Penalty under section 221 of the Income Tax Act, 1961 for default in making payment of Tax

Section 221(1) of the Income-tax Act, 1961 deals with the penalty where payment of tax is in default. As per section 221(1), if a taxpayer is treated as an assessee in default, then he shall be liable to pay penalty of such an amount as the Assessing Officer may impose. However, penalty cannot exceed the amount of tax in arrears. Thus, penalty under section 221(1) is a general penalty and can be levied in all the cases in which the taxpayer is treated as an assessee in default.

History and background

The section is on the same lines as Section 46(1) and 46(1A) of the Income-tax Act 1922. The section provides for levy of penalty for non-payment of tax. Where the assessee has defaulted in payment of tax or is deemed to be in default, the assessing officer is entitled to levy penalty in addition to the interest payable under subsection 2 of section 220 of the Income-tax Act 1961. Though the section is on the same lines as the law under the Income-tax Act, 1922 there are some major differences between the old provision and the new section (which has been amended many times over the years). The difference have been brought out hereunder and therefore all the old judgments may not be applicable to the current section 221 in the current form.

Text of Section 221

Penalty payable when tax in default

221. [1][(1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable, by way of penalty, to pay such amount as the [2][Assessing] Officer may direct, and in the case of a continuing default, such further amount or amounts as the [2][Assessing] Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :

Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard

[3][Provided further that where the assessee proves to the satisfaction of the [2][Assessing] Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section.]]

[4][Explanation. - For the removal of doubt, it is hereby declared that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the tax.]

(2) Where as a result of any final order the amount of tax, with respect to the default in the payment of which the penalty was levied, has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded.

KEY NOTE

1.   Substituted by the Taxation Laws (Amendment) Act, 1970, with effect from 01.04.1970.

2.   Substituted for “Income-tax” by the Direct Tax Laws (Amendment) Act, 1987, with effect from 01.04.1988.

3.   Substituted by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986, with effect from 10.09.1986.

4.   Inserted by the Taxation Laws (Amendment) Act, 1975, with effect from 01.10.1975.

Though the section is for levy of penalty, the said section is placed under Chapter of XVI–D Collection and Recovery and not under Chapter XXI – Penalties Imposable. This arrangement is indicative of the fact that it is to be used as a deterrent to non-payment of taxes or delay in payment of taxes.

Assesse in Default

If the amount specified in the notice of demand under section 156 is not paid within 30 days or such time as is extended by Assessing Officer.

Default in payment of tax

The section refers to the default in payment of tax. The term tax is defined under section 2(43) of the Act. The said definition includes income tax, super tax and fringe benefit tax, but does not include interest or penalty. Thus, penalty under this sections is to be restricted to the tax default and does not include the interest under sections 234A, 234B, 234C, 220(2) or penalty.

ITAT was justified in holding the penalty under section 221(1) is to be imposed in respect of only the tax excluding interest under  section 234A, 234B & 234C without appreciating that section 221(1) does not contain any such condition that the penalty imposed under the said section should be a percentage of only the tax excluding the interest

It was held that on reading the provisions of Section 221 conjointly with the definition of “tax” as detailed under Section 2(43), the irresistible conclusion that can be drawn is that the phraseology “tax in arrears” as envisaged in Section 221 of the Act would not take within its realm the interest component. It would be abundantly clear that the Assessing Officer can impose penalty for default in making the payment of tax, but the same shall not exceed the amount of tax in arrears. Tax in arrears would not include the interest payable under Section 220(2) of the Act. In the result, the substantial question of law are answered against the Appellant. The Appeal stands dismissed. However, no order as to costs. – [CIT v. P. S. Hathiramani (1994) 207 ITR 483 : (1993) 68 Taxman 449 (Bom)]

Penalty under section 221 – Tax in default – Penalty can be imposed on arrears of tax excluding interest under section 220(2)

Dismissing the appeal of the revenue, the Court held that on reading the provisions of section 221 conjointly with the definition of “tax” as detailed under section 2(43) of the Act, the irresistible conclusion that could be drawn was that the phraseology “tax in arrears” as envisaged in section 221 of the Act would not take within its realm the interest component. The Assessing Officer could impose penalty for default in making the payment of tax, but it should not exceed the amount of tax in arrears. Tax in arrears would not include the interest payable under section 220(2) of the Act. – [CIT v. Oryx Finance and Investment (P) Ltd. (2017) 395 ITR 745 : 83 taxmann.com 194 (Bom)]

The tax authorities shall give the taxpayer a reasonable opportunity of being heard. No penalty is levied if the taxpayer proves to the satisfaction of the tax authorities that the default was for good and sufficient reason.

