On November 19, 2025, the Earnings Tax Appellate Tribunal (ITAT) in Hyderabad determined that any severance package an worker receives from their employer after their employment ends, whether in lump sum or in any other case, can be handled as profits in lieu of wage and thus field to profits tax.
This vogue that if any terminated worker will get any severance pay, they must encompass that quantity of their profits tax return (ITR) unless it qualifies for exemption under Fragment 10 (VRS and retrenchment compensation).
Background of this judgement
The case revolves around Smt Nagendla from Secunderabad, who worked as as Operations Lead with a eminent MNC. On January 10, 2019, she filed her profits tax return for AY 2018-19, declaring a total profits of Rs 25 lakh.
On the other hand, her ITR was selected for Total Scrutiny on the points of Salary Earnings and Refund Claim, ensuing in a perceive under Fragment 143(2) of the Earnings Tax Act, 1961, being sent to her on September 28, 2019.
Throughout the scrutiny, the Assessing Officer (AO) examined the wage indispensable functions and figured out a astronomical discrepancy between the total taxable wage reported in Annexure-II of Fabricate 24Q by the employer and the wage declared in her ITR.
Whereas Smt Nagendla had got a ugly wage of Rs 61 lakh (61,29,902), she had on the other hand, declared handiest Rs 26 lakh (26,58,124) as ugly wage within the ITR. Upon extra enquiry under Fragment 142(1), the tax officer figured out that Smt Nagendla had got Rs 26 lakh as severance compensation and claimed all of the volume as exempt profits.
So the tax officer, on the premise of Fragment 17(3), determined that severance pay got after stop of employment is fully taxable as “profits in lieu of wage”, unless particularly exempted under Fragment 10. Accordingly, the tax officer made an addition of Rs 26 lakh (26,97,912) to Smt Nagendla’s profits and assessed her total profits at Rs 52 lakh (52,08,672) thru an say dated January 11, 2021 under Fragment 143(3) read iwith Fragment 143(3A) and 143(3).
Miserable with the say of the tax officer (AO), the assessee appealed to the Commissioner of Appeals CIT(A). The CIT(A) agreed with the AO’s addition and rejected the enchantment. After shedding in CIT (A), Smt Nagendla took her case to ITAT Hyderabad. On November 19, 2025 she lost the case in ITAT Hyderabad.
Summary of the judgement
Chartered Accountant (Dr.) Suresh Surana acknowledged to ET Wealth On-line: In the given case (ITA No.1521/Hyd/2025), the taxpayer, was employed as an Operations Lead with a company and she or he filed her ITR for AY 2018-19 declaring ugly wage of Rs 26,58,124.
Throughout scrutiny evaluate, the Assessing Officer seen a mismatch between wage reported by the employer in Fabricate 24Q and the profits disclosed within the return. It was identified that the assessee got Rs. 26,97,912 as severance compensation on the time of stop of employment, which she claimed as a capital receipt no longer at possibility of tax.
In step with Surana the Assessing Officer invoked Fragment 17(3) of the Earnings-tax Act, 1961 , treating the severance quantity as “profits in lieu of wage” and added it to taxable profits. The Commissioner of Earnings Tax (Appeals) upheld the addition. Aggrieved, the assessee appealed earlier than the Earnings Tax Appellate Tribunal (ITAT).
The Tribunal examined the scope of Fragment 17(3), seriously clause (iii), which, put up the Finance Act, 2001, covers any quantity got by an worker at or after stop of employment, unless particularly exempt under Fragment 10.
Surana says that the Tribunal infamous that the severance fee was mirrored as wage in Fabricate 16 and tax was deducted at source. Additional, the fee terms demonstrated that it was neither gratuitous nor voluntary, and was linked to services rendered sooner than stop.
In step with Surana the Tribunal additionally notion about judicial precedents cited by the assessee claiming severance as capital receipt. On the other hand, it seen that those rulings connected to intervals sooner than the modification of Fragment 17(3). The amended legislation clearly covers such receipts inner the definition of wage, regardless of nomenclature, mode of fee or whether the volume was voluntary or contractual.
In step with Surana the enchantment was pushed apart as a result of the following key causes:
- The amended provision of Fragment 17(3)(iii) of the IT Act explicitly taxes any quantity got at termination of employment. The year under litigation (AY 2018-19) falls inner the amended regime, leaving no scope for interpretation.
- The assessee did not kind proof demonstrating that the severance quantity compensated for loss of source of profits or was a capital receipt. There was no proof that the payout was gratuitous or out of doorways the scope of contractual employment duties.
