Commuted pension exemption under tax law extends to terminal benefits paid as part of an integral retirement scheme

Retirement benefits paid under rule 37A of the Central Civil Services (Pension) Rules, 1972 were treated as one integral commutation scheme, so the terminal benefit received on government service absorption in a public sector undertaking was not split from the commuted value of one-third pension for tax purposes. On that basis, the terminal benefit was regarded as falling within the exemption for commuted pension under section 10(10A)(i) of the Income-tax Act, 1961. The underlying rectification orders granting exemption were therefore not displaced by revision under section 263.

---

---

Issues: Whether the terminal benefit received by civil servants on retirement from Government service and absorption in a public sector undertaking, together with the commuted value of one-third pension, was exempt from tax under section 10(10A)(i) of the Income-tax Act, 1961, and whether the Commissioner could revise the rectification orders under section 263.

Analysis: The appeals turned on the treatment of retirement benefits paid under rule 37A of the Central Civil Services (Pension) Rules, 1972. The Tribunal followed the Delhi High Court ruling that the two components of the lump sum received under rule 37A(1) form one integral scheme of commutation and are not to be split for tax purposes. On that basis, the terminal benefit paid in addition to the commuted value of one-third pension was held to fall within the exemption for commuted pension under section 10(10A)(i). As the underlying tax treatment was governed by that legal position, the rectification orders granting exemption were not liable to be displaced on the revenue's revision.

Conclusion: The terminal benefit received by each assessee was exempt from tax under section 10(10A)(i), and the assessees succeeded in the appeals.

---