Reported VRS payment as salary in ITR? Pune ITAT grants tax relief in ₹65.21 lakh case

The Pune bench of the Income Tax Appellate Tribunal (ITAT) has ruled that a ₹65.21 lakh amount received by a former Pfizer Healthcare India employee under a voluntary retirement scheme (VRS) is a non-taxable capital receipt, even though the taxpayer had initially reported it incorrectly in his income tax return (ITR).

In its June 8, 2026 order in the case of Prakash Sukhdeo Sonawane vs Income Tax Officer, the tribunal held that the payment arose from a voluntary retirement scheme following the closure of Pfizer’s Aurangabad manufacturing unit and was not received in connection with termination of employment.

The employee had received ₹65.21 lakh during FY2018-19 under the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019. While filing his return for AY2019-20, he mistakenly treated the amount as advance salary and claimed relief under Section 89 of the Income-tax Act.

The Assessing Officer rejected the claim. The Commissioner of Income Tax (Appeals) later held that the amount should instead be taxed as “Income from Other Sources” under Section 56(2)(xi).

Why the ITAT ruled in the employee’s favour

Before the tribunal, the taxpayer changed his legal stand and argued that the payment was not salary but compensation received under a voluntary retirement scheme and therefore constituted a capital receipt that was not liable to tax.

It examined the terms of the Pfizer scheme and noted that employees opting for the scheme were treated as having voluntarily resigned rather than being terminated or retrenched by the employer. Since the cessation of employment was by voluntary retirement, Section 56(2)(xi), which taxes compensation received in connection with termination of employment, did not apply.

The tribunal also observed that employees who opted for the scheme were not entitled to compensation or notice pay under the Industrial Disputes Act because the separation was treated as resignation under the scheme itself.

Tribunal cites consistency with earlier Pfizer employee cases

The ITAT further noted that similar payments received by other Pfizer employees under the same 2019 financial scheme had already been accepted as capital receipts in reassessment proceedings. Coordinate benches of the tribunal had also consistently ruled that such receipts were not taxable.

Holding that the lower tax authorities had ignored these precedents, the tribunal set aside the appellate order and directed the Assessing Officer to modify the assessment accordingly.

The ruling highlights that the taxability of a receipt depends on its true legal character rather than the manner in which it is reported in an income tax return. While the employee’s original claim under Section 89 was incorrect, the tribunal held that this mistake could not convert a non-taxable capital receipt into taxable income.