The Revenue's appeal against the CIT(A)-14's order was dismissed, upholding the view that ex-gratia compensation was voluntary and not taxable.

Overview

• In a notable legal proceeding, Vice President G.S. Pannu presided over an appeal involving the Revenue Department and a taxpayer, where a significant addition of Rs. 2,13,08,444/- to the taxpayer's income for the assessment year 2009-10 was disputed. The case focused on whether a lump sum amount of Rs. 2 crore received by the taxpayer from their employer, INX Media, after their termination from service, and an additional Rs. 13,08,444/- received for the purchase of a new car, should be treated as profits in lieu of salary under Section 17(3)(i) of the Income Tax Act, 1961.

The Appeal

• The Revenue Department challenged the decision made by the Commissioner of Income Tax (Appeals) (CIT(A)) that reversed the Assessing Officer's (AO) addition to the taxpayer's income. The grounds of appeal focused on whether the lump sum amount and car purchase perquisites received by the taxpayer were correctly classified as profits in lieu of salary.

The Dispute

• Classification of Compensation: The Revenue Department argued that the payment of Rs. 2 crore from the employer was a form of compensation and should be treated as profits in lieu of salary. The Ld. DR contended that the Assessing Officer was justified in treating the amount as a component of salary and the additional Rs. 13,08,444/- as perquisites.
• Taxpayer's Argument: The taxpayer, represented by their legal counsel, argued that the compensation was a voluntary settlement out of court with the employer (INX Media) due to harassment and ill-treatment. They further stated that the additional amount of Rs. 13,08,444/- received for the purchase of a new car could not be treated as taxable income.

Vice President Pannu's Verdict

• Ex-Gratia Compensation: Vice President G.S. Pannu agreed with the taxpayer's stance, stating that the ex-gratia compensation was voluntary and not conditioned by any legal obligation or service rules. Consequently, the compensation could not be treated as profits in lieu of salary.
• Precedent Cases: The judgment referenced several high court cases, including CIT v. Deepak Verma and Arunbhai R. Naik v. Income Tax Officer, to support the view that voluntary payments without legal obligations do not constitute compensation under Section 17(3)(i).
• Assessment Order: The assessment order by the Assessing Officer was considered inappropriate as it relied on cases with different facts and existing agreements, unlike the current case. The order by CIT(A) to delete the addition was upheld.

Conclusion

• The appeal filed by the Revenue Department was dismissed by Vice President G.S. Pannu, who supported CIT(A)'s decision to delete the Rs. 2,13,08,444/- addition made by the Assessing Officer. The ruling emphasized that the payment of ex-gratia compensation was voluntary and did not fall under the scope of Section 17(3)(i) of the Income Tax Act. This case serves as an important reference for similar disputes regarding the classification of lump sum payments and perquisites received from employers.

Topic-Income-tax Officer Versus Avirook Sen

Court: ITAT-Delhi

Date: 12/04/2024

Team Taxonation

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