KEY NOTE

An assessee shall not cease to be liable to any penalty under section 221(1) merely by reason of the fact that he paid the tax before the levy of such penalty.

Nature of default

Failure to pay tax demand or self-assessment tax under section 140A and interest payable under section 220(2) within prescribed time.

Authorities empowered to impose penalty

Only the  Assessing Officer is empowered to impose penalty under section 221

Quantum of penalty

MINIMUM PENALTY

Such amount as the Assessing Officer may impose.

MAXIMUM PENALTY

Tax in arrears.

Assessing Officer could not levy penalty under section 221 for non-payment of self-assessment tax by assessee

Where Assessing Officer passed penalty order under section 221(1) on account of assessee's failure to pay self-assessment tax within stipulated period, in view of fact that amended section 140A(3) with effect from 01.04.1989 does not envisage any penalty for non-payment of self-assessment tax, impugned penalty order was to be set aside. – [Heddle Knowledge (P) Ltd. v. ITO (2018) 195 TTJ 536 : 69 ITD 304 : 195 TTJ 536 : 90 taxmann.com 376 (ITAT Mumbai)]

Penalty under section 221(1) for default in payment of demand cannot exceed tax amount

On reading the provisions of section 221 conjointly with the definition of “tax” as detailed under section 2(43), the irresistible conclusion that can be drawn is that the phraseology “tax in arrears” as envisaged in section 221 of the Act would not take within its realm the interest component. It would be abundantly clear that the assessing officer can impose penalty for default in making the payment of tax, but the same shall not exceed the amount of tax in arrears. Tax in arrears would not include the interest payable under section 220(2) of the Act. - [CIT v. Oryx Finance and Investment (P) Ltd. - Date of Judgement : 01.07.2015 (Bom)]

Failure on part of the agent - Good and sufficient reasons

Assessee had directed his banker to deposit all three instalments and same could not be done by banker in time and therefore, it had good and sufficient reasons not to deduct tax at source. – [Baljindra Singh v. ITO, Suratgarh (2009) 179 Taxman 28 (ITAT Jodhpur)]

Non-Availability of books - Good and sufficient reasons

Delay in deduction and deposit of tax due to non-availability at books of account as these were seized by Department and therefore, it had good and sufficient reasons not to deduct tax at source. - [Tony Electronics Ltd. v. ACIT (1997) 63 ITD 41 (ITAT Delhi)]

What constitutes “Good & Sufficient Cause”?

The words ‘good and sufficient reasons’ should be in a way to achieve effective, speedy and proper implementation of the provisions of the Act. ‘good and sufficient reason’ depends on the facts. – [CIT v. Chembara Peak Estates Ltd. (1989) 47 Taxman 166 (Ker); Nachimuthu Industrial Association v. CIT (1980) 123 ITR 611 (Mad)]

Penalty cannot be levied for non payment of interest

Since ‘tax’ and ‘interest’ are different in character. The definition of ‘tax’ in section 2(43) does not cover interest. – [Shreeniwas & Sons v. ITO (1974) 96 ITR 562 (Cal)]

Penalty cannot be levied for nonpayment of penalty

Since the definition of ‘tax’ does not include ‘penalty’ – [Kunhalaumma v. ITO (1968) 68 ITR 840 (Ker)]

Power of Principal Commissioner or Commissioner to reduce or waive penalty, etc. in certain cases as per the provisions of Section 273A of the Income Tax Act, 1961

Section 273A empowers the Principal Commissioner or Commissioner to waive or reduce  penalty levied under the Income-tax Act as well as to stay or compound any proceeding for the recovery of penalty. Section 273A was substituted by the Taxation Laws (Amendment) Act, 1975, with effect from 01.10.1975. Mainly there are two provisions under section 273A which provides power to the Principal Commissioner or Commissioner to reduce or waive penalty i.e. sub-sections (1) and (4). Both are independent of each other.

