Compensation received on termination of employment is not taxable in Income Tax : ITAT

Gunjan Kakkad, AR for the Appellant.Ashok Kumar Suthar, Sr. DR for the Respondent.

ORDER

Siddhartha Nautiyal, Judicial Member. – This appeal filed by the Assessee is directed against the order passed by the learned CIT(A), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 11/08/2023 for the Assessment Year (AY) 2017-18.

2. The assessee has taken the following Grounds of Appeal:-

“Each ground is without prejudice to each other. The grounds of appeal are as under:

Ground No. 1: No adjustment to total income was warranted

1. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [hereinafter referred to as “the ld.CIT(A)” for sake of brevity] has erred in confirming the action of Income-tax Officer Ward 5(3)(1), Ahmedabad (hereinafter referred to as “the Assessing Officer” for sake of brevity) in respect of adjustment made to total income of the Appellant.

2. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in not considering the explanation that was furnished by the Appellant in respect of the adjustments made to the total income.

Ground No. 2: Total income processed under section 143(1) was a mistake apparent on record

3. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in holding that the order passed by the AO is proper and that there is no mistake apparent from record.

4. On the facts and circumstances of the case and in law, the Ld.CIT(A) ought to have appreciated that there is no possibility of the Appellant disclosing any receipt as capital receipt.

5. On the facts and circumstances of the case and in law, the Ld.CIT(A) ought to have appreciated that the Appellant has a right to seek rectification fo an intimation under section 143(1) of the Act under the express provisions of section 154 of the Act and thus, merely because the income-tax return utility and the intimation under section 143(1) of the Act does not provide for separate disclosure should not mean that the Appellant is not entitled to make a claim which is otherwise valid and in accordance with law.

Ground No. 3: Voluntary severance pay/ex-gratia received by the Appellant on account of termination of employment constitutes a capital receipt and thus, not taxable as Income

6. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in effectively holding that voluntary ex-gratia received by the Appellant is taxable under section 17(3)(i) of the Act.

7. On the facts and circumstances of the case and in law, the voluntary ex-gratia payment received by the Appellant cannot be considered as compensation for the purpose of section 17(3)(i) of the Act.

Ground No. 4: Violation of principles of natural justice

8. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in not providing any opp0ortunity of personal hearing before disposing the appeal of the Appellant.

9. On the facts and circumstances of the case and in law, the Ld.CIT(A) has failed to consider the submission of the Appellant in a proper perspective which has resulted into a flaw in the decision making process.

10. On the facts and circumstances of the case and in law, the Appellant submits that the order of the Ld.CIT(A) and that of DCIT CPC deserves to be quashed on account of failure to comply with principles of natural justice.

11. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that the Appellant had made detailed submissions and he has erred in holding that no submissions were filed.”

3. The brief facts of the case are that the assessee filed original return of income on 24/07/2017 declaring total income at Rs. 68,14,800/-. The return was processed by CPC vide order dated 18/10/2017 at Rs. 68,14,800/- and credit of TDS as claimed in the return of income was granted and refund of Rs. 29,170/-was issued to the assessee. Subsequently, the assessee that realized out of the aforesaid return of income filed by the assessee for the impugned assessment year, the same included a sum of Rs. 46,19,364/- which had been given to the assessee by way of severance compensation paid by the employer towards cessation of his employment. The assessee was of the view that in view of several decisions rendered by various courts, including the Hon’ble Jurisdictional Gujarat High Court, such one time compensation received by the assessee from his employers M/s. Areva india Pvt.Ltd. towards Cessation and termination of his employment was a “capital receipt” and hence not chargeable to tax. Accordingly, the assessee filed an application for rectification of the intimation u/s.143(1) of the Act. Thereafter, the assessee filed another letter dated 29-7-2023 before the Assessing Officer, again seeking the rectification of the intimation u/s.143(1) of the Act. However, the application for rectification was rejected by the Assessing Officer on the ground that the amount was not bifurcated by the assessee in the return of income and thus, the same was not a mistake for the purposes of section 154 of the Act. The Assessing Officer held that the aforesaid amount of Rs. 46,19,364/- was not shown as exempt income in the return of income of the assessee and, hence, the intimation u/s.143(1) of the Act cannot be rectified.

