TaxTMI 
TaxTMI 
2005 (9) TMI 67
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....ficer employees of the bank, provided they have completed fifteen (15) years of actual service or forty (40) years of age and the eligibility to be reckoned as on January 1, 2001. The employees who seek voluntary retirement under the scheme were required to make appropriate application and it is the prerogative of the bank's management either to accept the request for voluntary retirement under the scheme or to reject the same depending upon the requirement of the bank. Clause (6) of annexure 1 to the circular issued by the bank dated December 11, 2000, provides for benefits available under the scheme for those employees seeking voluntary retirement under the scheme. Apart from payment of gratuity, provident fund/pension, encashment of privilege leave, the scheme also provides for payment of "ex gratia amount" as specified in clause 6.1 of the annexure to the circular. A scheme similar to the one floated by the respondent bank came up for consideration before the Supreme Court in the case of Bank of India v. O.P. Swaranakar [2003] 102 FJR 242 ; AIR 2003 SC 858. The question before the court was, whether an employee, who opts for the voluntary retirement pursuant to or in furtheran....
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....retirement from service under the scheme floated by the bank. On acceptance of the offer, the assessee had received the full and final settlement of ex gratia payment and other benefits as per the scheme from his employer. In the return of income filed for the assessment year 2001-02, the assessee had claimed exemption to the extent of Rs. 5 lakhs received under the voluntary retirement scheme from his employer under section 10(10C) of the Act and also relief under section 89(1) of the Act in respect of the amount received in excess of Rs. 5 lakhs from his employer. The assessee's claim was rejected by the Assessing Officer. The reasons assigned by the Assessing Officer to deny the relief under section 89(1) of the Act is, that once the assessee had availed of the benefit under section 10(10C) of the Act in respect of the amount of Rs. 5 lakhs, he is not entitled to the benefit of spread over in respect of the amount received in excess of Rs. 5 lakhs under section 89(1) of the Act. According to the Assessing Officer, the amount received by the assessee under the voluntary retirement scheme is not an arrears or advance of salary, not a gratuity, pension or compensation in connection....
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....under the aforesaid provision. The assessing authority has also observed in his order, that the computation of relief under section 89(1) of the Act is governed by rule 21A of the Rules and there is no provision under rule 21A of the Rules for providing relief under section 89(1) of the Act under the name ex gratia payment. As regards the compensation, the amount received under the voluntary retirement scheme would not come under the purview of the compensation found in rule 21A(1)(c) of the Rules and under clause (3) of section 17 of the Act. These provisions are found in the Act and in the Rules much before the voluntary retirement scheme came into existence and the so-called compensation out of the special voluntary retirement scheme amount does not find a place in rule 21A of the Rules for granting relief under section 89(1) of the Act. Lastly, relying on the Board's letter dated April 23, 2001, addressed to the Chief Commissioner of Income-tax (Karnataka and Goa), the assessing authority has rejected the claim of the assessee for relief under section 89(1) of the Act by concluding that the amount received over and above Rs. 5 lakhs under the voluntary retirement scheme is not ....
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....on 260A of the Income-tax Act, 1961 (hereinafter for the sake of brevity referred to as "the Act, 1961"), against the order passed by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, in the case of CIT v. Manager, Canara Bank in I.T.A. No. 1657 (Bang.) of 2002, dated August 20, 2004. The four questions of law raised for our consideration and determination are: "I. Whether the Tribunal was correct in holding that the respondent was exercising powers under section 192(2A) of the Act and once Form No. 10E is filed by the employees he has merely to compute the tax and grant relief under section 89(1) of the Act and therefore the respondent cannot be treated as an assessee in default under section 201(1) in respect of that tax and levy interest under section 201(1A) of the Act? II. Whether the respondent when discharging the jurisdiction conferred under section 192(2A) of the Act is bound to follow the instructions/Circulars F. No. 174/5 of 2001-ITA-I dated April 23, 2001, issued by the Central Board of Direct Taxes under section 119 of the Act where it has been clarified that if relief under section 10(10C) of the Act is granted no relief under section 89(1) can be all....
