2025 (6) TMI 1611 - AT - Income Tax

Entitlement to relief u/s 89(1) read with Rule 21A(1)(a) - lumpsum ex-gratia payment received from the employer - assessee was employed as labourer in maintenance department of Textiles Industry drawing a salary of approximately Rs. 18, 000/- per month and was not under the taxable bracket and subsequently the company incurred heavy losses and was shut down and assessee received an ex-gratia amount as per the agreement with the company HELD THAT - Relief claimed u/ 89(1) was allowed in the case of Rajesh Shantaram Chavan 2022 (4) TMI 1179 - ITAT MUMBAI . On perusal of the order of the co-ordinate bench we find that the facts of the case are identical to the case of the assessee and the co-ordinate bench has allowed the relief claimed u/s 89(1) of the Act after consideration of the facts and circumstances of lump sum payment made to these employees. Thus assessee is entitled to relief u/s 89(1) of the Act in respect of lumpsum payment received for the employer. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the assessee is entitled to relief under section 89(1) of the Income-tax Act, 1961 read with Rule 21A of the Income-tax Rules, 1962, in respect of lumpsum ex-gratia payment received from the employer, which was treated as salary paid in advance.

(b) Whether the lumpsum ex-gratia payment qualifies as salary received in advance or is to be treated as compensation for loss of employment, thereby affecting the applicability of relief under section 89(1).

(c) The correctness of the denial of relief under Rule 21A(1)(a) and confirmation of relief under Rule 21A(1)(c) by the Commissioner of Income-tax (Appeals) [CIT(A)].

(d) The validity of the interest levied under sections 234C and 244A of the Income-tax Act, 1961.

(e) The condonation of delay in filing the appeal, given the 479 days delay and the reasons furnished by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Entitlement to Relief under Section 89(1) read with Rule 21A in respect of lumpsum ex-gratia payment

Relevant legal framework and precedents: Section 89(1) provides relief to taxpayers who receive salary in arrears or in advance, by allowing them to spread the tax impact over the relevant years to mitigate hardship. Rule 21A prescribes the manner of claiming such relief. The key question is whether the lumpsum payment qualifies as salary received in advance or as compensation for loss of office/employment.

The Tribunal relied heavily on the precedent set by a coordinate bench in a case involving a similarly situated employee of the same company, where relief under section 89(1) was allowed. The coordinate bench's decision examined the nature of the payment, the contractual basis, and the tax treatment by the employer, including TDS under section 192.

The Supreme Court's decision in V.D. Talwar was cited, which distinguished payments that are genuine salary in advance from those that are compensation for loss of office. The Court held that payments made under contract terms as salary in lieu of notice period or deferred remuneration are taxable as salary and not as compensation.

Court's interpretation and reasoning: The Tribunal noted that the assessee did not opt for the voluntary retirement scheme and was paid a lumpsum ex-gratia amount as per individual agreement, which was computed to represent the salary payable till the age of 63 years. The employer deducted TDS under section 192, issued Form 16, and described the payment as salary paid in advance.

The Tribunal found that the payment was not compensation for loss of employment but salary paid in advance, consistent with the principles laid down in the V.D. Talwar case and the coordinate bench decision. The Tribunal emphasized the substance over form approach, noting the employer's own characterization of the payment as salary.

Key evidence and findings: The employer's letter dated 18.02.2019, the individual agreement, TDS deduction under section 192, and issuance of Form 16 were critical in establishing the payment's nature. The fact that the textile mill was shut down in 2008 and the employee did not accept the voluntary retirement scheme was also relevant.

Application of law to facts: Applying the legal principles, the Tribunal held that since the lumpsum payment was salary paid in advance, the assessee was eligible for relief under section 89(1) read with Rule 21A. The Tribunal directed the Assessing Officer to allow the relief accordingly.

Treatment of competing arguments: The Revenue contended that the payment was compensation taxable under section 17(3)(i) and not eligible for relief. The Tribunal rejected this, relying on the employer's own treatment and the precedents distinguishing salary in advance from compensation for loss of office.

Conclusion: The Tribunal allowed the claim for relief under section 89(1) and set aside the CIT(A)'s order denying such relief.

Issue (c): Disallowance of relief under Rule 21A(1)(a) and confirmation under Rule 21A(1)(c)

The CIT(A) had confirmed the Assessing Officer's stand disallowing relief under Rule 21A(1)(a) and allowing relief under Rule 21A(1)(c). The Tribunal did not specifically elaborate on the technical distinction between these sub-rules but, by allowing relief under section 89(1) read with Rule 21A, effectively overruled the CIT(A)'s confirmation. The relief granted was consistent with the coordinate bench decision and the nature of the payment as salary in advance.

Issue (d): Confirmation of interest under sections 234C and 244A

The assessee's grounds challenging interest under sections 234C and 244A were raised but not specifically addressed in the Tribunal's order. The focus remained on the principal issue of relief under section 89(1). The absence of explicit discussion suggests the Tribunal found no merit in these grounds or considered them ancillary to the main dispute.

Issue (e): Condonation of delay in filing the appeal

The appeal was delayed by 479 days. The assessee explained the delay was due to lack of knowledge of the CIT(A) order, reliance on a union-appointed tax consultant who failed to inform him, and personal hardship including depression due to job loss and lack of resources.

The Tribunal accepted these explanations as genuine and unintentional, thus condoning the delay. This allowed the appeal to be heard on merits.

3. SIGNIFICANT HOLDINGS

"We are inclined to treat the compensation received by the assessee as only salary received in advance. Therefore, we direct the Assessing Officer to allow the claim of the assessee u/s. 89 r.w. rule 21A of I.T. Rules."

"What has been paid to the appellant is his salary in lieu of notice. If that is the true position then the amount paid is taxable under 5.7 of the Indian Income tax Act, 1922. It is not compensation for loss of employment within the meaning of Explanation 2 thereto."

"The basis of compensation calculated by the company and the company also treated the one-time compensation as a salary paid in advance and deducted the TDS on the same, clearly indicates that the compensation received by the assessee is only salary received in advance not as termination compensation even though this was paid in lumpsum as ex-gratia in one go."

Core principles established include the application of substance over form in characterizing lumpsum payments, the eligibility of relief under section 89(1) for salary received in advance even if paid as lumpsum ex-gratia, and the importance of employer's own tax treatment in determining the nature of payment.

Final determinations on each issue:

(i) Relief under section 89(1) read with Rule 21A is allowed for the lumpsum ex-gratia payment treated as salary in advance.

(ii) The CIT(A)'s order denying such relief is set aside.

(iii) Delay in filing the appeal is condoned.

(iv) Other grounds, including interest under sections 234C and 244A, were not specifically overturned and thus remain as per lower authorities.