- The employer handled the volume as wage and deducted TDS. This corroborated that the volume was linked to employment provider, no longer capital compensation.
- Case guidelines relied upon by the taxpayer pertained to intervals sooner than insertion of Fragment 17(3)(iii). The Tribunal held that such precedents would possibly perhaps well no longer override the actual put up-2002 statutory language.
- The Tribunal conclusively held that the severance compensation got by the taxpayer constituted taxable wage profits within the form of “profits in lieu of salary” under Fragment 17(3), and was no longer a non-taxable capital receipt. Accordingly, the addition made by the Assessing Officer and confirmed by the CIT(A) was upheld, and the enchantment was pushed apart.
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Prognosis of the judgement
Mihir Tanna, accomplice director, S.K Patodia LLP says that on stop/termination of employment, most frequently worker salvage money as well as to wage due. It can well even be in opposition to loss of employment and loss of source of profits. Typically it is voluntary fee and no longer under any compulsion under settlement. Questions arise whether it is wage and taxable as per same earlier provisions or no longer.
In the profits tax, the total receipts are broadly divided into two (1) Earnings in nature : treasure for any individual wage profits, passion profits, dividend profits etc (2) Capital in nature : treasure capital indulge in from sale of any asset treasure home property or shares. Earnings receipts are most frequently taxable under the Earnings Tax Act, 1961, unless particularly exempted, whereas capital receipts are no longer taxable unless particularly lined in explicit profits tax provisions treasure capital good points. Accordingly, quantity got on stop/termination of employment, can be earnings or capital in nature. If it is earnings, this would possibly perhaps well even be taxable under which portion?
Fragment 17(3)of the Act presents that any quantity got by an assessee from anyone after stop of employment, whether in lump sum or in any other case, shall be handled as profits in lieu of wage, other than where particularly exempt under portion 10.
Tanna says that within the case of Sudhakar Ratan Shanker Gautam Vs ITO ITA No.1033/Ahd/2024, Ahmedabad ITAT has explained that “The Act distinguishes between receipts that are taxable as wage profits and of us that are notion about capital receipts, that are most frequently no longer taxable unless explicitly brought inner the tax obtain by explicit provisions of the Act.
Below Fragment 17(3), “profits in lieu of salary” is a key provision that seeks to tax definite funds got by an worker in reference to the termination of employment. On the different hand, capital receipts, seriously within the context of employment, once in a whereas characterize to compensation for the loss of a source of profits and are most frequently no longer taxable, unless specified”
Tanna says: “However, recently, in the case of Smt. Supriya Nagendla Vs ITO (ITA No.1521/Hyd/2025), Hyderabad ITAT has rejected the argument that employment amount received was capital in nature since she could not produce any evidence that her employment ended due to corporate restructuring and therefore the compensation received was towards loss of employment and loss of source of income, not for services rendered.”
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ITAT Hyderabad analyses wage and severance pay medicine under tax legislation
ITAT Hyderabad in its judgement (ITA No.1521/Hyd/2025) dated November 19, 2025 acknowledged that the divulge is whether or no longer the severance compensation of Rs 26,97,912 got by her is taxable or exempt under the Earnings Tax Act.
ITAT Hyderabad acknowledged that on this regard, it will doubtless be important to struggle thru the provision contained under Fragment 17(3) of the Act, which is to the following enact:
“Salary”, “perquisite” and “profits in lieu of wage” are outlined.
17. For the applications of Sections 15 and 16 and of this Fragment –
“(3) “profits in lieu of salary” involves—
(i) the volume of any compensation as a result of or got by an assessee from his employer or ancient employer at or in reference to the termination of his employment or the modification of the terms and stipulations pertaining to thereto;
(ii) any fee (different than any fee referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of Fragment 10), as a result of or got by an assessee from an employer or a ancient employer or from a provident or different fund, to the extent to which it doesn’t encompass contributions by the assessee or passion on such contributions or any sum got under a Keyman insurance protection protection along with the sum distributed via bonus on such protection.
Clarification.—For the applications of this sub-clause, the expression “Keyman insurance policy” shall salvage the that scheme assigned to it in clause (10D) of Fragment 10;
(iii) any quantity as a result of or got, whether in lump sum or in any other case, by any assessee from anyone—
(A) earlier than his becoming a member of any employment with that person; or
(B) after stop of his employment with that person”
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ITAT Hyderabad acknowledged that on perusal of the above, they earn that the provisions contained under Fragment 17(3) clearly presents that any quantity got by an assessee from anyone after stop of employment, whether in lump sum or in any other case, shall be handled as profits in lieu of wage, other than where particularly exempt under portion
ITAT Hyderabad acknowledged that the language of the provision is sure and unambiguous.
