Ex-Gratia Payment Under Pfizer VRS Is Capital Receipt, Not Taxable as Income From Other Sources: ITAT Pune

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has held that the ex gratia amount received by an employee under Pfizer Healthcare India Pvt. Ltd.'s voluntary retirement scheme is a capital receipt and cannot be taxed as income from other sources.

Observing that it had consistently taken the same view in identical cases involving other employees of the company, the bench ruled, "We find that the identical issue had come up before the tribunal in the case of other employees of M/s. Pfizer Healthcare India Pvt. Ltd. and the tribunal has consistently decided the impugned issue in favour of the assessee holding that the impugned amount received by the assessee under the Scheme is a capital receipt not chargeable to tax in the hands of the assessee."

A bench of Vice President R.K. Panda and Judicial Member Astha Chandra allowed the appeal filed by a taxpayer, Ram Dattatray Kaldate.

The bench held that the issue was already covered by several earlier decisions involving similarly placed employees of Pfizer Healthcare India Pvt. Ltd. who had received identical payments under the same scheme.

Kaldate, a former employee of Pfizer Healthcare India Pvt. Ltd., received ₹54.64 lakh as full and final settlement after opting for the company's voluntary retirement scheme.

The scheme was introduced following the closure of the company's Aurangabad manufacturing unit. While filing his return of income for Assessment Year 2019-20, the assessee treated the amount as advance salary and claimed relief under Section 89 of the Income Tax Act.

The Assessing Officer found that the payment had been received under the voluntary retirement scheme. The officer rejected the assessee's computation of relief under Section 89 and recomputed the amount of relief admissible under the provision. As a result, the relief available to the assessee was restricted.

During the appellate proceedings, however, the taxpayer changed his stand. He argued that the payment was a capital receipt received under the voluntary retirement scheme and was therefore not chargeable to tax. According to him, the payment was made outside the contract of employment and was not received on termination of employment.

The Commissioner of Income Tax (Appeals) rejected the contention. While exercising enhancement powers, the Commissioner held that the amount was taxable as "Income from Other Sources" under Section 56(2)(xi) of the Income Tax Act.

The commissioner reasoned that the payment had been received in connection with the termination of the assessee's employment.

Before the tribunal, the assessee argued that the payment had been received under a voluntary retirement scheme and not on termination of employment. He submitted that the Pune Bench had consistently held in several cases involving co-employees of Pfizer Healthcare India Pvt. Ltd. that identical ex gratia payments received under the same scheme were capital receipts not liable to tax.

He also pointed out that, in reassessment proceedings involving other employees covered by the same scheme, the revenue itself had accepted the compensation as a capital receipt without making any addition.

The revenue supported the Commissioner's order. It argued that Section 56(2)(xi), which applies from Assessment Year 2019-20, covers compensation or other payments received in connection with the termination of employment. It therefore submitted that the payment was taxable as income from other sources.

After considering the rival submissions, the tribunal noted that the issue had already been decided in favour of employees who had received identical payments under the same Pfizer scheme. It observed that coordinate benches had consistently treated such payments as capital receipts not chargeable to tax.

The bench also took note of the revenue's stand in reassessment proceedings involving similarly placed employees, where no addition had been made after treating the amounts as capital receipts. Following those earlier decisions, the tribunal held that the assessee was entitled to the same relief.

Accordingly, the tribunal held that the ex gratia amount received by the assessee under Pfizer Healthcare India Pvt. Ltd.'s voluntary retirement scheme was a capital receipt and could not be taxed under Section 56(2)(xi) of the Income Tax Act. The appeal was allowed.

For Assessee: Advocate Nikhil S. Pathak and Archana Shetty

For Revenue: Advocate Sandip Pawar