Seema Arora vs ADDL/JCIT (A)

PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:

This appeal is filed by the Assessee against the order of The Commissioner Of Income Tax, Appeal Addl/Jcit (A)-3 Hyderabad vide order dated 31-Mar-2026 arising out of the assessment order passed by the Assessing Officer (hereinafter referred to as “the AO”) i.e., ADIT CPC- Bengaluru u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 10.12.2020 for the Assessment Year (AY) 2020-21.

The Assessee has raised the following grounds of appeal:

ERROR IN LAW IN UPHOLDING TAXABILITY OF EX-GRATIA COMPENSATION   That the Learned CIT(A) erred in law and on facts in upholding the action of the Assessing Officer in bringing to tax the ex-gratia compensation received by the Appellant under MTNL VRS-2019, by incorrectly restricting exemption to ₹5,00,000 in AY 20-21, without appreciating the correct statutory framework and judicial position governing such receipts.

MISCHARACTERISATION OF COMPENSATION UNDER SECTION 10(10C) INSTEAD OF APPLICABILITY OF THE SECOND PROVISO TO SECTION 10(10B)   That the Learned CIT(A) erred in applying the provisions of Section 10(10C) to the impugned receipt, without appreciating that the compensation received by the Appellant is in substance retrenchment compensation, squarely falling within the ambit of Second proviso to Section 10(10B) of the Income Tax Act, 1961 (hereinafter the ‘the Act’).   It is submitted that Mahanagar Telephone Nigam Limited (MTNL) incurred continuous financial losses over three consecutive financial years, resulting in severe liquidity constraints. After the Indian telecom sector opened up, MTNL, being a public sector company, struggled to compete with the private players and lost market share rapidly.The Company faced difficulties in meeting its salary obligations towards employees, and in view of its deteriorating financial position, it was categorized as an “INCIPIENT SICK” public sector undertaking in the year 2017.

In order to address the financial stress, government also approved that certain noncore assets, including land and buildings, would be monetized, and the proceeds thereof would be credited to MTNL to improve its financial health. The financial difficulties were further compounded by technological obsolescence arising from the introduction of 4G telecommunications technology, necessitating substantial capital investment for network upgradation.

In a nutshell, MTNL VRS 2019 was a workforce rationalization measure implemented in a financially distressed PSU declared “INCIPIENT SICK”, suffering continuous operational losses and salary payment constraints. Hence, the appellant has no option but to accept the voluntary retirement scheme.   The said scheme was:

Approved at the Union Cabinet level,

Issued through Department of Telecommunications Office Memorandum,

Funded through budgetary support of the Government of India, Implemented to reduce workforce cost and restructure the entity

The impugned finding is contrary to the settled position laid down by the Hon’ble ITAT Chandigarh in:

HARISH KUMAR V. ITO (ITA NO. 42/CHD/2025)

SHRI MARTIN EKKA V. ITO (ITA No. 281/CHD/2023) and several other judicial pronouncements wherein it has been held that MTNL VRS-2019, was a retrenchment scheme in the garb of a VRS scheme and was announced by Government of India for revival of MTNL.

The Appellant places reliance on the judgment of the Hon’ble Madras High Court in Hindustan Photo Film Workers' Welfare Centre (CITU) (441 ITR 661 (Madras) [01-07-2021]). In the said case, the court held:

Where the Central Government approves support for the rehabilitation of employees during the winding up or downsizing of a government company, the monetary benefits paid under a special package scheme constitute RETRENCHMENT COMPENSATION.

Such benefits fall squarely under the 2nd PROVISO TO SECTION 10(10B) of the Act, regardless of being "styled as VRS".

Though the scheme is referred as Voluntary Retirement Scheme, one has to see the object and intent behind it. When once a factual finding is given that it is a special package, a different view is not possible.

the decision in Hindustan Photo Film Workers' Welfare Centre has been consistently followed in the cases of HMT, RANBAXY and BSNL/MTNL.   The appellant submits that in the case of Commissioner of Income Tax v. B. Suresh (Karnataka High Court)

The Hon’ble Karnataka High Court held that:

The true nature of the payment must be determined based on facts and circumstances.

Merely labelling a scheme as “VRS” is not conclusive.

Where the introduction of such schemess is effectively due to closure or compulsion, the payment assumes the character of retrenchment compensation.

NON-CONSIDERATION OF SECOND PROVISO TO SECTION 10(10B)   That the Learned CIT(A) failed to appreciate that the scheme under which the compensation was paid was approved by the Central Government, and therefore, by virtue of the Second Proviso to Section 10(10B), the monetary ceiling of ₹5,00,000 prescribed in the First Proviso is inapplicable.   The above position has been categorically affirmed in:

 Dayal Singh v. ITO (ITA No. 519/CHD/2024)

wherein it has been held that once Government approval is established, full exemption must be granted without any monetary restriction.

FAILURE TO APPRECIATE SUBSTANCE OVER FORM   That the Learned CIT(A) erred in law in determining the taxability of the impugned receipt solely on the basis of nomenclature of the scheme, without examining the real nature, purpose and surrounding circumstances of the transaction.   It is a settled principle that:

The true character of a receipt must be determined based on its substance and not merely on its form.   The Hon’ble ITAT in Martin Ekka and Harish Kumar (supra) has applied this principle and held that:

Economic compulsion, financial distress of PSU, and Government-mandated restructuring convert the nature of the payment into retrenchment compensation.

IGNORING BINDING COORDINATE BENCH DECISIONS ON IDENTICAL ISSUE   That the Learned CIT(A) erred in disregarding binding decisions of coordinate benches of the Tribunal on identical facts involving the same BSNL/MTNL VRS2019 scheme, thereby rendering the impugned order contrary to judicial discipline.

