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August 10, 2022

On closure of employer unit lump sum compensation received will be treated as advance salary

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

On closure of employer unit lump sum compensation received will be treated as advance salary

Facts and Issues of the case

The background of the issue is M/s.Century Textiles and Industries Limited was incurring heavy losses and shut down its Worli Textile Mill Unit in 2008. Around 6300 of its 6600 Mill workers opted for the voluntary retirement scheme, however, 275 workers had opposed for closure of the Mill. Assessee is one of the 275 employees who did not opt for voluntary retirement scheme declared by the company. The company in its application to the Labour Commissioner inter-alia offered to pay an ex-gratia amount of compensation to each of the 275 employees provided they accept the closure and termination of their services without agitating the issue or obstructing the development of the entire Mill land.

Accordingly, the ex-workers barring a few, entered into individual agreements with the Company confirming the terms and conditions specified above. As per the terms of agreement between the Company and the individual workers, it was specifically agreed that each of the 275 ex-workmen would be paid an ex-gratia amount per month on the condition that they would not obstruct the development of the entire Mill land (except 1.08 acres of land). By the agreement, the ex-worker accepted the closure of the Mill and also accepted their consequent termination of service and also agreed that they be treated as left employment and has having given up their right of employment.

The Company entered into a Supplementary Agreement individually with the ex-workers with the aim of settling the matter forever whereby, each ex worker agreed to accept a lump sum amount in lieu of the remaining years of service up to 63 years of age. The Company also confirmed that the onetime lump sum ex-gratia amount was towards full and final settlement and no claim would lie against any remuneration, compensation, ex-gratia or any other benefits.

In accordance with the Supplementary agreement dated, the Company has computed the total dues payable by the Company to the assessee till he attains 63 years of age to be Rs.59, 61,483/-. The company has paid the ‘one time lump-sum ex-gratia amount’ of Rs.42, 66,844/- after deducting income tax of Rs.16, 94,639/- as per the provisions of Section 192 of the Act. The Company in the said agreement has explained that the onetime lump sum ex-gratia amount is deemed ‘salary’ paid to an ex-employee in advance within the meaning of the provisions of the Act, it has therefore, deducted tax at source in accordance with the relevant provisions of the income tax act, 1961, as stated above. Form 16 has been duly issued to the assessee by the Company for the relevant F.Y certifying deduction of tax.

Observations by the Court

 The Court considered the rival submissions and material placed on record, we observed from the record that assessee is one of the employee who did not agree for the voluntary retirement scheme offered by the company and subsequently company has pledged a piece of land for the benefit of 275 employees who are not agreed for the voluntary retirement scheme compensation. Subsequently owing to the order of the Labour Commissioner and Municipal Corporation of the Greater Mumbai which imposed certain conditions on the company to safeguard the interest of the 275 workers who had not opted for voluntary retirement scheme.

Subsequently individual employees and the company entered into supplementary agreement and the company agreed to compute the total compensation payable by the company till they attain 63 years of age and accordingly in the case of the assessee it was determined to be at Rs.59, 61,483/-. The company after considering that these are one time lump sum ex-gratia amount payable to the employee and settled the same after deducting the TDS as per the provision u/s. 192 of the Act. We observe from the record that company in the supplementary agreement has explained that the one-time lump sum ex-gratia amount is salary paid to the ex-employee in advance and accordingly, it has deducted tax at source in accordance with the provisions of the I.T. Act.

In this regard the company also issued Form 16 to the assessee for the relevant year 2016-17. On careful consideration of the facts on record we observe that even though the textile unit was closed on 2008 and assessee has refused to agree the voluntary retirement scheme offered by the company and under protest assessee and similar employees managed to get compensation through Labour Commissioner and as per the directions of the Labour Commissioner, as agreed by the company, the assessee was awarded the compensation for the remaining period of service till the age of 63 years.

The basis of compensation calculated by the company and the company also treated the one-time compensation as a salary paid in advance and deducted the TDS on the same, clearly indicates that the compensation received by the assessee is only salary received in advance not as termination compensation even though this was paid in lump sum as ex-gratia in one go. We are inclined to treat the compensation received by the assessee as only salary received in advance.

Conclusion

The compensation received by the assessee is salary received in advance and not termination compensation even though this was paid in lump sum as ex-gratia in one go.

Rajesh-Shantaram-Chavan-vs.-ACIT-ITAT-Mumbai

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