Encashment of Leave Salary would be a Profit in Lieu of Salary, Not Taxable under Voluntary Separation Programme: ITAT deletes Income Tax Addition [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the addition of Rs. 13 lakhs, ruling that the encashment of leave salary constitutes profit in lieu of salary and is not taxable under the Voluntary Separation Programme. This appeal stated that AO added an amount of Rs. 2, 00, 00,000/- received by the respondent-assessee from his employer INX Media after his termination from service and Rs. 13,08,444/- received as perquisites from the employer has been added in the total income of the assessee as profits in lieu of salary for A.Y. 2009-10, vide assessment order dated 30.03.2011 passed under Section 143(3) of the Income Tax Act, 1961. Mr. Anuj Garg representing the respondent assessee argued that the Assessing Officer was right in treating Rs.2 crore received by the assessee from his employer after his termination as compensation amount as component of salary along with Rs. 13,08,444/- as perquisites. He further argued that CIT (A) has failed to differentiate the facts of the instant case with the facts of referred case declared by the Delhi High Court reported in CIT vs. Deepak Verma, as the assessment in that case was pertaining to the A.Y. 2001-02 i.e. before the insertion of Section 17(3)(iii) in the Act with effect from 01.04.2002. It was also submitted that the AO was right in carrying out the aforesaid assessment by treating the aforesaid receipt of assessee as profits in lieu of salary. Mr. Vivek Bansal representing the department has argued that the respondent assessee received the aforesaid amount of Rs. 2 crore as lump sum amount as a settlement out of court with the employer (INX Media) of the assessee and voluntary settled the case as the reputation of the assessee was diminished due to extreme harassment and ill treatment caused by the employer. He also argued that the additional amount of Rs. 13,08,444/- received from the employer (INX media) for the purchase of the new car could not have been treated as taxable income as a prerequisite. He relied on Deepak Verma case, wherein Delhi High Court has held that if payment is made as ex gratia or voluntary by an employer out of his own sweet will and is not conditioned by any legal duty or legal obligation, either on sympathetic grounds or otherwise, such payment is not to be treated as profit in lieu of salary under sub clause (i) of section 17(3). He further submitted that the AO has made the addition by specifically relying on sub-clause (i) of Section 17(3) and at this stage, the dispute is only in respect of the assessment made under Section 17(3)(i) only and prayed to confirm the impugned order passed by CIT(A). Further the counsel has cited Arunbhai R. Naik vs. Income Tax Officer wherein Gujarat High Court while interpreting Section 17 of the Act, held that payment of exgratia compensation received by the employee under Section 17(3) if voluntary in nature without being any obligation on part of employer to pay any further amount to assessee in terms of service rules, it would not amount to compensation in terms of Section 17(3) (i) of Income Tax Act. The two member bench of the tribunal comprising Astha Chandra (Judicial member) and G.S Pannu (Vice President) observed that as the payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of employer to pay further amount to assessee in terms of any service rule. It would not amount to compensation in terms of Section 17(3)(i) of the Income Tax Act. The impugned addition was rightly deleted by the CIT(A). The appeal is accordingly not sustainable as ITAT did not find any error of law or fact in the impugned order passed by CIT (A). Accordingly, the appeal of revenue was dismissed. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates