ITAT Chennai Allows Section 10(10B) Exemption on BSNL VRS-2019 Ex-Gratia Claimed at Appellate Stage

1. Background and Core Issue

In Shanmugasundar Vs ITO (ITAT Chennai), ITA No. 2960/CHNY/2026, the Chennai Bench of the Income Tax Appellate Tribunal examined two important questions arising from an ex-gratia payment received under BSNL’s VRS-2019 scheme for Assessment Year 2021-22:

  1. Whether an assessee can seek exemption under section 10(10B) for the first time before the appellate authority, even though the claim was not made in the original return.
  2. Whether the ex-gratia received under BSNL’s Government-approved VRS-2019 scheme qualifies as retrenchment compensation eligible for exemption under section 10(10B).

The Tribunal ultimately ruled in favour of the assessee on both counts, holding that:

  • The bar in Goetze (India) Ltd. v. CIT, 284 ITR 323 (SC) applies only to the Assessing Officer and does not restrict the powers of appellate authorities.
  • Following earlier coordinate Bench rulings, ex-gratia received under BSNL VRS-2019 is to be treated as eligible for exemption under section 10(10B).

2. Facts of the Case

2.1 Return Filing and Disclosure of Ex-Gratia

  • The assessee, an individual, filed his return of income for AY 2021-22 on 29.11.2021.
  • He declared a total income of Rs.44,40,070/-.
  • This income figure included an ex-gratia amount of Rs.38,23,242/- received from Bharath Sanchar Nigam Ltd. (BSNL) under its Government approved VRS Scheme of 2019 (BSNL VRS-2019).
  • The return was processed under section 143(1) of the Income Tax Act, 1961.

At this stage, the ex-gratia amount was treated as fully taxable by the assessee himself in the return.

2.2 Rectification Petition under Section 154

Subsequently, the assessee became aware of a favourable Tribunal decision where ex-gratia under the same BSNL VRS-2019 scheme was held to be exempt under section 10(10B).

  • Relying on this coordinate Bench decision, the assessee filed an application under section 154 seeking rectification of the intimation under section 143(1).
  • In the rectification petition, he requested exemption of the ex-gratia amount under section 10(10B) on the ground that the nature of the payment fell within that provision.

However, the Centralized Processing Centre (CPC) did not accept this claim:

  • The CPC passed an order under section 154 but did not grant the requested exemption under section 10(10B).

2.3 Appeal before First Appellate Authority

Aggrieved by the CPC’s rectification order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), Addl./JCIT(A), Thane (referred to as “FAA”).

The FAA dismissed the appeal on the following reasoning:

  • The assessee was putting forward a fresh claim which had not been made in the original return of income.
  • Entertaining such a claim would, in the FAA’s view, effectively alter the returned income at the assessment stage.
  • The FAA relied on Goetze India Ltd. vs CIT [2006] 284 ITR 323 (SC) to hold that a fresh claim could not be entertained without a revised return.

Consequently, the FAA declined to grant any relief on the ex-gratia amount.

2.4 Appeal before ITAT Chennai

The assessee then challenged the FAA’s order before the ITAT Chennai. The appeal raised two connected issues:

  • Procedural: Whether the FAA was justified in rejecting the claim on the ground that it was a fresh claim not made in the return, in light of Goetze (India) Ltd. v. CIT.
  • Substantive: Whether the BSNL VRS-2019 ex-gratia qualifies for exemption under section 10(10B) as retrenchment compensation.

3. Tribunal’s Analysis on Procedural Aspect

3.1 Scope of Goetze (India) Ltd. Decision

The ITAT first addressed the procedural objection raised by the FAA.

The FAA had cited Goetze (India) Ltd. v. CIT, [2006] 284 ITR 323 (SC) to justify refusing the claim on the basis that it was not made in the original return and no revised return had been filed.

The Tribunal clarified the correct scope of the Supreme Court ruling: