ITO Archives - Tax Heal

In the absence of new material facts, the principle of consistency applies and school’s surplus cannot be assessed separately when integrated into the parent board’s accounts.

Ashwani Kumar — Sat, 01 Aug 2026 08:26:20 +0000

In the absence of new material facts, the principle of consistency applies and school’s surplus cannot be assessed separately when integrated into the parent board’s accounts.

Issue

Whether the surplus/income of a school can be separately assessed in its hands under Section 144 of the Income-tax Act, 1961, when it claims to be part of an overarching board (CDBE) whose accounts include the school’s income, and where the Revenue had accepted this position in previous assessment years without any change in facts.

Facts

Non-Filing of Return: The assessee, an educational institution/school, did not file its Income Tax Return (ITR) for the Assessment Year (AY) 2017-18.
Notice Under Section 142(1): Following information regarding cash deposits made during the demonetization period, the Assessing Officer (AO) issued a notice under Section 142(1) directing the assessee to file its return.
Claim of Entity Integration: The assessee submitted that it was an integral part of the Chhattisgarh Diocese Board of Education (CDBE) and that its financial transactions, including income and expenditure, were accounted for within CDBE’s overall financial statements.
Best Judgment Assessment (Section 144): The AO rejected the assessee’s claim citing a lack of supporting evidence and completed the assessment under Section 144, treating the surplus from the school’s income and expenditure account as taxable income in the assessee’s hands.
Failure to Verify: Neither the AO nor the Commissioner of Income-tax (Appeals) [CIT(A)] conducted a verification of whether the school’s income was indeed declared in CDBE’s audited accounts for the year under consideration.
Past Precedent: For AY 2015-16, the Revenue had previously accepted the assessee’s claim that it operated as a constituent unit of CDBE.

Decision

Rule of Consistency Applied: The Tribunal/Court held that since the Revenue had accepted the assessee’s status as part of CDBE in AY 2015-16, it could not arbitrarily alter its position for AY 2017-18 without showing any new material or change in factual circumstances.
Defective Assessment: The lower authorities erred by making a best judgment assessment without verifying whether the surplus was already reflected and assessed in the hands of CDBE.
Outcome: The addition made in the hands of the assessee school was set aside, and the issue was decided in favor of the assessee.

Key Takeaways

Principle of Consistency: While res judicata strictly does not apply to income tax proceedings on a year-to-year basis, the Revenue cannot change its established stand on a fundamental aspect unless there is a material change in facts or law.
Duty of Verification: Before making a best judgment assessment under Section 144 by rejecting an entity’s claim of integrated accounting, tax authorities are obligated to verify the parent entity’s financial statements.
Avoidance of Double Taxation: Income reflected and accounted for in the consolidated or main financial statements of a parent board cannot be taxed separately in the hands of a constituent unit without proving independent existence or unreported income.

IN THE ITAT RAIPUR BENCH ‘DB’

Burgess English Senior Secondary School

ITO

Partha Sarathi Chaudhury, Judicial Member
and DR. DIPAK P. RIPOTE, Accountant Member

IT Appeal No. 486 (RPR) of 2024
[Assessment year 2017-18]

JUNE 29, 2026

Sunil Kumar Agrawal, CA for the Appellant. CH. Rajeswara Reddy, Sr. DR for the Respondent.

ORDER

Partha Sarathi Chaudhury, Judicial Member. – This appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC), Delhi, passed under section 250 of the Income Tax Act, 1961 (‘the Act’) for the Assessment Year (AY) 2017-18 on 17.09.2024 emanating from assessment order under section 144 of the Act dated 14.12.2019.

2. The assessee has raised following grounds of appeal:

“Gr.No.1: “On the facts & circumstances of the case and in law, assessment made u/s144 for AY17-18 dt.14-12-19 is invalid; appellant having no legal status/sanctity to be assessed under the IT Act; it is a school’ comes under the registered society i.e. “Chhattisgarh Diocese Board of Education, Raipur” having PAN-AACAC1876F. which is an “AOP” having ’16 schools’ along with the appellant and the said registered society having a legal status to be assessed under the IT Act for AY17-18 for the transactions made by the appellant, the said registered society is granted registration u/s10(23C)(vi) from the CIT (Exemption), Bhopal order dt.6-4-22 effective from AY22-23 & is filing ROI since AY22-23 claiming exemption u/s10(23C)(vi); impugned assessment is invalid and is liable to be quashed.”

Gr.No.2: “On the facts & circumstances of the case and in law, assessment made u/s144 for AY17-18 dt.14-12-19 is invalid; as the AO himself accepted the contention of the assessee in reassessment order passed u/s147 for AY15-16 dt.31-3-23 that it is part of the registered society i.e., “Chhattisgarh Diocese Board of Education” having PAN-AACAC1876F, which is an “AOP” liable to be assessed under the IT Act: impugned assessment is invalid and is liable to be quashed.”

Gr.No.3: “On the facts and circumstances of the case and in law, Id CIT(A) has erred in sustaining addition of Rs.64,31,628 by treating it as business income in the hands of the appellant, while, transaction of Rs.64,31,628 is included & part of transactions of the registered society i.e., “Chhattisgarh Diocese Board of Education, Raipur” having PAN-AACAC1876F, which is an “AOP” and the said registered society is liable to be assessed on its hands only; impugned assessment is invalid and addition made is unjustified thus, assessment is liable to be quashed & addition is liable to be deleted; relied on Ch. Atchaiah (1996) (SC).

Gr.No.4: “The appellant craves leave, to add, urge, alter, modify or withdraw any grounds before or at the time of hearing.”

3. In this case, the assessee, i.e. Burgess English Senior Secondary School, Raipur, had not filed Income Tax Return (‘ITR’) for AY 2017-18. The ITO, Ward-1(2), Bilaspur received an information that during the demonetization period, the assessee had made cash deposits. Therefore, the ITO had issued notice under section 142(1) of the Act on 11.12.2017 asking assessee to file ITR. Subsequently, the ITO issued various notices which are mentioned in the assessment order. During the assessment proceedings, the assessee had submitted that the assessee runs a school the amount mentioned in the notice pertains to the fees which was directly paid by the students in the bank account mentioned in the notice. Thus, the assessee i.e. Burgess English Senior Secondary School, Raipur claimed that they had not deposited any cash but it is students who had deposited the same. The assessee has also submitted that the assesse is a part of Chhattisgarh Diocese Board of Education, Raipur. The Chhattisgarh Diocese Board of Education, Raipur, runs 12 schools and the assessee, Burgess English Senior Secondary School is part of the same. This claim was made by the assessee before the Ld. Assessing Officer (‘AO’), however, the Ld. AO rejected the claim on the ground that no evidence has been filed and accordingly, made an addition of Rs.64,31,628/-, which was the surplus emanating from the Income and Expenditure Account submitted by the assessee. The assessee filed appeal before the Ld. CIT(A). The assessee repeated the submission, however, the Ld. CIT(A) confirmed the addition as the assessee has PAN No.AAABB0788Q whereas the Chhattisgarh Diocese Board of Education, Raipur, has PAN No.AACAC1876F, therefore, the Ld. CIT(A) has treated the assessee as independent entity and confirmed the addition. It was pleaded before the Ld. AO as well as, the Ld. CIT(A) that the income of the assessee has been reflected in the income shown by the Chhattisgarh Diocese Board of Education, Raipur in the ITR. Ld. AR claimed that the Audited Balance Sheet, Receipt and Payment and Income and Expenditure account of Chhattisgarh Diocese Board of Education, Raipur was filed before the Ld. AO and Ld. CIT(A), which is at page 69 and 70 of the paper book. Ld. AR submitted that the entire income has been shown by the Chhattisgarh Diocese Board of Education, Raipur, therefore, there was no requirement for taxing the same in the hands of the assessee.

4. Ld. AR further submitted that in the assessment order for AY 2015-16, the Ld. AO has accepted the assessee’s claim that it is a part of Chhattisgarh Diocese Board of Education, Raipur. Ld. AR submitted that the department cannot change its stand for AY 2017-18.

5. Ld. DR accepted the fact that for AY 2015-16 in the assessment order passed under section 147 of the Act, the Ld. AO had accepted the assessee’s claim that it is a part of Chhattisgarh Diocese Board of Education, Raipur. Ld.DR further submitted that the assessment order for AY 2015-16 is bad in law and therefore, Ld. Pr.CIT has initiated the proceedings under section 263 of the Act. However, he could not furnish any evidences to that effect.

6. In this case, the assessee has repeatedly submitted that it is part of Chhattisgarh Diocese Board of Education, Raipur. The assessee also filed a copy of the Income and Expenditure and Balance Sheet of the Chhattisgarh Diocese Board of Education, Raipur. However, neither Ld. AO nor Ld. CIT(A) had bothered to verify the claim of the assessee that assessee’s income has been shown in the Income and Expenditure account of Chhattisgarh Diocese Board of Education, Raipur. It is also observed that for AY 2015-16, the Ld. AO has accepted the assessee’s claim that the assessee is a part of Chhattisgarh Diocese Board of Education, Raipur. The Ld. Sr. DR failed to furnish any distinguishable evidence to that as had appeared for A.Y.2015-16. The Ld. Sr. DR was unable to bring out what were the different factual position for present assessment year which was not there for A.Y.2015-16. That in absence of any contradicting evidence, the Revenue authorities are bound by the principle of consistency as held by the Hon’ble Apex Court in the case of Radhasoami Satsang v. CIT 193 ITR 321 (SC). That in absence of any distinguishable facts and evidence in the case of the assessee for the present year and also for the fact that there is no findings by the Revenue authorities verifying the claim of the assessee that the assessee’s income had already shown in the income expenditure account of Chhattisgarh Diocese Board of Education, Raipur and also for the fact that for A.Y.2015-16, the A.O had accepted the assessee’s claim that the assessee is a part of Chhattisgarh Diocese Board of Education, Raipur, hence, following the dictate of the Hon’ble Apex Court (supra), the claim of the assessee stands allowed.

7. The principle of consistency dictates that Indian Revenue authorities must maintain the legal stand on identical factual situations across different tax periods to prevent arbitrary decision making while each assessment year represents separate legal proceedings and the rule of “Res-judicata” does not apply to taxation, the Revenue authorities cannot shift their stance wildly without material change in facts or law. The Hon’ble Apex Court in the case of Bharat Sanchar Nigam Ltd. (BSNL) v. UOI (2006) 3 SCC 1 has held that the Courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position.

8. In the facts of the present case before us, no new fact or material change has been proved to justify any change of stand between the assessment year 2015-16 and A.Y.2017-18 i.e. the year under consideration. Further, in the case of Berger Paints India Ltd. v. CIT 266 ITR 99 (SC), the Hon’ble Apex Court established that if the Revenue accepts a specific legal position or interpretation in the case of one taxpayer, it cannot challenge the very same proposition in the case of another taxpayer without just cause. The Hon’ble Allahabad High Court in the case of Samsung India Electronics (P.) Ltd. v. State of U.P. (Allahabad)/[Writ Tax No.660 Of 2023] decided on March 12, 2024 explicitly held that “consistency is sacrosanct in taxation matters”. When the Department accepts a refund or deduction stand for multiple periods, suddenly cannot deny the same for a specific period if the underlying transactions are identical.

9. The legal rationale as emanating from these aforesaid decisions are that when the Revenue on certain factual matrix on the basis of which, it had decided in a particular manner for a particular assessment year, the onus to prove is on the Revenue itself to demonstrate distinguish shift in the facts for new assessment year so to take a different view. In the present case before us the Revenue had failed to bring out any difference in facts between A.Y.2015-16 and the relevant assessment year i.e. A.Y.2017-18.

10. That as per above terms, the appeal of the assessee is allowed.

Interest under Section 28 of Land Acquisition Act Forms Part of Compensation, Not Taxable under Income from Other Sources

Ashwani Kumar — Mon, 27 Jul 2026 11:05:55 +0000

Interest under Section 28 of Land Acquisition Act Forms Part of Compensation, Not Taxable under Income from Other Sources

Issue

Whether interest received on enhanced compensation under Section 28 of the Land Acquisition Act, 1894 is taxable as ‘Income from Other Sources’ under Section 56(2)(viii) or forms part of the compensation itself.

Facts

Compulsory Acquisition: The assessee’s agricultural land was subject to compulsory acquisition under the Land Acquisition Act, 1894.
Interest Receipt: The assessee received interest under Section 28 of the Land Acquisition Act, 1894 on the enhanced compensation awarded.
Assessment Years: The matter pertained to Assessment Years 2013-14 and 2015-16.
AO’s Treatment: The Assessing Officer treated the interest on enhanced compensation as taxable under the head “Income from Other Sources” under Section 56(2)(viii), granting a standard deduction of 50% under Section 57(iv).

Decision

The interest awarded under Section 28 of the Land Acquisition Act, 1894 represents an accretion to the value of the land and forms an integral part of the compensation itself.
Such interest does not partake the character of income from other sources under Section 56(2)(viii).
The substitution of Section 145A and insertion of Section 56(2)(viii) do not apply to interest awarded under Section 28 of the Land Acquisition Act.
The issue was decided in favour of the assessee.

Key Takeaways

Nature of Section 28 Interest: Interest paid under Section 28 of the Land Acquisition Act, 1894 is distinct from interest on delayed payment under Section 34. Section 28 interest forms part of the capital compensation for the acquisition of land.
Exemption Applicability: Since interest under Section 28 is part of the compensation for compulsory acquisition of agricultural land, it inherits the tax-exempt status applicable to such compensation under the Income-tax Act.

IN THE ITAT PUNE BENCH ‘B’

Pandurang Gopal Thakur

ITO

R. K. PANDA, Vice President
and Vinay Bhamore, Judicial Member

ITA No. 1797, 1798 and 1799 (PUN) OF 2024
[Assessment years 2013-14 and 2015-16]

JUNE 15, 2026

Nikhil S Pathak and Ajinkya Vaishampayan for the Appellant. Umesh Phade, Addl. CIT for the Respondent.

ORDER

R.K. Panda, Vice President. – The above 3 appeals filed by the respective assessees are directed against the separate orders of the Ld. CIT(A) / NFAC, Delhi as mentioned above. Since identical grounds have been raised by the respective assessees, therefore, for the sake of convenience, these were heard together and are being disposed of by this common order.

2. There is a delay of 432 days in filing of the appeal in ITA No.1797/pUN/2024, delay of 477 days in filing of the appeal in ITA No.1798/pUN/2024 and the delay of 411 days in filing of the appeal in ITA No.1799/pUN/2024 before the Tribunal for which the respective assessees have filed separate condonation applications along with affidavits explaining the reasons for such delay. In all the affidavits it has been mentioned that they have not received the order of the Ld. CIT(A) / NFAC but came to know of passing of such order only after the Assessing Officer initiated recovery proceedings. Thereafter, immediately after coming to know of passing of such order by the Ld. CIT(A) / NFAC the respective assessees have taken immediate steps and filed the appeals which caused the delay. However, if the period from the date of receipt of recovery notice till the date of filing of the appeals is considered, there is no delay in filing of the appeals before the Tribunal. Relying on various decisions the Ld. Counsel for the assessee submitted that the delay in filing of the appeals before the Tribunal should be condoned.

3. The Ld. DR on the other hand strongly opposed the condonation applications filed by the assessee.

4. We have heard the rival arguments made by both the sides on the issue of delay in filing of the appeals and considered the contents of the condonation applications filed along with the affidavits of the assessee. There is no dispute to the fact that there is delay in filing of the appeals by the respective assessees as mentioned above. A perusal of the condonation applications filed along with the affidavits show that there was bonafide reasons in not filing of the appeals in time.

5. We find the Hon’ble Supreme Court in the case of Collector, Land Acquisition v. Mst. Katiji (SC)/167 ITR 471 (SC) has held that when substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties.

6. We find recently the Hon’ble Supreme Court in the case of Inder Singh v. State of Madhya Pradesh [SLP (Civil) No. 6145 of 2024, dated 21-3-2025]/2025 LiveLaw (SC) 339 has held as under:

“14. There can be no quarrel on the settled principle of law that delay cannot be condoned without sufficient cause, but a major aspect which has to be kept in mind is that, if in a particular case, the merits have to be examined, it should not be scuttled merely on the basis of limitation. “

7. Considering the totality of the facts of the case and in the light of the decisions of Hon’ble Supreme Court cited (supra), the delay in filing of all the appeals is condoned and the appeals are admitted for adjudication.

8. First we take up appeal in the case of Pandurang Gopal Thakur vide ITA No.1797/pUN/2024 for assessment year 2013-14 as the lead case.

9. Facts of the case, in brief, are that the assessee is an individual and is a salaried employee. During the year under consideration the assessee was working with Jilha Parishad School and has earned salary income of Rs.1,91,540/-. In addition to this, the assessee has declared interest income earned during the year. He filed his return of income on 24.07.2013 declaring total income of Rs.2,45,410/- after claiming refund of Rs.10,80,300/-. While doing so, the assessee disclosed a sum of Rs.95,60,208/- being enhanced compensation received on compulsory acquisition of agricultural land by the Special Land Acquisition Officer (SLAO) and claimed the same as exempt from tax. The return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) accepting the returned income. Subsequently the Assessing Officer received specific information that during the financial year 2012-13 relevant to assessment year 2013-14 the assessee has received interest on enhanced compensation from SLAO which is subject to tax to the extent of Rs.33,13,299/- apart from others. The Assessing Officer accordingly reopened the assessment as per the provisions of section 147 of the Act and notice u/s 148 of the Act dated 10.06.2016 was issued and served on the assessee requiring him to furnish the return of income within 30 days. The assessee vide letter dated 18.07.2016 stated that the return filed on 24.04.2013 u/s 139(1) of the Act may be treated as return in response to the notice and compliance thereof. He also asked the Assessing Officer to supply the reasons recorded for issuing notice u/s 148 of the Act. The Assessing Officer supplied the reasons and also disposed off the objections raised by the assessee challenging the reopening of the assessment. Subsequently notice u/s 143(2) of the Act was issued. Thereafter, notice u/s 142(1) of the Act along with a questionnaire was issued.