4. The assessee filed appeal against the aforesaid order passed by the Ld.AO dismissing the rectification application filed by the assessee. However, in appeal, the ld.CIT(A) dismissed the appeal of the assessee with the following observations:

” 4.3 Facts on record and submissions of the appellant were perused. As rightly noted by the ITO, in the return of income filed by the appellant, no claim has been made regarding any sum as being one time payment from his employer or that it was exempt. As noted by the AO, the appellant had not even bifurcated the income shown under the head Salary into regular salary and or one time payment etc. That being the case, the return filed has been duly processed us. 143(1) by CPC as such since the return did not warrant any adjustment coming within the ambit of section 143(1) of the Act.

4.4. Now, the appellant seeks to make a fresh claim that the income shown under the head “Salary” comprised of certain one-time settlement and that it is exempt from income. These are new facts and new claims which do not arise from the return filed. Further, these fresh claims also entail a long-drawn process of verification of new facts outside the records and also involves seeking third party confirmation from the employer concerned etc., which is clearly outside the scope and ambit of section 154 of the Act.

4.5. It is pertinent to note that the original intimation which was sought to be rectified was issued us. 143(1) of the Act and hence it is not a case of passing of a detailed scrutiny assessment order. When the fresh claim now being sought to be made could not have been examined by the A while processing the return u/s. 143(1) of the Act, the same cannot be done through the subterfuge of rectification proceedings us. 154 of the Act, because of the scope of section 154 cannot go beyond the original jurisdiction itself.

4.6. What the appellant sought in its application u/s.154 to the ITO was to redetermine partially the income shown under the head “Salary” as exempt without furnishing any revised return to that effect. This is not a mistake which was apparent from the return filed by it as it involves a new claim warranting verification of new facts which is possible only after a long-drawn process. This is beyond the scope of original processing us. 143(1) itself and hence cannot be attempted through rectification process us. 154 of the Act. The case laws relied on by the appellant were clearly on different sets of facts, where either the proceedings involved were a detailed scrutiny assessment or condoning the delay in furnished revised return etc., and hence are not applicable to the facts of appellant’s case.

4.7. The Hon’ble Supreme Court in the case of T. S. Balaram,/TO v Volkart Bros (1971) 82 ITR 40 (SC), held that “a mistake apparent on the record” must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record. A look at the records must show that there has been an error and that error may be rectified; Reference to documents outside the records and the law is impermissible when applying the provisions of section 154 [CIT v Keshri Metal (P.) Ltd.(1999) 237 ITR 165 (SC)].

4.8. It is a trite law as laid down by Hon’ble Supreme Court, in the case of State of Uttar Pradesh v. Singhara Singh AIR 1964 SC 358 as reiterated in the case of Chandra Kishore Jha v. Mahavir Prasad [1999] 8 SCC 266, that “if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner’

4.9 It may be pertinent to quote the Hon’ble Bombay High Court in the case of Commissioner of Income-tax v. Shivanand Electronics 209 IT 63 to emphasise the point as follows: “When the Legislature casts a duty on the assessee claiming certain benefit, to comply with requirements which are associated with such benefit, the assessee cannot get the benefit without doing his part of the duty. He cannot be allowed to say that it was for the ITO to ask him to do so. If the assessee does not do his part of the statutory duty, the ITO may proceed to decide the allowability or otherwise of the relief on the basis of the facts and material available before him.”

