2023 (6) TMI 1504 - AT - Income Tax

Assessee granted full s.10(10)(i) gratuity exemption; AO's addition deleted, s.10(10)(iii) limitations rejected on appeal following precedent

ITAT CHANDIGARH - AT allowed the appeal, holding the assessee entitled to exemption under s.10(10)(i) for gratuity received as an employee of a State ... Exemption u/s 10(10)(i) - Gratuity received from the employer being a State Government employee or the said exemption is to be limited to Rs. 10 lacs as provided u/s 10(10)(iii) - assessee has submitted that the assessee was an employee of Haryana State Electricity Board HELD THAT:- It is held that the assessee is entitled to the exemption u/s 10(10)(i) of the Income Tax Act and respectfully following the aforesaid decision of Shri Jagdeep Singh [2016 (5) TMI 1632 - ITAT DELHI] the impugned addition made by the AO is ordered to be deleted. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether an employee transferred from a State Government entity to a successor/Corporation that, by government notification, preserves pre-transfer service conditions including pension and death-cum-retirement gratuity, is entitled to exemption under section 10(10)(i) (death-cum-retirement gratuity under revised Pension Rules/similar scheme applicable to members of the civil services of a State) rather than being limited to the ceiling under section 10(10)(iii) (other gratuity subject to statutory ceiling). 1.2 Whether the adopting of State Civil Service (Revised Pension) rules or equivalent pension/gratuity scheme by the successor body and government notifications preserving existing service conditions justify application of section 10(10)(i) to gratuity received from that successor body. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1. Entitlement to exemption under section 10(10)(i) versus limitation under section 10(10)(iii) Legal framework: Section 10(10) distinguishes between (i) death-cum-retirement gratuity received under revised Pension Rules of the Central/State Government or any similar scheme applicable to civil services of a State (exempt), and (iii) 'any other gratuity' received on retirement/termination/death to the extent of a specified formula subject to a monetary limit notified by the Central Government. Precedent treatment: The Tribunal followed a co-ordinate bench decision addressing identical factual matrix (employees transferred from a State Government body to successor corporations where service conditions, including pension/gratuity, were preserved). No contrary judicial authority was adduced by Revenue in the present proceedings. Interpretation and reasoning: Where a government notification on transfer expressly provides that terms and conditions of service, including 'Pension and Death-cum-retirement benefit, gratuity and leave encashment,' shall not be less favourable than before transfer, employees transferred to successor entities retain the benefits that attached to their prior status as State Government employees. The adoption by the successor body of the State Civil Service (Revised Pension) rules or a declared position that the successor is a 'Government Company' for relevant purposes demonstrates continuity of the pension/gratuity regime akin to that applicable to State civil servants. In such circumstances the gratuity received on retirement is covered by the language of section 10(10)(i) (gratuity under revised Pension Rules or any similar scheme applicable to members of the civil services of a State) rather than the residual category of section 10(10)(iii). Ratio vs. Obiter: Ratio - where pre-transfer service conditions including pension/gratuity are preserved by governmental notification and the successor adopts the State pension/gratuity rules (or is effectively treated as within the State scheme), gratuity received by the transferred employee is exempt under section 10(10)(i) and not limited by the ceiling in section 10(10)(iii). Observations on departmental consistency and prior allowance to other employees are supportive but ancillary. Conclusion: The Court concluded that the gratuity paid to the transferred employee is exempt under section 10(10)(i). The addition based on treating the payment under section 10(10)(iii) was deleted. Issue 2. Effect of government notifications and adoption of State pension rules by successor entity Legal framework: Statutory exemption under section 10(10)(i) requires the gratuity to be 'received under the revised Pension Rules of the State Government or under any similar scheme applicable to the members of the civil services of a State.' The character of the scheme, not merely the payer, determines the applicability. Precedent treatment: The Tribunal relied on prior co-ordinate bench reasoning that a notification preserving service conditions and the successor's adoption of State pension rules establishes the requisite character of the gratuity scheme for section 10(10)(i). Interpretation and reasoning: A government notification that explicitly preserves pay, allowances, pension, death-cum-retirement benefits and gratuity 'shall not in any way be less favourable' implies continuity of the pension/gratuity regime. Where the successor entity adopts the State Civil Service (Revised Pension) rules (or where the government declares the successor to be a Government Company with no public fund distinction), the gratuity payable by the successor is to be treated as paid under a scheme similar to the State pension rules. The proper legal characterization focuses on the substance of the scheme and statutory/regulatory adoption rather than the form of the employer (i.e., corporation vs government department). Ratio vs. Obiter: Ratio - governmental preservation of pre-transfer pension/gratuity conditions combined with formal adoption of State pension rules by the successor establishes that gratuity is governed by a scheme 'similar' to State revised Pension Rules, thereby attracting section 10(10)(i) exemption. Observations on departmental practice and specific administrative orders demonstrating similar treatment of other employees are corroborative but not central to statutory interpretation. Conclusion: The Court held that the notifications and rule adoption were determinative in classifying the gratuity as falling under section 10(10)(i), entitling the recipient to full exemption under that provision. Issue 3. Relevance of departmental consistency and absence of contrary authority Legal framework: Principles of administrative consistency and equal treatment are relevant in assessing the reasonableness of Revenue's denial of benefits previously granted to similarly situated employees; absence of contrary judicial authority affects the weight of Revenue's position in appeal. Precedent treatment: The Tribunal applied the principle of consistency where the department had allowed identical exemption to other employees under like notifications/orders. Interpretation and reasoning: When Revenue has permitted exemption to other members of the same class of transferred employees on identical factual and regulatory foundations, denying the same benefit to the present employee lacks justification absent distinguishable facts or contrary legal authority. The Revenue did not produce any contrary decision; this reinforced the Tribunal's reliance on the co-ordinate bench ruling and supported deletion of the addition. Ratio vs. Obiter: Ancillary ratio - administrative consistency and lack of contrary precedent supported the decision to allow the exemption; however, the principal legal basis remains statutory characterization under section 10(10)(i). Conclusion: The Tribunal upheld the exemption in reliance on statutory interpretation, regulatory notifications and the principle of consistent administrative treatment; absence of contrary authority led to respectful followance of the co-ordinate bench decision. Overall Disposition The gratuity paid to an employee transferred from the State Government to a successor entity that preserved pre-transfer pension/gratuity conditions and adopted the State pension rules is exempt under section 10(10)(i) rather than being limited by section 10(10)(iii); the addition based on the latter was deleted. The Tribunal followed the co-ordinate bench authority and noted no conflicting ruling was produced by Revenue.