ITAT Pune Quashes Tax Demand on Pfizer Ex-Gratia, Classifies Voluntary Severance as Capital Receipt

The classification of severance pay and ex-gratia compensation received during company closures has long been a subject of intense litigation between the revenue authorities and the assessee. The core debate typically revolves around whether such receipts should be taxed as revenue income under the head of salary or treated as a non-taxable capital receipt owing to the loss of an income source.

In a highly significant judicial pronouncement, the Pune Bench of the Income Tax Appellate Tribunal (ITAT) delivered a decisive ruling in the case of Ashok Raghunathrao Kulkarni Vs ITO (ITAT Pune). Through its order dated 12/08/2024, concerning the Assessment Year 2019-20, the Tribunal provided absolute clarity on the taxability of voluntary financial packages offered during plant shutdowns, ruling firmly in favor of the assessee.

Factual Matrix of the Dispute

The dispute originated when the assessee, an individual previously employed with Pfizer Healthcare India Pvt. Ltd., filed his income tax return for the Assessment Year 2019-20 on 02.08.2019. The return declared a total income of Rs. 61,10,370.

The circumstances leading to the receipt of the disputed funds were rooted in corporate restructuring. Pfizer Healthcare India Pvt. Ltd. decided to permanently shutter its manufacturing facility located in Aurangabad. This closure was necessitated by stringent United States Food and Drug Administration (USFDA) norms, which resulted in a severe, long-term decline in product demand.

To facilitate a smooth exit and provide a beneficial settlement to its permanent workforce, the company introduced a specialized "Financial Scheme for employees at Aurangabad, 2019". Under this purely voluntary scheme, the assessee received a comprehensive financial package amounting to Rs. 57,12,674 upon his separation from the company on February 8, 2019.

Initially, the assessee disclosed this amount as advance salary in accordance with Rule 21A and sought tax relief amounting to Rs. 18,74,899 under Section 89 of the Income-tax Act, 1961. The comprehensive payout of Rs. 57,12,674 consisted of multiple components:

  • Ex-gratia (Severance pay) calculated based on tenure: Rs. 41,76,438
  • Early bird and group participation incentives: Rs. 12,00,000
  • Notice period payout: Rs. 2,39,867
  • Earned leave encashment: Rs. 60,866
  • Fractional salary for the relieving month (February 2019): Rs. 20,699
  • Bonus for the current fiscal year: Rs. 14,400
  • Medical reimbursements: Rs. 404