10. During the course of assessment proceedings the Assessing Officer noted that the agricultural land of the assessee at Survey No.22 Issa No.7H having area 27-0 – H R P situated in Village Dhutum, Tal: Uran, Dist: Raigad was compulsorily acquired by the Special Land Acquisition Officer (Metro Centre-2), Uran in the year 1997. Compensation inclusive of interest was awarded to the assessee of Rs.37,091/ against compulsory acquisition of his above agricultural land. Being aggrieved, the assessee filed appeal against the Award before the Civil Court, Alibag. The Civil Court, Alibag, vide Order dated 14-09-2011 awarded enhanced compensation and interest thereon as under, which was received by the assessee during the previous year relevant to A Y 2013-14.

Enhanced compensation	2295000
30% Solatium	688500
Interest @ 12% u/s. 23(1A) of Land Acquisition Act, 1873 for the period 22-05-1997 to 09-12-1997	150705
Less: Amount as per section 11 Award dated 14-01-1998	49890
	3084315
Interest @ 9% u/s. 28(f) of Land Acquisition Act, 1873 for the period 13-01-1998 to 12-01-1999	277588
Interest @ 15% u/s. 28(f) of Land Acquisition Act, 1873 for the period 13-01-1999 to 06-02-2013	6198305
Total	9560208

11. Out of total enhanced compensation and interest of Rs.95,60,208/-, the Special Land Acquisition Officer deducted tax at source of Rs.10,80,303/-. Along with the computation of total income, the assessee has claimed enhanced compensation and interest as exempt relying on the decision of Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF) 315 ITR 1 (SC). The assessee endorsed a note along with the return of income for claiming exemption of the income of enhanced compensation and interest received during the relevant year under consideration. According to the Assessing Officer since the agricultural land was compulsorily acquired under the State law for which he has received enhanced compensation and interest during the year, therefore, the conditions laid down in section 10(37) and 2(14)(iii) are fulfilled. Therefore, the enhanced compensation of Rs.22,95,000/- received by the assessee during the impugned assessment year against compulsory acquisition of his agricultural land is eligible for claim of exemption u/s 10(37) of the Act. However, the interest received by the assessee against the compulsory acquisition of his agricultural land is taxable as ‘Income from other sources as per the provisions of section 56(2)(viii) subject to deduction u/s 57(iv) of the Act. Since the assessee has claimed interest received as exempt, he confronted the same to the assessee. Rejecting the various explanations given by the assessee, the Assessing Officer made addition of Rs.33,13,299/- as ‘Income from other sources’ by observing as under:

12. In appeal the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer by observing as under:

13. Aggrieved with such order of the Ld. CIT(A) / NFAC the assessee is in appeal by raising the following grounds:

The following grounds are taken without prejudice to each other

On facts and in law,

The Appellant-Assessee requests to condone the delay in view of the affidavit and admit an appeal with further request to note that order of CIT(A)-NFAC dated 24/04/2023 was not communicated and assessee came to know about appeal dismissed by the CIT(A)-NFAC where notice of recovery dated 16/08/2024 was received.

The Learned CIT(A)-NFAC failed to adjudicate the validity of notice issued u/s 148 and inter-alia re-assessment proceedings and merely reproduced the part of assessment order, disposing off the objections raised by the Assessee against issue of notice u/s 148 of the Act.

The learned CIT(A)-NFAC failed to appreciate while confirming the action of the AO that the nature of the Gross Interest at Rs.66,26,598/- (50% assessed at Rs.33,13,299/-) awarded u/s 28 of the Land Acquisition Act, 1894 was Capital receipt and not taxable u/s 56(2)(viii) r.w.s. 145A(b) and sec 57(iv) of the Income Tax Act, 1961; as per principle/precedent laid down by the Hon’ble Supreme Court in the case of CIT v/s Ghanshyam HUF [2009] 315 ITR 1.

The learned CIT(A)-NFAC failed to appreciate while confirming the action of the AO that the Gross Interest at Rs.66,26,598/- (50% assessed at Rs.33,13,299/-) awarded u/s 28 of the Land Acquisition Act, 1894 was Capital Receipt but not chargeable as capital gain u/s 45(5) as the compulsorily acquired agricultural land was Rural Agricultural Land and therefore was not capital asset u/s 2(14) which fact is not disputed by the learned AO and the learned CIT(A)-NFAC.

The learned CIT(A)-NFAC awarded u/s 28 of the Land Acquisition Act, 1894 without appreciating that.

(a)

The decision of Hon’ble Apex Court in the case of CIT v/s Ghanshyam HUF [2009] 315 ITR 1 still prevails and therefore the interest u/s 28 of the Land Acquisition Act, 1894 is not coming in the ambit of taxation.

(b)

The SLP dismissed by Hon’ble Supreme Court in the case of Mahendra Pal Narang v/s CBDT, Ministry of Finance reported at (SC) filed against the order of Hon’ble Punjab and Haryana High Court in the case of Mahendra Pal Narang v/s CBDT [2020] does not prescribe a law or new position with respect to the claim of the assessee that interest awarded u/s 28 of the Land Acquisition Act, 1894 is capital receipt not subject to tax.

The learned CIT(A)-NFAC while confirming the order of the AO failed to note that:

(a)

No binding precedence is created and don’t constitute a law declared by Hon’ble Supreme Court and does not result in res-judicata where Special Leave Petition (the SLP) is dismissed by the Hon’ble Apex Court by non-speaking order as in the case of Mahendra Pal Narang v/s CBDT reported at (SC) and

(b)

The learned CIT(A)-NFAC failed to consider for this purpose decisions of Hon’ble Apex Court in the following cases-

Khoday Distilleries Ltd. (supra): State Manipur v/s Thingujan Brojen Meeteil [1996] 95 SCC 29 and

ii.

Om Prakash Gargi v/s State of Punjab [1996] 11 SCC 395 and

iii.

Sun Export Corp v/s Collector of Customs AIR 1997 SC 2658 and

iv.

V M Salgaocar and Bros. (P) Ltd. v/s CIT (SC)

(c)

SLP dismissed by the Hon’ble Supreme Court [relied by the CIT(A)] is not dismissed after assigning reasons.

(d)

In light of the above precedents, the decision of Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF) still prevails and holds the ground.

The learned CIT(A)-NFAC failed to appreciate that majority of decisions cited and relied upon by the assessee which were rendered by the Hon’ble ITAT Pune in favour of the assessee carry judicial precedence especially where there is no direct decision of jurisdictional High Court, even if the decision of Non-Jurisdictional High Court is against.

14. The Ld. Counsel for the assessee referring to page 62 of the paper book drew the attention of the Bench to the details of interest received u/s 28 of the Land Acquisition Act which are as under:

15. He submitted that the compensation / enhanced compensation received by the assessee has been accepted to be exempt from tax by the Assessing Officer and no addition has been made. However, he has brought to tax the interest of Rs.33,13,299/- on the compensation / enhanced compensation on compulsory acquisition of agricultural land which has been upheld by the Ld. CIT(A) / NFAC. He submitted that the Ld. CIT(A) / NFAC while deciding the issue against the assessee has referred to the decision of the Hon’ble Punjab & Haryana High Court in the case of Mahender Pal Narang v. CBDT, New Delhi 423 ITR 13 (Punjab & Haryana) and the decision of the Pune Bench of the Tribunal in the case of Madhav Pandharinath Kande v. ITO 195 ITD 579 (Pune – Trib.)/ITA No. 2584/pN/2016. He submitted that the Tribunal first considered this issue in the case of Basweshwar Mallikarjun Bidwe v. ITO [IT Appeal No. 1012 (PN) of 2017, dated 5-10-2020]. While deciding the issue, the Tribunal relied upon the decision of the Hon’ble Bombay High Court, Aurangabad Bench in the case of Shivajirao v. State of Maharashtra [ WP No. 5402 of 2013, dated 27-8-2013]. The Tribunal held that the Hon’ble Bombay High Court in the said case has held that interest u/s 28 of the Land Acquisition Act is chargeable to tax. Considering the said decision the Tribunal held that interest received by the assessee was rightly taxed by the Assessing Officer u/s 56(2)(viii) of the Act. He submitted that the Tribunal in the case of Madhav Pandharinath Kande (supra) has again held that the interest received u/s 28 of the Land Acquisition Act was chargeable to tax.

16. Referring to the decision of the Hon’ble Bombay High Court Bombay Bench in the case of Rupesh Rashmikant Shah v. Union of India 417 ITR 169 (Bombay) he submitted that the Hon’ble Bombay High Court while dealing with the issue of interest awarded under the Motor Accident claim case held that the interest received from the date of claim petition till passing of the award or judgment would not be income chargeable to tax. While deciding the issue the Hon’ble High Court relied upon the decision of the Hon’ble Supreme Court in the case of Ghanshyam (HUF)(supra) wherein the Hon’ble Supreme Court held that the interest received u/s 28 of the Land Acquisition Act was part of the compensation received. The Hon’ble Bombay High Court considering the said decision held that the interest received by the assessee would be part of the compensation awarded.

17. He submitted that subsequent to the decision of the Pune Bench of the Tribunal in the case of Madhav P. Kande (supra), the Co-ordinate Bench of the Tribunal in the case of Sanjay Bhimrao Patil v. ITO 200 ITD 575 (Pune – Trib.)/ITA No.532/pN/2017, after considering the decisions in the case of Shivajiro decided by the Hon’ble Bombay High Court Aurangabad Bench and in the case of Rupesh Rashmikant Shah decided by the Hon’ble Bombay High Court Bombay Bench as well as the Pune Bench of the Tribunal in the case of Basweshwar M. Bidwe held that the interest received u/s 28 of the Land Acquisition Act would be part of the enhanced compensation and therefore would not fall within the ambit of section 56(2)(viii) r.w.s. 145A(b).

18. He submitted that the Co-ordinate Bench of the Tribunal in the case of Raghunath B. Patil v. ITO [IT Appeal No.235 (Pune) of 2023, dated 27-4-2023] had an occasion to decide similar issue. In that case, the Tribunal referred to the decisions in the case of Shivajirao and Others as well as Rupesh Rashmikant Shah and held that since the land forming subject matter of compulsory acquisition as well as the Assessing Officer was within the territorial jurisdiction of the Hon’ble Bombay High Court, Bombay Bench, therefore, the decision of Rupesh R. Shah would be followed. Similar view has been taken by the Co-ordinate Bench in the case of Kusum Jayram Thakur Dhutum v. ITO 207 ITD 237 (Pune – Trib.)/ITA No.1332/pUN/2023. He submitted that in the case of Azizuddin Latiphoddin Kazi v. ITO 203 ITD 152 (Pune – Trib.)/ITA No.835/pUN/2023 the jurisdiction of the Assessing Officer was at Latur which fell under the Hon’ble Bombay High Court, Aurangabad Bench and hence, the claim of the assessee was rejected. He submitted that recently Pune Bench of the Tribunal in the case of Sushila M. Mhatre v. ITO [IT Appeal Nos.2786 and 2787 (Pune) of 2025, dated 19-2-2026] has allowed the claim of the assessee holding that the interest received u/s 28 of the Land Acquisition Act is exempt from tax.

19. He submitted that in the present case the land which has been acquired was located at village Dhutum, Tal Uran, Dist. Raigad. The Assessing Officer who has framed the assessment is ITO, Ward 4, Panvel. Accordingly, the land as well as the Assessing Office who has framed the assessment fall within the territorial jurisdiction of the Hon’ble Bombay High Court, Bombay Bench. Therefore, the addition made u/s 56(2)(viii) should be deleted. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be set aside and the grounds raised by the assessee be allowed.

20. The Ld. DR on the other hand strongly relied on the order of the Ld. CIT(A)/NFAC and relied on the following decisions:

(a)

Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC)

(b)

T.N.K. Govindaraju Chetty v. CIT [1967] 66 ITR 465 (SC)

(c)

Rama Bai v. CIT [1990] 181 ITR 400 (SC)

(d)

Bikram Singh v. Land Acquisition Collector [1997] 224 ITR 551 (SC)

(e)

CIT v. Ghanshyam (HUF)(supra)

(f)

Shivajirao (supra)

(g)

Manjet Singh (HUF) Karta Manjeet Singh v. Union of India [SLP Appeal (C) No. 34642 of 2014, dated 18-12-2014

(h)

Rupesh Rashmikant Shah (supra)

(i)

Mahender Pal Narang (supra)

(j)

Basweshwar Mallikarjun Bidwe (supra)

(k)

Mahender Pal Narang v. CBDT, Ministry of Finance [2024] 462 ITR 498 (SC)

(l)

Madhav Pandharinath Kande (supra)

(m)

Shri Ram Laxmanrao v. ITO [IT Appeal No.574 (Pune) of 2020, dated 23.11.2022] for assessment year 2013-14

(n)

Sanjay Bhimrao Patil (supra)

(o)

Raghunath Budhaji Patil (supra)

(p)

Azizuddin Latiphoddin Kazi (supra)

(q)

Kusum Jayram Thakur Dhutum (supra)

(r)

Anvar Ali Poolakkodan v. ITO (Kerala)

21. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.33,13,299/- being 50% of the interest received of Rs.66,26,598/- on compensation / enhanced compensation received by the assessee on compulsory acquisition of land by invoking the provisions of section 56(2)(viii) of the Act. We find the Ld. CIT(A) / NFAC confirmed the addition made by the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that since the land in the instant case which was compulsorily acquired was located in a village called Dhutum, Tal Uran, Dist. Raigad and the Assessing Officer who has framed the assessment is ITO, Ward 4, Panvel, therefore, the decision of the Hon’ble Bombay High Court, Bombay Bench, which has been subsequently followed by the Co-ordinate Bench of the Tribunal in various other cases should be followed and it should be held that the interest received u/s 28 of the Land Acquisition Act is exempt from tax.

22. We find some force in the above arguments of the Ld. Counsel for the assessee. We find the Co-ordinate Bench of the Tribunal in the case of KusumJayram Thakur Dhutum (supra) has held that interest received u/s 28 of Land Acquisition Act, 1894 on enhanced compensation granted by reference court on acquisition of land is not taxable u/s 56(2)(viii) of the Act. The relevant observations of the Tribunal read as under:

“3. Suffice to say, the assessee’s sole substantive grievance raised herein seeks to reverse both the learned lower authorities action assessing it’s interest received u/sec.28 of the Land Acquisition Act, 1894 granted by the learned Reference Court, u/sec.56(2)(viii) r.w.s.145A of the Act qua the amount in question of Rs.2,65,38,689/- in the Assessing Officer’s assessment herein dated 27.12.2018. Both the learned Assessing Officer as well as the NFAC herein are of the opinion that in light of the foregoing statutory amendment in the Act, such an interest income of enhanced land acquisition compensation is no more exempt from taxation.

4. Both the learned representatives reiterated their respective stands during the course of hearing. It transpires during the course of hearing that the Assessing Officer before us is learned ITO, Ward-3, Panvel. This being the clinching fact, it is noticed that the tribunal’s recent coordinate bench(es) order in Raghunath Budhaji Patil, Uran v. ITO ITA.No.235/pUN./2023 decided on 27.04.2023 has already settled the issue in assessee’s favour and against the department going by jurisdictional bench of hon’ble high court as under :

“3. We have given our thoughtful consideration to vehement rival stands against and in support of the lower authorities findings holding the assessee’s interest income received under section 28 of the Land Acquisition Act, 1894 as taxable under the head income from “Other” sources under section 56(2)(viii) of the Act. The assessee’s case before us is that such an interest income is part of the land acquisition compensation itself and not taxable, therefore, in light of Ghanshyam(HUF) v. CIT [2009] 315 ITR 1 (SC). Learned counsel thereafter quoted [2016] 138 DTR 229 (Guj) Moraliya B Balashai v. ITO and [2019] 471 ITR 169 (Bom), Ruesh R.Shah v. Union of India and vehemently contended that the learned lower authorities action under challenge is hardly sustainable in law.

4. Mr.Jasnani on the other hand has quoted this tribunal’s co-ordinate bench’s order in Basweshwar Mallikarjun Bidwe v. ITO in ITA No.1012/pUN/2017 dated on 05.10.2020 in department’s favour as under :

“3. Succinctly, the facts of the case are that the assessee filed his return declaring total income of Rs.42,370/-. He received enhanced compensation at Rs.38,19,709/- and interest u/s.28 of the LAA amounting to Rs.68,32,020/- on compulsory acquisition from The Special Land Acquisition Officer (MIW), Latur against the land situated at Village Khadgaon, Tq. Latur. In the column of exempt income in the return, the assessee showed figures of total interest at Rs.68,32,020/- and agriculture income at Rs.2,37,900/-. On being called upon to explain as to why the interest was not shown separately as income u/s.56(2)(viii) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) Act, the assessee made certain submissions which did not find favour with the Assessing Officer (AO). Treating 50% of the interest income as deductible in terms of section 57(iv), the AO added net interest income of Rs.34,16,010/-u/s. 56(2)(viii) of the Act. The ld. CIT(A), relying on certain decisions, which we will advert to in the later part of the order, jettisoned the claim of the assessee thereby approving the view of the AO in bringing to tax the interest income u/s.56(2)(viii) of the Act. Aggrieved thereby, the assessee has approached the Tribunal.

4. We have heard both the sides through virtual court and cogitated over the relevant material on record. Indisputably, the amount of net interest income computed by the AO u/s.56(2)(viii) of the Act pertains to section 28 of the LAA. The assessee treated such amount as part of the enhanced compensation of land and claimed the same as exempt from tax on the ground that the land itself was agricultural. To buttress the contention that interest u/s 28 of the LAA is a part of compensation and hence not chargeable to tax, the ld. AR chiefly relied on the judgment of the Hon’ble Supreme Court in CIT v. Ghanshyam (HUF) (2009) 315 ITR 1 (SC) before the Tribunal in which it has been held that interest u/s.28 under The Land Acquisition Act, is to be taxed as part of consideration on receipt basis. This judgment was delivered on 16-07-2009. The Finance (No.2) Act, 2009 w.e.f. 01-04-2010 inserted clause (viii) to section 56(2) providing that: “income by way of interest received on compensation or on enhanced compensation referred to in subsection (1) of section 145B” shall be chargeable to income-tax under the head “Income from other sources”. Section 145B(1) provides that: “Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received”. Thus it is palpable that post the decision in Ghanshyam (supra), a statutory amendment has been carried out providing that income by way of interest received on compensation or on enhanced compensation shall be chargeable to income-tax under the head “Income from other sources”.

