Severance Payment Received Due to Redundancy and Job Termination Not Taxable as Profits in Lieu of Salary | ITAT

Case Details: Sudhakar Ratan Shanker Gautam vs. Income-tax Officer - [2024] 168 taxmann.com 369 (Ahmedabad-Trib.)

Judiciary and Counsel Details

• T.R. Senthil Kumar, Judicial Member & Makarand V. Mahadeokar, Accountant Member
• Kushal Fofaria, AR for the Assessee. 
• Smt. Bhavna Gupta Singh, Sr.DR for the Revenue.

Facts of the Case

The assessee was employed with a private limited company, which was subsequently acquired by another company. Following this acquisition, the assessee’s employment was terminated, and he received a severance compensation of a certain amount. While furnishing the return of income for the relevant assessment year, the assessee claimed such an amount as a capital receipt that was not chargeable to tax. The Assessing Officer (AO) treated this amount as ‘profits in lieu of salary’ under section 17(3) and added it to the assessee’s total income.

On appeal, the CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved by the order, an appeal was filed to the Ahmedabad Tribunal.

ITAT Held

The Tribunal held that the severance payment received by the assessee was due to redundancy and job termination, which should not be taxable as profits in lieu of salary under section 17(3). The compensation was paid for the loss of employment, not for past services. It was consistently held that payments, when not tied to services rendered, are capital in nature and not taxable as salary income. Since the employer had no obligation to pay further amounts upon termination, the compensation should be deemed a capital receipt and thus not taxable under section 17(3).

The Act distinguishes between receipts that are taxable as salary income and those that are considered capital receipts, which are generally not taxable unless explicitly brought within the tax net by specific provisions of the Act. Under section 17(3), ‘profits in lieu of salary’ is a key provision that seeks to tax certain payments received by an employee in connection with the termination of employment. On the other hand, capital receipts, especially in the context of employment, typically relate to compensation for the loss of a source of income and are generally not taxable, unless specified.

This distinction is critical in determining whether a severance payment or other termination-related compensation is subject to tax as salary income or can be treated as a non-taxable capital receipt. Accordingly, the severance compensation received by the assessee was a capital receipt, not chargeable to tax under section 17(3).

List of Cases Referred to

• Arunbhai R. Naik v. ITO [2015] 64 taxmann.com 216/[2016] 236 Taxman 190/[2015] 379 ITR 511 (Gujarat) (para 5)
• Ashok Raghunathrao Kulkarni v. ITO [2024] 165 taxmann.com 680 (Pune – Trib.) (para 5.2).