WITHOUT PREJUDICE – RECEIPT IS CAPITAL IN NATURE   Without prejudice to the above, the Learned CIT(A) erred in not appreciating that the impugned compensation represents consideration for LOSS OF EMPLOYMENT AND SOURCE OF INCOME, and therefore constitutes a capital receipt, not chargeable to tax unless specifically brought within the charging provisions.   Quoting here the judgement given by ITAT Chandigarh in the case of HARISH

The issue is squarely covered by the decision of the Co-ordinate Chandigarh Bench of the Tribunal the Case of other employees in similar facts and circumstances vide order dated 11.3.2019 passed in ITA No.870/Chd/2018 & Others titled as 'Sh. Rajeshwar Sharma & Others Vs. ITO'. This Tribunal observed as under:

The amount was paid as a compensation for retrenchment of services taking into consideration the length of service, basic salary, the age and other factors. In our view, the said amount is a compensation paid by the employer while terminating the services of the employee on account of 1oss of job and further subsistence, thus, the said amount was just a capital receipt in the hands of the assessee. In fact, no part of amount received by the assessee is taxable.

ENTITLEMENT TO RAISE CORRECT LEGAL CLAIM AT APPELLATE STAGE   That the Learned CIT(A) failed to appreciate that the Appellant is entitled to raise a correct legal claim even if not made in the original return.   The appellant has placed reliance on:

 CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. (349 ITR 336)

 CIT v. Jai Parabolic Springs Ltd. (306 ITR 42)

wherein it has been held that appellate authorities have wide powers to grant lawful relief.

 The Appellant’s fresh claim should be admitted as the omission to claim exemption under Second Proviso to Section 10(10B) was a bonafide mistake, and the same be allowed in the interest of equity and natural justice.

SUBSTANTIVE RELIEF CANNOT BE DENIED ON PROCEDURAL GROUNDS   That the impugned order is contrary to the law laid down by the Hon’ble Supreme Court in the case of Wipro Finance Ltd. v. CIT (443 ITR 250) wherein it has been held that substantive rights cannot be defeated by procedural lapses.

VIOLATION OF CBDT CIRCULAR NO. 14 OF 1955   That the action of the lower authorities is contrary to CBDT Circular No. 14 (XL-35), which mandates that: Tax authorities must assist taxpayers in securing lawful relief and not take advantage of ignorance of law.

VIOLATION OF ARTICLE 265 OF THE CONSTITUTION   The appellant pleads that the taxation of the impugned receipt, which is otherwise not chargeable to tax, is in violation of Article 265 of the Constitution of India.

ORDER IS ARBITRARY AND UNSUSTAINABLE   The appellant submits that the impugned order passed by the learned Commissioner of Income Tax (Appeals) is arbitrary, unjust, and contrary to the settled principles of law, and is therefore liable to be set aside. The impugned order has resulted in undue hardship to the appellant by denying a legitimate claim.

PRAYER  The Appellant prays that the Hon’ble Tribunal may:

 Allow the appeal and grant full exemption under the Second Proviso to Section 10(10B) of the Income-tax Act, 1961  Hold that ₹5,00,000 limit is not applicable:

 Delete the addition;

 Direct grant of consequential refund;

 Pass such order as this Hon’ble Tribunal may deem fit and proper in the interest of justice, equity, and good conscience.”

Brief facts of the case are that the assessee, Smt. Seema Arora, is an employee of Bharat Sanchar Nigam Limited (hereinafter referred to as “BSNL”). The assessee opted for retirement under the Voluntary Retirement Scheme (VRS), 2019 and received an amount of Rs.13,72,791 /- under the scheme during the year under consideration.

The assessee filed his return of income on 11.08.2020 declaring a total income of Rs.19,58,400/-, wherein exemption of Rs.5,00,000/- was claimed on account of compensation received from retirement scheme.

The return was processed u/s. 143(1) of the Act accepting the returned income. Subsequently, the assessee became aware that the amount received on voluntary retirement was eligible for exemption u/s. 10(10B) of the Act. As the exemption of Rs.5,00,000/- only was claimed as “Any Other” exemption. Aggrieved, assessee has filed the appeal seeking to claim the eligible exemption on the said amount before the ld. CIT(A). The ld. CIT(A) vide the impugned order, dismissed the appeal on the ground of delay, without appreciating that the delay was occasioned due to bona fide reasons, including reliance on incorrect professional advice and the subsequent crystallization of the legal position through judicial precedents.

Aggrieved assessee is now in appeal before us.

Before us, ld. Counsel for the assessee stated that the Ld. CIT(A) did not condone the delay and passed the order in limine.

On the other hand, ld. DR relied on the order of the ld. CIT(A).

We have heard the rival submissions and have perused the relevant material on record. We find that the ld. CIT(A) rejected the assessee’s application for condonation of delay and dismissed the appeal in limine without discussing the case on merits as per the provisions of section 250(6) of the Act.

In such factual matrix, we are of the view that the reasons stated by the assessee, seems to be reasonable and sufficient cause. Accordingly, we condone the delay in filing appeal before the CIT(A), in the light of the decision of the hon’ble Supreme Court in the case of in Collector, Land Acquisition, Anantnag v. Mst. Katiji (1987), reported in 1987 AIR 1353, 1987 2 SCC 107. Further, in view of the above facts and circumstances and in the interest of natural justice and fair play, we are of the considered opinion that the issues be restored to the file of the ld. CIT(A) for adjudication afresh on merits. The CIT(A) is directed to accord three effective and adequate opportunities of being heard to the assessee. Needless to say that the assessee is also directed to provide necessary information /documents as required by the authorities.

In the result, appeal of assessee in ITA No.6166/DEL/2026 is allowed for statistical purposes.