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....of 2001-I. T. A.-I dated April 23, 2001, in this regard. Accordingly, he has passed an order under section 201(1) of the Act, holding that the respondent-bank is an assessee in default to the extent of short deduction of tax at source and has levied interest under section 201(1A) of the Act. The view of the Assistant Commissioner of Income-tax (TDS) appears to be, once the exemption under section 10(10C) of the Act is allowed to the extent of Rs. 5 lakhs, the recipients under the voluntary retirement scheme are not entitled to relief under section 89(1) of the Act. The respondent-bank being aggrieved by the order passed by the Assistant Commissioner of Income-tax (TDS), had approached the Commissioner of Income-tax (Appeals), who in turn, by his order dated October 31, 2002, has rejected the appeal on the ground, that in accordance with section 192(2A) of the Act, the employee is entitled to relief only if he is eligible under section 89(1) of the Act and the respondent-bank being a tax deductor was bound to follow the circulars issued by the Board and deduct tax at source by not giving relief under section 89(1) of the Act, as exemption under section 10(10C) of the Act was alrea....
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....salary" and brought to tax under section 17(1)(iv) of the Act. In support of this submission, reference is made to the observations made by the Supreme Court in the cases of Karamchari Union v. Union of India [2000] 243 ITR 143 and Shriyans Prasad Jain v. ITO [1993] 204 ITR 616 and also the decision of the Calcutta High Court in the case of I.E.L. Ltd. v. CIT [1993] 204 ITR 386. Therefore, the ex gratia amount received by the assessee as per the voluntary retirement scheme should be treated as "salary" in accordance with section 17(1)(iv) of the Act and brought to tax. Learned counsel would further submit that the ex gratia payment received by the assessee would squarely fall under section 17(1)(iv) of the Act, for the reason, once the employee of a public sector opts for the voluntary retirement under the scheme, he gives up all the terms and conditions of statutory employment and, therefore, the amount received under the voluntary retirement scheme is a lawful consideration and cannot be termed as compensation for loss of employment; compensation is paid for breach of contract and in the present case, since the amount is received under the voluntary retirement scheme, the same ca....
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.... The said Explanation had come up for interpretation by the Supreme Court in the case of CIT v. E.D. Sheppard [1963] 48 ITR (SC) 237 wherein the Supreme Court has observed, that the expression "compensation for loss of employment" used in Explanation 2 to section 7 of the Act refers to any payment made, whether under a legal liability or voluntarily to compensate, or act as a solatium for the loss of employment suffered by the employee. Since Explanation 2(1) to section 7 of the 1922 Act is replaced by section 17(3) of the 1961 Act, the meaning assigned by the Supreme Court to the phrase "compensation due to or received by an assessee from his employer or former employer at or in connection with termination of his employment" should be adopted for interpretation of section 17(3) of the Act. It is further contended that the word "termination" is not confined to the termination by the employer or a termination at the instance of the employer. No specific qualification in this regard has been made in the provisions of section 17(3) of the Act when using the expression "termination". The word "termination" according to the dictionaries is "cessation of employment". It includes termina....
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....f voluntary retirement scheme provided by the nationalised banks. Further, as stated earlier, though the voluntary retirement scheme provides an option to the employees to seek or to volunteer for the termination of employment, it is the employer, who terminates the services by accepting the offer of the employee. In fact, the final say is with the employer, who can even reject the offer of the employer. Thus, in effect, it is termination of the services of the employee by the employer and so the provisions of section 17(3)(i) are applicable and, consequently, the provisions of section 89 are also applicable. Nextly, it is contended that, it is an undisputed fact that the compensation received by the retired employee of the bank is exempted under section 10(10C) of the Act to the extent of Rs. 5 lakhs. It is also an undisputed fact that the amount of compensation in excess of Rs. 5 lakhs is includible as income under the head "Salary" and such compensation is to be treated as profits in lieu of salary under section 17(1)(iv) of the Act read with section 17(3) of the Act. It cannot be held to be profits in addition to salary. The employee after he receives a communication to the ef....
