ITAT Chandigarh Allows Full Exemption on HMT VRS Compensation as Retrenchment under Section 10(10B)

Background of the Dispute

A group of appeals came up before the ITAT Chandigarh involving former employees of HMT Ltd., Tractor Division, Pinjore. These employees had opted for a special Voluntary Retirement Scheme (VRS/VSS) that was introduced in the backdrop of the Government of India’s decision to close down the loss-making Tractor Division of HMT Ltd.

The core controversy was:

  • The assessees’ stand: The compensation received under the VRS/VSS was in connection with the closure of the undertaking, and therefore, the entire amount was exempt as retrenchment compensation under Section 10(10B) of the Income Tax Act 1961.
  • The Revenue’s stand: The amounts were benefits under a voluntary retirement package, hence only the limited exemption of Rs. 5,00,000/- under Section 10(10C) was available, and the balance was taxable.

The Tribunal, after examining Government approvals, press releases, the HMT VRS/VSS scheme, and prior judicial decisions, ultimately held in favour of the assessees, treating the compensation as falling under Section 10(10B).

Lead Case and Facts Considered

The appeals were clubbed and disposed of by a consolidated order. The case of Suresh Pal Chauhan Vs ITO was treated as the lead matter for adjudication. The assessee in this case was an employee of HMT Ltd., Tractor Division, Pinjore.

Benefits Received on Exit

In the relevant previous year (Financial Year 2016-17 corresponding to Assessment Year 2017-18), the assessee received the following from HMT Tractor Division as part of separation:

  • Salary: Rs. 5,16,318
  • Voluntary Retirement Compensation: Rs. 36,07,576
  • Gratuity: Rs. 10,00,000
  • Leave encashment: Rs. 3,61,386

The assessee filed a return and subsequently a revised return, initially:

  • Claiming exemption of Rs. 5,00,000/- under Section 10(10C) on VRS compensation
  • Claiming exemption on gratuity and leave encashment under Section 10
  • Claiming relief under Section 89 on gratuity and VRS amount

The Assessing Officer completed the assessment under Section 143(3), allowing the Rs. 5,00,000 exemption under Section 10(10C) but denied relief under Section 89, citing the bar on simultaneous benefit of Section 10(10C) and Section 89.

Before the CIT(A), and subsequently before ITAT, the assessee revised his legal position and claimed:

  • The correct exemption is under Section 10(10B), treating the payment as retrenchment/closure compensation, not as standard VRS.
  • Consequently, the bar in the proviso to Section 89 (linked only to Section 10(10C)) would not apply to gratuity relief.

Rival Contentions

Assessee’s Arguments

The authorised representative advanced detailed submissions, which can be broadly summarised as follows:

  1. Nature of Scheme – Linked to Closure, Not Ordinary VRS

    • The Government of India, Ministry of Heavy Industries and Public Enterprises, issued a press release dated 27.10.2016 announcing:
      • Budgetary support to HMT Ltd.
      • Clearance of outstanding salary/wages and statutory dues.
      • Closure of operations of Tractor Division.
      • Introduction of an “attractive and improved” VRS/VSS package based on 2007 notional pay scales.
    • The closure decision was approved by the Union Cabinet. Funds were specifically allocated for:
      • Past dues (salary, PF, gratuity, leave encashment, etc.)
      • Ex-gratia payments and liabilities on closure.

  2. Terms of HMT VRS/VSS Order
    The scheme was implemented through HMT Office Order No. 15/16 dated 04.11.2016. Key features included:

    • Scheme applicable only to permanent employees of HMT Tractor Division.
    • Scheme described as a “ONE TIME BENEFIT” consequent to Cabinet approval for closure.
    • Ex-gratia calculated on the basis of 2007 notional basic pay plus DA.
    • Crucial clause: Employees not opting for VRS/VSS would be retrenched under the Industrial Disputes Act, 1947 since the Tractor Division was to be closed down.

    Thus, the assessee effectively had no realistic choice – it was either accept VRS/VSS or face retrenchment upon closure of the unit.

  3. Precedents in HMT Employees’ Own Cases

    • CIT(A), Panchkula had already granted exemption under Section 10(10B) to other HMT Tractor Division employees such as Sh. Prem Pal and Sh. Karam Pal.
    • CIT(A), NFAC Delhi and other CIT(A) offices had also allowed Section 10(10B) exemption in multiple HMT and similar PSU closure cases, including:
      • Shri Raj Kumar Singh
      • Shri Kedar Singh Mewari
    • The Revenue had not appealed those favourable CIT(A) orders, creating a clear pattern of consistent administrative application.

  4. Judicial Support – Hindustan Photo Films Decision

    • Strong reliance was placed on the judgment of the Hon’ble Madras High Court in Hindustan Photo Films Workers vs Government of India, wherein a severance package granted pursuant to Government decision for closure of HPF and special protection to its employees was held to be exempt under Section 10(10B).
    • The Single Judge decision was affirmed by the Division Bench; further, the SLP was dismissed by the Hon’ble Supreme Court on 19.02.2018.
    • According to the assessee, the HMT fact matrix closely parallels the HPF scenario:
      • Loss-making public sector undertaking
      • Government decision to close unit
      • Special package funded by the Government
      • Objective: rehabilitate/protect employees of a closing undertaking.