2019 (3) TMI 2087 - AT - Income Tax

Exemption u/s 10(10A) - receipt as lump sum payment from its erstwhile employer on account of discontinuance of certain retirement policy of company - HELD THAT - Though in strict terms it may not be said that the amount received by the assessee was on account of commutation of pension however the fact on the file is that the aforesaid amount was given by the new employer who has taken over the company from the earlier employer and he had terminated the services of the employees on account of job retrenchment. The amount was paid as a compensation for retrenchment of services taking into consideration the length of service basic salary the age and other factors. In our view the said amount is a compensation paid by the employer while terminating the services of the employee on account loss of job and further subsistence thus the said amount was just a capital receipt in the hands of the assessee. In fact no part of amount received by the assessee is taxable. We therefore allow the appeal of the assessee and delete the disallowance and consequent additions made by the AO in this respect. Assessee is entitled to claim refund / adjustment of the tax paid in respect of the aforesaid compensation received if so claimed by the assessee. In the above terms the appeal of the assessee stands partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

(a) Whether the amount received by the assessee as a lump sum payment from the employer on account of discontinuance of a retirement policy qualifies as commuted pension and is therefore exempt under section 10(10A) of the Income-tax Act, 1961;

(b) Whether the exemption under section 10(10A) is available to employees of private companies, given the statutory language and scope of the provision;

(c) Whether the additions made by the Assessing Officer on account of cash deposits, claimed to be from earlier cash withdrawals, are justified (though this ground was later not pressed by the appellant).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Exemption under section 10(10A) for lump sum payment received on discontinuance of retirement policy by a private company employee

Relevant legal framework and precedents:

Section 10(10A) of the Income-tax Act, 1961, provides exemption in respect of any payment received on commutation of pension to certain categories of employees, including members of civil services, defence services, all India services, civil posts under a State, employees of local authorities, or corporations established by Central, State or provincial Acts. The question arises whether employees of private companies fall within the ambit of this exemption.

Court's interpretation and reasoning:

The Assessing Officer initially disallowed the exemption claim on the basis that section 10(10A) applies only to government or statutory employees and not to private company employees. However, the Commissioner of Income Tax (Appeals) (CIT(A)) held that the exemption under section 10(10A)(ii) is also available to private sector employees. Despite this, the CIT(A) upheld the disallowance on the ground that the payment was not a commutation of pension but a lump sum payment made due to the unilateral withdrawal of the retirement policy by the employer. The CIT(A) reasoned that the payment was calculated considering various factors such as salary, length of service, and years remaining until retirement, but it was not made under a commutation of pension scheme and, therefore, not eligible for exemption.

Key evidence and findings:

The payment in question was a lump sum amount of Rs. 28,08,847/- received from the employer, M/s Ranbaxy Laboratories Ltd, on account of discontinuance of a retirement benefit policy. The payment was made in the context of retrenchment following the takeover of the company by a new employer. The amount was calculated based on the employee's length of service, salary, and other factors, but no formal pension commutation scheme existed under the retirement policy.

Application of law to facts:

The Tribunal observed that although the payment may not strictly qualify as commuted pension, it was compensatory in nature, paid due to termination of employment on retrenchment. The amount was therefore characterized as compensation for loss of job and subsistence, constituting a capital receipt rather than taxable income. The Tribunal held that no part of this amount was taxable and allowed the exemption accordingly. It further held that the assessee was entitled to claim refund or adjustment of any tax paid on this amount.

Treatment of competing arguments:

The Revenue's contention rested on the narrow interpretation of section 10(10A) as excluding private employees and on the nature of the payment not being pension commutation. The CIT(A) accepted the first contention but rejected the exemption on the nature of payment. The Tribunal rejected the Revenue's interpretation on the scope of exemption to private employees and also held that the payment, although not strictly commuted pension, was compensatory and hence not taxable. The assessee's argument that the amount was a retirement benefit and exempt was thus accepted in a broader sense.

Issue (c): Addition on account of cash deposits

This ground was initially raised but subsequently not pressed by the assessee's counsel and was dismissed accordingly without detailed examination.

3. SIGNIFICANT HOLDINGS

"In our view, the said amount is a compensation paid by the employer while terminating the services of the employee on account loss of job and further subsistence, thus, the said amount was just a capital receipt in the hands of the assessee. In fact, no part of amount received by the assessee is taxable."

The Tribunal established the principle that a lump sum payment made by an employer to an employee on account of discontinuance of retirement policy and retrenchment, even if not strictly a commuted pension, should be treated as compensation for loss of employment and is therefore a capital receipt not taxable under the Income-tax Act.

The Tribunal clarified that exemption under section 10(10A) is not confined solely to government or statutory employees but extends to private employees as well, provided the payment qualifies as commuted pension or equivalent retirement benefit.

Final determinations:

(i) The exemption claim under section 10(10A) was allowed in respect of the lump sum payment received on discontinuance of retirement policy, treating it as a compensatory capital receipt.

(ii) The appeal was partly allowed accordingly, with directions permitting the assessee to claim refund or adjustment of tax paid on the said amount.

(iii) The ground relating to cash deposits was dismissed as not pressed.