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....of the Act once some relief is obtained under any provision, it is made specific in the section itself. In so far as the levy of penalty for not making deduction at source or at the time when the amounts were paid to the employees, learned senior counsel would contend that under section 192 of the Act, the employer was obliged to deduct tax at source out of the payment of income chargeable under the head "Salary". Section 192(2A) of the Act provides for the employer giving relief under section 89(1) of the Act, when the employee furnishes to the person obliged to deduct tax at source such particulars in such form and verified in such manner as may be prescribed. The form prescribed is Form No. 10E under rule 21AA of the Rules. The person responsible to deduct tax at source has no right to deny the appropriate relief. Thus no default or failure to deduct tax at source is attributable to the employer or the employee when the relief under section 89(1) of the Act is granted on the basis of the application made by the employee. When there is no default attributable, the provisions of section 201(1) and section 201(1A) of the Act are not applicable. In aid of his submissions, learned s....
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....ernment ; or the Central Government ; or an institution having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette specify in this behalf; or such institute of management as the Central Government ma)' by notification in the Official Gazette specify in this behalf; exempt from income-tax, at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in sub-clause (i), a scheme of voluntary separation, to the extent that such amount does not exceed five lakh rupees. The second proviso to this sub-clause provides that where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year. Chapter IV of the Act provides for computation of total income. Section 14 of the Act classifies the chargeable income into various heads of income, such as salaries, income from house property, income from business or profession, capital gains and income from other sources. Section 15 of the ....
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....ord 'salary'-(i) fees, (ii) commissions, (iii) perquisites, and (iv) profits in lieu of or in addition to salary. In common parlance, fees, commissions, perquisites or payments of profits in lieu of salary may not be considered to be salary. But by this inclusive definition, it has been provided so. After giving this exhaustive definition of the word 'salary', a further inclusive definition is given to the word 'perquisite', with which we are not concerned in these appeals. Thereafter, clause (3) provides for an inclusive definition of the phrase 'profits in lieu of salary'. Sub-clause (i) of clause (3), inter alia, includes the amount of any compensation received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto. The inclusion of this amount of compensation has a direct connection with the employment or the terms and conditions relating thereto." Having noticed the meaning assigned by the apex court to the term "salary", in our view, it would be appropriate to notice the provisions of section 17(3) of the Act, which in our view, is the section which would ....
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....m his employer or former employer at or modification of the terms and conditions relating thereto". The expression "compensation" is explained by the apex court in the case of CIT v. E.D. Sheppard [1963] 48 ITR (SC) 237. Though the decision was rendered prior to the amendment of section 7 of the 1922 Act with effect from 1955, still the meaning assigned to the word can be usefully applied to understand the meaning of the expression "compensation". By a majority view, the court has observed, "that 'compensation' in Explanation 2 to section 7(1) of the Income-tax Act does not mean compensation which is payable or compellable at law. Compensation for loss of employment is a well known term. It means a payment to the holder of an office as compensation for being deprived of profits to which as between himself and his employer he would, but for an act of deprivation by his employer or some third party such as the Legislature, have been entitled". Proceeding further, the court has observed: "That if the object of the payment was not related to the relation between the employer and the employee, it would not fall within the expression 'profit received in lieu of salary' in Explanation 2....
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.... retirement, resignation and superannuation. "Salary" as defined by section 17(1) of the Act covers any kind of remuneration received by or due to the employee irrespective of the fact that the payment is received during the period of employment or at the termination of employment. Terminal payments are not actually remuneration for services rendered but are in the nature of compensation for the termination of employment. Such payments, in order to bring them within the tax net, have been given the character of "profits in lieu of salary" and are included in the salary income of the employee by virtue of section 17(1)(iv) of the Act. The expression "profits in lieu of salary" has to be understood as comprehending not only such things as they signify to their nature and import but also those things which the interpretation clause declares that they shall include. This expression cannot be understood to mean only such things, which the definition or interpretation clause declares that they shall include. Section 17(3)(i) of the Act treats the amount of any compensation due to or received by an employee from his employer or former employer at or in connection with the termination of....
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....r on superannuation. A Division Bench of the Karnataka High Court in the case of Management of M.S. Ramaiah Medical College and Hospital v. Dr. M. Somashekar, has noticed the meaning of the expression "termination" and in that, has observed that "termination of service" is broadly classified into those imposed by way of punishment and those which are not dismissal and removal are terminations. "Termination" simpliciter refers to a termination in terms of the contract, otherwise than by way of punishment/penalty/retrenchment. Another situation which is envisaged in the sub-section is, that, though the employee may continue with his employer, the terms and conditions of service may be rearranged or modified and under the modified terms and conditions, the employee may be paid a lump sum in consideration of the remuneration payable to him during the subsequent years of service being reduced. The lump sum so received by way of compensation would be regarded as profits in lieu of salary and would be taxable. In order to constitute the receipt of compensation as "profits in lieu of salary" it must come from the employer or former employer. If the receipt or receipts happens to come from....
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....mount of compensation received by the assessee is liable to be treated as salary and, therefore, we are of the view that there is no error in the order of the Tribunal in holding that the amount received by the assessee is taxable as salary." In CIT v. G.V. Venugopal [2005] 273 ITR 307, the Madras High Court has stated: "The word 'salary' as defined in section 17 of the Act includes any profit in lieu of salary, which has been defined in section 17(3) of the Act to include any amount of compensation due or received by the assessee from his employer or former employer in connection with the termination of his employment. Hence, payment under the voluntary retirement scheme is covered by the word 'salary', which has been given a very wide definition in section 17. Since the assessee is covered by section 89, he will get both the benefits, which he has claimed for." Now coming to section 89 of the Act, it provides for relief when salary, etc., is paid in arrears or in advance. The said section is as under: "Section 89 : Relief when salary, etc., is paid in arrears or in advance.- Where an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance ....
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....e nature of salary paid in arrears or in advance or gratuity in respect of past services or compensation received at or in connection with the termination of employment or in commutation of pension, in accordance with the provisions of sub-rule (6); where an employee receives compensation on termination of his employment. Having noticed the provisions of section 89(1) of the Act and the corresponding rule, the question as to whether the assessee is entitled to the relief under section 89(1) of the Act would depend on the interpretation to be placed on the words "termination of employment" that find a place in section 17(3)(i) of the Act. According to learned counsel for the Revenue, the termination of employment should be confined only to cases of voluntary retirement from service and termination of employment on attaining the age of superannuation. It is his further submission that what is paid under the voluntary retirement scheme by the employer is an incentive and the payment received as per the terms of the scheme and not as per the terms of the conditions of employment and, therefore, the amount received by the assessee is only lawful consideration and it cannot be construed....
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....nstruction or the circular. The assessee in the instant case, has received ex gratia payment from his employer under the voluntary retirement scheme. The amount so received to the extent prescribed under section 10(10C) of the Act is exempt from payment of tax. The amount over and above the prescribed limit is taxable under section 17(3) of the Act as "profits in lieu of salary". The amount so received cannot be termed as salary or advance salary, but an amount of compensation received by the assessee from his employer or former employer in connection with the termination of his employment. Once it is not in dispute that the amount is taxable not as arrears of salary or advance salary, but profits in lieu of salary, as provided under section 17(3) of the Act, it is eligible for relief under section 89(1) of the Act whether the said amount is received under the voluntary retirement scheme or it has been granted exemption under section 10(10C) of the Act to the extent prescribed. The amount of compensation received by the employee from his former employer at or in connection with the termination of his employment is received in any one financial year, the income is liable for asses....