5. The question of taxability of interest received u/s 28 of the LAA came up for consideration before Hon’ble Punjab & Haryana High Court in the case of Manjet Singh (HUF) Karta Manjeet Singh v. Union of India (P&H). It noted another judgment of three Judges of the Hon’ble Apex Court in Bikram Singh v. Land Acquisition Collector, (1997) 224 ITR 551(SC) following Dr. Shamlal Narula v. CIT (1964) 53 ITR 151 (SC) holding that interest under Section 28 of the 1894 Act was a revenue receipt and is taxable. After considering all the available relevant material including the judgment in Ghanshyam (HUF) (supra) and also the statutory amendments carried out w.e.f. A.Y. 2010-11, the Hon’ble High Court, vide its judgment dated 14.01.2014, decided this issue in favour of the Revenue by holding that interest u/s.28 of LAA was chargeable to tax u/s. 56(2)(viii) of the Act. The SLP filed against the judgment in the case of Manjet Singh v. Union of India has since been dismissed by the Hon’ble Supreme Court on 18-12-2014 (SLP No. 34642 of 2014) holding that “Heard ld. Counsel for the petitioners and perused the relevant material. We do not find any legal and valid ground for interference. The special leave petitions are dismissed.”

6. Question of deduction of tax at source on interest u/s 28 of the LAA once again came up for consideration before the Hon’ble jurisdictional High Court in a batch of 13 petitions with the lead case of Shivajirao S/o Dnyanoba Ghanwat & Ors. v. The State of Maharashatra & Ors. (WP No. 5402 of 2013). The petitioners contended that the tax was deducted at source on the entire amount of compensation awarded in Land Acquisition proceedings, including the interest u/s 28 of the Land Acquisition Act, which was not deductible in the light of the judgment of the Hon’ble Supreme Court in Ghanshyam (HUF) (supra). Per contra, the Respondent made out a case that tax at source was rightly deductible as there was no difference between the interest granted u/s 28 and 34 of the LAA. This view was bolstered on the basis of an earlier judgment of the Hon’ble Supreme Court in Bikram Singh (supra) 224 ITR 551 (SC). The Hon’ble Bombay High Court, vide its judgment dated 27.08.2013 (copy at pages 69 onwards of the assessee’s paper book), recorded the petitioner’s contention in para 8 and that of the respondent in paras 3 read with 4. In para 5 of the judgment, their Lordships found that: ‘Section 34 casts obligation upon Collector to pay interest after compensation is worked out. Section 28 puts similar obligation upon the Court when the Court finds that the compensation awarded under section 11 was inadequate. Therefore, there is no change in nature of interest either u/s.28 or section 34. Even if court hikes compensation for land and interest is awarded under Section 28 of the Act, upon such increased compensation, in the light of larger Bench judgment, the Department and Disbursing Authorities are bound to effect deduction of TDS’. On the interplay between the Hon’ble Apex Court judgments in Ghanshyam (supra) & Bikram Singh (supra), the Hon’ble Bombay High Court in para 4 found the: ‘issue to be squarely covered by the larger Bench judgment of the Apex court’ in Bikram Singh (supra). Then it noted in para 9 of the judgment that: “We have perused para 24 and 25 of the judgment of the Apex Court in Commissioner of Income Tax v. Ghanshyam (supra). We find that the Hon’ble Apex Court there, was not called upon to look into the Larger Bench judgment delivered earlier in case of Bikram Singh (supra). In para 7, the Hon’ble Larger Bench has found that the interest paid u/s.28 is not by way of any charge on compensation determined u/s.23(1). We, therefore, with respect, follow the larger Bench judgment of the Hon’ble Apex Court”. Thus it is plentifully lucid that the Hon’ble jurisdictional High Court has categorically held that interest u/s 28 of the Land Acquisition Act is chargeable to tax.

7. The ld. AR submitted that the Hon’ble jurisdictional High Curt has not correctly appreciated the legal position inasmuch as the decision in the case of Ghanshyam (supra) was binding and ought to have been followed. He unsuccessfully tried to convince the Tribunal that the decision rendered by the Hon’ble Bombay High Court should not be preferred over certain other decisions in favour of the assessee. We find that in certain decisions, the issue has been decided in assessee’s favour. Notwithstanding any contrary view expressed by a nonjurisdictional Hon’ble High Court, the Tribunal, being an authority inferior in hierarchy to its jurisdictional High Court, is bound by the verdict of its superior Hon’ble High Court and cannot read, consider or understand the judgments of the Hon’ble Supreme Court in a way different from the one understood by the Hon’ble jurisdictional High Court unless such a view has been subsequently reversed/modified by the Hon’ble Supreme Court.

8. The ld. AR then submitted that the Hon’ble Supreme Court in Union of India and others v. Hari Singh and others (2018) 302 CTR 0458 (SC) has considered a similar issue and decided the same in favour of the assessee. It was then contended that since the judgment of the Hon’ble jurisdictional High Court was rendered prior to that of Hon’ble Supreme Court in Hari Singh and others (supra), the latter should be followed in preference to the former.

9. We are unable to find any relevance of the judgment of Hon’ble Supreme Court in Hari Singh and others (supra), insofar as the issue under consideration is concerned. In that case, the Land Acquisition Collector deducted tax at source from compensation on account of compulsory acquisition of land and deposited the same with the exchequer. A writ petition was filed in the High court urging that no deduction of tax at source was permissible in view of the provisions of section 194LA of the I.T. Act, since the land which was acquired was agricultural land and this provision categorically mentions that in respect of agricultural land, tax at source was not to be deducted. The Hon’ble High Court directed the Income-tax Department to refund the amount to the collector and held: “that the Collector will determine whether the compensation paid is for property other than the agricultural land or otherwise and whether deduction of tax at source was permissible under other provisions of law…….”.

00A0ggrieved thereby, the Revenue approached the H0on’ble Supreme Court pleading that the matter should have been remitted to the AO for deciding the nature of land acquired and not the Collector as it was the AO who was to come to the conclusion whether land was agricultural or not. Accepting the contention on behalf of the Revenue, the Hon’ble Supreme Court held that the claimant should approach the concerned AO and raise the issue that no tax was payable on compensation/enhanced compensation which was received by them as their land was agricultural land. It was further observed that, while determining as to whether the compensation paid was for agricultural land or not, the AO will keep in mind the provisions of Section 28 of the Land Acquisition Act and the law laid down by this Court in CIT, Faridabad v. Ghanshyam (HUF) in order to ascertain whether the interest given under the said provision amounts to compensation or not. It is abundantly clear that the judgment in the case of Hari Singh and others (supra) is based an altogether different factual matrix in which the question was as to whether it was the Collector or the AO who will decide as to whether any tax was payable on compensation/enhanced compensation. This issue came to be decided by Hon’ble Supreme Court by holding that the AO was the competent authority. There is no adjudication on the point as to whether interest u/s.28 of the Land Acquisition Act is chargeable to tax separately or part of enhanced compensation. There is a simple direction to the AO to consider this aspect of the matter.

10. In view of the foregoing discussion, it is manifest that the judgment of the Hon’ble jurisdictional High Court holding that interest u/s.28 under the LAA is chargeable to tax, is intact and has not been disturbed in any manner by the Hon’ble Supreme Court in the case of Hari Singh and others (supra). On a specific query, the ld. AR could not point out as to whether the judgment of the Hon’ble jurisdictional High Court in Shivajirao (supra) has been reversed or modified in any manner by the Hon’ble Supreme Court. Respectfully following the judgment of the Hon’ble jurisdictional High Court in Shivajirao (supra) and the judgment of Hon’ble Punjab & Haryana High Court in Manjeet Singh (supra) along with the statutory amendment carried out to section 56(2) inserting clause (viii) w.e.f. 0104-2010, it is overt that the ld. CIT(A) has taken an unexceptionable view in the matter pertaining to the A.Y. 2013-14. We, therefore, uphold the same. This ground is not allowed.”

5. We have heard the foregoing vehement rival contentions. It transpires that the instant issue of taxability of the assessee’s interest income received under section 28 of the Act is covered in assessee’s favour as per the hon’ble high court’s Bombay bench holding that the same is not taxable under section 56(2)(viii) of the Act as against the Revenue’s contentions that the Aurangabad bench of the very hon’ble jurisdictional high court has taken a divergent view against the taxpayer in Shivajirao and Others v. State Writ Petition No.5042/2013 dated 27.08.2013 (supra).

6. Faced with the situation, we are of the opinion that it is the Bombay and not Aurangabad bench of the hon’ble jurisdictional high court whose decision would prevail in the given facts and circumstances as the assessee, his land/capital asset forming subject matter of compulsory acquisition as well as “situs” of the Assessing Officer who has framed assessment before us dated 28.11.2017, are covered within its territorial jurisdiction notified from time to time. We thus quote PCIT v. ABC Paper Limited [2022] 447 ITR 1 (SC) and decide the instant sole substantive ground as well as the main appeal is assessee’s favour. Ordered accordingly.

5. We adopt the detailed discussion mutatis mutandis “for Panvel” to accept the assessee’s instant sole substantive grievance on merits.”

23. We find the Co-ordinate Bench of the Tribunal in the case of Sanjay Bhimrao Patil(supra) has held that interest received by assessee under section 28 of Land Acquisition Act, 1894 on enhanced compensation received for compulsory acquisition of its agricultural land for the period from the date of acquisition of land till the date of payment of compensation to assessee was part of compensation and, thus, same was not taxable and amendment by way of substitution of section 145A and insertion of clause (iii) in section 56(2) would not be applicable on same.

24. We find the Hon’ble Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai v. ITO 388 ITR 343 (Gujarat) has held that the interest received on compensation/enhanced compensation under section 28 of Land Acquisition Act forms part of compensation and not interest as contemplated under section 145A; same is not taxable under head ‘income from other sources’ and department was not justified in deducting tax at source under section 194A.

25. We find recently the Co-ordinate Bench of the Tribunal in the case of Sushila Maruti Mhatre(Supra) for assessment year 2016-17 while deciding an identical issue has held that interest on enhanced compensation on acquisition of agricultural land situated in village Bokadvira, Taluka Uran, District Raigad is exempt from tax. The relevant observations of the Tribunal read as under:

“4. We have heard both the parties and perused the records. In this case, Agricultural Land of Assessee’s Father situated in BOKADVIRA Village, Taluka Uran, District Raigad was compulsorily acquired under Land acquisition Act on 25.11.1986 as noted from the judgment or Civil Court, Alibagh(page no.4 to 20 of the paper book).

5. Assessing Officer issued notice u/s.148 for A.Y.2016-17 on 31.03.2021 based on the information received on Portal of Income Tax Department. Then, Assessing Officer issued notice u/s.142 on various dates. Assessee filed Return of Income in response to notice u/s.148 on 08.03.2022 declaring total income at Rs.13,500/-. In the Return of Income, Assessee has claimed interest received on enhanced compensation under section 28 of Land Acquisition Act, of Rs.87,64,016/- as exempt income.

6. The Assessing Officer in the assessment order held that interest income of Rs.87,64,016/- received under section 28 of Land Acquisition Act, on enhanced compensation is taxable under section 56(2)(viii) of the Income Tax Act. Assessing Officer allowed deduction u/s.57(iv) of the Income Tax Act and taxed Rs.43,82,008/-. Aggrieved by the assessment order, Assessee filed appeal before ld.CIT(A).

7. Assessee relied on the decision of Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF) 315 ITR 1 and other decisions before ld.CIT(A). The ld.CIT(A) upheld the assessment order. Aggrieved by the order of the ld.CIT(A), Assessee has filed appeal before this Tribunal.

7.1 Thus, the only issue before us is that whether interest received u/s.28 of the Land Acquisition Act on enhanced compensation is taxable under section 56(2)(viii) of the Income Tax Act or not!

8. It is an admitted fact that Assessee’s Father’s Agricultural Land was compulsorily acquired by the Government of Maharashtra in 1986 under the Land Acquisition Act.

9. Assessee’s father has expired. Senior Division Civil Judge, District Raigad vide his order dated 13.05.2013 has enhanced the compensation paid by the State Government of Maharashtra.

9.1 Admittedly, Assessee has received interest income of Rs.87,64,016/- under section 28 of the Land Acquisition Act, on enhanced compensation.

10. The Hon’ble Supreme Court in the case of CIT v. Ghanshyam(HUF) [2009] 315 ITR 1 vide order dated 16.07.2009 has observed as under, while explaining taxability under compulsory land acquisition :

“14. The following conditions need to be satisfied for taxing a transaction as capital gains, viz., the subject-matter must be a capital asset, the transaction must fall in the definition of “transfer”, there must be profit or loss called “Capital Gains” and that the taxpayer has claimed exemption in whole or in part by complying withlegal provisions (Like section 54F).

…… ……. …

33. …….. …… …….Interest under section 28 unlike interest undersection 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which isnot the case with interest under section 34 of the 1894 Act.”

10 .1 Thus, Hon’ble Supreme Court held that interest income under section 28 of Land Acquisition Act is part of enhanced compensation.

11. Hon’ble Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai v. Income-tax Officer-TDS- 1-Surat in Special Civil Application No.17944 of 2015 vide order dated 31.03.2016; 388 ITR 343 (Gujarat) has held as under :

“13. The upshot of the above discussion is that since interest under section 28 of the Act of 1894, partakes thecharacter of compensation, it does not fall within the ambit of the expression “interest” as contemplated insection 145A of the I.T. Act.

12. Before the Hon’ble Gujarat High Court(supra), Revenue had taken the plea that Income Tax Act was amended w.e.f. 01.04.2010 and hence, decision of Hon’ble Supreme Court in the case of CIT v. Ghanshaym(HUF) was not applicable after the amendment. However, Hon’ble Gujarat High Court in para 11 held as under :

“11…. …… …. ….

Thus, the substitution of section 145A by Finance (No. 2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai v. CIT [1990] 181 ITR400 whereby it was held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. Therefore, when one reads the words “interest received on compensation or enhanced compensation” in section 145A of the I.T. Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF)’s case (supra).”

12.1 Thus, Hon’ble Gujarat High Court held that Hon’ble Supreme Court’s decision in the case of CIT v. Ghanshyam(HUF) is applicable even after the amendment introduced from 01.04.2010.

13. No contrary decision of Hon’ble Jurisdictional High Court has been brought to our notice.

14. ITAT Pune Bench in the case of Sanjay Bhimrao Patil v. ITO [2023] 200 ITD 575 vide order dated 08.02.2023 has held as under :

“Therefore, respectfully following the decision of Hon’ble Jurisdictional High Court of Bombay in the case of Rupesh Rashmikant Shah (supra), we hold the interest received u/s. 28 of the Land Acquisition Act would not fall within the ambit of the expression interest as envisaged u/s. 145A(b) of the Act, further, hold that the amendment by way of substitution of section 145A by Finance (No. 2) Act, 2009 w.e.f. 1-042010 and amendment by way of insertion of clause (iii) in section 56(2) by Finance Act, 2009 would have no applicability to the facts of the present case and in view of the same the order of CIT(A) in confirming the order of AO is not justified.

14.1 Thus, the proposition of law laid down by Hon’ble Supreme Court, Hon’ble Gujarat High and ITAT Pune Bench is that the interest income under section 28 of Land Acquisition Act, is not taxable under section 56(2)(viii) of the Income Tax Act, 1961.

15. Respectfully following the decision of Hon’ble Supreme Court, Hon’ble Gujarat High Court and ITAT Pune Bench, the Ground No.1 raised by the Assessee is allowed.”

26. Since the land in the instant case is located at village Dhutum, Tal Uran, Dist. Raigad and the Assessing Officer who has framed the assessment is ITO, Ward-4, Panvel, therefore, the Assessing Officer who has framed the assessment falls within the territorial jurisdiction of the Hon’ble Bombay High Court, Bombay Bench. Therefore, in view of various decisions cited (supra), we hold that the interest received on enhanced compensation on compulsorily acquisition of land is not taxable u/s 56(2)(viii) of the Act. Accordingly, the order of the Ld. CIT(A) / NFAC is set aside and the grounds raised by the assessee are allowed.

27. Grounds by the assessee in ITA No.1798/pUN/2024 read as under:

The following grounds are taken without prejudice to each other-

On facts and in law,

The Appellant – Assessee requests to condone the delay in view of the affidavit and admit an appeal with further request to note that order of CIT(A)-NFAC dated 10/03/2023 was not communicated and assessee came to know about appeal dismissed by the CIT(A)-NFAC when notice of recovery dated 20/08/2024 was received.

The learned CIT(A)-NFAC failed to appreciate while confirming the action of the AO that the nature of the Gross Interest at Rs.1,84,90,236/- (50% assessed at Rs.92,45,118/-) awarded u/s 28 of the Land Acquisition Act, 1894 was Capital receipt and not taxable u/s 56(2)(viii) r.w.s. 145A(b) and sec 57(iv) of the Income Tax Act, 1961; as per principle/precedent laid down by the Hon’ble Supreme Court in the case of CIT v/s Ghanshyam HUF [2009] 315 ITR 1.

The learned CIT(A)-NFAC failed to appreciate while confirming the action of the AO that the Gross Interest at Rs.1,84,90,236/- (50% assessed at Rs.92,45,118/-) awarded u/s 28 of the Land Acquisition Act, 1894 was Capital Receipt but not chargeable as capital gain u/s 45(5) as the compulsorily acquired agricultural land was Rural Agricultural Land and therefore was not capital asset u/s 2(14) which fact is not disputed by the learned AO and the learned CIT(A)-NFAC.

