Severance Compensation Received on Voluntary Basis Towards Termination of Employment is a Capital Receipt | ITAT

Case Details: Shamik Pankajbhai Parikh vs. Income-tax Officer - [2024] 158 taxmann.com 283 (Ahmedabad-Trib.)

Judiciary and Counsel Details

• • Mrs Annapurna Gupta, Accountant Member & Siddhartha Nautiyal, Judicial Member
  • Gunjan Kakkad, AR for the Appellant.
  • Ashok Kumar Suthar, Sr. DR for the Respondent.

Facts of the Case

The assessee filed his return, which CPC processed, and an intimation order under section 143(1) was issued. Subsequently, the assessee realized that the income offered by him to tax included a certain sum paid to him by way of severance compensation by the employer towards the cessation of his employment. The assessee believed that such one-time compensation received by the assessee from his employers was a ‘capital receipt’ and, hence, not chargeable to tax.

Accordingly, the assessee applied for rectification of the intimation. However, the same was rejected by the Assessing Officer (AO) on the ground that the amount was not bifurcated and shown as exempt by the assessee in the return of income. Thus, the same was not a mistake for the purposes of section 154.

On appeal, the CIT(A) also upheld the order passed by the AO. Aggrieved by the order, the assessee filed an appeal before the Ahmedabad Tribunal.

ITAT Held

The Tribunal held that on perusal of the terms of employment letter of the assessee, the amount paid to the assessee as compensation towards the discharge of his services was voluntary in nature. Also, it was not disputed that the severance compensation received by the assessee voluntarily towards the termination of employment from his employers is a ‘capital receipt’ and, hence, not taxable in the hands of the assessee.

AO is competent to rectify any mistake in the intimation under section 143(1), which was brought to his notice by the assessee. From a bare reading of section 154, it is apparent that the power of rectification extends to the amendment of an intimation or deemed intimation under section 143(1). This rectification power enures even after the matter has been considered and decided in any proceedings through appeal or revision. This power extends even at the appeal stage and further appeal to the Tribunal.

Further, as per provisions of section 143(1), the authority has to examine whether any claim made by the assessee is correct or not. This includes understatement and overstatement of the income. If the AO failed to take note of any incorrect claim with regard to the total income of the assessee, such failure would necessarily mean a mistake apparent from the record.

Therefore, the amount received by the assessee as voluntary severance compensation is held to be not taxable in the hands of the assessee, and the same was liable to be deleted under section 154.

List of Cases Reviewed

• • Arunbhai R.Naik v. ITO [2015] 64 taxmann.com 216/[2016] 236 Taxman 190/[2015] 379 ITR 511 (Guj.) (para 7)
  • Ajay B. Ghose v. Dy. CIT [IT Appeal No. 1720/Mum/2021] (para 7.2)
  • Dy. CIT v. Justice Dilip Kumar Seth [2006] 98 ITD 241 (kol.) (para 7.3)
  • Pawan Kumar Aggarwal v. CIT [IT Appeal No. 199 of 2014] (Delhi) (para 7.3)
  • Zen Tobacco (P.) Ltd. v Asstt.CIT [2016] 65 taxmann.com 320 (Ahd. – Trib.) (para 7.3) followed.

List of Cases Referred to

• • Arunbhai R. Naik v. ITO [2015] 64 taxmann.com 216/[2016] 236 Taxman 190/[2015] 379 ITR 511 (Guj) (para 7)
  • Ajay B. Ghose v. Dy. CIT [IT Appeal No. 1720 (Mum) of 2021] (para 7.2)
  • Dy. CIT v. Justice Dilip Kumar Seth (2006) 98 ITD 241 (Kol.) (para 7.3)
  • Pawan Kumar Aggarwal v. CIT [IT Appeal No. 199 of 2014] (para 7.3)
  • Zen Tobacoo (P.) Ltd. v. Asstt. CIT [2016] 65 taxmann.com 320 (Ahd. – Trib) (para 7.3).