Employee wrongly reported Rs 65.21 lakh VRS payout in ITR, lost tax relief; ITAT Pune rules the amount is not taxable and grants him relief

When Mr Sonawane from Aurangabad opted for a voluntary retirement scheme (VRS) after his employer, Pfizer Healthcare India, closed its manufacturing plant, he received Rs 65.21 lakh comprising ex-gratia payment, incentives and notice pay. However, the way he initially reported this payment in his income tax return (ITR) triggered a lengthy legal battle with the Income Tax Department.

While filing his income tax return (ITR), Sonawane treated the Rs 65.21 lakh as advance salary and claimed tax relief under Section 89 of the Income Tax Act. Since this was wrong reporting, the Income Tax Department rejected his claim.

However, during the proceedings, Sonawane took an alternative legal stand, arguing that the payment was not salary at all but a capital receipt received on account of the loss of his employment, and therefore not taxable. This disagreement over the true nature of the payment eventually reached the Pune Income Tax Appellate Tribunal (ITAT).


In a ruling delivered on June 8, 2026, the Pune ITAT accepted Sonawane's contention and held that the Rs 65.21 lakh was a non-taxable capital receipt. Chartered Accountants Nikhil S. Pathak and Archana Shetty represented Sonawane before the Tribunal.

Chartered Accountant Tanmay Aggarwal told ET Wealth Online that ITAT Pune held that the compensation was received under a voluntary retirement scheme and not in connection with termination of employment.

Aggarwal says: “Since the scheme expressly treated the employee's separation as voluntary retirement rather than termination, the Tribunal held that the payment fell outside the scope of Sections 17(3)(i) and 56(2)(xi) of the Income-tax Act and constituted a non-taxable capital receipt."

Also read: Senior citizen mistakenly paid tax on tax-free VRS compensation; wins complete relief from ITAT Chennai on this ground

Why the employee won this case in ITAT Pune?

Akhil Chandna, Partner, Global People Solutions Leader, Grant Thornton Bharat said to ET Wealth Online: The tax tribunal accepted the employee’s contention because, on the facts of the case, the severance amount was found to be a voluntary ex-gratia payment received under a specially designed financial scheme and not a contractual payment arising from termination of employment.

Chandna says: "The tax tribunal also noted that the employer had structured the scheme as voluntary retirement rather than employer-initiated termination, and the payment was not made pursuant to any legal or contractual obligation."

Chandna says: "The ruling underscores that taxability ultimately depends on the legal character of the receipt and not merely on the timing of payment or the fact that it was received upon cessation of employment."

Summary of the judgement

Chartered Accountant Suresh Surana explained to ET Wealth Online: The Pune ITAT, in the case relating to AY 2019-20, allowed Mr Sonawane’s appeal and ruled that the amount received by him under the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019, was a capital receipt and not chargeable to tax.

ITAT Pune accordingly set aside the order of the CIT(A)/NFAC and directed the Assessing Officer to modify the assessment.

Mr Sonawane was an employee of Pfizer Healthcare India Pvt. Ltd., Aurangabad. In FY 2018-19, Pfizer India closed its Aurangabad plant and introduced a financial scheme for its employees.

Mr Sonawane opted for voluntary retirement under the scheme and received a total of Rs 65,21,105, comprising ex-gratia/severance pay, early bid and group participation incentives, and a notice period payout.

In his ITR, Mr Sonawane had claimed relief under Section 89 of the Income-tax Act, 1961, treating the amount as advance salary. The Assessing Officer rejected the claim of relief under Section 89.

In appeal, the CIT(A)/NFAC further held that the amount was taxable as “Income from Other Sources” under Section 56(2)(xi), on the basis that it was received in connection with termination of employment.

Mr Sonawane argued before ITAT Pune that the amount was received on voluntary retirement/resignation under a special scheme and not following the termination of employment by the employer.

Mr Sonawane also relied on various earlier decisions of the Pune Tribunal involving similarly placed employees of Pfizer India, where similar receipts under the same scheme were held to be capital receipts not chargeable to tax.

It was further argued that Section 56(2)(xi) applies only where compensation or other payment is received in connection with termination of employment or modification of employment terms, whereas the scheme itself clarified that the cessation of employment constituted resignation and not retrenchment or termination by the company.

ITAT Pune accepted Mr Sonawane’s contention and observed that, as per the relevant clause of the scheme, employees opting for voluntary retirement were not entitled to compensation or notice pay under the Industrial Disputes Act, 1947, and their cessation from employment was specifically treated as resignation, not retrenchment or termination of employment by the company.

On this basis, ITAT Pune held that Section 56(2)(xi) could not be applied, since the amount was not received in connection with termination of employment.

According to Surana, ITAT Pune also relied on the principle of consistency, noting that in several cases of other Pfizer India employees who had received similar amounts under the same scheme, the Income Tax Department had accepted such receipts as capital in nature in reassessment proceedings, and various co-ordinate benches of other ITAT Tribunals had also decided the issue in favour of similarly placed employees.

ITAT Pune held that the lower authorities had failed to follow binding precedent and consistency on an identical factual matrix.

Accordingly, the employee (Mr Sonawane) won the case because the Tribunal found that the amount was received following voluntary retirement/resignation and not due to termination of employment. The payment was in the nature of a capital receipt arising from loss of employment/source of income. Section 56(2)(xi) did not apply and earlier co-ordinate bench rulings in identical Pfizer employee cases supported the assessee’s position.

The appeal was therefore allowed in favour of the assessee (Mr Sonawane).