The learned CIT(A)-NFAC confirmed the addition of interest awarded u/s 28 of the Land Acquisition Act, 1894 without appreciating that:

(a)

The decision of Hon’ble Apex Court in the case of CIT v/s Ghanshyam HUF [2009] 315 ITR 1 still prevails and therefore the interest. u/s 28 of the Land Acquisition Act, 1894 is not coming in the ambit of taxation.

(b)

The decision of the Non-Jurisdictional High Court cannot be applied when direct decision of Hon’ble Supreme Court is existing and without distinguishing the facts of the case as against the facts of the decision relied upon by the Assessee.

(c)

Majority of decisions cited and relied upon by the assessee which were rendered by the Hon’ble ITAT Pune in favour of the assessee carry judicial precedence especially where there is no direct decision of jurisdictional High Court, even if the decision of Non-Jurisdictional High Court is against.

The Assessee craves leave to add, alter, amend or delete any of the grounds of appeal.

28. Grounds by the assessee in ITA No.1799/pUN/2024 read as under:

The following grounds are taken without prejudice to each other

On facts and in law.

The Appellant-Assessee requests to condone the delay in view of the affidavit and admit an appeal with further request to note that order of CIT(A)-NFAC dated 15/05/2023 was not communicated and assessee came to know about appeal dismissed by the CIT(A)-NFAC where notice of recovery dated 16/08/2024 was received.

The Learned CIT(A)-NFAC failed to adjudicate the validity of notice issued u/s 148 and inter-alia re-assessment proceedings.

The learned CIT(A)-NFAC failed to appreciate while confirming the action of the AO that the nature of the Gross Interest at Rs.10762305/- (50% assessed at Rs.53,81,153/-) awarded u/s 28 of the Land Acquisition Act, 1894 was Capital receipt and not taxable u/s 56(2)(viii) r.w.s. 145A(b) and sec 57(iv) of the Income Tax Act, 1961; as per principle/precedent laid down by the Hon’ble Supreme Court in the case of CIT v/s Ghanshyam HUF [2009] 315 ITR 1.

The learned CIT(A)-NFAC failed to appreciate while confirming the action of the AO that the Gross Interest at Rs.10762305/ (50% assessed at Rs.53,81,153/-) awarded u/s 28 of the Land Acquisition Act, 1894 was Capital Receipt but not chargeable as capital gain u/s 45(5) as the compulsorily acquired agricultural land was Rural Agricultural Land and therefore was not capital asset u/s 2(14) which fact is not disputed by the learned AO and the learned CIT(A)-NFAC.

The learned CIT(A)-NFAC erred in confirming the addition of interest awarded u/s 28 of the Land Acquisition Act, 1894 without appreciating that:

(a)

The learned CIT(A)-NFAC failed to appreciate that majority of decisions cited and relied upon by the assessee, during the assessment proceedings, which were rendered by the Hon’ble ITAT Pune in favour of the assessee carry judicial precedence especially where there is no direct decision of jurisdictional High Court, even if the decision of Non-Jurisdictional High Court is against.

The Assessee craves leave to add, alter, amend and delete any of the grounds of appeal.

29. After hearing both the sides, we find the grounds raised by the respective assessees in the above 2 appeals are identical to the grounds raised in ITA No.1797/pUN/2024. We have already decided the issue in ITA No.1797/pUN/2024 and allowed the grounds raised by the assessee by holding that the interest received on enhanced compensation on compulsory acquisition of land is not taxable u/s 56(2)(viii) of the I.T. Act, 1961. Following similar reasonings, we allow the grounds raised by the respective assessees.

30. In the result, all the 3 appeals filed by the respective assessees are allowed.

Inadvertent Claim Of Full Pre-Incorporation Expenses Disclosed Bona Fide Does Not Attract Section 270A Penalty

Ashwani Kumar — Sat, 25 Jul 2026 06:31:38 +0000

Inadvertent Claim Of Full Pre-Incorporation Expenses Disclosed Bona Fide Does Not Attract Section 270A Penalty

Issue

Levy of Penalty under Section 270A for Inadvertent Expense Claim: Whether penalty under Section 270A for under-reporting of income can be levied when an assessee inadvertently claims 100% of pre-incorporation expenses instead of 1/5th under Section 35D, but offers a bona fide explanation, discloses all material facts under Section 270A(6)(a), and the AO fails to specify the exact limb/clause of under-reporting under Section 270A(2).

Facts

Business & Filing: For AY 2018–19, the assessee-company, a joint venture incorporated to manufacture helicopters, filed its return of income.
Disallowance under Section 35D: During assessment, the Assessing Officer (AO) noted a claim of pre-incorporation expenses amounting to approximately Rs. 26.83 lakhs. Under Section 35D, such preliminary expenditure is allowable only in 5 equal annual installments (1/5th per year, i.e., Rs. 5.37 lakhs allowed and Rs. 21.47 lakhs disallowed).
Assessee’s Surrender & Explanation: The assessee explained that claiming the full amount instead of 1/5th was an inadvertent error in the return. The assessee agreed to the AO’s proposal to restrict the deduction to Rs. 5.37 lakhs.
Subsequent Year Behavior: To demonstrate bona fides, the assessee did not claim the remaining 4/5th preliminary expenditure in subsequent assessment years.
Penalty Initiation: The AO made the disallowance of Rs. 21.47 lakhs and initiated penalty under Section 270A for under-reporting of income, without specifying the exact clause or limb under Section 270A(2) under which the charge was framed.

Decision

Bona Fide Explanation Covered under Section 270A(6)(a) (In favor of Assessee): Held YES. The explanation that the full claim was an inadvertent error was genuine and supported by all material disclosures, bringing the case squarely under the exclusion provided in Section 270A(6)(a). [Para 11.1]
Defective Charge Vitiates Penalty (In favor of Assessee): Held YES. The AO failed to specify the precise limb or clause of Section 270A(2) under which under-reporting was alleged; hence, the penalty levied under Section 270A was liable to be deleted. [Para 11.4]

Key Takeaways

Inadvertent Errors Are Protected by Section 270A(6)(a): A bona fide inadvertent mistake in claiming deductions—where all underlying material facts are fully disclosed—does not constitute under-reporting or misreporting of income for penalty purposes.
AO Must Specify Precise Limb of Section 270A: Failure by the Assessing Officer to record a specific charge stating which exact clause of Section 270A(2) or Section 270A(9) is satisfied invalidates the penalty proceedings.

IN THE ITAT BANGALORE BENCH ‘A’

Indo-Russian Helicopters Ltd.

ITO

Prashant Maharishi, Vice President
and Keshav Dubey, Judicial Member

IT Appeal No. 72 (Bang) of 2026
[Assessment year 2018-19]

JUNE 23, 2026

Sudharshan Gupta, AR for the Appellant. Balusamy H., JCIT-D.R. for the Respondent.

ORDER

Keshav Dubey, Judicial Member.-This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 23/01/2024 vide DIN & Order No. ITBA/NFAC/S/250/2023-24/1060031566 passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2018-19.

2. The assessee has raised the following grounds of appeal: –

The order passed by the ld. CIT(A), NFAC is erroneous, contrary to law and facts of the case.

The ld. CIT(A) erred in upholding the order of the ld. AO imposing penalty u/s 270A of the Income Tax Act, 1961

The ld. CIT(A) erred in law and on facts in holding that the appellant company had under reported its income, despite the fact that the appellant had incurred losses during the relevant assessment year.

The appellant craves to leave, add amend, alter and or modify any of the grounds of appeal before or at the time of hearing.

For these and other grounds that may be urged before the Honourable Income Tax Appellate Tribunal, it is prayed that the penalty u/s 270A of the Income Tax Act, 1961 be deleted.

3. At the outset, as noted by the Registry, there is a delay of 642 days in filing the appeal before this Tribunal. The ld. A.R. of the assessee drew our attention on an application for condonation of delay dated 31/12/2025 stating the reasons/cause for such huge delay, which are reproduced below for ease of reference and record:

3.1 Having heard the ld. Counsel for the assessee as well as ld. D.R. it is perceived that the explanation offered in the condonation application is plausible and sufficient cause been shown by the assessee which prevented them from filing the appeal within the prescribed period u/s 253 of the Act and accordingly we inclined to condone the delay and admit the appeal for adjudication on merits.

4. The brief facts of the case are that the assessee is a company incorporated on 2.5.2017 to carry on the business of manufacturing of Russian design Kamov 226T Helicopter. The company is a joint venture between Hindustan Aeronautics Ltd., Russian Helicopters and Rosoboronexport. The assesse company filed its return of income for AY 2018-19 on 29.8.2018 by declaring total loss of Rs.45,33,901/-. The said return of income was processed and accordingly intimation u/s 143(1) of the Act was passed accepting the returned loss of Rs.45,33,901/-. Thereafter, the case of the assessee was selected for scrutiny under CASS and accordingly notices u/s 143(2) as well as 142(1) of the Act along with show cause notice were issued. The assessee furnished submissions on various dates through e-filing/ITBA portal. The reason for selection of the case was “Introduction of large capital/share capital in the year of incorporation”. During the course of assessment proceeding, the AO noticed that the assessee had claimed pre-incorporation expenditure of Rs.26,83,290/- and accordingly the assessee was requested to furnish complete details of pre-incorporation/pre-operative expenditure and justify its allowability as expenses. The AO observed that as per the provisions of section 35D of the Act, the assessee was eligible to claim deduction of only 1/5^th of the pre-incorporation expenses in a year and the total expenses was to be claimed in 5 equal instalments in 5 years. However, the assessee claimed full expenses in a single year i.e. during financial year 2017-18 relevant for assessment year 2018-19 which is not allowable. Hence, an amount of Rs.5,36,658/- (1/5^th of Rs.26,83,290/-) only to be allowed as deduction and remaining expenses of Rs.21,46,632/-(Rs.26,83,290/- – Rs.5,36,658/-) is liable to be disallowed and allowed to be carried forward for claiming deduction in subsequent four years. Accordingly, the draft assessment order proposing modification in the returned loss was prepared and sent to the assessee.

4.1 The assessee vide its reply dated 3.5.2021 submitted that company has incurred pre-incorporation expenses of Rs.26,83,290/-which has been inadvertently fully claimed in the return of income instead of 1/5^th of such expenses over a period of 5 years. The assessee company agreed on the action of AO in allowing Rs.5,36,638/- for the AY 2018-19 and disallowing Rs.21,46,632/-which is in accordance with the provisions of section 35D of the Act. The assessee again reiterated that the claim of the entire expenditure was not intentional but inadvertent claim and accordingly prayed not to initiate penalty proceedings u/s 270A of the Act on the ground that income for the year is under reported. As the assessee agreed with the disallowance of Rs.21,46,632/- as per the provisions of section 35D of the Act, as proposed in the draft assessment order, accordingly, an amount of Rs.21,46,632/- was disallowed and added back to the income of the assessee for the year under consideration. The AO completed the assessment proceedings u/s 143(3) of the Act on 20.5.2021 on a total assessed loss of Rs.23,87,269/- against a returned loss of Rs.45,33,901/-. The AO before completion of the assessment proceedings also initiated the penalty proceedings u/s 270A of the Act for under reporting of income.

5. Thereafter, the AO on the very same day i.e. on 20.5.2021 issued show cause notice u/s 274 r.w.s. 270A of the Act asking the assessee to show cause as to why penalty order u/s 270A of the Act shall not be passed for under reporting of income amounting to Rs.21,46,632/-. During the course of penalty proceeding, the assessee company once again reiterated that assessee company has incurred pre-incorporation expenditure of Rs.26,83,290/- which has been inadvertently fully claimed in the return of income instead of 1/5^th of such expenses over a period of 5 years. The assessee also submitted that the claim was not intentional but an inadvertent claim and accordingly prayed that the penalty proceeding u/s 270A of the Act may not be initiated. The AO however, did not accept the contention of the assessee by holding that the assessee during the course of assessment proceeding accepted the disallowances under the head “pre-incorporation expenses” as per provisions of section 35D of the Act and therefore, the under reported income to the tune of Rs.21,46,632/- as per section 270A of the Act for AY 2018-19 was imposed to the assessee company @ 50% of the amount of tax payable. Accordingly, the AO directed to pay an amount of Rs.3,31,655/- i.e. 50% of Rs.6,63,310/- by way of penalty u/s 270A of the Act for under reporting of income.

6. Aggrieved by the penalty order passed u/s 270A of the Act dated 16.3.2022, the assessee preferred an appeal before the ld. CIT(A)/NFAC.

7. The ld. CIT(A)/NFAC dismissed the appeal of the assessee by holding that the assessee did not furnish any concrete reasons or explanation in the submission as to why the AO’s action was unwarranted. In view of the same, the penalty imposed by the AO of Rs.3,31,655/- was upheld.

8. Again, aggrieved by the order of ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal.

9. Before us, the ld. A.R. of the assessee vehemently submitted that assessee company had incurred pre-incorporation expenditure of Rs.26,83,290/- which has been inadvertently fully claimed in the return of income instead of 1/5^th of such expenses over a period of 5 years. Further, ld. A.R. of the assessee submitted that during the course of assessment proceedings as well as penalty proceedings, the assessee had categorically agreed with the action of AO in allowing Rs.5,36,638/-for the AY 2018-19 and disallowing Rs.21,46,632/-, which is in accordance with the provisions of section 35D of the Act. The ld. A.R. further submitted that the entire claim of preincorporation expenditure in AY 2018-19 was not intentional but an inadvertent claim and accordingly prayed that the penalty may be deleted. Further, the assessee has also filed a written submission which are also reproduced below for ease of reference and convenience:

10. The ld. D.R. on the other hand supported the orders of the authorities below and vehemently submitted that the assessee company during the course of assessment proceedings admitted the action of AO in disallowing Rs.21,46,632/- in accordance with the provision u/s 35D of the Act and therefore, penalty is fully justifiable. Further, the ld. D.R. submitted that had the case not been selected for scrutiny, this fact would not have come to the light.

11. We have heard the rival submissions and perused the materials available on record. The AO had passed the assessment order for the AY 2018-19 after assessee agreed that only 1/5^th of the pre-incorporation expenses was allowable and accordingly concluded the assessment proceedings on a total assessed loss of Rs.23,87,269/- against the returned loss of Rs.45,33,901/-. On going through the assessment order, we also observed that the AO had initiated the penalty proceedings on or before the completion of the assessment proceedings on the ground of under reporting of income.

11.1 It is an undisputed fact that the assessee had incurred preincorporation expenditure of Rs.26,83,290/-. The contention of the assessee is that the claim of entire amount of pre-incorporation expenditure in AY 2018-19 was not intentional but an inadvertent claim. We observed that during the course of assessment proceeding, the assessee vide reply dated 3.5.2021 suo-moto agreed that only 1/5^th of pre-incorporation expenses was allowable and accordingly agreed with the disallowances of Rs.21,46,632/- as per the provisions of section 35D of the Act. We are of the considered opinion that the claim of the assessee was not intentional but an inadvertent claim also supports from the fact that the assessee in subsequent assessment years did not claim the said preliminary expenditure. This clearly demonstrate that there was no intention to deprive any legitimate dues of the government. We also take a note of the fact that during the course of assessment proceeding, the assessee company voluntarily accepted the inadvertent error and agreed for the disallowance of Rs.21,46,632/-. Thus, we are of the considered opinion that the explanation offered by the assessee that it was an inadvertent error and the claim was not intentional is bona fide and the assessee has disclosed all the material facts fully to substantiate the explanation offered within the meaning of section 270A (6)(a) of the Act.

11.2 For the purpose of evaluating the correctness of rival submissions addressed, we deem it apposite to extract section 270A of the Act herein below:

“270A. Penalty for under-reporting and misreporting of income.

(1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.

(2) A person shall be considered to have under-reported his income, if-

(a) the income assessed is greater than the incone determined in the return processed under clause (a) of sub-section (1) of section 143;

(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;

(d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of subsection (1) of section l43;

(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;

(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;

(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

(3) The amount of under-reported income shall be,-

(i) in a case where income has been assessed for the first time,-

(a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143;

(b) in a case where no return of income has been furnished or where return has been furnished for the first time under section 148,-

(A) the amount of income assessed, in the case of a company, firm or local authority; and

(B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);

(ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order;

Provided that where under-reported income arises out of determination of deemed total Income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula-

(A- B) + (C- D)

where,

A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);

B= the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;

C= the total income assessed as per the provisions contained in section 115JB or section 115JC;

D= the total income that would have been chargeable had the total income assessed as per the provisions contained in section l15JB or section 115JC been reduced by the amount of underreported income:

Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Explanation.- For the purposes of this section,-

(a) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated;

(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.

(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under- reported for the preceding year in the following order-

(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and

(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.

(6) The under-reported income, for the purposes of this section, shall not include the following, namely:-

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

(b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

(e) the amount of undisclosed income referred to in section 271AAB.

(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under- reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hndred per cent of the anount of tax payable on under-reported income.

(9) The cases of misreporting of income referred to in sub-section

(8) shall be the following, namely:-

(a)misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

(10) The tax payable in respect of the under-reported income shall be-

(a) where no return of income has been furnished or where return has been furnished for the first time under section 148 and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;

(b) where the total income determined under clause (a) of subsection (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;

X= the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and

Y= the amount of tax calculated on the total income determined under clause (a) of sub- section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.”

11.3 On plain reading of the same, we are of the opinion that when a notice u/s 270A of the Act is issued, the following step ladder should be followed by the AO while levying penalty u/s 270A of the Act-

Underreporting – First the onus is on the AO to establish whether any of the contingency spoken of in clauses (a) to (g) of Section 27OA(2) in the case of the assessee are attracted or not. If Yes, under which clause (limb) the assessee has underreported the income?

Now the onus shifted on the assessee to refute by establishing that the assessee falls within any of the clauses (a) to (e) of section 270A(6) of the Act & hence there is no underreporting of income & the proceedings end there. Section 270A(6) is a window given by the legislature to give a leave to the Assessee.

If the assessee is not able to controvert the charge of under reporting, the under reporting gets confirmed.

Once the charge of underreporting is confirmed, then the AO has to establish whether the underreporting is in consequence of any of the clauses (a) to (f) of Section 270A(9) of misreporting. If Yes, under which clause (limb) the assessee has misreported the income?