Text of Section 273A

POWER TO REDUCE OR WAIVE PENALTY, etc., IN CERTAIN CASES.

273A. (1) Notwithstanding anything contained in this Act, the Principal Commissioner or Commissioner may, in his discretion, whether on his own motion or otherwise,—

  (i) [Omitted  by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989]

 (ii) reduce or waive the amount of penalty imposed or imposable on a person under section 270A or clause (iii) of sub-section (1) of section 271; or

(iii) [Omitted  by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989]

   if he is satisfied that such person—

 (a) [Omitted  by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989]

 (b) in the case referred to in clause (ii), has, prior to the detection by the Assessing Officer, of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income, voluntarily and in good faith, made full and true disclosure of such particulars,

 (c) [Omitted  by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989]

and also has, in the case referred to in clause (b), co-operated in any enquiry relating to the assessment of his income and has either paid or made satisfactory arrangements for the payment of any tax or interest payable in consequence of an order passed under this Act in respect of the relevant assessment year.

Explanation .—For the purposes of this sub-section, a person shall be deemed to have made full and true disclosure of his income or of the particulars relating thereto in any case where the excess of income assessed over the income returned is of such a nature as not to attract the provisions of section 270A or clause (c) of sub-section (1) of section 271.

(2) Notwithstanding anything contained in sub-section (1),—

 (a) [Omitted  by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989]

 (b) if in a case falling under section 270A or clause (c) of sub-section (1) of section 271, the amount of income in respect of which the penalty is imposed or imposable for the relevant assessment year, or, where such disclosure relates to more than one assessment year, the aggregate amount of such income for those years, exceeds a sum of five hundred thousand rupees,

no order reducing or waiving the penalty under sub-section (1) shall be made by the Principal Commissioner or Commissioner except with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General, as the case may be.

(3) Where an order has been made under sub-section (1) in favour of any person, whether such order relates to one or more assessment years, he shall not be entitled to any relief under this section in relation to any other assessment year at any time after the making of such order :

Provided that where an order has been made in favour of any person under sub-section (1) on or before the 24th day of July, 1991, such person shall be entitled to further relief only once in relation to other assessment year or years if he makes an application to the income-tax authority referred to in sub-section (4) at any time before the 1st day of April, 1992.

(4) Without prejudice to the powers conferred on him by any other provision of this Act, the Principal Commissioner or Commissioner may, on an application made in this behalf by an assessee, and after recording his reasons for so doing, reduce or waive the amount of any penalty payable by the assessee under this Act or stay or compound any proceeding for the recovery of any such amount, if he is satisfied that—

  (i) to do otherwise would cause genuine hardship to the assessee, having regard to the circumstances of the case; and

 (ii) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him:

Provided that where the amount of any penalty payable under this Act or, where such application relates to more than one penalty, the aggregate amount of such penalties exceeds one hundred thousand rupees, no order reducing or waiving the amount or compounding any proceeding for its recovery under this sub-section shall be made by the Principal Commissioner or Commissioner except with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General, as the case may be.

(4A) The order under sub-section (4), either accepting or rejecting the application in full or in part, shall be passed within a period of twelve months from the end of the month in which the application under the said sub-section is received by the Principal Commissioner or the Commissioner:

Provided that no order rejecting the application, either in full or in part, shall be passed unless the assessee has been given an opportunity of being heard:

Provided further that where any application is pending as on the 1st day of June, 2016, the order shall be passed on or before the 31st day of May, 2017.

(5) Every order made under this section shall be final and shall not be called into question by any court or any other authority.

(6) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1989 shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.

(7) Notwithstanding anything contained in sub-section (6), the provisions of sub-section (1), sub-section (2), or, as the case may be, sub-section (4) as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1989 (3 of 1989), shall apply in the case of reduction or waiver of penalty or interest in relation to any assessment for the assessment year commencing on the 1st day of April, 1988 or any earlier assessment year, with the modifications that the power under the said sub-section (1) shall be exercisable only by the Principal Commissioner or Commissioner and instead of the previous approval of the Board, the Principal Commissioner or Commissioner shall obtain the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General, as the case may be, while dealing with such case.

Principal Commissioner or Commissioner may reduce/waive penalty [Section 273A(1)]

Section 273A(1) empowers the Principal Commissioner or Commissioner to reduce or waive the amount of penalty imposed or imposable on a person under section 270A (i.e., penalty for under-reporting and misreporting of income) or under section 271(1 )(c) (i.e., penalty for concealment of particulars of income or furnishing inaccurate particulars of income).

The power under this section 273A() can be exercised either before or after levy of penalty, as the section uses the term ‘imposed’ or ‘imposable’.

Waiver may be suo moto or otherwise [Section 273A(1)]

The waiver or reduction under section 273A(1) can be granted by the Principal Commissioner or Commissioner either on his own motion or otherwise, i.e., on an application made by the taxpayer.

Conditions necessary to be satisfied for the waiver or reduction of penalty under section 273A(1)

The power to reduce or waiver the penalty under section 271(1)(c) or 270A can be excercised by the Principal Commissioner or Commissioner on his own motion or on an application made by the assessee, if the Principal Commissioner or Commissioner id satisfied that the assessee has :

(i)    prior to the detection by the Assessing Officer, of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income, voluntarily  and in good faith, made full and true disclosure of such particulars;

(ii)   co-operated in any enquiry relating to the assessment of his income; and

(iii)  has either paid or made satisfactory arrangements for the payment of any tax or interest payable in consequence of an order passed under the Income-tax Act, 1961 in respect of the relevant assessment. ie the assessment year(s) for which application is made under section 273A.

       If the assessee satisfied all the above three conditions, then the Principal Commissioner or Commissioner shall ( ie he is duty bound) waive the penalty and in that case there is no discretion.

Deemed case of true disclosure [Explanation to Section 273A(1)]

For the purposes of section 273A(1), a person shall be deemed to have made full and true disclosure of his income or of the particulars relating thereto in any case where the excess of income assessed over the income returned is of such a nature as not to attract the provisions of section 270A or section 271(1)(c).

Prior approval of Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General necessary where aggregate concealed income exceeds Rs. 5,00,000 [Section 273A(2)]

According to section 273A(2), no order under section 273A(1) for reducing or waiving the penalty shall be made by the Principal Commissioner or Commissioner except with the prior approval of the Chief Commissioner/Director General, as the case may be, in a case falling under section 270A or 271(1)(c) where the amount of income in respect of which the penalty is imposed or imposable for the relevant assessment year, or, where such disclosure relates to more than one assessment year, the aggregate amount of such income for those years, exceeds a sum of Rs. 5,00,000.

Relief available only once in life time where an order has been made under section 273A(1) [Section 273A(3)]

According to section 273A(3), where an order has been made under section 273A(1) in favour of any person, whether such order relates to one or more assessment years, he shall not be entitled to any relief under section 273A(1) in relation to any other assessment year at any time after the making of such order.

Power to reduce or waive any penalty {Section 273A(4)]

Section 273A(4) empowers the Principal Commissioner or Commissioner to waive or reduce any penalty imposable under the Income-tax Act, 1961 as well as to stay or compound any proceeding for the recovery of any  such amount provided certain conditions are satisfied.

Waiver only when application is made by the assessee [Section 273A(4)]

The waiver or reduction of penalty under section 273A(4) is possible only when an application for the same is made by the assessee. It cannot be done suo moto by the Principal Commissioner or Commissioner.

Conditions to be satisfied for waiver or reduction of penalty under section 273(4)

Such power shell be excercised by the Principal Commissioner or Commissioner if he is satisfied that

(i)    to do otherwise levy of penalty would cause genuine hardship to the assessee, having regard to the circumstances of the case; and

(ii)   the taxpayer has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

Previous approval of Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General where amount of such penalties exceeds Rs. 1,00,000 [Proviso to Section 273A(4)]

Where the amount of any penalty payable under the Income-tax Act, 1961 or, where such application relates to more than one penalty, the aggregate amount of such penalties exceeds Rs. 1,00,000, no order reducing or waiving the amount or compounding any proceeding for its recovery under section 273A(4) shall be made by the Principal Commissioner or Commissioner except with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General, as the case may be.

Opportunity of being heard [First Proviso to Section 273A(4A)]

No order rejecting the application, either in full or in part, shall be passed unless the assessee has been given an opportunity of being heard.

Time-limit for passing order under section 273A(4) [Section 273A(4A)]

The Principal Commissioner or Commissioner, as the case may be, shall pass order, either accepting or rejecting assessee’s application in full or in part, shall bepassed within a period of 12 months from the end of the month in which application under section 273A(4)  is received by the Principal Commissioner or Commissioner, as the case may be. However, order shall be passed on or before May 31, 2017 in case of application pending as on June 1, 2016.

Interest under section 234A, 234B and 234C can not be waived or reduced by the Principal Commissioner or Commissioner

Interest under section 234A, 234B and 234C can not be waived or reduced by the Principal Commissioner or Commissioner under section 273B.

Difference between the waiver of penalty under section 273A(1) and section 273A(4)

Besides the conditions to be satisfied, following are the differences between under section 272A(1) and 273A(4) :

S. No.	Section 273A(1)	Section 273A(4)
(i)	Under section 273A(1), the Principal Commissioner or Commissioner can reduce or waiver the penalty imposed under section  271(1)(c) or under section 270A.	Under section 273A(4), the Principal Commissioner or Commissioner can reduce or waiver any penalty imposed.
(ii)	Once in a life time in case of section 273A(1) waiver is possible.	Any number of times in case of section 273A(4) waiver is possible
(iii)	In case of section 273A(1), the Principal Commissioner or Commissioner can reduce or waive the penalty either suo moto or on an application made by the assessee.	In case of section 273A(4), the Principal Commissioner or Commissioner can reduce or waive the penalty only on an application made by the assessee and suo moto is not permissible.
(iv)	Prior approval of Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General is required under section 273A(1) if the concealed income exceeds Rs. 5,00,000.	Prior approval of Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General is required under section 273A(4) if any penalty exceeds Rs. 1,00,000.
(v)	The Principal Commissioner or Commissioner has no power under section  273A(1) to stay or compound the proceeding for recovery.	Whereas it is possible under section 273A(4).

Finality of the order [Section 273A(5)]

Every order made under section 273A shall be final and shall not be called into question by any Court or any other authority

Order under section 273A is not appealable

Every order made under section 273A shall be final and shall not be called into question by any court or any other authority. However, the assessee can file a writ with the High Court under Article 226 of the Constitution and thereafter a special leave petition to the Supreme Court.

The whole concept under section 273A is that the assessee admits his liability to the penalty but relies upon certain mitigating circumstances specified in the section for the purpose of getting the interest or penalty waived or reduced. Under section 273A the Commissioner is given the discretion, when the requisite conditions envisaged by section 273A are satisfied, that he may waive or reduce the penalty or interest imposable under the various sections of the Act. However, such discretion must be exercised judiciously by taking into consideration all the relevant facts and not arbitrarily or capriciously. - [K.S.N. Murthy v Chairman, CBDT (2001) 252 ITR 269 (AP)]

The Principal Commissioner or commissioner must give his reasons while passing an order on waiver of 18 penalty under section 273A: The power under section 273A is a quasi-judicial power and, therefore, it is desirable for the Commissioner to reason his decision in every case. In this case the Commissioner while reducing the penalty by 50% did not give any reason for his action. The order was therefore quashed. - [Shri Ganesh Trading Co. v CIT (2004) 134 Taxman 441 (P&H)]

Compensation on retrenchment – Exemption as per the provisions of Section 10(10(B) of Income Tax Act, 1961

Any compensation received by a workman under the Industrial Disputes Act, 1947, or under any other Acts or rules or any order or notification issued thereunder; or under any standing orders; or under any award, contract of service or otherwise, at the time of retrenchment, is exempt as under:—

Quantum of deduction :

The least of following amount is exempt:—

(i)   actual amount received.

