Voluntary ex-gratia compensation not taxable u/s 17(3)(i). Department has to confine to the grounds taken in appeal – ITAT
Voluntary ex-gratia compensation not taxable u/s 17(3)(i). Department has to confine to the grounds taken in appeal and not permitted to set up altogether a new case.
ABCAUS Case Law Citation:
ABCAUS 3954 (2024) (04) ITAT
Important Case Laws relied upon:
Khanna & Annadhanam vs CIT 258 CTR (Del) 72
CIT vs Deepak Verma
C, N. Badami vs CIT (1999) 240 ITR 263 (Mad)
P. Arunachalam vs CIT (2000)240 ITR 827 (Mad)
Arunbhai R. Naik vs. Income Tax Officer [2015] 65 taxmann.com 216 (Gujarat)
In a recent judgment, ITAT has held that payment of voluntary ex-gratia compensation not taxable u/s 17(3)(i) of the Act. Income Tax Department has to confine to the grounds taken and not permitted to set up altogether a new case and assume his position of CIT under section 263 of the Act
In the instant case, the Income Tax Department had challenged the order passed by the CIT(A) in deleting an addition made by the Assessing Officer (AO) towards amount received by the respondent-assessee from his employer after his termination from service.
The CIT(A) had held that amount received by the assessee from his employer was not salary.
The main point for consideration was as to whether the payment of Rs. 2 crore received by the assessee as lump sum amount after his termination from service and amount received for the purchase of new car, can be treated as profits in lieu of salary as provided u/s 17(3)(i) of the Income Tax Act, 1961 (the Act).
The assessee contended that he received the aforesaid amount of Rs. 2 crore as lump sum amount as a settlement out of court with the employer and voluntary settled the case as the reputation of the assessee was diminished due to extreme harassment and ill treatment caused by the employer. He also argued that the additional amount received from the employer for the purchase of new car could not have been treated as taxable income as prequisite.
The assessee relied on the judgment of the Hon’ble Delhi High Court wherein it had been held that if payment is made as ex gratia or voluntary by an employer out of his own sweet will and is not conditioned by any legal duty or legal obligation, either on sympathetic grounds or otherwise, such payment is not to be treated as profit in lieu of salary under sub clause (i) of section 17(3).
The assessee further submitted that the AO had made the addition by specifically relying on sub-clause (i) of Section 17(3) and at this stage, the dispute was only in respect of the assessment made u/s 17(3)(i) only and prayed to confirm the impugned order passed by CIT(A).
The assessee also relied upon the judgment of the Hon’ble High Court wherein the Court while interpreting Section 17 of the Act, held that payment of ex-gratia compensation received by the employee u/s 17(3) if voluntary in nature without being any obligation on part of employer to pay any further amount to assessee in terms of service rules, it would not amount to compensation in terms of section 17(3)(i).
The Tribunal observed that the AO while making addition u/s 17(3)(i) had relied upon the judgment of Hon’ble Madras High Court in which it had been held that the amount received for encashment of leave salary would be a profit in lieu of salary and taxable under “voluntary Separation Programme”. However, the High Court held as above as there was an existing agreement, whereas there was no such agreement between assessee and his employer in the facts of the present appeal, hence, the facts of the present case were easily distinguishable.
With respect to the argument of Department with respect to the applicability of Section 17(3)(iii) of the Act, the Tribunal noted that as held by the Co-ordinate Bench of ITAT, the scope of arguments of Department has to confine to the grounds taken in the appeal and it cannot be permitted to set up altogether a new case and assume his position as that of CIT under section 263 of the Act.
The Tribunal opined that 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.
Accordingly, the Tribunal held that the impugned addition was rightly deleted by the CIT(A) and dismissed the appeal of the Revenue.
Download Full Judgment ABCAUS 3954 (2024) (04) ITAT Click Here >>
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