11.4 In the present case, we are of the considered opinion that first the onus is on the AO to establish whether any of the contingency spoken of in clauses (a) to (g) of Section 27OA(2) in the case of the assessee are attracted or not. If yes, under which clause (limb) the assessee has underreported the income. In our opinion, the AO has not brought on record any specific charge of under reporting of income as to how the ingredient of sub-section (2) of section 270A of the Act is satisfied i.e. under which clause(limb) the assessee has under reported his income. In our considered opinion, the provision of section 270(6)(a) of the Act is applicable in the case of the assessee which states that the under reporting of income shall not include the amount of income in respect of which assessee offers an explanation and the AO is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered. We are of the considered opinion that the claim of the assessee was not intentional but an inadvertent claim also supports from the fact that the assessee in subsequent assessment years did not claim the said preliminary expenditure. This clearly demonstrate that there was no intention to deprive any legitimate dues of the government. We also take a note of the fact that during the course of assessment proceeding, the assessee company voluntarily accepted the inadvertent error and agreed for the disallowance of Rs.21,46,632/-. Thus, in our opinion the explanation offered by the assessee that it was an inadvertent error and the claim was not intentional is genuine one.

11.5 We are also of the opinion that the penalty by hereditary nature is always discretionary. The legislature has used the word “may” in Section 270A(1) of the Act which clearly says that it is discretionary on the part of the AO to levy penalty or not. In our opinion, the penalty is not at par with the tax and interest and therefore, penalty should not be levied in a light-hearted manner or in a routine-manner and not every additions/ disallowances are liable for penalty. The primary onus is on the revenue to prove that assessee falls under particular limb of the fault. The AO has to bring the case in the four corners of the sections in order to levy penalty, which in our opinion, the authorities below failed to do so. In view of the above & considering the fact that assessee during the course of assessment proceeding admitted that the entire pre-incorporation expenditure of Rs.26,83,290/- was inadvertently claimed in the return of income instead of 1/5^th of such expenses over a period of 5 years and the claim was not intentional, we direct the AO to delete the entire penalty of Rs. 3,31,655/- levied under Section 270A of the Act.

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

Ex-Gratia Amount Received On Voluntary Retirement Under Employer Scheme Is Non-Taxable Capital Receipt

Ashwani Kumar — Wed, 22 Jul 2026 07:54:22 +0000

Ex-Gratia Amount Received On Voluntary Retirement Under Employer Scheme Is Non-Taxable Capital Receipt

Issue

Whether ex-gratia/settlement amounts received by an employee upon opting for voluntary retirement under an employer’s financial scheme constitute a non-taxable capital receipt or taxable income under Section 56(2)(xi) / Section 17 of the Income-tax Act, 1961.

Facts

Background & Receipt: The assessee, an ex-employee of Pfizer India, received ~₹54.64 lakhs under a corporate Financial Scheme following a plant closure.
Original Return & AO Order: The assessee filed a return for AY 2019-20 declaring income of ~₹60.34 lakhs and claimed ~₹18.29 lakhs as Section 89 relief by treating the payout as advance salary. The Assessing Officer restricted the Section 89 relief to ~₹12.82 lakhs.
CIT(A) Ruling: On appeal, the assessee withdrew the Section 89 claim and pleaded that the settlement amount was a non-taxable capital receipt. The CIT(A)/NFAC rejected this and held ~₹53.53 lakhs taxable under Section 56(2)(xi) as “Income from Other Sources.”
Co-Employee Precedents: Identical cases involving other employees of the same company under the exact same scheme had already been decided by the Tribunal in favor of the employees.

Decision

Voluntary Nature of Exit: The assessee’s exit under the scheme was a voluntary retirement/resignation as per settlement terms, rather than retrenchment or forced termination by the employer.
Non-Taxable Capital Receipt: Since there was no compulsory termination of employment, the ex-gratia/settlement amount received under the scheme constitutes a capital receipt not chargeable to tax.
Deletion of Addition: The addition sustained by the CIT(A)/NFAC under Section 56(2)(xi) was held unjustified and ordered to be deleted.

Key Takeaways

Capital Receipt Standard: Ex-gratia compensation received on voluntary retirement/resignation under an agreed employer scheme is a capital receipt and remains non-taxable unless explicitly brought under tax provisions.
Inapplicability of Section 56(2)(xi): Settlement payouts arising from mutual agreement/voluntary retirement schemes do not fall under Section 56(2)(xi) as income from other sources.
Binding Consistency: Identical issues resolved by appellate forums for co-employees under the same corporate scheme bind subsequent assessments on the same set of facts.

IN THE ITAT PUNE BENCH ‘B’

Ram Dattatray Kaldate

ITO

R.K. PANDA, Vice President
and Ms. Astha Chandra, Judicial Member

IT Appeal No. 2177 (PUN) OF 2025
[Assessment year 2019-20]

JUNE 9, 2026

Nikhil S Pathak and Archana Shetty for the Appellant. Sandip Pawar for the Respondent.

ORDER

Astha Chandra, Judicial Member. – The appeal filed by the assessee is directed against the order dated 24.07.2025 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)/NFAC”] pertaining to Assessment Year (“AY”) 2019-20.

2. Briefly stated facts of the case are that the assessee is an individual and ex-employee of M/s. Pfizer Healthcare India Pvt. Ltd., Aurangabad (“Pfizer India”). For AY 2019-20, the assessee filed his return of income on 29.07.2019 declaring income of Rs.60,34,360/- and claiming relief of Rs.18,28,958/- u/s 89 of the Income Tax Act, 1961 (the “Act”). The case of the assessee was selected for scrutiny under CASS for issues relating to refund claim and relief for arrear salary or advance salary. During the AY 2019-20, the assessee received Rs.54,64,480/- as a full and final settlement on account of his voluntary retirement from his employment with Pfizer India pursuant to Pfizer Healthcare India Private Limited Finance Scheme for employees at Aurangabad, 2019 (“Scheme”) which was framed by the company and offered to the assessee due to closure of its plant at Aurangabad. The assessee claimed the said amount as advance salary for the remaining service period and sought relief u/s 89 of the Act. The Ld. Assessing Officer (“AO”) noted that the payment was made under a Voluntary Retirement Scheme (VRS), which is ineligible for claiming relief u/s 89 of the Act. The Ld. AO further observed certain errors in the assessee’s tax computation in Form 10E, where no tax was calculated for the future years. After recomputing, the Ld. AO restricted the relief claimed u/s 89 of the Act to Rs.12,82,510/- as against Rs.18,28,958/- claimed by the assessee in his return of income for AY 2019-20 and accordingly completed the assessment vide his order dated 20.09.2021 passed u/s 143(3) r.w.s. 144B of the Act.

3. Aggrieved, the assessee filed an appeal before the Ld. CIT(A)/NFAC. During the appellate proceedings, the assessee submitted that during the assessment proceedings he withdrew his claim of relief made u/s 89 of the Act and alternatively claimed the said receipts of ex-gratia and other incentives as capital receipts. However, the Ld. AO has not considered the same while passing the impugned assessment order. After considering the submission(s) of the assessee and various contentions raised therein along with judicial precedents in support thereof, the Ld. CIT(A)/NFAC dismissed the appeal of the assessee holding that the amount of Rs.53,52,77/-received by the assessee is chargeable to tax as income under the head „income from other sources’ as per the provisions of section 56(2)(xi) of the Act and also upheld the disallowance of relief claimed u/s 89 of the Act of Rs.12,82,510/- made by the Ld. AO. The relevant observations and findings of the Ld. CIT(A)/NFAC are reproduced below :

“6. Decision:

6.1 The appellant has raised various grounds and it is seen that all are related to the sole issue of taxability of compensation/amounts received of Rs.54,64,480/- (Rs.53,52,775/-) in terms of Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 on account of the appellant opting to voluntarily retire from the employment with the said Company.

6.2 The appellant was an employee of Pfizer Healthcare India Pvt. Ltd., Aurangabad and the said company decided to cease manufacturing in its plant due to significant long-term loss of product demand. The said company therefore provided a beneficial settlement to all permanent employees of the Plant by offering a financial scheme which was voluntary with option given to employee to opt for the same or not. The appellant opted for the above financial scheme offered by the said company and received an amount of Rs.54,64,480/- (Rs.53,52,775/-) during FY 2018-19 as full and final settlement as per the above financial scheme of the said company.

6.2.1 In the return of income filed for the impugned AY 2019-20 the appellant has shown the total income at Rs.64,34,360/- and after computing tax has claimed relief u/s 89 of the Act of Rs.18,25,958/- During the course of assessment proceedings the appellant has stated that he has claimed relief u/s 89 of the Act read with Rule 21A of the Income Tax Rules, 1962 on the proposition that the amount of Rs.54,64,480/- received is salary in advance. The Assessing Officer (AO) observed that full and final settlement amount received as Ex-Gratia (Severance Pay) of Rs.54,64,480/- (Rs.53,52,775/-) is advance salary in respect of the balance period of service. However, the Assessing, Officer recomputed the relief claimed by the appellant u/s 89 of the Act at Rs. 12,82,510/- based on his observation that basic exemption limit and deduction u/s VIA cannot be allowed twice in computing relief u/s 89 of the Act. Accordingly, in the assessment order passed u/s 143(3) r.w.s. 1448 of the Income Tax Act, 1961 dated 20/09/2021 the total income of the appellant as returned was accepted and relief or Rs. 12,82,510/- was allowed u/s 89 of the Act.

6.3 During the course of appellate proceedings in initial submission made the appellant has stated that during assessment proceedings he has withdrawn the claim of relief u/s 89 of the Act made in ITR & computation and alternatively requested the AO to treat/consider the amount received as Ex-Gratia (Severance Pay) of Rs. 54,64,480/- (Rs. 53,52,775/-) as Capital Receipts. The appellant has stated that the amounts received in terms of the Financial Scheme of the Company were paid de hors any contract of employment and thus were voluntary payments & was not paid on termination of his employment. The appellant has relied on decision of Jurisdiction Hon’ble Pune ITAT in case of Mahadev Dhangekar, and various other judicial pronouncements of Hon’ble High Courts in support of his claim of Capital Receipts. The appellant has also relied on the judgment of Hon’ble Bombay High Court in the case of Balmukund Acharya, 310 ITR 310 to claim that if the assessee under a mistake/misconception is over assessed then the Authorities should assist him and ensure that only legitimate taxes due are collected.

6.3.1 In further submissions made during appellate proceedings the appellant has furnished copies of the orders passed u/s 250 of the Act in the case of employees of the Colgate Palmolive, Aurangabad and claimed that the amounts receive by the appellant are Capital Receipts and not ‘Profit in lieu of Salary’ as held in the above orders passed u/s 250 of the Act. The appellant in submissions made has relied on the judgments given by Hon’ble Pune ITAT in case of Mahadev Dhangekar, Hon’ble Mumbai ITAT in the case of Ajay Ghose and by Hon’ble Ahmedabad ITAT in the case of Shamik P. Parikh by stating that the facts of these cases are similar to the facts of the appellant’s case. The appellant on the issue of claim of Capital Receipts not made in return but made before the AO based on various judicial pronouncements stated that the appellant is entitled to make any claim before the assessment is completed and also powers of appellate authorities to entertain a valid, lawful & meritorious claim during appellate proceedings.

6.3.2 The appellant during the course of appeal proceedings has also furnished the details of assessment orders passed in about 84 cases and has claimed that in these 84 cases are of similar employees working in the same Company and in the reopened assessment completed in these cases the claim of Capital Receipts has been accepted. The appellant has also furnished order passed by CIT(A)’s in the cases of Nilesh B Thorwe, Navanath E. Londhe, Devidas S.Chandapure, Rafique K.Sayyad and Arjun Bapurao Kale wherein the claim of Capital Receipts has been accepted. The appellant has also relied on the judgments of the jurisdictional Hon’ble Pune ITAT in the cases of Ashok Raghunathrao Kulkarni in 117/pUN/2024 dated 12.08.2024, Prasad Vijaykumar Kulkarni in 850/pUN/2024 dated 17/09/2024 and Atul Shashikant Garbhe in 863/pUN/2024 dated 17/09/2024 which are cases of Co-employees and the Hon’ble ITAT has accepted the claim of Capital receipts and instructed the AO to delete the additions made u/s 17(3) of the Act.

6.3.3 The appellant was given hearing notice on 25/06/2025 for enhancement of income by proposing to bring to tax the amount of compensation received of Rs. 54,64,480/- (Rs. 53,52,775/-) under the head ‘Income from Other Sources’ as per provisions of section 56(2)(xi) of the Income Tax Act, 1961. In reply to the above the appellant has submitted that as per the terms of the Settlement Scheme of the Company there is no termination of employment of the appellant and therefore the provisions of section 56(2)(xi) of the Act are not applicable. The appellant has also again stated that the claim of Capital Receipts has been accepted by various ITAT & High Courts and cited the judgments in the case of ITO v. Avirook Sen Delhi ITAT – , Mahadev Dhangekar – Pune ITAT , Shamik Pankajbhai Parikh v. ITO Ahmedabad ITAT No. 659/Ahd/2023, Ajay Ghose v. DCIT Mumbai ITAT No. 1720/Mum/2021, CIT v. Deepak Verma – Delhi High Court – 339 ITR 475 and Arunbhai Naik v. ITO – Gujarat High Court- 379 ITR 511.

6.4 I have perused the assessment order passed, the statement of facts, the submissions made by the appellant and the various judicial pronouncement cited by the appellant during the appeal proceedings. The undisputed facts in the case of the appellant are as under.

1 . The appellant was an employee of the company Pfizer Healthcare India Private Limited.

2 . The appellant has opted to retire voluntarily from his employment with the sald Company in accordance with the Scheme called the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019.

3 . The appellant has received an amount of Rs. 53,52,775/- [Ex-gratia (Severance pay) Rs. 38,76,521.75+ Other Payments (Early Bid and Group participation Incentives) Rs. 12,00,000/- + Notice Period Payout (3 months x monthly gross considered for scheme calculation) Rs. 2,76,252.60] as per the above Financial Scheme during the financial year 2018-19.

4 . The appellant in the return of income and computation has not made a claim that the amounts of Rs. 53,52,775/- received as per the Financial Scheme is a Capital Receipt but has claimed relief u/s 89 of the Act.

6.4.1 The appellant during appeal proceedings have stated that he has made a claim during assessment proceedings that the amount of Rs. 53,52,775/-received as per the Financial Scheme is a Capital Receipt. From the perusal of reply furnished by the appellant during assessment proceedings it transpires that a passing reference was made by the appellant about the amount received as Ex-gratia (Severance Pay) being Capital Receipts but no formal claim for the same was made. Nevertheless, the appellant during the appellate proceedings has made a claim that the amount of Rs. 53,52,775/-received as per the Financial Scheme should be treated as a Capital Receipt and not profit in lieu of salary and has relied on various judicial pronouncements in support of the claim made.

6.4.2 In the various submissions made during appellate proceedings it has been emphasized by the appellant that the amount received as per the Financial Scheme is not a compensation to fall under the definition of ‘profits in lieu of salary’ as it is a voluntary payment by the Company and has been received on resignation and therefore does not constitute refrenchment or termination of employment. The appellant has relied on a plethora of judicial pronouncements in support of the above claim made. From the analysis of the judicial pronouncements relied upon by the appellant it is seen that in those cases the Hon’ble Courts and ITATS have held that any voluntary payment made by a company as ex-gratia and received by a person on termination owing to closure of department/company would be a ‘Capital Receipt’. However, it is also important to note that all these judicial pronouncements relied upon by the appellant (except in some cases) are related to the A.Y. 2016-17, 2017-18 and 2018-19 or to an assessment year earlier to A.Y. 2019- 20.

6.4.3 By way of the Finance Act, 2018 a new Clause (xi) was inserted in sub section (2) of Section 56 of the Income Tax Act, 1961 w.e.f. 01.04.2019. The provisions of Section 56(1) of the Income Tax Act, 1961 provides that income of every kind which is not chargeable under any of the heads specified in section ’14, items A to E shall be chargeable to income tax under the head “Income from Other Sources’. Further, clause (xi) of section 56(2) of the Act provided that any compensation or other payment received by any person in connection with the termination of his employment will be chargeable to tax under head ‘Income from Other Sources’. In view of above provisions of section 56(2)(xi) of the Income Tax Act, 1961 which was applicable for the impugned AY 2019-20 the appellant was issued a notice for enhancement of income as per provisions of section 251(2) of the Income Tax Act, 1961 during the course of appellate proceedings.

6.4.4 In response to the above notice the appellant has furnished his submissions on 03.07.2025 and has stated that there is no termination of employment of the appellant by the Company and therefore the provisions of section 56(2)(xi) of the Income Tax Act, 1961 is not attracted to the amount paid in connection with the settlement scheme. The appellant has relied on Clause (viii) of the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 and stated that as per the said clause no compensation of any kind has been paid and there is no termination of employment by the Company. The appellant has based his submissions on the arguments that he has not been paid any compensation and there has been no termination of employment therefore the amount received by him in connection with the settlement scheme would neither be taxable u/s 17(3)(1) of the Act nor u/s 56(2)(xi) of the Act as it is a capital receipt.

6.5 The argument of the appellant that amount received under the Financial Scheme is not compensation is taken up first for adjudication. The receipt of amounts on account of cessation of employment whether constitutes compensation has been a subject matter of litigation before the various Hon’ble High Courts. The Hon’ble High Court of Madras in the case of G.N. Badami v. CIT as reported in [1999] 240 ITR 263 (Madras)/[1998] 144 CTR 289 (Madras) has in the case of the assessee who has received special payment under a voluntary programme to leave the company has held that the Tribunal had come to the correct conclusion that there was a termination of the assessee’s employment and the termination of the employment may be either at the instance of the assessee or at the instance of the employer but the words, in connection with’ found in sub-clause (i) of clause (3) of section 17 are wide enough to include any compensation received in connection with the termination of the employment of the assessee. Therefore, the Tribunal had come to the correct conclusion in holding that the compensation received by the assessee in connection with the termination of his employment was a profit in lieu of salary within the meaning of sub-clause (1) of clause (3) of section 17.

