiating penalty proceedings u/s. 270A of the Act.
6. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
3.1 There has been a delay of one day in filing this appeal before us. The assessee filed an affidavit along with the application for condonation of delay, stating that the delay occurred due to a clerical oversight. The papers were handed over to the clerk of the Chartered Accountant on 15/05/2024, the due date for filing the appeal. However, at the time of filing, it was noticed that one of the copies of the appeal memo was not signed. Consequently, the signature was obtained the next day, causing a delay of one day.
4. The learned Departmental Representative (DR) did not object to the condonation of the delay. In light of the reasons stated in the affidavit and the absence of any objection from the DR, we are satisfied that the delay is neither intentional nor willful. Therefore, we condone the delay and proceed to adjudicate the appeal on merits.
5. During the course of hearing before us, the Authorised Representative (AR) for the assessee contended that the amount of Rs.15,50,905/- was received as compensation due to the termination of employment and, therefore, it is a capital receipt. Relying on several judicial precedents, including the decision of the Hon’ble Gujarat High Court in Arunbhai R. Naik vs. ITO [2015] 64 Taxmann.com 216 (Guj), the AR submitted that severance compensation paid voluntarily by the employer is not taxable as salary under Section 17(3) of the Act.
5.1 The AR placed on record the discharge letter from the employer, which clearly stated that the termination was due to redundancy following a business acquisition and not related to job performance. This, the AR argued, supports the contention that the compensation was for the loss of employment, and should be treated as a capital receipt.
5.2 The AR contended that even after insertion of section 56(2)(xi) of the Act with effect from 01-04-2019, the Pune Bench of the Tribunal has decided in favour of assessee in case of Ashok Raghunathrao Kulkarni Vs. ITO [2024] 165 taxmann.com 680.
5.3 The AR placed reliance on following judicial precedents:
1. Shamik Pankajbhai Parikh vs. ITO, Ward 5(3)(1), Ahmedabad [2024] 158 taxmann.com 283.
2. Arunbhai R. Naik vs. ITO [2015] 64 com 216 (Gujarat High Court).
3. Ajay B. Ghose vs. DCIT (ITA No. 1720/Mum/2021).
4. Ashok Raghunathrao Kulkarni vs. ITO [2024] 165 taxmann.com 680 (Pun-Tribunal).
6. The DR supported the orders of the lower authorities and contended that the severance compensation was rightly treated as “profits in lieu of salary” under Section 17(3) of the Act, as the amount was paid due to the termination of employment.
7. We note that the assessee was employed as the Zonal Business Head with You First Money Express Private Limited, which was subsequently acquired by Ebix Money Express Private Limited. Following the acquisition, the assessee’s employment was terminated effective from 26th October 2017, on account of redundancy. As per the letter placed before us, the assessee received a severance compensation of Rs.18,00,000/-, which included pay for notice days, monthly CTC of October 2017, and ex-gratia.
7.1 We have carefully considered the facts of the case, the grounds raised, the submissions of both sides, and the judicial precedents cited. The primary issue in dispute is whether the compensation of Rs.15,50,905/- received by the assessee constitutes a capital receipt or profits in lieu of salary under Section 17(3) of the Act. The assessee has argued that the compensation was voluntary and due to the termination of employment for redundancy, and thus, it is a capital receipt not chargeable to tax.
7.2 We have reviewed the judicial precedents relied on by the AR. These judicial precedents overwhelmingly support the assessee’s case that the severance compensation of Rs.15,50,905/- should be treated as a capital receipt, not taxable under Section 17(3) of the Act. Both the Gujarat High Court and various ITAT decisions have consistently held that voluntary severance payments made without contractual obligation are capital receipts and not subject to tax as profits in lieu of salary. In the present case the severance payment received by assessee was due to redundancy and job termination which should not be taxable as profits in lieu of salary under Section 17(3). The compensation was paid for the loss of employment, not for past services. It is consistently held that payments, when not tied to services rendered, are capital in nature and not taxable as salary income. Since the employer had no obligation to pay further amounts upon termination, the compensation should be deemed a capital receipt and thus not taxable under Section 17(3).
7.3 The Act distinguishes between receipts that are taxable as salary income and those that are considered capital receipts, which are generally not taxable unless explicitly brought within the tax net by specific provisions of the Act. Under Section 17(3), “profits in lieu of salary” is a key provision that seeks to tax certain payments received by an employee in connection with the termination of employment. On the other hand, capital receipts, especially in the context of employment, typically relate to compensation for the loss of a source of income and are generally not taxable, unless specified.
7.4 This distinction is critical in determining whether a severance payment or other termination-related compensation is subject to tax as salary income or can be treated as a non-taxable capital receipt. Section 56(2)(xi), introduced w.e.f. 1st April 2019, deals with compensation received or receivable in connection with the termination or modification of terms of employment contracts. However, this amendment applies to assessment years starting from AY 2019-20 onwards. Since the current assessment year is AY 2018-19, the amendment has no bearing on the current case.
7.5 In view of the above, we are of the considered opinion that the severance compensation of Rs.15,50,905/- received by the assessee is a capital receipt, not chargeable to tax under Section 17(3) of the Income-tax Act, 1961. The order of the CIT(A) is set aside, and the addition made by the AO is deleted.
7.6 Given that the addition under Section 17(3) of the Act is being set aside, the consequential levy of interest under Sections 234A/B/C/D of the Act and the initiation of penalty proceedings under Section 270A do not survive.
8. In the result, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 3rd October, 2024 at Ahmedabad.
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