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....ving regard to the economic viability of the public sector company and also considering other relevant circumstances. This exemption is available both to the workmen and the officer of the company. The scope of this section was extended with effect from April 1, 1993, even to workmen and employees of "any other company", a statutory authority, a local authority, a co-operative society, an university, an Indian Institute of Technology and such Institute of Management as may be specified by the Central Government. The exemption provided under this subsection would cover payments made at the time of voluntary retirement or termination of an employee in accordance with any scheme or schemes of voluntary retirement The exemption allowed under this sub-section is to an extent of rupees five lakhs only. Rule 2BA of the Rules prescribes requirements for a scheme of voluntary retirement. It is a rule framed for the purpose of working; out the provisions of section 10(10C) of the Act and it cannot override the provisions of the Act and it is the section which prevails over the rules. The section specifically speaks of voluntary retirement/termination of an employee in accordance with the sc....
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....sed by the employee seeking voluntary retirement from service and also employing the retired employee in another company or concern belonging to the same management. However, this does not prevent an employee, who has taken voluntary retirement from service with one employer, joining other employer and again opting for voluntary retirement from service under the scheme floated by another employer. In order to prevent such misuse of the provision by an employee opting for voluntary retirement from service, the proviso makes it clear that once an employee has taken the benefit of exemption from tax provided under section 10(10C) of the Act, he will not be allowed to make exemption in any other assessment year. This is only to prevent the misuse of the provisions of section 10(10C) of the Act by employees, who could jump from one employer to another employer and take the benefit under the provision of section 10(10C) of the Act. Secondly, the proviso appended to the section speaks of "exemption" and not "relief" as envisaged under section 89(1) of the Act. If an exemption under the Act is claimed and granted by the Assessing Officer for any assessment year, the assessee will not be el....
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.... the question of law raised was whether the sum of Rs. 25,000 received by the assessee in the facts and circumstances was a revenue receipt liable to tax under the Income-tax Act or a capital receipt not liable to tax under the Act? The apex court, in the facts and circumstances of the case, was pleased to observe that the expression "any salary" must be construed in the context of the appointment letter which said that if Mr. V.D. Talwar's service was to be terminated within five years, he would be entitled to a notice of twelve months or salary in lieu thereof. No notice for the termination of service was given to him in the present case, but he was given twelve months salary. He, therefore, got exactly what he was entitled to under the terms of his employment and he was not deprived of any rights under the contract of service. There being no deprivation of his rights under the contract, the payment cannot be said to be "compensation for loss of service". In our view, the case law on which reliance was placed would not assist the Revenue in any manner whatsoever, the reason being, the facts noticed by us in detail would clearly demonstrate that the contract that was entered int....
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.... (SC) 237. The ratio of this decision is, once it is held that the payment in the present case was a payment made solely as compensation for loss of employment, there is an end of the appeal, because Explanation 2 in clear terms excepts such payment from being treated as a profit in lieu of salary. The Tribunal held on evidence before it, that the payment was made solely as compensation for loss of employment. The High Court, rightly, took the view that no distinction could be made between compensation for loss of employment and compensation for loss of prospects rooted in that employment. The High Court also rightly pointed out, that if the object of payment was unrelated to the relation between the employer and the employee, it would not fall within the expression "profit received in lieu of salary" in Explanation 2. In our view, the observations made by the apex court in the decision would assist the assessee rather than the Revenue. Sri Seshachala, learned counsel for the Revenue has also invited our attention to the observations made by the apex court in the case of Shriyans Prasad Jain v. ITO [1993] 204 ITR 616. In our view, certain observations made by the apex court were e....