6.5.1 Similarly, the Hon’ble, High Court of Madras in another case of P. Arunachalam v. CIT as reported in (Madras)/[2000] 241 ITR 827 (Madras) has in the case of an assessee who’s services were terminated under a scheme called ‘Voluntary Separation Scheme’ and assessee was paid certain sum has held that the provisions of section 17(3)(1) are clear that any compensation received at or in connection with the termination of the employment by its employer, is liable to be treated as profit in lieu of salary. It is not disputed that the amount received is compensation and it was received by the assessee from his employer in connection with the termination of his employment. The conditions prescribed under section 17(3)(1) are fully satisfied in this case and the amount of compensation received by the assessee is liable to be treated as salary and, therefore, we are of the view that there is no error in the order of the Tribunal in holding that the amount received by the assessee is taxable as salary and, accordingly, we answer the question of law referred to us in the affirmative, against the assessee and in favour of the revenue.

6.5.2 However, the Hon’ble Gujarat High Court in the case of Arunbhai Naik v. ITO as reported in [2015] (Guj has held that where ex gratia compensation paid to assessee on his discharge from services was voluntary in nature, it would not amount to compensation in terms of section 17(3)(i) of the Act. The Calcutta High Court in the case of CIT v. Ajit Kumar Bose [1987] 165 ITR 90/[1986] 26 (Cal), held that the true nature and character of, the payment was ex-gratia, that is to say, totally voluntary; it was not compensation which implies some sort of an obligation to pay. The amount in question was not “profits in lieu of salary” within the meaning of clause (3) of section 17 of the Act and was not taxable as such. Further, the Delhi High Court in the case of CIT v. Deepak Verma [2010] 339 ITR 475 (Delhi) observed that the word “compensation” when received, the employee should have a right to receive such payment. If the employee has no right, it cannot be treated as “compensation”. The court held that it is for this reason that if the payment is made ex-gratia or voluntary by an employer out of his own sweet will and not conditioned by any legal duty or legal obligation, whether on sympathetic reasons or otherwise, such payment is not to be treated as “profits in lieu of salary” under clause (i).

6.5.3 In view of the contradictory decisions on the various Hon’ble High Courts as discussed above and in order to address the issue of taxation of amounts on received by any person in connection with termination of his employment by way of the Finance Act, 2018 a new Clause (xi) was inserted in sub section (2) of Section 56 of the Income Tax Act, 1961 w.e.f. 01.04.2019. The provisions of Clause (xi) of Section 56(2) of the Income Tax Act, 1961 is reproduced below for clarity:

“(xi) any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto;”

The provisions of clause (xi) of section 56(2) of the Act therefore provides that any compensation or other payment received by any person in connection with the termination of his employment will be chargeable to tax under head ‘Income from Other Sources’ and is applicable for the AY 2019-20.

6.5.4 It will be relevant to point out that the provisions of section 56(2)(xi) of the Act are similar to the provisions of section 17(3)(i) of the Act and the only difference is that it is not restricted only to the compensation but also includes other payments. Thus, the provisions of clause (xi) of section 56(2) of the Act covers not only compensation but also ‘Other Payment received by a person in connection with termination of his employment. In view of above, the argument of the appellant that the amounts received of Rs. Rs. 53,52,775/- does not constitute compensation losses significance as the said amount if not compensation will be covered under “Other Payments’. Therefore, the amount of Rs. 53,52,775/- received by the appellant in connection with termination of his employment falls within the ambit of provisions of (xi) of section 56(2) of the Act as income under the head ‘Income from Other Sources’.

6.6 Now in order to evaluate the other argument taken by the appellant that the said amount Rs. 53,52,775/- has not been received on termination of employment it would be relevant to perceive what is meaning of the term ‘termination of employment’. The appellant has relied on the terms of the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 particularly clause (viii) of ‘Other terms & conditions’ as per the Scheme document. The said clause (viii) is reproduced below for clarity:

“(viii) All Employees who opt for voluntary retirement under the Scheme will not be entitled to any compensation or notice pay under the provisions of the Industrial Disputes Act, 1947 as their cessation from the employment constitutes “resignation” and does not constitute “retrenchment” or “termination of employment by the Company.

6.6.1 Under the ‘Industrial Disputes Act, 1947’ termination of employment, including dismissal, retrenchment, or other forms of termination, is considered an industrial dispute, even if it involves a single employee. It thus transpires that above clause (viii) of ‘Other terms & conditions’ in the Finance Scheme has been incorporated by the Company in order to protect itself from any legal/industrial disputes which could arise under the ‘Industrial Disputes Act, 1947’ by stating that the cessation from employment would not constitute termination of employment. Accordingly, the mention by the Company that the resignation would not constitute termination of employment is clearly in relation to compensation or notice pay required to be paid under the ‘Industrial Disputes Act, 1947’. In view of above the mentioning by the Company that the opting of voluntary retirement would not constitute ‘termination of employment’ is with reference to the ‘Industrial Disputes Act, 1947’.

6.6.2 It will be pertinent to mention here the next clause (ix) of ‘Other terms & conditions of the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019. The said clause (ix) is reproduced below for clarity:

“(ix) Employees opting for the Scheme shall not raise any dispute whatsoever about their separation from the services of the Company, since such separation arises consequent upon their resignation submitted voluntarily under the Scheme.”

The above terms in clause (ix) clearly specifies that the separation from the Company is consequent upon resignation submitted voluntarily under the Scheme and the employees opting for the Scheme shall not raise any dispute whatsoever about their separation.

6.6.3 Further, from the application form given by the appellant opting for the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 it is seen that the appellant has voluntarily resigned from his employment with Pfizer Healthcare India Private Limited with effect from February 8, 2019. It can thus be seen that the separation of the appellant from the employment with the Company has occurred on the basis of voluntary resignation given consequent to which, the appellant has received the amount of Rs. 53,52,775/-as per the said Financial Scheme. It would therefore be appropriate to ascertain whether the term ‘termination of employment’ implies or includes cases of voluntary retirement.

6.6.4 In the case of G.N. Badami v. Commissioner of Income Tax, before the Hon’ble High Court of Madras, the assessee was employed with I.B.M. World Tade Corporation, a multinational company offered an opportunity to all its employees who had served more than one year of service to receive a special payment subject to a condition that they should leave the company. It is a voluntary programme so that the employees, if they wish to follow other pursuits or start new careers may have the chance to do so with the assistance of the company. The Hon’ble High Court of Madras after analysing the above facts gave its decision on 21/10/1997 as reported in [1999] 240 ITR 263 (Madras)/[1998] 144 CTR 289 (Madras) observing that admittedly, in the instant case, the assessee exercised the right of option to leave the service of the company and on the acceptance of the offer of the employer by the assessee, the services of the assessee to the company were terminated. Therefore, it is a case of termination of employment within the meaning of sub- clause (i) of clause (3) of section 17 of the Act.

6.6.5 The Hon’ble High Court of Madras in the case of CIT v. J. Visalakshi as reported in (Madras)/[1994] 206 ITR 531 (Madras) has interpreted the words ‘termination of his employment and observed that termination of service can take place either by resignation or by dismissal or by compulsory retirement or on attaining superannuation. As such there is no justification to confine the meaning of the word ‘termination’ only to the case of either voluntary retirement or superannuation. Further, the Hon’ble High Court of Kerala in the case of State Bank of Travancore v. CBDT in its decision dated 08/12/2005 as reported in (Kerala) has held that the word ‘termination’ of service includes all categories of cases, such as voluntary retirement, superannuation, compulsory retirement, resignation, dismissal and so on.

6.6.6 In view of the judicial pronouncements cited above the voluntary retirement taken by the appellant in terms of the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 clearly tantamount to termination of employment. Accordingly, the receipt of amount of Rs. 53,52,775/- as per the said Financial Scheme is held to be received in connection with the termination of employment of the appellant with the said Company.

6.7 In addition to the claims made regarding compensation and termination of employment the appellant has relied on various case laws to further claim that the amount received under the said Financial Scheme of Rs. 53,52,775/- Is a capital receipt. It would therefore be appropriate to examine the said case laws cited by the appellant to see whether they are applicable in the case of the appellant.

6.7.1 The appellant has relied on the decision of ITO v. Avirook Sen – Delhi ITAT 0- . In the case before Hon’ble Delhi ITAT there was no agreement between assessee and his employer and the amount was received on account of out of court settlement. On such facts and circumstances, it was held by Hon’ble Delhi ITAT that payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of the employer to pay further amount to assessee in terms of any service rule and it would not amount to compensation in terms of section 17(3) (i) of the Act. It is therefore seen that the facts of the appellant’s case are totally different from the case before Hon’ble Delhi ITAT and the Assessment Year involved was 2009-10.

6.7.2 The appellant has relied on the decision of Mahadev Dhangekar – Pune ITAT . In the case before the Hon’ble Pune ITAT the assessee received Rs. 47.21 lakhs from the company as Ex gratia and from this amount claimed Rs. 5 lakhs under section 10(10C) VRS compensation/ Termination of service and balance remaining amount of Rs. 42.21 lakhs from Ex gratia was taken as capital receipt. The Hon’ble ITAT observed that the amount was received by the assessee after cessation of his employment with the employer company. In the normal course, section 17(3)(iii) would apply and the payment would be covered within the definition of profit in lieu of salary as brought out by the department. However, in this case, the letter which has been issued by the employer clearly stated that the payment of the amount has been made voluntarily to the assessee and is not the compensation. The letter of the employer dated 16.02.2021, referred to above that ex gratia of Rs.42,21,154/- was paid voluntarily and this payment was made by them out of their own sweet will as an appreciation to him for his quality of integrity and commitment in performance of his duties for the entire tenure of his service with the company. It is therefore seen that the facts of the appellant’s case are totally different from the case before Hon’ble Pune ITAT and the Assessment Year involved was 2018-19.

6.7.3 The appellant has relied on the decision of CIT v. Deepak Verma -Delhi High Court-339 ITR 475 (2010). In the case before the Hon’ble Delhi High Court all dues which were admissible to the assessee on his resignation are, otherwise, paid by the employer to him. Therefore, whatever terminal dues including earned salary etc., which were payable to the assessee in terms of contract or otherwise were paid to him. In addition, the employer agreed to pay “in its discretion” Rs. 35 lakhs as an “exceptionable” and “one off ex gratia payment”. It is very clearly stated in the letter that management had agreed to pay this amount in its discretion. It was not compelled by any obligation to pay this amount which would assume the nature of any ‘compensation’. The amount is also described as not only exceptionable but ex gratia. It, therefore, clearly partakes the character of voluntary payment and cannot be termed as payment by way of ‘compensation’. It is therefore seen that the facts of the appellant’s case are totally different from the case before the Hon’ble Delhi High Court and the Assessment Year involved was 2001-02.

6.7.4 The appellant has relied on the decision of Arunbhal Naik v. ITO -Gujarat High Court- 379 ITR 511 (2015). In the case before the Hon’ble Gujarat High Court the assessee was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee in terms of the services rules. The employer, voluntarily at its discretion, agreed to pay the amount in question to the assessee with a view to bring an end to the litigation. There was no obligation cast upon the employer to make such payment and, therefore, the same would not take the colour of compensation as envisaged under section 17(3)(i). The amount in question would, therefore, not fall within the ambit of the expression ‘profits in lieu of salary as contemplated under section 17(3)(i). It is therefore seen that tyhe facts of the appellant’s case are totally different from the case before the Hon’ble Gujarat High Court and the Assessment Year involved was 1994-95.

6.7.5 The appellant has relied on the decisions in the cases of ShamikPankajbhai Parikh v. ITO – Ahmedabad ITAT – ITA No. 659/Ahd/2023&Ajay Ghose v. DCIT-Mumbai ITAT – ITA No. 1720/Mum/2021. The facts of the appellant’s case are seen to be similar to the case before Hon’ble Ahmedabad ITAT wherein it is observed that the severance compensation received by the assessee on voluntary basistowards termination of employment from his employers is a “capital receipt” and, hence, not taxable in the hands of the assessee. The above decision of the Hon’ble Ahmedabad ITAT is based on the decision of Hon’ble ITAT Mumbai in the case of Ajay B. Ghose v. DCIT -CPC in ITA No.1720/Mum/2021wherein it has been observed 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. However, it is seen that in both the above decisions the Assessment Year involved was 2017-18.

6.8 From the analysis of the case laws relied upon by the appellant as given above It can be seen that in most of the cases the facts are different from the case of the appellant. Even in cases where the facts of the cases before the Hon’ble Tribunals are similar to case of appellant as given in para 6.7.5 above wherein It has been held that the severance pay or ‘ex-gratia’ payment takes the character of a capital receipt the assessment year involved was 2017-18. As discussed earlier the provisions of clause (xi) of section 56(2) of the Act inserted by Finance Act, 2018 w.e.f. 1.4.2019 provides that any compensation or other payment received by any person in connection with the termination of his employment will be chargeable to tax under head ‘Income from Other Sources’ and is applicable for the AY 2019-20.

6.8.1 The intention of the legislation in inserting the said clause (xi) in section 56(2) of the Act is explained in the Memorandum issued explaining the provision of the Finance Act, 2018.In the Memorandum explaining the provision of the Finance Act, 2018 the intention of inserting said clause (xi) in section 56(2) of the Act is explained as under:

Taxability of compensation in connection to business or employment

Under the existing provisions of the Act, certain types of compensation receipts are taxable as business income under section28. However, the existing provisions of clause (ii) of section 28 is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation receipts in connection with business and employment is out of the purview of taxation leading to base erosion and revenue loss.

Therefore, it is proposed to amend section 28 of the Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be taxable as business income. It is further proposed that any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year 2019-20 and subsequent assessment years.

6.8.2 The explanation given in the above memorandum clearly lays down the intention of the legislation of insertion of clause (xi) in section 56(2) of the Act which is to bring into purview of taxation the compensation receipts in connection with business and employment that were leading to base erosion and revenue loss. Further, any compensation received whether in the nature of revenue or capital in connection with termination of employment shall be taxable u/s 56 of the Act from the assessment year 2019-20 and subsequent assessment years. Thus, even if it is considered that the amount received under the Finance Scheme by the appellant are capital receipt, as the same have been received during FY 2018-19 relevant to assessment year 2019-20, the same are taxable as per provisions of section 56(2)(xi) of the Income Tax Act, 1961.

6.9 Most of the case laws and decisions relied upon by the appellant in support of the claim made that the amounts received on termination of employment are capital receipts are found to be related to the A.Y. 2016-17, 2017-18 and 2018-19 or to assessment years prior to A.Y. 2019-20 i.e. before the insertion of clause (xi) in section 56(2) of the Act and therefore render these case laws and decisions redundant. However, it is seen that the decisions given by the Hon’ble Income Tax Appellate Tribunal, Pune ‘A’ Bench, Pune in the cases of Ashok Raghunathrao Kulkarni, Prasad Vijaykumar Kulkami and Atul Shashikant Garbhe are related to AY 2019-20. Further it is seen that the decisions given by Hon’ble ITAT in cases of Prasad Vijaykumar Kulkarni and Atul Shashikant Garbhe is based on the decision given in the case of Ashok Raghunathrao Kulkarni in ITA No. 117/pUN/2024 dated 12/08/2024 for AY 2019-20.

6.9.1 The Hon’ble Income Tax Appellate Tribunal, Pune ‘A’ Bench, Pune in the case of Ashok Raghunathrao Kulkarni in its decision in ITA No. 117/pUN/2024 dated 12/08/2024 for AY 2019-20 has observed that that the payment of ex- gratiacompensation received by the assessee was voluntary in nature without therebeing any obligation on the part of the employer to pay further amounts to the assessee in terms of any service rule and therefore, such compensation received was capital in nature and not falling u/s 17(3) of the Act. However, from the contents of the said order of the Hon’ble Income Tax Appellate Tribunal, Pune ‘A’ Bench, Pune it is seen that the provisions of section 56(2)(xi) of the Income Tax Act, 1961 which were applicable for the impugned AY 2019-20, were neither brought to the notice of the Hon’ble ITAT during the appellate proceedings nor have been considered by the Hon’ble ITAT before adjudicating the issue in appeal.

6.9.2 In view of above, the observations of the Hon’ble Income Tax Appellate Tribunal, Pune ‘A’ Bench, Pune in the case of Ashok Raghunathrao Kulkarni dated 12/08/2024 is considered but respectfully inferred that the ratio case of the said decision cannot be applied to the case of the appellant, as it has been rendered without taking into consideration the provisions of section 56(2)(xi) of the Income Tax Act, 1961 which were applicable for AY 2019-20. Similarly, the reliance of the appellant on the decision of CIT(A) in order u/s 250 of the Act dated 20/05/2024 given in the case of Navanath Eknath Londhe for AY 2019-20 is misplaced as the same has been given without considering the provisions of section 56(2)(xi) of the Income Tax Act, 1961.

6.10 In view of the foregoing discussion made, the amount received of Rs. 53,52,775/-under the Finance Scheme by the appellant on opting to voluntary retire as per the terms of Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 during financial year 2018-19, are held to be compensation or other payments received in connection with the termination of employment. Further as the amount of Rs. 53,52,775/- has been claimed by the appellant to be not chargeable to income tax under the head “Salaries” (item A in Section 14) the said amount of Rs. 53,52,775/- is held to be chargeable to tax under the head “Income from Other Sources” as per provisions of section 56(2)(xi) of the Income Tax Act, 1961 for the impugned AY 2019-20.

6.11 Accordingly, the income shown by the appellant in return of income filed for the impugned AY 2019-20 under the head ‘Salaries’ of Rs. 61,84,356/- is bifurcated and the Assessing Officer is directed to adopt the income of the appellant under the head “Salaries” at Rs. 8,31,581/- (Rs. 61,84,356 less Rs. 53,52,775) and the amount of Rs. 53,52,775/- as income under the head “Income from Other Sources as per provisions of section 56(2)(xi) of the Act. Further, the Assessing Officer is directed to withdraw the relief allowed of Rs. 12,82,510/- u/s 89 of the Income Tax Act, 1961 in the assessment order passed u/s 143(3) r.w.s. 144B of the Income Tax Act, 1961 dated 20/09/2021.

