ITAT Chennai Grants Full Tax Exemption on BSNL VRS Compensation

Ms Hemalatha Govindarajulu from Raja Annamalai Puram, Chennai who worked in BSNL for quite some time had accepted BSNL's Voluntary Retirement Scheme (VRS)-2019. For this reason, she received ex-gratia compensation of about Rs 39.96 lakh (5+5.94+5+24.02).

However, while filing her income tax returns (ITRs), she claimed only the Rs 5 lakh tax exemption under Section 10(10C) and offered the balance amounts of Rs 5.94 lakh and Rs 24.02 lakh to tax for AY 2020-21 and AY 2021-22, respectively.

Later, after she learnt from WhatsApp forwards from colleagues, about various judicial rulings holding that BSNL VRS compensation qualifies for tax exemption under Section 10(10B) as retrenchment compensation, she immediately sought to fix her mistake and claim back her paid taxes. So she challenged the taxability of these amounts before the first appeallte authority.

However, she was late as she submitted an appeal to the first appellate authority (FAA) after a delay of 1582 days. The FAA dismissed his appeals without condoning the delay. Feeling aggrieved, he filed an appeal in the Income Tax Appellate Tribunal in Chennai (ITAT Chennai).

The legal stance was that the ex-gratia compensation received under the BSNL VRS scheme is fully tax exempt under Section 10(10B) of the Income Tax Act, 1961.

Advocate Ramesh Bhat represented Govindarajulu before ITAT Chennai and argued that the BSNL VRS 2019 scheme was approved by the Union Cabinet on October 23, 2019 and the compensation payable under the scheme was funded out of budgetary support provided by the Government of India.

Therefore, Bhat contended that the BSNL VRS-2019 scheme is not merely a voluntary retirement scheme in the ordinary sense, but is also a central government-approved retrenchment scheme that qualifies for exemption under Section 10(10B) of the Income Tax Act.

On May 21, 2026, ITAT Chennai ruled in Govindarajulu's favour and granted her full tax exemption on the VRS retrenchment compensation.

ITAT Chennai order and discussion

George George K, vice president and Ms. Padmavathy S, accountant member of ITAT Chennai, said that considering the facts and circumstances of the case and following the judicial precedents, they hold that the ex-gratia compensation received by the assessee (Govindarajulu) under the BSNL VRS-2019 scheme is eligible for tax exemption under Section 10(10B).

ITAT Chennai said that from evidence placed before them it is evident that the BSNL VRS-2019 scheme was formulated pursuant to the revival package approved by the Government of India and the Union Cabinet on October 23, 2019 and the compensation payable under the scheme was funded through Government budgetary support.

Moreover, Govindarajulu also pointed out to ITAT Chennai that though the nomenclature is mentioned as VRS, it is in effect a retrenchment scheme, since BSNL could not pay salary to employees just before rolling out the scheme. Therefore, ITAT Chennai said that the scheme partakes the character of a Government-approved retrenchment compensation scheme and cannot be treated as an ordinary voluntary retirement scheme simpliciter.

ITAT Chennai said that a similar case had come up for consideration before the Chandigarh Bench of the Tribunal in the case of Harish Kumar vs. ITO, wherein the Tribunal held that the ex-gratia compensation received under BSNL VRS-2019 is eligible for exemption u/s 10(10B) of the Income Tax Act.

Order:

Consequently, the additions made by taxing the ex-gratia compensation are directed to be deleted.

The AO is also directed to grant consequential relief, in accordance with law, in respect of exemption claimed under Section 10(10AA), if otherwise found eligible.

In the result, the appeals filed by the assessee are allowed. Order pronounced in the open court on 21st May, 2026 at Chennai.

Mihir Tanna, associate director, S K Patodia LLP said to ET Wealth Online: It is a settled position that taxpayer can make a fresh claim (or additional claim) before the Income Tax Appellate Tribunal (ITAT), even if it was not raised in the original return or before the Assessing Officer (AO). Thus, in case the tax amount is substantial and the matter is litigative which is settled or came to the knowledge of the taxpayer after filing ITR; he/she may decide to file an appeal to get relief in fresh claim (like in this case, appeal was filed to claim exemption based on other judicial pronouncements having similar facts)

Regarding the time limit for filing appeals, an appeal can be filed before CIT(A) within 30 days of receiving an adverse order/intimation received from CPC and an appeal before ITAT can be filed within 60 days of receiving the order from CIT(A). However, delay (if any) in filing appeal can be condoned by CIT(A)/ITAT if the reason is genuine and supported by documents. In this case, the delay in filing an appeal was supported by orders passed by the Tribunal and circulated among employees through WhatsApp groups)

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