While filing your income tax return and claiming tax exemptions, it is important to be aware of the limits and applicability. In one such case where the taxpayer was mistaken about the amount of tax exemption available to her for a gratuity amount after retiring, the Income Tax department ended up imposing a penalty.She eventually appealed to the Income Tax Appellate Tribunal and won. What was the case and what does the ruling mean for taxpayers?According to an ET report, a retired Kerala state government employee faced a tax penalty after incorrectly claiming excess tax exemption on her gratuity. She submitted her income tax return on August 6, 2018, for FY 2017-18, initially claiming Rs 10 lakh tax-exempt gratuity under Section 10(1) of the Income Tax Act. Subsequently, she filed a revised ITR, increasing the gratuity exemption claim to Rs 20 lakh. Her case was then selected for regular scrutiny by the tax department.The assessing officer determined that the increased tax exemption of Rs 20 lakh under Section 10(10) of the Income Tax Act, 1961 was only valid for retirements occurring on or after March 29, 2018. As her retirement fell within FY 2017-18, she was ineligible for the enhanced tax exemption of Rs 20 lakh.Consequently, the tax officer limited her gratuity tax exemption to Rs 10 lakh under Section 10(10) and finalized her assessment at Rs 36 lakh (36,89,900), contrary to her ITR-declared income of Rs 26 lakh (26,89,900).Also Read | Income Tax department doubts Rs 10 lakh gift – brother gets tax notice for cash received from sisters; how he appealed & won the caseThe officer initiated penalty proceedings under Section 270A and levied a Rs 2.2 lakh penalty under Section 270A (1) read with Section 270A (9), concluding that she had misreported her income.Dissatisfied with the decision, the retired employee appealed to the Commissioner of Income Tax (Appeals), or CIT(A). The CIT(A) rejected her appeal, noting her failure to provide evidence of reasonable cause for not declaring Rs 10 lakh as taxable income and for claiming Rs 20 lakh exemption instead of the entitled Rs 10 lakh.The former employee, dissatisfied with the CIT(A) decision, took her case to the Income Tax Appellate Tribunal (ITAT), Cochin Bench. She received a favorable verdict from ITAT Cochin Bench on September 22, 2025.
Gratuity tax exemption claim penalty: Why did ITAT rule in her favour?
- The Cochin Income Tax Appellate Tribunal’s analysis centers on the taxpayer’s disclosure compliance. The tribunal noted that the assessee provided comprehensive factual details in both original and revised returns without withholding any significant information.
- The higher gratuity claim stemmed from a genuine misunderstanding that the revised limit applied to the situation. Upon learning during assessment proceedings that the enhanced limit was inapplicable, the assessee complied with the assessment order, remitted the tax liability and refrained from appealing.
- The tribunal concluded that the case lacked elements of misreporting or fact suppression, rendering the Section 270A(9) penalty untenable.
- Additionally, it determined that even if classified as income underreporting, the assessee qualified for
Section 270AA immunity having paid the assessed tax without disputing the quantum addition. Consequently, the tribunal eliminated the need for a penalty.
Gratuity tax exemption explained
According to Section 10(10) and the Government Notification of March 29, 2018, employees who retired or became eligible for gratuity from March 29, 2018 onwards could claim the revised exemption limit of Rs 20 lakh. However, those who retired before this date remained subject to the previous Rs 10 lakh tax exemption ceiling.The specific case referenced here involves an assessee who retired in FY 2017-18, before the notification came into effect. Therefore, she qualified for an exemption of only Rs 10 lakh under Section 10(10). Any gratuity amount received beyond this threshold was considered taxable salary income for that financial year.Also Read | Landlord vs tenant eviction case: Supreme Court rules in favor of landlord despite tenant’s son not signing rent receipts – here’s what the ruling meansConsequently, the employee’s gratuity exemption entitlement remained at Rs 10 lakh, which was the applicable limit when she retired.The retired employee argued that no misreporting occurred on the assessee’s part. Additionally, they suggested that at most, the case could be viewed as income underreporting. Given that the assessee accepted the addition and cleared the demand, they claimed eligibility for immunity under Section 270AA.According to the ET report, the Income Tax Department on its part argued that the assessee’s claim for Rs 20 lakh gratuity benefits exemption clearly violated applicable provisions.The Departmental Representative referred Paragraph 7.19 to 7.22 from the Ld. CIT(A)’s impugned order, noting that the assessee had not sought Section 270AA benefits. Furthermore, these benefits were not applicable in cases involving income misreporting.The Tribunal noted: “It is an admitted position that when the enhanced claim was rejected by the assessing officer, the assessee has accepted the assessment order and paid the additional tax demand.”1. The assessing officer was incorrect in determining that the retired employee had misreported income.2. The retired employee qualifies for immunity under Section 270AA, having paid additional tax and not appealed against the assessment order.