7.0 In the result, the appeal of the appellant is dismissed. “

4. Dissatisfied, the assessee is in appeal before the Tribunal raising the following grounds of appeal:

“1

. The Learned CIT(A) has erred in bringing altogether new provision of sec. 56(2)(xi) under pretext of Enhancement of Income, the provision of sec. 56(2)(xi) was not invoked by the AO in assessment proceedings. Thus CIT(A) has erred in law & has no powers to bring in a new provision which was not a subject matter of original disallowance.

The Learned CIT(A) has erred in applying the provisions of Sec. 56(2)(xi) which are conditioned with Termination of employee & he has failed to appreciate the fact that the Appellant was not terminated.

The Learned CIT(A) has erred by not following & applying the Jurisdictional Judgments of various Co-employees whereby the Hon’ble Pune ITAT has held that all such amounts are not Profits in lieu of Salary & are Capital Receipts.

The Learned CIT(A) has erred in interpreting the definition of Termination as per the Industrial Dispute Act 1947.

The Learned CIT(A) has erred in following the AO who had erred in not considering and understanding the Financial Scheme Document and failed to arrive at the correct interpretation and the underlying intentions of the Co. towards the appellant and the need for evolving the said scheme of pre-mature retirement of all employees permanently.

The Learned CIT(A) has erred by not accepting the Appellant’s stand that the said amount received being Capital Receipts in nature, irrespective of the same being obligatory or not on part of the Co. and has erred in not considering that the payments were made de hors any contract of employment & was paid voluntarily & towards loss of source of income for premature termination of Appellant employment & the Appellant was legally entitled to change the nature of his claim form Profits in lieu of Salary to the same being Capital Receipts in the course of assessment proceedings.

The Appellant Craves Leave to add, Alter, or amend any of the Grounds of the Appeal, before or during hearing of the Appeal.”

5. The Ld. AR, at the outset, submitted that the Ld. CIT(A)/NFAC has erred in not accepting the claim of the assessee that the impugned amount received by the assessee is capital receipt not chargeable to tax. The Ld. AR submitted that the impugned issue is no longer res-integra and covered in favour of the assessee by catena of decisions of the Co-ordinate Bench of the Pune Tribunal wherein the Tribunal under the identical facts and circumstances has held that the amount/ex-gratia received by the assessee being capital in nature cannot be added to the taxable income of the assessee and hence would not be taxable under the provisions of section 17(3)(i) of the Act as profit in lieu of salary. The Ld. AR placed a legal compilation on record containing various order(s) of Co-ordinate Bench of Pune Tribunal in support of his claim as under :

Subramanian Kathirsen v. ITO [IT Appeal No. 765 (Chny) of 2025, dated 2-9-2025]

ii.

Parna Vasudevaiah v. ITO [IT Appeal No. 456 (PUN) of 2024, dated 22-5-2025]

iii.

Godavari Vijay Kulkarni v. ITO [IT Appeal No. 1159 (PUN) of 2023, dated 3-4-2025]

iv.

Ashok Raghunathrao Kulkarni v. ITO (Pune – Trib.)

Prasad Vijaykumar Kulkarni v. ITO [IT Appeal No. 850 (PUN) of 2024, dated 17-9-2024]

vi.

Atul Shashikant Garbhe v. ITO [IT Appeal No. 863 (PUN) of 2024, dated 17-9-2024]

vii.

Parvez Mukhtar Khan v. ITO IT Appeal No. 1111 (PUN) of 2024, dated 27-9-2024]

viii.

Shrikant Anantrao Zori v. ITO [IT Appeal No. 798 (PUN) of 2024, dated 28-1-2025]

ix.

Mahadev Vasant Dhangekar v. Asstt. CIT 201 ITD 5 (Pune – Trib.).

5.1 So far as the invocation of section 56(2)(xi) of the Act by the Ld. CIT(A)/NFAC is concerned, the Ld. AR submitted that the Ld. AO did not apply this section at all at the time of assessment proceedings and thus the Ld. CIT(A)/NFAC has not power to bring in a new provision during the appellate proceedings before him. Without prejudice, the Ld. AR submitted that as per section 56(2)(xi) of the Act, any compensation or other payment received by the assessee in connection with termination of his employment or the modification of the term and condition relating thereto is taxable as income from other sources. In the instant case in hand, the assessee has voluntarily retired as per the term of settlement entered with the employer i.e. Pfizer India and accordingly it is the case of voluntarily resignation and not termination of employment. The Ld. AR submitted that termination of employment is at the behest of the employer wherein the employer terminates the services of the employee, however, retirement is voluntarily in nature. The Ld. AR submitted that since the assessee has voluntarily retired, provisions of section 56(2)(xi) are not applicable to the facts of the present case.

5.2 Referring to sub-clause 8 of clause 11 of the Financial Scheme for Employees of Aurangabad 2019, dated 09.01.2019 (“Scheme”), the Ld. AR submitted that it is specifically provided therein that the retirement of the employees under the Scheme does not amount to retrenchment or termination of employment by the company. Thus, as per the Scheme there is no termination of employment of the assessee.

5.3 The Ld. AR further submitted that the provisions of section 56(2)(xi) are applicable on termination of employment. Termination of employment and voluntarily retirement are two different concepts. In support thereof, the Ld. AR drew our attention to the provisions of section 10(10C) of the Act whereby it has been clarified that any amount received from various person as provided therein by the employer “on his voluntarily retirement or termination of his services.” Similarly section 80JJAA(2)(iii)(b) provides therein that “any lump sum payment paid or payable to employee at the time of termination of his service or superannuation or voluntarily retirement.” He therefore submitted that the legislature has specifically used the term voluntarily retirement and termination separately. He accordingly submitted that termination does not include voluntarily retirement and both the terms are to be understood and applied differently. In the instant case, the employment of the assessee has not been terminated but he has voluntarily retired under the Scheme and thus invocation of provisions of section 56(2)(xi) by the Ld. CIT(A)/NFAC is not justified.

5.4 Referring to the decision of this Bench of the Tribunal in the case of Ashok Raghunathrao Kulkarni(supra), the Ld. AR submitted that the facts of the assessee’s case in the present appeal are identical to the facts in the case of Ashok Raghunathrao Kulkarni Case (supra) and the assessee’s in both the cases are the ex-employees of Pfizer India are covered by the same Scheme of the company. Referring to para 13 and 28 of the order of the Tribunal in Ashok Raghunathrao Kulkarni’s Case (supra), the Ld. AR submitted that the Tribunal has held that the amount received by the assessee was voluntarily in nature without there being any obligation to pay on the part of the company.

5.5 In view of his above submission, the Ld. AR argued that the assessee has received the impugned amount from Pfizer India on his voluntary retirement from the company under the voluntary Scheme of the company and not on account of termination of his employment and hence the decision of the Tribunal in the case of Ashok Raghunathrao Kulkarni (supra) which has been followed in many subsequent orders of the Tribunal still holds good.

5.6 The Ld. AR, thereafter, brought to the attention of the Bench the assessment orders passed in the case of other assessee employees of Pfizer India where they have also received similar amount from the company and the respective Assessing Officer in the reopening assessment for AY 201920 had show caused the assessee for making addition u/s 56(2)(xi) of the Act, however, the said amount has not been added and assessment has been completed by the respective AO treating the same as capital in nature. In view of this, he argued that in the instant case, the amount received by the assessee from Pfizer India on his voluntarily retirement under the Scheme should therefore be treated as capital receipt and addition made by the Ld. AO and confirmed by Ld. CIT(A)/NFAC should be deleted.

6. The Ld. DR, on the other hand, strongly supported the order of the Ld. AO and the Ld. CIT(A)/NFAC.

7. We have heard the Ld. Representatives of the parties and perused the material available on record as well as the paper book(s) filed by the Ld. AR on behalf of the assessee. We have also perused various judicial precedents cited by the Ld. AR. We find that the Ld. AO has rejected the assessee’s claim of relief u/s 89 of the Act amounting to Rs. 12,82,510/-. The assessee received an amount of Rs.53,52,775/- during the relevant AY 2019-20 as per the Scheme which has been added to the income of the assessee for the relevant AY 2019-20 under the provisions of section 56(2)(xi) of the Act by the Ld. CIT(A)/NFAC during the appellate proceedings before him rejecting the claim of the assessee that such receipts are capital in nature.

8. We find that the identical issue had come up before the Tribunal in the case of other employees of M/s. Pfizer Healthcare India Pvt. Ltd. and the Tribunal has consistently decided the impugned issue in favour of the assessee holding that the impugned amount received by the assessee under the Scheme is a capital receipt not chargeable to tax in the hands of the assessee. We find that the Tribunal in the case of Ashok Raghunathrao Kulkarni (supra) for AY 2019-20 order dated 12.08.2024, has decided the identical issue by observing as under :

“23. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case rejected the claim of relief u/s 89 of the Act of Rs.18,74,899/- on income of Rs.57,12,674/-treating the same as income u/s 17(3) of the Act. We find the CIT(A) / NFAC upheld the action of the Assessing Officer, reasons of which are already reproduced in the preceding paragraphs. The CIT(A) / NFAC also rejected the alternate claim of the assessee that such amount being a capital receipt cannot be brought to tax. It is the submission of the Ld. Counsel for the assessee that in case of various other employees who have received similar compensation, the same has been accepted as capital receipt by the respective AOs in re-assessment proceedings and no addition has been made. Further, various Co-ordinate Benches of the Tribunal in similarly placed employees have also treated such compensation received on termination of service as capital in nature and not falling u/s 17(3) of the Act.

24. We find the Assessing Officer in the case of Sharad D. Magar, who also resigned voluntarily from service of Pfizer Healthcare India Pvt. Ltd., Aurangabad has accepted the compensation received at Rs.30,49,176/- as capital in nature by observing as under:

“Brief facts of the case:

The assessee, Shri Sharad Daulatrao Magar, having PAN: ASHPM1986C, an salaried individual, had filed ITR-1 u/s. 139(1) for AY 2019-20 on 29.07.2019 declaring total income of Rs.32,03,150/-. Further, Rs.35,54,140/- was shown as Gross Salary. The assessee was employee of M/s Pfizer Healthcare India Pvt Ltd, Aurangabad during FY2018-19. The company launched VRS beneficial to the employees on planned closure of its unit. The assessee voluntarily resigned from service w.e.f 08.02.2019 and received compensation and out of that compensation he claimed Rs.30,49,176/- being salary claimed in Advance as exempt u/s 89 from taxation in his ITR u/s 139(1) of the Act.

14. The submissions made by the assessee have been examined. As the assessee has submitted corroborative and binding judicial pronouncements in support of his claim that the amount of Rs.30,49,176/- received by him from his employer at the time of cessation of his employment due to closure of the manufacturing unit was a capital receipt, not subject to tax. The assessee has also placed reliance on various case laws, in support of his above claim, and court has held as under “The amounts received were due to loss of employment & not recurring in nature & are not paid in lieu of any salary hence it does not come under the preview of sec. 17(3)(i) as amount of compensation. The said amounts have not been paid against any services of the assessee. Hence the same is not compensation as contemplated under the provisions of sec. 17(3)(i).” As the various courts have allowed the claim that the amount received at the time of cessation of his employment due to closure of the manufacturing unit as capital receipt during assessment proceedings in the cases referred by the assessee, the AO’s has duly accepted the above claims of the respective assessee, which are very similar cases as that of the assessee’s instant case. Hence, the reopened assessment proceedings in the case of the assessee, is hereby proposed to be completed by accepting the income returned by the assessee in response to 148.”

25. In the remaining cases also, the respective AOs have treated such compensation as capital in nature. We, therefore, find merit in the arguments of the Ld. Counsel for the assessee that when the concerned AOs after reopening of the assessment have treated such compensation as capital in nature and the Revenue has not challenged the same and which has attained finality since no 263 proceedings have been initiated, therefore, the assessee’s case being identical to the facts of the other employees of Pfizer Healthcare India Pvt. Ltd., the CIT(A) / NFAC is not justified in sustaining the addition made by the Assessing Officer.

26. We further find the Hon’ble Calcutta High Court in the case of CIT v. Ajit Kumar Bose (supra) has observed as under:

“4 . The amount in question was received by the assessee from his employer. It was received by him in connection with the termination of his service. But the question still remains whether it was compensation. Since it was received by the assessee in connection with the termination of his employment, the term “compensation” would be referable to that event. In other words, it is to be seen whether the amount was paid as compensation for the termination or in lieu of the termination of the employment.

5. The letter issued by the employer dated July 3, 1969, stated that the amount was being paid ex gratia. There is nothing to indicate that the assessee was entitled to continue in the employment of the company up to any particular age. Under the conditions of service, his services were liable to be terminated on giving three months’ notice without assigning any reason. Under the circumstances, it cannot be said that the assessee was entitled to remain in service for any period longer after the requisite notice has been given or that the employer was under any obligation to pay anything to the assessee in connection with the termination of his employment other than the salary for the period of notice. Under the circumstances, in its true nature and character, the payment was ex gratia, that is to say, totally voluntary; it was not compensation which implies some sort of an obligation to pay.

6. In this view, it cannot be said that the amount in question was profits in lieu of salary within the meaning of Clause (3) of Section 17. It was not taxable as such. The finding of the Tribunal that the amount was a capital receipt or that it was payment of a casual and non-recurring nature was in the circumstances not necessary. We, hence, do not express any opinion on it.

7. The question of law referred to us in this case, namely :

“Whether, on the facts and in the circumstances of the case, the amount of Rs. 24,933 received by the assessee could be treated as income under the charging section or under the section dealing with the computation of income of the assessee ?”

8. is answered in the negative, in favour of the assessee and against the Department.”

27. We find the Delhi Bench of the Tribunal in the case of ITO v. Avirook Sen (supra) at para 12 of the order has observed as under:

“12. 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. The impugned addition was rightly deleted by the Ld. CIT(A). The aforesaid point is accordingly determined against the revenue department. The appeal is accordingly not sustainable as we don’t find any error of law or fact in the impugned order passed by Ld. CIT(A). The department appeal is liable to be dismissed.”

28. The various other decisions relied on by the Ld. Counsel for the assessee placed in the paper book support his case to the proposition that the payment of ex-gratia compensation received by the assessee was voluntary in nature without there being any obligation on the part of the employer to pay further amounts to the assessee in terms of any service rule and therefore, would not amount to compensation in terms of section 17(3) of the Act. We, therefore, set aside the order of the CIT(A) / NFAC and direct the Assessing Officer to delete the addition. The grounds raised by the assessee are accordingly allowed.”

9. Similar view has been taken by the Tribunal in various other cases involving the similar set of facts by following the decision in the case of Ashok Raghunathrao Kulkarni (supra). Reliance may be placed on the decision of the Tribunal in the case of Shrikant Anantrao Zori(supra), dated 28.01.2025, Atul Shashikant Garbhe(supra), Prasad Vijaykumar Kulkarni(supra)and Parna Vasudevaiah(supra).

10. As regards invocation of provisions of section 56(2)(xi) of the Act, we find some force in the arguments advanced by the Ld. AR that the provisions of section 56(2)(xi) of the Act would not be applicable in the instant case since as per the Scheme pursuant to which the assessee has received the impugned amount, there is no termination of employment and the assessee has voluntarily retired/resigned from the company.

11. Section 56(2)(xi) of the Act reads as under:

“2.[(xi) any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto.].”

12. Now coming to relevant clause of the Scheme i.e. clause 11 (viii) (placed on page 195 of the paper book) which reads as under:

“(viii) All Employees who opt for voluntary retirement under the Scheme will not be entitled to any compensation or notice pay under the provisions of the Industrial Dispute Act, 1947 as their cessation from the employment constitutes “resignation” and does not constitute “retrenchment” or “termination of employment” by the Company”.

13. From the conjoint reading of the relevant clause of the Scheme and the provisions of section 56(2)(xi) of the Act, we find some force in the argument advance by the Ld. AR that the retirement of the employees under the Scheme does not amount to retrenchment or termination of employment by the company but the assessee in the present case has voluntarily retired as per the terms of settlement entered with Pfizer India. Accordingly, as per the Scheme, there is no termination of employment and the assessee has voluntarily retired/resigned from the company. We also find some force in the contention of Ld. AR that the Act has specifically provided for a scheme of taxation in the case of voluntarily retirement visa-vis termination of employment separately which is emanating from the provisions of section 10(10C) and section 80JJAA(2)(iii)(b) of the Act as argued by the Ld. AR. It is not disputed that the employment of the assessee has not been terminated by Pfizer India but the assessee opted for voluntarily retirement under the Scheme which was voluntarily offered to the assessee.

14. The above contention of the assessee finds support from the order of the Co-ordinate Bench of the Tribunal in the case of Ashok Raghunathrao Kulkarni (supra) (page 37-52 of the Legal Compilation refers) wherein the Tribunal in para 13 and 28 thereof, under the similar set of facts as that of the assessee in the present appeal, observed and held as under:

“13. Referring to other terms and conditions as per clause (11), the Ld. Counsel for the assessee drew the attention of the Bench to the sub-clause (viii) of the same, which reads as under: “(viii) All Employees who opt for voluntary retirement under the Scheme will not be entitled to any compensation or notice pay under the provisions of the Industrial Dispute Act, 1947 as their cessation from the employment constitutes “resignation” and does not constitute “retrenchment” or “termination of employment” by the Company”.

28. ……….the paper book support his case to the proposition that the payment of ex-gratia compensation received by the assessee was voluntary in nature without there being any obligation on the part of the employer to pay further amounts to the assessee in terms of any service rule and therefore, would not amount to compensation in terms of section 17(3) of the Act. We, therefore, set aside the order of the CIT(A) / NFAC and direct the Assessing Officer to delete the addition. The grounds raised by the assessee are accordingly allowed.”

