Disability pension exemption preserved under CBDT circular, with refund of tax recovered plus interest and costs directed.

Disability pension arrears paid to a disabled armed forces officer were treated as exempt from income tax under the CBDT circular dated 02.07.2001, and the later circular dated 24.06.2019 could not be used to deny that benefit while it remained under challenge and subject to status quo. On that basis, tax already recovered from the exempt pension income was refundable, and consequential interest and costs were also granted, with enhanced interest if payment was delayed beyond the stipulated time. The writ petition accordingly succeeded and the rejection of refund was set aside.

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Issues: (i) whether disability pension arrears received by a disabled armed forces officer remained exempt from income tax under the CBDT circular dated 02.07.2001 notwithstanding the later circular dated 24.06.2019, and (ii) whether the petitioner was entitled to refund of tax already recovered, with interest and costs.

Issue (i): whether disability pension arrears received by a disabled armed forces officer remained exempt from income tax under the CBDT circular dated 02.07.2001 notwithstanding the later circular dated 24.06.2019

Analysis: The exemption circular of 02.07.2001 reiterated that the entire disability pension, including both the disability element and the service element, continued to be exempt from income tax. The later circular dated 24.06.2019 was under challenge before the Supreme Court, which directed the parties to maintain status quo. The petitioner's entitlement was also supported by earlier High Court decisions applying the exemption to similarly situated disabled armed forces personnel. In these circumstances, the later circular could not be applied to deny the benefit claimed by the petitioner.

Conclusion: The disability pension received by the petitioner remained exempt, and the objection based on the later circular could not defeat the claim.

Issue (ii): whether the petitioner was entitled to refund of tax already recovered, with interest and costs

Analysis: Once the pension income was held exempt, the tax recovered on the relevant years could not be retained. The Court accepted the petitioner's claim for refund, and also granted consequential interest and costs, with an additional higher rate of interest if payment was delayed beyond the stipulated period.

Conclusion: The petitioner was entitled to refund of the tax recovered along with interest and costs.

Final Conclusion: The writ petition succeeded and the impugned rejection of refund was set aside, resulting in consequential monetary relief in favour of the petitioner.

Ratio Decidendi: Disability pension exempted by the CBDT circular dated 02.07.2001 cannot be denied by a later circular that is itself under challenge and subject to a status quo order, and tax recovered on such exempt income is refundable with consequential interest.

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