Total Service Period for Gratuity Calculation Clarified by Bombay HC

The Bombay High Court held that under section 10(10) of the Income-tax Act, "completed service" includes the aggregate service period, not limited to a single employer, for gratuity calculation. The court ruled in favor of the assessee, allowing exemption for the entire gratuity amount based on total service under multiple employers, as the individual had not received gratuity from the former employer. The judgment clarified that once gratuity is received for a specific period from a previous employer, it cannot be reconsidered for section 10(10) calculation. The court answered affirmatively that "completed service" encompasses the total service period, regardless of the number of employers involved.

---

---

Issues: Interpretation of "completed service" under section 10(10) of the Income-tax Act, 1961 for gratuity calculation.

The judgment by the Bombay High Court, delivered by DR. B. P. SARAF J., addresses a reference under section 256(1) of the Income-tax Act, 1961, regarding the interpretation of the term "completed service" in section 10(10) of the Act. The case involves an individual assessee who retired from one employer after ten years of service and had previously worked for another employer for eight years without receiving gratuity. The question raised was whether the period of service under both employers should be considered for calculating gratuity under section 10(10) if the individual was not paid gratuity by the former employer. The Income-tax Officer initially restricted the exemption to the gratuity related to the last employer, but the Income-tax Appellate Tribunal allowed exemption for the entire gratuity amount considering the total service under both employers. The Tribunal emphasized that the term "completed service" in section 10(10) does not necessarily refer to service under a single employer but encompasses the aggregate service period, subject to statutory limits.

The court analyzed the relevant provision of section 10(10)(iii) concerning gratuity exemption, emphasizing that the exemption is based on the formula of one-half month's salary for each year of completed service, subject to certain maximum limits. The court highlighted that the provision does not specify that the service must be with the same employer who pays the gratuity. It noted that the payment of gratuity depends on the terms of employment, and if an individual agrees to include service under a former employer for gratuity calculation, there should be no limitation on the relief granted under section 10(10) unless explicitly provided for in the provision itself. The court concluded that there is no restriction under section 10(10) regarding the period of service being under one or multiple employers, emphasizing that the total service period is crucial for gratuity calculation.

The court further clarified that if an individual has already received gratuity for a specific period from a previous employer, that period cannot be re-considered for calculating gratuity under section 10(10). In this case, since the assessee had not received gratuity from the former employer, the court ruled in favor of the assessee, allowing exemption for the entire gratuity amount based on the total service period under both employers. The court answered the referred question affirmatively, supporting the interpretation that "completed service" in section 10(10) encompasses the aggregate service period, irrespective of the number of employers involved. The judgment did not award costs to any party.

---