ITAT Hyderabad additionally acknowledged that they’ve long passed thru the selections of the Coordinate Bench of the Tribunal within the conditions of Sudhakar Ratan Shanker (Supra) and Samik Pankajbhai Parikh (Supra) relied on by Smt Nagendla.
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ITAT Hyderabad acknowledged that in both these decisions, the Tribunal proceeded on the premise of the judgment of the Hon’ble Gujarat High Court docket in Arunbhai R. Naik vs. ITO (64 taxmann.com 216) dated October 12, 2015, whereby severance compensation was held to be a capital receipt on the bottom that the same was a voluntary fee no longer falling inner the ambit of portion 17(3)(i).
ITAT Hyderabad acknowledged that they’ve studied the judgment of the Gujarat High Court docket and it is evident that the acknowledged judgment pertained to Evaluate Year 1994-95, when the statutory suppose was materially different.
The Finance Act, 2001 inserted clause (iii) to portion 17(3) of the Act with enact from April 1, 2002, which brings inner the scope of “profits in lieu of wage” “any quantity got by an worker, whether in lump sum or in any other case, from anyone, earlier than his becoming a member of, or after stop of his employment.”
ITAT Hyderabad acknowledged: “Thus, put up 01.04.2002, any quantity got by an worker at or on termination of employment, regardless of nomenclature, mode of fee, or voluntariness, is at possibility of be taxed under Fragment 17(3)(iii) of the Act.”
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Therefore, with enact from April 1, 2002, the statutory scheme has undergone a substantive commerce, and the ratio of Arunbhai R. Naik judgement, which was making an allowance for a pre-modification year, can’t be robotically utilized to Evaluate Year 2018-19, which is the year under enchantment earlier than ITAT Hyderabad.
ITAT Hyderabad upheld CIT (A) say
ITAT Hyderabad acknowledged that they’ve additionally long passed thru the para no. 7.3 on page 13 of the say of the Ld. CIT (A), which to the following enact:
“7.3 The respond of the assessee and the evaluate say were perused. The AO has relied upon portion 17(3) (iii) and has additionally mentioned that the case guidelines relied upon by the assessee pertain to the duration sooner than the insertion of this portion. I earn pressure within the finding of the AO that the receipt of the assessee falls squarely inner the purview of portion 17(3)(iii). The assessee has got a lump sum quantity from her employer on myth of stop of her employment.
The conditions and stipulations of the stop are immaterial. The amount has been got on myth of the stop. It is a long way viewed from the stop of employment letter that the fee made by the employer was no longer voluntary and that the fee was made in lieu of services rendered by the assessee.
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Also assessee was obligated because the letter states that “ The indispensable functions of the stop of your services with the corporate are to be saved confidential”. Therefore, it clearly falls inner the ambit of wage profits. Additional, in survey of those facts, the employer itself has long gone forward and deducted TDS on the acknowledged quantity, and taken it as share of wage in Fabricate 16.”
ITAT Hyderabad acknowledged that on perusal of the above say, they figured out that the CIT (A) has recorded a particular comely finding that the fee made by the employer to the assessee (Smt Nagendla) was no longer voluntary, and that the compensation was paid in lieu of services rendered by the assessee (Smt Nagendla) all the scheme thru the duration earlier the stop of employment.
The assessee (Smt Nagendla) has no longer brought earlier than ITAT Hyderabad any documentary proof to rebut the comely findings so recorded by the Ld. CIT(A). No field matter has been positioned to demonstrate that the fee was gratuitous, voluntary, or compensatory for loss of employment in a capital field.
ITAT Hyderabad judgement
- In the absence of any contrary proof, and in survey of the actual statutory inclusion under Fragment 17(3)(iii) of the Act, we’re unable to settle for the contention of the assessee that the severance compensation got by her of constitutes a capital receipt.
- Accordingly, we uphold the findings of the Ld. CIT(A) and protect that the severance compensation got by the assessee (Smt Nagendla) is taxable as profits in lieu of wage under portion 17(3) of the Act.
- The grounds of enchantment raised by the assessee are, as a result of this truth, pushed apart. In the final result, the enchantment of the assessee is pushed apart. Explain pronounced within the Delivery Court docket on nineteenth November, 2025.
