Tax Exemption on BSNL VRS 2019 Payouts: ITAT Nagpur Classifies Ex-Gratia as Retrenchment Compensation Under Section 10(10B)

Introduction and Background of the Dispute

In a significant judicial pronouncement, the Nagpur Bench of the Income Tax Appellate Tribunal (ITAT) delivered a consolidated order addressing a batch of appeals filed by multiple assessees. The primary case, identified as Yogesh Shyamsunder Maheshwari Vs DCIT, pertained to the Assessment Years 2020-21 and 2021-22. The core controversy revolved around the taxability of ex-gratia compensation received by the employees of Bharat Sanchar Nigam Limited (BSNL) under the highly publicized BSNL Voluntary Retirement Scheme, 2019.

The central question before the appellate tribunal was whether the financial packages handed out to the departing employees should be treated as standard voluntary retirement receipts governed by Section 10(10C) of the Income Tax Act 1961, or if they legally qualify as retrenchment compensation under Section 10(10B) of the Act, thereby rendering them as capital receipts completely exempt from income tax.

The Genesis of the BSNL Voluntary Retirement Scheme, 2019

To understand the legal context, it is imperative to look at the administrative decisions leading up to the severance payouts. BSNL, operating under the administrative umbrella of the Department of Telecommunications, Government of India, had been facing severe financial distress. To rescue and revive the telecom giant, alongside Mahanagar Telephone Nigam Limited (MTNL), the Union Cabinet sanctioned a comprehensive revival strategy on October 23, 2019.

Following this approval, the Department of Telecommunications issued an Office Memorandum on October 29, 2019, rolling out the BSNL Voluntary Retirement Scheme, 2019. This initiative specifically targeted the reduction of the existing workforce by offering an ex-gratia compensation package to employees aged 50 years and above who opted for early retirement.

The Assessee's Initial Filings and Subsequent Claims

When the affected BSNL employees originally filed their income tax returns, they claimed tax exemptions on the received ex-gratia amounts under Section 10(10C) of the Income Tax Act 1961. This specific statutory provision caps the maximum allowable exemption for voluntary retirement compensation at ₹5 lakh. Consequently, any severance amount exceeding this ₹5 lakh threshold was offered to tax, and the corresponding income tax was duly paid by the assessees.

However, as legal interpretations of the BSNL revival package evolved, the assessees realized that the nature of their termination was closer to a forced workforce reduction rather than a traditional voluntary retirement. Consequently, they raised a fresh claim before the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 250 of the Act. They argued that the entire compensation amount should be reclassified as retrenchment compensation under Section 10(10B), which does not impose the strict ₹5 lakh ceiling found in Section 10(10C).