2016 (5) TMI 1632 - AT - Income Tax

Gratuity exempt under section 10(10)(i) where transferred employees retained government gratuity entitlement; AO addition deleted

ITAT, Del - AT held that gratuity received by the taxpayer was exempt under section 10(10)(i), not section 10(10)(iii), because employees transferred from ... Addition made on account of excess claim of gratuity - assessee claimed the exemption u/s 10(10)(i) while the AO allowed the exemption u/s 10(10)(iii) - AO was of the view that the claim for exemption in respect of gratuity received by the assessee was covered u/s 10(10)(iii) of the Act and as per provisions of this Section, the gratuity was exempted upto the limit of 3,50,000/- for the employees who retired on or before 24.05.2010, thereafter the limit was enhanced to Rs.10,00,000/-., AO accordingly made the addition HELD THAT:- Employees who were transferred in the Power Department like the assessee were eligible for all the benefits which were available before their transfer i.e. when they were the employee of the State Government. As per the provisions contained in Section 10(10)(i) of the Act, the exemption was available for deathcum-retirement gratuity to the employees of the State Government, therefore, the assessee was eligible for exemption u/s 10(10)(i) of the Act and not u/s 10(10)(iii) of the Act as has been held by the AO. It is also noticed that the department itself has allowed the exemption to another employees also on the basis of the notification issued on 01.07.1999 by the Government of Haryana in which it has been declared that the Dakshin Haryana Bijli Vitran Nigam Ltd. is a Government Company and there is no existence of public fund and the employees of the wrest while HSEB were very much covered under GPF scheme which applies only to the Government employees. DHBVN also adopted the Haryana Civil Service (Revised Pension), Part-1, Rules, 2009 which shall apply to all pensioners entitled as on 01.01.2006 under PCS Rules, 1953. One of such order dated 18.05.2012 u/s 147/143(3) of the Act for the assessment year 2010-11 in the case of Sh. Jai Dayal Singh Bamel, 488, Sector-7, Faridabad was furnished by assessee which is placed on record. Therefore, when the department itself had allowed the exemption on account of gratuity to the employees of the same category to which the assessee belongs then there was no reason to deny the benefit to the assessee, in view of the principle of the consistency. Delete the addition made by the AO and sustained by the CIT(A). ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147 read with section 148 was justified or amounted to change of opinion. 2. Whether the Assessing Officer complied with statutory conditions and provided a speaking order disposing of the assessee's objections to the reasons for reopening (reference to GKN Driveshafts principle). 3. Whether gratuity received by an employee of a corporation (constituted out of an erstwhile State Electricity Board and wholly owned by the State Government) is exempt under section 10(10)(i) or only under section 10(10)(iii) of the Income Tax Act, 1961. 4. Whether addition made by the Assessing Officer on account of excess claim of gratuity is sustainable where departmental practice/assessments in similar cases and statutory notifications indicate entitlement to exemption under section 10(10)(i). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of reassessment under sections 147/148 (change of opinion) Legal framework: Sections 147 and 148 permit reopening of assessment where income has escaped assessment; valid reasons must be recorded and procedural requirements followed. Precedent treatment: Ground raised invoked GKN Driveshafts (principle concerning disposal of objections and requirement of reasons) though the Tribunal did not decide detailed precedent comparison on this point in the operative reasoning. Interpretation and reasoning: The appeals raised grounds challenging reopening; however this consolidated order proceeds to decide gratuity issue first and disposes appeals on merits. The Tribunal did not expressly set aside the reopening on grounds of change of opinion or failure to issue a speaking order; those grounds were pleaded but not determinatively adjudicated in the operative part of the decision. Ratio vs. Obiter: Observations on reopening and GKN are largely reflected in appellants' grounds but the Tribunal's ultimate decision rests on substantive entitlement to exemption; thus any comment on reopening is obiter and not the basis for the final relief. Conclusions: The Tribunal did not annul the reassessment on the ground that reasons were mere change of opinion or on procedural non-compliance; the appeals were allowed on substantive gratuity entitlement instead. (See cross-reference to Issue 3 and Issue 4.) Issue 2 - Requirement of a speaking order disposing objections to reasons for reopening (reference to GKN Driveshafts) Legal framework: Principles