4.10. For detailed reasons cited as above, the rejection of appellant’s application us. 154 seeking to modify the intimation u/s. 143(1) dated 16-3-2021 by the AO does not warrant any interference on facts and in law. The Grounds raised in this regard fail. COME TAX DEPART

5. Conclusion:

5.1 In the result, the appeal is “dismissed”

5. The ld. counsel for the assessee submitted that firstly, on perusal of the return form (ITR-2) there is no specific column, wherein such income could have been shown as “exempt income”. Secondly, it was submitted that the aforesaid income, which was received by the assessee gratuitously was on account of retrenchment of the assessee due to restructuring of the assessee’s employer-company and the aforesaid payment was paid as a result of termination of the employment of the assessee. The ld. counsel for the assessee drew our attention towards several judicial precedents which have held that such one time compensation paid by the employees towards severance of employees is a “capital receipt” and not taxable in the hands of the employer. Accordingly, it was submitted that it was for the aforesaid reason that the rectification application was filed since the aforesaid amount was not liable to be taxed in the hands of the assessee, in view of several unanimous decisions on this issue in favour of the assessee including the Hon’ble Jurisdictional High Court.

6. In response, the Ld. DR submitted that the employer of the assessee had duly deducted tax on the aforesaid amount as salary income and further even in the return of income filed by the assessee, the aforesaid amount was not separately shown as “exempt income” and the aforesaid amount had been offered to tax by the assessee as a part of salary income itself. Accordingly, the aforesaid order passed u/s. 143(1) of the Act could not have been rectified u/s.154 of the Act since there was no mistake apparent from the record in such order by the CPC.

7. We have heard rival contentions and perused the material on record. In the instant case, we observe that any stage of the proceedings, Department has not challenged that the aforesaid income received by the towards severance of his employment is liable to be taxed in the hands of the assessee as its taxable income. Further, on identical set of facts, the Hon’ble Gujarat High Court in the case of Arunbhai R.Naik v. ITO [2015] 379 ITR 511, the Hon’ble High Court held that where ex-gratia compensation paid to the assessee on his discharge was very voluntary in nature, it would not amount to compensation in terms of section 17(3)(i) of the Act. While passing the order, the Hon’ble Gujarat High Court made the following observations:

“12. It has been contended on behalf of the revenue that the manner of computation of the amount to be paid to the appellant under the settlement, reveals that the same is in the nature of terminal benefits on account of bringing an end to the services of the appellant. In the opinion of this court, the manner of computation of the amount payable to the assessee in terms of the settlement, would not change the character of the payment, inasmuch as, the same being voluntary in nature and without any obligation on the part of the employer, would not amount to compensation in terms of section 17(3)i) of the Act. The Tribunal was, therefore, no justified in holding that the amount of Rs. 3,51,308/-received by the appellant pursuant to the judgment of the High Court was income liable to tax under section 17(3) of the Act.”

7.1 Even in the instant facts, we observe that on perusal of the terms of employment letter of the assessee, the aforesaid amount paid to the assessee as compensation towards discharge of his services was voluntary in nature, as is evident in the terms of employment. Accordingly, in our considered opinion, the case of the assessee was directly covered in his favour by the order passed by the Hon’ble Gujarat high Court in the case of Arunbhai R. Naik (supra). Further, it is also observed that the aforesaid order passed by the Hon’ble Gujarat High Court on 12/10/2015, which was prior to the date of passing of the order u/s.143(1) of the Act dated 18/10/2017 and, hence, would apply to the impugned assessment year under consideration.

7.2 Further, we also observe that in the case of Ajay B. Ghose v. DY. CIT [IT Appeal No. 1720/Mum/2021], the assessee’s employment was terminated by the same employer M/s.Areva India Pvt.Ltd. and the assessee had received an amount of Rs. 74,28,585/- towards severance pay due to the loss of employment from the employer M/s.Areva India Pvt.Ltd. because of shutting down business operation in India. The assessee did not offer the aforesaid amount in the return of income. The assessee received intimation with the addition of severance pay of Rs. 74,28,585/- on account of mismatch of income as per Form No. 26 AS. The assessee filed application for rectification submitting that the aforesaid severance pay received by the assessee was a capital receipt and, hence, not taxable to tax. In appeal, the ITAT held that the aforesaid amount received by the assessee was a capital receipt and, hence, not taxable in the hands of the assessee. While allowing the appeal of the assessee, the ITAT made the following observations:

