Full pension exemption under Rule 37A applies to a lump sum paid on absorption, not the ordinary one-third commutation limit.

A lump sum paid on permanent absorption of a Government servant in a public sector undertaking under Rule 37A of the Central Civil Services (Pension) Rules, 1972, was treated as a distinct terminal benefit in substitution of the entire pension, not as ordinary commutation under the Civil Pensions (Commutation) Rules. On that construction, section 10(10A) of the Income-tax Act, 1961, was read to extend full exemption to the amount received under the special absorption scheme, without importing the one-third commutation limit applicable to ordinary pension commutation.

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Issues: Whether the amount paid to a Government servant on permanent absorption in a public sector undertaking under Rule 37A of the Central Civil Services (Pension) Rules, 1972, was exempt in full under Section 10(10A) of the Income-tax Act, 1961, or whether tax exemption was confined only to the commuted value of one-third of the pension under the Civil Pensions (Commutation) Rules.

Analysis: The statutory scheme distinguished ordinary commutation under the Civil Pensions (Commutation) Rules from the special terminal-benefit arrangement under Rule 37A. Rule 37A applied where a Government servant was absorbed in a corporation or company and elected to receive a death-cum-retirement gratuity together with a lump sum in lieu of pension. The combined effect of clauses (a) and (b) of Rule 37A was that the employee surrendered the right to receive the balance of pension and received a terminal payment in substitution of the entire pensionary liability. That payment was therefore under a scheme different from the ordinary commutation rules, and not merely a payment governed by the one-third commutation limit under those rules. Section 10(10A), as amended, extended exemption to payments received under any similar scheme applicable to members of the civil services of the Union, and the relief could not be restricted by importing the limit applicable to the separate commutation rules.

Conclusion: The full amount received under Rule 37A was exempt from inclusion in total income under Section 10(10A) of the Income-tax Act, 1961, and the direction to deduct tax on two-thirds of the amount was unjustified.

Final Conclusion: The impugned direction requiring deduction of income-tax on part of the commuted pension was quashed, and the petitioner succeeded.

Ratio Decidendi: Where a lump sum is received under a distinct statutory absorption scheme in substitution of the entire pension, the payment falls within the exemption for amounts received under a similar pension-commutation scheme and is not confined to the one-third limit applicable to ordinary commutation.

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