require that objections to the reasons for reopening be considered and disposed of with reasons; GKN Driveshafts is cited as landmark authority articulating such requirement. Precedent treatment: GKN was pleaded by the assessee as a ground; the Tribunal noted the plea but did not base the ultimate decision on a finding that the AO failed to issue a speaking order under GKN. Interpretation and reasoning: The Tribunal's analysis and final relief did not depend on a procedural defect under GKN; rather, it examined substantive entitlement to exemption and departmental consistency in similar cases and notifications. Ratio vs. Obiter: Any reference to failure to comply with GKN is obiter in this decision because the order's operative result flows from substantive statutory interpretation and facts. Conclusions: No decisive relief was granted on the basis of failure to issue a speaking order; the appeal was allowed on substantive grounds (see Issue 3 and Issue 4). Issue 3 - Entitlement to exemption: applicability of section 10(10)(i) v. section 10(10)(iii) Legal framework: Section 10(10) contains sub-clauses (i), (ii) and (iii) specifying categories of gratuity exempt from tax: (i) gratuity to employees of a State or employees of a local authority or under similar pension rules applicable to State civil service; (ii) gratuity under the Payment of Gratuity Act, 1972; (iii) other gratuity subject to prescribed limits (half month's salary per completed year, subject to notified ceiling). Precedent treatment: The Tribunal applied statutory text and contextual facts (notifications and departmental treatment) rather than distinguishing or following any conflicting judicial precedent in this order. Interpretation and reasoning: Facts found and relied upon include (a) the assessee was originally employed by the State Government and worked in the State Electricity Board which was subsequently reorganised; (b) upon transfer the relevant government notification (14.08.1998) preserved service terms including pension and gratuity 'not be less favourable'; (c) the successor corporation adopted Haryana Civil Service (Revised Pension) Rules and other government notifications declared the corporation a Government Company and indicated applicability of government pension benefits; (d) departmental practice showed grant of section 10(10)(i) exemption to other employees of identical category. The Tribunal held that these facts establish that the assessee continued to be entitled to the benefit of gratuity exemption under section 10(10)(i) as a consequence of the preserved service terms and adoption of State pension rules, and that treatment given by the department to similarly situated employees supported this conclusion by principle of consistency. Ratio vs. Obiter: The conclusion that employees of the challenged corporation were entitled to exemption under section 10(10)(i) is the ratio of the decision in these appeals; reliance on notification preserving terms of service and departmental consistency forms the decisive legal reasoning. Conclusions: Gratuity paid to the assessee is exempt under section 10(10)(i) rather than being restricted by section 10(10)(iii); the addition made on account of 'excess claim of gratuity' is therefore not sustainable. Issue 4 - Validity of addition for excess gratuity and effect of departmental practice/notifications (consistency) Legal framework: Taxability of gratuity depends on the sub-clause of section 10(10) applicable; departmental practice and administrative notifications may inform whether employees of a corporate successor retain entitlement to government-style exemption. Precedent treatment: The Tribunal relied on factual matrix and administrative instruments rather than deciding unsettled points of law; no contrary precedent was held to bind the outcome. Interpretation and reasoning: The Tribunal placed weight on (a) the government notification preserving employment terms at transfer, (b) adoption of State pension rules by the corporation, (c) a government notification describing the entity as a Government Company and indicating nonexistence of public fund, and (d) instances where the department allowed 10(10)(i) exemption in assessments of similarly situated employees. These factors collectively demonstrated that the gratuity was paid in terms analogous to State service and that denial of full exemption produced inconsistency with departmental practice. Ratio vs. Obiter: The decision to delete the addition is ratio - the Tribunal concluded that addition was unjustified given the entitlement under section 10(10)(i) and the departmental treatment of similarly placed cases. Conclusions: The addition of Rs. 4,78,150/- (as excess gratuity) confirmed by lower authorities is deleted; appeals allowed. The Tribunal applied the principle of consistency in departmental treatment and interpreted statutory provisions in light of notifications preserving service benefits at transfer.