“11. On applying the ratio of the decision to the present case, the fact remains that the assessee was paid severance pay due to loss of employment because fo shutting down of business operation in India. Further, such payment takes the character of a capital receipt and cannot be considered taxable u/s.173(3)(i) as a compensation. The assessee has received the onetime payment and it is not recurring in nature. We are of the substantiate opinion that the assessee has lost his employment which was continued from the year 2006. The letter dated 31-5-2016 was in respect of severance payment received by the assessee though specifically does not mention the term “ex-gratia” but the fact remains that the assessee has lost his employment at the instance of the employer closing down its business operations in India. We are of the considered view that the receipt of severance pay though the nomenclature is not mentioned as ex-gratia but takes the character of a capital receipt and the payment was made voluntary by the employer for loss of employment, and such capital receipt is not taxable in the hands of the assessee. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition and allow the grounds of appeal in favour of the assessee.

Since we have decided the appeal on merits and allowed in favour of the assessee. Again adjudicating on technical issues will become academic and are left open.

12. In the result, the appeal filed by the assessee is allowed.”

7.3 Accordingly, in our considered view, the case of the assessee is directly covered by the aforesaid decisions, which have on identical set of facts held that the severance compensation received by the assessee on voluntary basis towards termination of employment from his employers is a “capital receipt” and, hence, not taxable in the hands of the assessee. Further, even the Department has not contested the claim of the assessee that the aforesaid amount is not taxable in the hands of the assessee as his income. In the case of Dy. CIT v. Justice Dilip Kumar Seth [2006] 98 ITD 241/101 TTJ 90 (Kol), the ITAT held that the Assessing Officer is well competent to rectify any mistake in the intimation u/s.143(1) of the Act which was brought to his notice by the assessee. Further, the Hon’ble Delhi High Court in the case of Pawan Kumar Aggarwal v. CIT [IT Appeal No. 199/2014] has held that from bare reading of section 154 of the Act, it is apparent that the power of rectification extends to amendment of an intimation or deemed intimation u/s.143(1) of the Act. The Hon’ble High Court further held that this power of rectification enures even after the matter has been considered and decided in any proceedings by way of appeal or revision. It was held that necessarily this power extends even at the stage of the appeal and further appeal to the ITAT. In the case of Zen Tobacco (P.) Ltd. v. Asstt. CIT (Ahd. – Trib.), the assessee had filed its return of income declaring certain income and the same was processed under section 143(1). Subsequently, on verification of assessee’s record, it was noticed that the provision of deferred tax assets of certain amount, which ought to have been deducted from total income, was not deducted but added back to amount of profit and, thus, taxable income was overstated. Therefore, the assessee filed an application under section 154 seeking for rectification of mistake along with the revised statement of income and claimed a refund. The Assessing Officer rejected the application observing that the assessee should have filed a revised return rather than taking recourse to section 154, which was not permissible under the Act. On appeal, the Commissioner (Appeals) dismissed the appeal. On second appeal, the Ahmedabad ITAT held that from the provisions of sections 139(1), 139(5) and 143(1) it is evident that it is not the case that revenue authorities have to accept whatever stated in the return and compute the taxable income mechanically. As per provisions of section 143(1), the concerned revenue authority has to examine whether any claim as made by the assessee is correct or not. This includes understatement and overstatement of the income. If the revenue authority failed to take note of any incorrect claim with regard to total income of the assessee, such failure would necessarily mean mistake apparent from the record. Therefore, following the judgment of the Delhi High Court in Pawan Kumar Aggarwal’s case (supra) and the decision of the Co-ordinate Bench in the case of Justice Dilip Kumar Seth (supra) the order of the Commissioner (Appeals) was directed to be set aside and the Assessing Officer was directed by ITAT to allow the application of the assessee made under section 154 and grant refund amount.

7.4 In view of the aforesaid discussion and the judicial precedents on the subject, the aforesaid amount received by the assessee as voluntary severance compensation is held to be not taxable in the hands of the assessee and especially in the light of the Hon’ble Jurisdictional High Court decision on this issue, the same should not have been taxed in the hands of the assessee as his taxable income and the same was liable to be deleted u/s.154 of the Act.

8. In the result, appeal of the assessee is allowed.