Madras High Court Holds Employer Cannot Grant Section 89 Tax Relief Without Form 10E From Employees

The Madras High Court on 24 June held that employers deducting Tax Deducted at Source (TDS) on voluntary retirement compensation cannot be faulted for not granting relief under Section 89 of the Income Tax Act (relief for salary received in arrears or advance) unless employees submit the prescribed Form 10E.

Justice C. Saravanan allowed the writ petition filed by the Hosur Bata Employees Union in part and directed the Income Tax Department to process the income tax returns of affected employees and refund any eligible TDS amount, while holding that Bata India Ltd. had acted in accordance with its statutory obligation to deduct tax. He observed:

"Although the 3rd and 4th respondents would have been aware of the fact that the members of the petitioners union may be entitled to the relief under Section 89 read with Section 17(3) of the Income Tax Act, 1961, and that the amounts paid to them may not [be] income to be included in computing the total income chargeable to income tax under Sections 4 and 5, it cannot be said that they are required to voluntarily grant such relief in the absence of an application in Form 10E, as is contemplated under Rule 21A. This is evident from the reading of Section 192(2A) of the Income Tax Act, 1961."

Hosur Bata Employees Union filed a petition seeking a direction to the Income Tax Department to instruct Bata India Ltd. to refund the TDS deducted from payments made under a settlement dated 10 January 2026.

The settlement was reached following an industrial dispute relating to wage revision and provided each of the 61 workers with Rs. 5 lakh towards the Voluntary Retirement Scheme (VRS), Rs. 40.50 lakh as compensation for loss of future salary up to 31 December 2032, and Rs. 50,000 towards wage revision arrears.

The Union contended that although the settlement permitted employees to claim relief under Section 89 by filing Form 10E, Bata deducted TDS on the entire compensation amount by treating it as taxable salary, resulting in excess deduction of tax.

The Court observed that compensation paid under the settlement may not ultimately form part of the employees' taxable income and noted that Sections 10(10C), 17(3), 89 and 192(2A) of the Income Tax Act operate together in cases involving VRS payments and compensation in lieu of salary.

However, it held that an employer is required to deduct tax at source under Section 192 (deduction of tax from salary income) and cannot independently grant relief under Section 89 unless employees furnish Form 10E in accordance with Rule 21A of the Income Tax Rules.

Holding that Bata India had complied with the statutory requirement while deducting and remitting TDS, the Bench declined to direct the company to refund the deducted amount. It held:

"Therefore, the 3rd and 4th respondents cannot be found at fault, as they acted strictly in accordance with the mandate of the law, although the amounts paid by them to the respective members of the Petitioner Union may not form part of their taxable income."

Accordingly, the High Court directed the affected employees to file their income tax returns under Section 139(1) (filing of returns of income) within 30 days from receipt of the order. It further directed the jurisdictional Income Tax Officer to process the returns under Section 143(1) (processing of returns) and refund the eligible amount within two months from the date of filing.

For Petitioner: Mr.V.Prakash, Senior Counsel

For Respondent: Dr. B.Ramasamy, Senior Standing Counsel and Mr.T. Poornam, Advocate