2019 (4) TMI 2180 - AT - Income Tax

Taxability of Receipt from the previous employer - whether the same was capital receipt and not taxable? - amount was claimed by the assessee to be amount received on account of retirement benefits from his employer company as per company s refreshment policy and was thus in the nature of commuted pension and therefore eligible for exemption u/s 10(10A) HELD THAT - The issue is squarely covered in the case of other employees in titled as Sh. Rajeshwar Sharma Others 2019 (3) TMI 2087 - ITAT CHANDIGARH held that said amount is a compensation paid by the employer while terminating the services of the employee on account of 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. We further hold that the assessee is entitled to claim refund / adjustment of the tax paid in respect of the aforesaid compensation received if so claimed by the assessee. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the receipt of Rs. 56,38,227/- from the previous employer on account of discontinuance of a retirement policy constitutes a capital receipt or taxable income under the Income Tax Act, 1961;

(b) Whether the exemption under section 10(10A) of the Income Tax Act, 1961, which provides exemption for commuted pension, is applicable to the assessee who was an employee of a private company;

(c) Whether the lump sum payment received by the assessee qualifies as commutation of pension under the company's retiral policy, thereby entitling the assessee to exemption under section 10(10A);

(d) The correctness of the Assessing Officer's (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] orders in disallowing the exemption claimed under section 10(10A).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (c): Nature of the Receipt - Capital Receipt or Taxable Income; Whether Payment is Commutation of Pension

Relevant legal framework and precedents: Section 10(10A) of the Income Tax Act, 1961, exempts commuted pension from taxable income. The provision is generally applicable to members of civil services, defence services, or employees of local authorities or corporations established by Central or State Acts. The question arises whether it extends to private sector employees and whether the lump sum payment received qualifies as commuted pension.

Court's interpretation and reasoning: The AO initially disallowed the exemption on the basis that section 10(10A) does not apply to private company employees. The CIT(A) acknowledged that exemption under section 10(10A)(ii) is available to private employees but upheld the disallowance on the ground that the payment was not a commutation of pension but a lump sum compensation paid due to the unilateral withdrawal of the retirement policy by the employer. The CIT(A) noted that the amount was calculated considering salary, length of service, and years remaining till retirement, but since the payment was triggered by policy discontinuance and not under a commutation scheme, it was not exempt.

Key evidence and findings: The payment was made as a lump sum on account of closure of the pension policy by the employer, not under any formal commutation scheme. The payment was related to retrenchment and considered various factors such as salary and service length.

Application of law to facts: The Tribunal relied on a coordinate bench decision involving identical facts, which held that such a payment is compensation for retrenchment and subsistence due to job loss, constituting a capital receipt rather than taxable income. The Tribunal emphasized that no part of the amount received is taxable and thus the exemption under section 10(10A) is not the correct basis for exemption; rather, the amount is non-taxable as capital receipt.

Treatment of competing arguments: The Revenue argued that the amount was taxable and the exemption under section 10(10A) was not applicable to private employees. The assessee contended that the amount was commuted pension and thus exempt. The CIT(A) partially accepted the Revenue's view on the nature of payment but erred in denying exemption solely on the basis of section 10(10A). The Tribunal rejected the Revenue's position on taxability, holding the amount as capital receipt and non-taxable.

Conclusions: The Tribunal concluded that the payment was a capital receipt arising from retrenchment due to discontinuance of the retirement policy and not a commutation of pension. Therefore, the amount is not taxable, and the exemption under section 10(10A) is not applicable but also not necessary since the amount is not income.

Issue (b): Applicability of Section 10(10A) to Private Employees

Relevant legal framework and precedents: Section 10(10A)(ii) extends exemption to commuted pension received by employees of private companies, subject to certain conditions.

Court's interpretation and reasoning: The CIT(A) correctly observed that section 10(10A) is not restricted to government employees but also covers private sector employees. However, the exemption was denied because the payment was not commutation of pension.

Key evidence and findings: The Tribunal accepted that section 10(10A) applies to private employees but found that the payment in question did not qualify as commuted pension under the policy.

Application of law to facts: Since the payment was not commuted pension, the exemption under section 10(10A) was not applicable, but the amount was held non-taxable as a capital receipt.

Treatment of competing arguments: The assessee's claim of exemption under section 10(10A) was rejected on the ground that the payment was not commutation of pension, despite the applicability of the section to private employees.

Conclusions: Section 10(10A) applies to private employees; however, the payment did not qualify as commuted pension and thus exemption under this section was not available.

Issue (d): Validity of AO and CIT(A) Orders

Court's interpretation and reasoning: The Tribunal found that the AO erred in treating the amount as taxable income and denying exemption under section 10(10A) on the basis that it does not apply to private employees. The CIT(A) correctly noted the applicability of section 10(10A) to private employees but erred in denying exemption on the ground that the payment was not commutation of pension without recognizing that the amount was a capital receipt and thus not taxable.

Key evidence and findings: The Tribunal relied on a precedent from a coordinate bench involving identical facts and circumstances, which held that the amount was a capital receipt and not taxable income.

Application of law to facts: The Tribunal applied the precedent and held that the AO and CIT(A) orders were erroneous in denying the non-taxability of the amount.

Treatment of competing arguments: The Tribunal rejected the Revenue's contention that the amount was taxable and upheld the assessee's claim for refund/adjustment of tax paid on the amount.

Conclusions: The Tribunal set aside the AO and CIT(A) orders on this issue and allowed the appeal of the assessee.

3. SIGNIFICANT HOLDINGS

"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 of 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 Assessing officer in this respect. We further hold that the assessee is entitled to claim refund / adjustment of the tax paid in respect of the aforesaid compensation received, if so, claimed by the assessee."

Core principles established include:

- A lump sum payment received on account of discontinuance of a retirement policy and retrenchment, calculated based on salary, length of service, and years remaining till retirement, constitutes a capital receipt and is not taxable income.

- Section 10(10A) exemption for commuted pension is applicable to private employees; however, if the payment is not a commutation of pension, the exemption does not apply.

- The non-taxability of a capital receipt is distinct from exemption under section 10(10A); thus, denial of exemption under 10(10A) does not automatically imply taxability.

- Tax authorities must correctly characterize receipts and apply the appropriate tax treatment; mischaracterization leads to erroneous tax demands.

Final determinations on each issue were that the payment was not taxable income, the exemption under section 10(10A) was not applicable as the payment was not commuted pension, and the appeal was allowed with directions to refund or adjust tax paid on the said amount.