ITAT: Voluntary payment Made out of appreciation towards employee falls outside the purview of Section 17(3)(iii) of Income Tax Act

ITAT: Voluntary payment Made out of appreciation towards employee falls outside the purview of Section 17(3)(iii) of Income Tax Act

The Income Tax Appellate Tribunal (ITAT), Pune observed that the payment made by an employer voluntarily out of appreciation for an employee fall outside the rigors of Section 17(3)(iii) of the Income Tax Act, 1961.

In the present case, the assessee/appellant- Mahadev Vasant Dhangekar submitted that he had taken from Racold Thermo Private Limited Pune during the year under consideration. Thereafter the assessee had started trading business of Industrial consumable supply in the name of M/s. Laxmi Enterprises. The assessee received Rs. 47,21,154 from the company as Ex-Gratia and from this amount claimed Rs. 5,00,000 under Section 10(10C) VRS compensation/Termination of service and balance remaining amount of Rs. 42,21,154 from Ex-Gratia taken as capital receipt.

A show-cause notice was issued to the assessee by the Assessing Officer (A.O).

When the matter went up to the National Faceless Assessment Centre (NFAC), it upheld the findings of the A.O by observing that the employer had deducted the Tax Deductible at Source (TDS) on the said amount of payment made. Further, the amount of Rs. 42,21,154 was included in the salary as per Form No. 16 submitted by the assessee.

The NFAC also observed that the letter submitted by the assessee that the payment received was voluntarily given by the employer was issued to the assessee only after the case was taken up for scrutiny and notices under Section 143(2) and 143(1) were issued to the assessee.

The NFAC had observed that, if the employer intended to treat the payment as voluntary “ex-gratia” payment given out of sweet will as an appreciation of the employer the same letter would have been given at the time of voluntary retirement of the employee and no TDS would have been deducted on the said payment and also the payment would not have been included in form No. 16 given to the assessee by the employer. Further also, the letter was signed by Vice President (Human Resources) whereas Form No. 16 had been signed by the Asstt. General Manager of the company.

Accordingly, the amount of Rs. 42,21,154 was brought within the purview of taxation under Section 17(3)(iii) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”).

The two-member bench of Partha Sarathi Chaudhury (Judicial Member) and R.S. Syal (Vice President) on pursual of Section 17(3)(iii) of the Act, held that any payment received whether in lump sum or otherwise by an assessee from any person after cessation of his employment with that person is also considered as profit in lieu of salary and is to be brought to tax accordingly being defined inclusively as per the Act.

The bench noted the contention of the assessee that the payment was made voluntarily by the employer out of his own sweet was not bound by any or condition by any legal duty or legal obligations which are were on sympathetic reason or otherwise.

Further, the bench noted that neither the terms of employment nor the service rules of the employer company provided for making ex-gratia payment. Thus, the said amount was totally voluntary and it was not compensation, the bench stated.

A letter was issued by the employer which clearly stated that the payment of the amount was made voluntarily to the assessee and is not the compensation. This letter was not doubted by the department, noted the Tribunal.

The bench remarked that without establishing the letter as non-genuine or without examining the sanctity of the payment made simply invoking the provisions of the Act for making addition was not appropriate for a quasi-judicial authority.

Therefore, the bench was of the considered view that when the employer itself had stated that the payment has been made voluntarily by them out of appreciation for the employee, thus falls outside the rigors of section 17(3)(iii) of the Act.

The ITAT set aside the order of the NFAC and directed the ld. A.O to delete the addition from the hands of the assessee.