(ii)  15 days’ average pay for every completed year of service or part thereof in excess of 6 months; in accordance with the provisions of section 25F(b) of the Industrial Disputes Act, 1947; or

(iii) amount as specified by the Central Government (i.e., Rs.5,00,000/-);

Ø  With effect from the assessment year 1986-87, the aforesaid limit will not apply in cases where the compensation is paid under any scheme approved by the Central Government.

Ø  Compensation in excess of the aforesaid limit is taxable as salary which is, however, eligible for relief under section 89 read with rule 21A.

Essential conditions:

Compensation is received by a workman at the time of :

(i)   Closing down of the undertaking.

(ii) Transfer (irrespective of by agreement/compulsory acquisition) if the following conditions are satisfied :

(a)  Service of workman interrupted by transfer.

(b) Terms and condition of employment after transfer are less favourable.

(c)  New employer is not under a legal obligation whether under the terms of transfer or otherwise to pay compensation on the basis that the employer & service has been continuous and has not been interrupted by transfer.

(iii)  The retrenchment compensation received by a workman is exempt provided that in general it does not exceed the sum calculated on the basis provided in section 25F(b) of Industrial Disputes Act, 1947 or any such amount as is specified by the Central Government by a Notification, whichever is less.

(iv) Retrenchment compensation upto 5 lakhs is not taxable and if it exceeds it is subjected to tax. However, exemption is applicable only once. Compensation received in excess of the aforesaid limit is taxable and would form part of Gross Salary. However assessee will be eligible for relief under section 89 read with Rule 21A.

KEY NOTE

Compensation received by a workmen at the time of closing of down of the undertaking in which he is employed shall be deemed to be the compensation received at the time of retrenchment

Compensation received at the time of transfer of ownership of management and the service of such workmen has been affected then such compensation shall also be deemed to be received at the time of retrenchment

The period of 6 months or excess thereof will be considered a full year, if period of employment is less than 6 months, it will not be considered a full year.

While calculating retrenchment compensation, Basic Wages, Dearness Allowance, all allowances for attendance , House Rent , Conveyance  etc shall have to be considered. The value of housing provided as well as value of amenities provided along with housing also will have to be considered.

The section 25F(b) of Industrial Disputes Act provides a retrenchment amount equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of 6 months. It is calculated basing on the previous income chart, multiplying income per day with number of years worked and again with 15.

What is not Included

Retrenchment does not cover the following:

(a)    Voluntary retirement of the employee.

(b)   Employee’s retirement at the age of superannuation.

(c)    Termination of service of workman as a result of non-renewal of the contract of employment.

(d)   Termination of workman owing to continued ill-health.

PROVISIONS ILLUSTRATED

Computation of Taxable Retrenchment Compensation
S. No.	Particulars		Amount (in Rs.)	Amount (in Rs.)
(1)	Amount Received as Retrenchment			7,00,000
	compensation
(2)	Less : Exemption under section 10(10B):			5,00,000
	Least of the following:
	(i)	Actual amount Received	6,50,000
	(ii) Amount determined under the		6,00,000
	Industrial Disputes Act, 1947			2,00,000
	(iii) Maximum Amount		5,00,000
(3)	Taxable amount of Retrenchment
	Compensation (1) – (2)

Ex-gratia from employer for settling industrial dispute is eligible for exemption under Section 10(10B) of the Income-tax Act

In the case of Vishnu Mohan T. Nair, it was held that the taxpayer is entitled to exemption under Section 10(10B) of the Act, with respect to ex-gratia amount received by the taxpayer under an ‘out-of court’ settlement for termination of service.

[Vishnu Mohan T. Nair v. ITO : Date of Judgement : 02.01.2018 (ITAT Ahmedabad)]

Hon’ble Supreme Court’s judgment in the case of Mahendra Singh Dhantwal v. Hindustan Motors Ltd (1985) 152 ITR 68 (SC), wherein compensation in lieu of reinstatement was treated as eligible for retrenchment compensation under section 10(10B).