ITAT Rajkot Condones Massive Delay in BSNL VRS Exemption Appeals; Directs CIT(A) to Re-examine Claims Under Section 10(10B)

The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, recently delivered a consolidated ruling addressing multiple appeals filed by former employees of Bharat Sanchar Nigam Limited (BSNL). The core dispute revolved around the taxability of severance compensation received under the BSNL Voluntary Retirement Scheme (VRS) of 2019. The judicial order in the case of Khimjibhai Nanjibhai Babaria Vs ITO and connected matters highlights the critical necessity for appellate authorities to thoroughly evaluate the foundational government schemes before dismissing tax exemption claims.

Furthermore, the Tribunal demonstrated a lenient approach toward procedural lapses by condoning extraordinary delays—spanning over four years in several instances—acknowledging the bona fide constraints faced by the assessees.

The Genesis of the Dispute: BSNL’s 2019 Revival Package

To understand the crux of the litigation, it is essential to trace the origins of the compensation. BSNL, a prominent Public Sector Undertaking functioning under the Department of Telecommunications (DoT), faced severe financial turbulence and mounting operational deficits. To ensure the long-term sustainability of the enterprise, the Union Cabinet sanctioned a comprehensive Revival and Restructuring Plan on 23 October 2019.

A pivotal component of this restructuring was a massive workforce reduction initiative, formalized as the BSNL Voluntary Retirement Scheme 2019 (VRS-2019). The scheme was officially rolled out via a DoT Office Memorandum dated 29 October 2019. Crucially, the financial backing for this severance package was entirely sourced from the budgetary allocations of the Central Government.

While the nomenclature of the scheme included the term "voluntary retirement," the affected employees argued that the initiative was, in substance, a government-mandated downsizing operation. Consequently, they contended that the severance package possessed the fundamental characteristics of retrenchment compensation, thereby triggering specific tax exemptions under the Income Tax Act 1961.

Factual Matrix of the Lead Case

The Tribunal consolidated seven appeals for the Assessment Years (AY) 2020-21 and 2021-22, utilizing the appeal of Lakhman Shir (ITA No. 497/RJT/2026) as the lead case to establish the factual background.

The lead assessee separated from BSNL under the VRS-2019 framework and was entitled to an ex-gratia compensation totaling Rs. 44,22,776. This substantial amount was disbursed in four distinct installments across two financial years:

  • **March 2020 (FY 2019-20)😗* Rs. 13,84,342
  • **June 2020 (FY 2020-21)😗* Rs. 9,95,135
  • **July 2020 (FY 2020-21)😗* Rs. 16,89,477
  • **March 2021 (FY 2020-21)😗* Rs. 3,53,822

The Initial Tax Filing Error

When filing the initial income tax returns, the assessee, allegedly acting on flawed professional counsel, offered the entire ex-gratia receipt of Rs. 44,22,776 to tax. The returns were subsequently processed by the revenue department under Section 143(1) of the Income Tax Act 1961.