15. We further find that in case of various other employees of Pfizer India who have received similar compensation from the company, the amount received by the assessee’s as per the Scheme have been accepted as capital receipt by the respective Assessing Officer(s) in reassessment proceedings and no addition has been made in the hands of the concerned assessee’s (pages 1-123 of paper book II refers). Further various Co-ordinate Bench(es) of the Tribunal in the cases referred to in Para 5 of this order (supra) in similarly placed employees have also treated such amount received by the assessee as capital in nature not chargeable to tax. Thus, in our view, both the lower authorities have failed to follow the principle of consistency and the binding precedence on the impugned issue and hence the impugned addition by the Ld. CIT(A)/NFAC is unjustified and deserves to be deleted.

16. In view of the factual matrix of the case and legal position set out above and in the absence of any contrary material/decision brought on record by the Revenue, we set aside the order of the Ld. CIT(A)/NFAC and direct the Ld. AO to modify the assessment accordingly. Accordingly, the effective grounds raised by the assessee are allowed.

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

No section 68 addition is sustainable for an alleged cash loan without any credit entry in the assessee’s books.

Ashwani Kumar — Thu, 09 Jul 2026 09:57:51 +0000

No section 68 addition is sustainable for an alleged cash loan without any credit entry in the assessee’s books.

Issue

Whether an addition under section 68 of the Income-tax Act, 1961 can be legally sustained when there is no credit entry in the assessee’s books of account, and the addition is based entirely on a third-party statement that lacks any specific reference to or identification of the assessee.

Facts

The assessee, an individual, filed her return of income for the Assessment Year 2011-12.
The assessment was subsequently reopened under section 147 based on information received from the Investigation Wing.
The information alleged that according to a statement by a partner of M/s Evergreen Enterprises, the assessee had taken a cash loan of Rs. 39,00,000 during the Financial Year 2010-11.
The assessee flatly denied taking any cash loan, pointed out that no such amount was credited in her books, and requested an opportunity to cross-examine the third party.
The Assessing Officer (AO) rejected her explanation, added Rs. 39,00,000 to her income under section 68, and the CIT(A) subsequently upheld this addition.
A perusal of the partner’s statement revealed that it contained no specific reference or identification of the assessee by name.
The alleged “Annexure-2,” which supposedly contained the names of the borrowers, was never discussed in the assessment order nor provided to the assessee at any stage of the proceedings.

Decision

The appeal is decided in favor of the assessee, and the impugned addition is deleted.
It was held that an addition under section 68 requires a “credit entry” to exist within the books of the assessee; in the absolute absence of such a credit, section 68 cannot be legally invoked.
The tribunal noted that the addition rested solely on a third-party statement that did not directly link or name the assessee.
Because the AO failed to provide the essential relied-upon documents (Annexure-2) and failed to bring any independent, corroborative material to prove the transaction, the addition could not be sustained.

Key Takeaways

Pre-requisite of a Credit Entry: Section 68 (or Section 102 of the 2025 Act) can only be triggered if a sum is found credited in the books of the assessee. Third-party diaries or external papers cannot form the sole basis of a cash credit addition if the entry is missing from the assessee’s own books.
Direct Nexus Requirement: Material unearthed from third-party searches must explicitly link and identify the assessee to have any evidentiary value.
Natural Justice Violation: Making an addition based on undisclosed annexures or denying cross-examination of an adverse third-party witness severely weakens the tax department’s case.

IN THE ITAT MUMBAI BENCH ‘J(SMC)’

Jigna Ashutosh Bhatt

ITO

Amit Shukla, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 3639 (Mum) of 2025
[Assessment year 2011-12]

JANUARY 6, 2026

Ketan L. Vajani, Ld. AR for the Appellant. Aditya Rai, Ld. DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member. – This appeal by the assessee is directed against the order dated 18.03.2025 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as “CIT(A)”] under section 250 of the Income-tax Act, 1961[hereinafter referred to as “the Act”], for Assessment Year 2011-12. The said appellate order arises out of the assessment order dated 29.12.2018 passed by the Income Tax Officer, Ward 33(2)(1), Mumbai [hereinafter referred to as “Assessing Officer or AO”], under section 143(3) read with section 147 of the Act.

2. The brief facts of the case are that the assessee is an individual. The assessee filed her original return of income for Assessment Year 2011-12 on 27.09.2011, declaring total income of Rs. 55,695/-. Subsequently, the Assessing Officer initiated reassessment proceedings by issuing notice under section 148 of the Act on 29.03.2018, after recording reasons and obtaining sanction under the Act. The reopening was based on information received from the DDIT (Investigation), Mumbai, to the effect that one Shri Nilesh Bharani, partner of M/s Evergreen Enterprises, in his statement recorded under section 132(4) of the Act, had allegedly admitted that the assessee had taken a cash loan of Rs. 39,00,000/- during the financial year 2010-11 relevant to the assessment year under consideration. In response to the notice issued under section 148 of the Act, the assessee filed a return of income on 12.11.2018, declaring the same income as returned originally.

3. During the course of reassessment proceedings, the Assessing Officer issued a show cause notice dated 24.12.2018, enclosing a copy of the statement of Shri Nilesh Bharani recorded under section 132(4), and required the assessee to furnish confirmation, ledger account and ITR acknowledgement of M/s Evergreen Enterprises, failing which the amount was proposed to be added as unexplained cash credit under section 68 of the Act. In response, the assessee, through her authorized representative, denied having obtained any cash loan from M/s Evergreen Enterprises. It was submitted that the statement relied upon by the Assessing Officer did not specifically name the assessee and opportunity of cross-examination of Shri Nilesh Bharani was not provided. It was also contended that no amount was found credited in the books of the assessee. The Assessing Officer was not convinced with the explanation furnished. According to the Assessing Officer, the assessee failed to establish the creditworthiness of the lender and the genuineness of the transaction. The Assessing Officer held that the assessee had obtained a cash loan of Rs. 39,00,000/- and treated the same as unexplained cash credit under section 68 of the Act. The reassessment was completed under section 143(3) read with section 147 of the Act vide order dated 29.12.2018, determining the total income of the assessee at Rs. 39,55,700/-. Penalty proceedings under sections 269SS, 269T and 271(1)(c) of the Act were also initiated.

4. Aggrieved by the reassessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee challenged the validity of the reassessment proceedings initiated under section 147 of the Act, contending that the reopening was based on borrowed satisfaction from the Investigation Wing and in the absence of any income escaping assessment.The addition of Rs. 39,00,000/- made under section 68 of the Act on merits was also challenged.

5. The CIT(A), while observing that the assessee was non-compliant during the appellate proceedings, proceeded to decide the appeal on the basis of material available on record.

6. On the issue of validity of reopening, the CIT(A) held that the original return was processed under section 143(1) and the Assessing Officer was in possession of fresh tangible material received from the Investigation Wing. The CIT(A) observed that at the stage of reopening, the Assessing Officer was only required to form a prima facie “reason to believe” and sufficiency of such reasons could not be examined. Accordingly, the reassessment proceedings initiated under section 147 of the Act were upheld. The CIT(A) also rejected the assessee’s contention regarding denial of cross-examination and violation of principles of natural justice, holding that no prejudice was demonstrated to have been caused to the assessee. On the addition under section 68 of the Act, the CIT(A) concurred with the Assessing Officer and held that the assessee failed to discharge the onus of explaining the alleged cash loan. The addition of Rs. 39,00,000/- was thus confirmed.

7. Further aggrieved by the order of the CIT(A), the assessee is in appeal before us raising following grounds of appeal:

Objection against confirming an invalid reassessment.

(a)

On the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) – NFAC, hereinafter referred to as the “CIT (A)”, has erred in confirming the validity of the reassessment in her case without appreciating the fact that the initiation of the reassessment itself is without any justification.

(b)

Your appellant respectfully submits that the initiation of reassessment itself in her case is not valid and consequently all actions taken in pursuance of such invalid reassessment are void ab initio. The appellant respectfully submits that the reassessment in her case is not valid for the following reasons:

That the reassessment in her case had been initiated merely on the basis of the borrowed satisfaction from the Investigation wing of the department, even without bothering to check the statement recorded by the investigation wing.

ii.

That without prejudice to any other grounds, there cannot be any income escaping assessment on the facts of the case and accordingly the initiation of reassessment without there being any income escaping assessment is without the authority of law.

(c)

In view of the above, the appellant submits that the reassessment in her case is invalid and the same deserves to be quashed. The appellant, prays that the same may please be quashed.

II.

Objection against confirming addition of Rs. 39,00,000/- made u/s. 68 of the Act

(a)

Without prejudice to the validity of reassessment, the CIT (A) has erred in confirming addition of Rs. 39,00,000/- made u/s. 68 of the Act on account of alleged cash loan borrowed by the appellant from M/s. Evergreen Enterprises.

(b)

Your appellant respectfully submits that the impugned addition is merely based on conjectures, surmises and suspicions and not supported by any evidence.

(c)

The appellant further submits that the impugned addition is made without appreciating the fact that there is not even a whisper about the appellant in the statement of Mr. Nilesh Bharani, partner of M/s. Evergreen Enterprises, which is the only base for making the impugned addition and accordingly the addition is made without any evidence whatsoever.

(d)

The appellant also submits that even otherwise the provisions of section 68 cannot be applied in her case considering the fact that no amount has been found credited in the books of the appellant.

(e)

In view of the above, the appellant submit that the impugned addition is not permissible and the same deserves to be deleted. The appellant, therefore, prays that the impugned addition may please be deleted.

III.

Objection against disposal of appeal without considering submissions made by the appellant.

(a)

Without prejudice to any of the grounds above, the CIT (A) has erred in not considering the submissions made by the appellant during the appellate proceedings and also not allowing sufficient opportunity to the appellant.

(b)

Your appellant respectfully submits that the order passed by the CIT (A) is in complete violation of the principles of natural justice and the same deserves to be set-aside for this reason as well.

(c)

The appellant, therefore, alternatively prays that the order of the CIT (A) may please be set-aside or any other relief as deemed fit may please be allowed to the appellant.

8. During the course of hearing before us the learned Authorized Representative (AR) for the assessee reiterated the facts as borne out from the assessment records and the appellate proceedings. The AR drew our attention to the statement of Shri Nilesh Bharani, partner of M/s Evergreen Enterprises, recorded, a copy of which is placed at page No. 33 of the paper book. It was submitted that a careful reading of the said statement clearly demonstrates that there is no specific mention or identification of the assessee by name therein. According to the learned AR, the addition has thus been made merely on presumptions without any direct or cogent material linking the assessee to the alleged cash loan transaction.

9. The learned AR further submitted that in Question No. 72 of the said statement, reference is made to Annexure-2. However, the said Annexure-2 has neither been referred to nor discussed by the Assessing Officer in the assessment order, nor has a copy of the same been furnished to the assessee at any stage of the proceedings.

10. The learned AR further submitted that, even otherwise, the provisions of section 68 of the Act could not have been invoked in the present case, as no amount has been found credited in the books of account of the assessee during the relevant previous year. It was contended that the primary and jurisdictional condition for application of section 68, namely existence of a credit entry in the books of the assessee, is completely absent, and therefore the addition made thereunder is legally unsustainable.

11. The learned AR also pointed out a discrepancy in the reasons recorded for reopening, wherein the name of the assessee is mentioned as “Jigna Ashok Bhatt”, whereas the correct name of the assessee is “Jigna Ashutosh Bhatt”. It was submitted that this discrepancy itself reflects non-application of mind on the part of the Assessing Officer while recording reasons for reopening the assessment.

12. Lastly, the learned AR controverted the observation of the CIT(A) that the assessee had failed to submit any reply during the appellate proceedings. He submitted that this finding is factually incorrect, as the assessee had duly filed her reply, a copy of which is placed at page No. 52 of the paper book. It was therefore contended that the order of the CIT(A) proceeds on an erroneous assumption of facts and deserves to be set aside on this ground as well.

13. The learned Departmental Representative (DR) strongly relied upon the orders of the Assessing Officer as well as the CIT(A). He submitted that the Assessing Officer has passed the assessment order after due verification and after granting adequate opportunity to the assessee. The learned DR specifically drew our attention to paragraph 11 of the assessment order, wherein the Assessing Officer has recorded detailed reasons for treating the cash loan of Rs. 39,00,000/- as unexplained cash credit under section 68 of the Act. It was submitted that, as noted by the Assessing Officer, the assessee failed to establish the creditworthiness of the loan creditor and failed to furnish supporting documentary evidence to substantiate the genuineness of the transaction.

14. We have carefully considered the rival submissions, perused the material available on record, and examined the orders passed by the lower authorities. We have also gone through the paper book filed by the assessee and the judicial precedents relied upon before the lower authorities.

15. At the outset, we note that the assessee has raised specific grounds challenging the validity of reopening under section 147 of the Act. However, during the course of hearing before us, the learned AR did not advance any specific arguments on the legality or jurisdiction of the reassessment proceedings. The learned AR confined his submissions primarily to the merits of the addition made under section 68 of the Act. In the absence of any specific arguments advanced at the time of hearing, and considering that the learned Departmental Representative relied upon the findings recorded by the Assessing Officer and upheld by the CIT(A), we proceed to adjudicate the appeal on merits of the addition made under section 68 of the Act, without expressing any independent opinion on the validity of the reassessment proceedings. Accordingly, the grounds challenging reopening are treated as not pressed.

16. The substantive issue for our consideration is the addition of Rs. 39,00,000/- made by the Assessing Officer under section 68 of the Income-tax Act, 1961, treating the same as unexplained cash credit, which has been confirmed by the CIT(A).

17. From the assessment order, it is evident that the Assessing Officer initiated reassessment proceedings on the basis of information received from the Investigation Wing, Mumbai, wherein reliance was placed on the statement of Shri Nilesh Bharani, partner of M/s Evergreen Enterprises, recorded under the Act. Based on the said information, the Assessing Officer proceeded on the premise that the assessee had taken a cash loan of Rs. 39,00,000/- during the previous year relevant to Assessment Year 2011-12.

18. During the assessment proceedings, the assessee categorically denied having taken any cash loan from M/s Evergreen Enterprises. It was specifically contended that there was no mention of the assessee’s name in the statement of Shri Nilesh Bharani and that no incriminating material evidencing receipt of cash loan by the assessee was brought on record. The assessee further objected to non-supply of documents relied upon by the Assessing Officer, including Annexure-2 referred to in Question No. 72 of the statement, and sought an opportunity of cross-examination of Shri Nilesh Bharani. These objections were rejected by the Assessing Officer.

19. The Assessing Officer, however, proceeded to make the addition by observing in paragraph 11 of the assessment order that the assessee failed to establish the creditworthiness of the loan creditor and failed to produce documentary evidence in support of the alleged cash loan. The Assessing Officer thus treated the alleged cash loan of Rs. 39,00,000/- as unexplained cash credit under section 68 of the Act. The CIT(A) upheld the action of the Assessing Officer, primarily on the ground that the assessee did not cooperate adequately during appellate proceedings and failed to substantiate her contentions with supporting evidence.

20. At this stage, it is necessary to note that the assessee had made detailed written submissions before the CIT(A), which are part of the appellate record, but have not been specifically dealt with or adjudicated in the impugned appellate order. In those submissions, the assessee had categorically contended that:

The statement of Shri Nilesh Bharani does not name or identify the assessee at all, and there is no whisper therein suggesting that the assessee had taken any cash loan from M/s Evergreen Enterprises.

II.

The Assessing Officer placed reliance on Annexure-2 referred to in Question No. 72 of the statement, allegedly containing names of persons involved in cash transactions. However, the said Annexure-2 was neither referred to nor discussed in the assessment order, nor was a copy of the same ever furnished to the assessee despite specific requests made during assessment proceedings.

III.

The assessee had repeatedly requested the Assessing Officer to furnish:

–

Annexure-2 referred to in the statement,

–

the alleged telephone diary,

–

copies of statements recorded under section 132(4),

–

and any other material linking the assessee with the alleged cash loan.

Admittedly, no such material was provided to the assessee.

21. These submissions, though forming part of the record before the CIT(A), have not been specifically addressed or rebutted in the impugned appellate order. The CIT(A) proceeded largely on the premise that the assessee failed to cooperate and failed to file submissions, which, on verification of the record, is factually incorrect.

22. On a careful consideration of the entire material on record, we find substance in the contentions advanced by the assessee on merits. Section 68 of the Act can be invoked only when any sum is found credited in the books of the assessee maintained for the relevant previous year and the assessee fails to offer a satisfactory explanation regarding the nature and source thereof. In the present case, it is an undisputed fact emerging from the record that no amount of Rs. 39,00,000/- has been found credited in the books of account of the assessee during the year under consideration. This foundational requirement for invoking section 68 is conspicuously absent.

23. Further, the addition has been made solely on the basis of a third-party statement. On perusal of the statement of Shri Nilesh Bharani, placed at page No. 33 of the paper book, we find that there is no specific reference or identification of the assessee by name. Moreover, the alleged Annexure-2, which is stated to contain names of persons in Question No. 72, has neither been discussed in the assessment order nor furnished to the assessee at any stage of the proceedings. The Assessing Officer has also not brought on record any independent corroborative material to establish that the assessee had in fact received any cash loan from M/s Evergreen Enterprises. We also noted that there is a discrepancy in the name mentioned in the reasons recorded for reopening, wherein the name appears as “Jigna Ashok Bhatt”, whereas the correct name of the assessee is “Jigna Ashutosh Bhatt”, which further reflects lack of proper linkage of the assessee with the alleged transaction.

24. The conclusion drawn by the CIT(A) that the assessee failed to file any reply is also found to be factually incorrect, as the reply filed by the assessee is placed at page No. 52 of the paper book. Thus, the appellate order proceeds, at least partly, on an erroneous factual premise.

25. In the absence of any credit entry in the books of the assessee, and in the absence of any cogent material directly linking the assessee with receipt of cash loan, we are of the considered view that the addition made under section 68 of the Act cannot be sustained in law.

26. In view of the above discussion and considering the totality of facts and circumstances of the case, we hold that the addition of Rs. 39,00,000/- made under section 68 of the Act and confirmed by the CIT(A) is unsustainable and is hereby directed to be deleted.

27. In the result the appeal of the assessee is partly allowed on merits.