Severance Pay received by employee for loss of job is capital receipt & not taxable under the Income Tax Act

Whether the severance allowance is a capital receipt or a revenue receipt is one of the most common question by the salaried taxpayers who are getting compensation at the time of leaving the job.

Here was an interesting case before ITAT Mumbai with the similar issue as under:

Case:

Ajay Ghose vs. DCIT-CPC – Mumbai Tribunal –  ITA  No. 1720/Mum/2021 – order dated 15-11-2021

Short Overview of the case:

The assessee is an employee and filed the return of income for the A.Y 2017- 18 on 01.08.2017 disclosing a total income of Rs.35,32,970/-.

The assessee’s income consists of income from salary, loss from house property and income from other sources. The assessee has received the intimation u/s 143(1)of the Act on 04.05.2018 by email, where the A.O.

(C P C) has assessed the total income of Rs.1,16,46,980/-and raised a demand of Rs. 36,71,880/-.

The assessee has received an amount of Rs.74,28,585/- towards severance pay due to loss of employment from the employer M/s. AREVA India Pvt Ltd because of shutting down the business operations in India.

In the said intimation AO proposed the addition of severance pay of Rs.74,28,585/-.

The assessee has filed the petition for rectification of mistake and the grievance was in respect of the claim of severance pay received on account of loss of employment and other claims. The assessee has submitted the reasons on severance pay claim as capital receipt and also challenged the provisions of adjustments being outside the scope of section 143(1) of the Act.

The assessee has filed a letter on the merits of the case along with the judicial decisions but there was no action from the DCIT.CPC. Finally, the intimation was passed u/s 143(1) of the Act on 27-

03-2019 making said addition for severance pay. Ld. CIT(A) partially allowed assessee’s appeal but held that severance pay was taxable u/s 17 as compensation.

Tribunal noted that the assessee was in employment for more than a decade with the company and due to business operations shutting down in India the company has taken a call to pay the severance payment along with the full and final settlement.

 It was the voluntary payment made by the company for loss of employment to the assessee. It held that the severance payment to the assessee is voluntary in nature and it does not amount to compensation within the provisions u/s 17(3)(i) of the Act.

Tribunal therefore held that Severance pay takes the character of a capital receipt and cannot be considered taxable u/s 17(3)(i) as a compensation. It also held that the assessee has received the payment onetime and it is not recurring in nature and thus, receipt of severance pay though the nomenclature is not mentioned as ex-gratia but takes the character of a capital receipt and the payment was made voluntary by the employer for loss of employment. and such capital receipt is not taxable in the hands of the assessee.