Gratuity within the notified exemption limit cannot be taxed without express statutory authority; tax demand notices were quashed.

Gratuity received by retired employees within the exemption limit notified under Section 10(10)(iii) of the Income-tax Act, 1961 cannot be subjected to income tax unless a statute expressly authorises such liability. The High Court noted that the impugned notification only fixed the enhanced gratuity ceiling and did not itself create a tax charge, and the respondents identified no provision supporting the demand raised in the notices. The notices seeking recovery of tax on gratuity paid within the notified limit were therefore quashed, and costs were imposed on the respondents.

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Issues: Whether the respondents could demand income tax on the enhanced gratuity paid to retired employees up to the statutory exemption limit.

Analysis: The impugned notification only fixed the enhanced ceiling of gratuity under Section 10 of the Income-tax Act, 1961 and did not itself create any taxable liability. Section 10(10)(iii) exempts gratuity received by an employee up to the limit specified by the Central Government by notification, and the legal opinion placed before the Court also stated that no tax should be deducted from gratuity payments up to Rs. 10 lakh. The respondents were unable to point to any provision authorising the demand raised in the impugned notices.

Conclusion: The demand to recover income tax from the petitioners on gratuity paid within the notified exemption limit was authority of law and was unsustainable.

Final Conclusion: The notices demanding tax on the enhanced gratuity were quashed, and costs were imposed on the respondents.

Ratio Decidendi: Gratuity received within the exemption limit notified under Section 10(10)(iii) of the Income-tax Act, 1961 cannot be subjected to tax in the absence of any statutory authority creating such liability.

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