High Court Of Kerala
State Bank Of Travancore & Ors. vs. Central Board Of Direct Taxes & Anr.
Sections 10(10C), 17(3)(i), 89
Asst. Year 2001-02
K.S. Radhakrishnan & K.T. Sankaran, JJ.
OP No. 8150 of 2002 and Writ Petn. Nos. 30774, 32607, 33979, 35894, 37488 & 40102 of 2003, 3877, 7877 & 10848 of 2004 & 27589 of 2005
8th December, 2005
Counsel Appeared
M. Pathrose Matthai & Mathews V. Jacob, for the Petitioner : P.K.R. Menon, for the Respondent
JUDGMENT
K.S. Radhakrishnan, J. :
Whether the voluntary retirement from service would fall under the term ‘termination of employment’ within the meaning of s. 17(3) of the IT Act and the relief under s. 89(1) is admissible after the grant of exemption under s. 10(10C)(viii) of the IT Act is the question that arises for consideration in these cases.
2. Petitioners were officers and employees of State Bank of Travancore who had availed of the benefit of Voluntary Retirement Scheme (in short ‘VRS’) framed by the Bank in accordance with the guidelines prescribed under r. 21A of the IT Rules. Altogether 915 employees had opted for the benefit of the Scheme and retired from service w.e.f. 31st March, 2001. Bank had deducted at source the income-tax on the taxable income for the year 2000-01 after excluding five lakhs under s. 10(10C)(viii) of the IT Act. After excluding that amount the bank arrived at the tax payable by each of the employees taking into account the allowances and reliefs and such other deductions under Chapter VI-A to Chapter X. Employees who took voluntary retirement therefore were found entitled to relief under s. 89(1) of the IT Act in respect of payment under the provisions of cl. (3) of s. 17. Employees later filed their return for the asst. yr. 2001-02 to the concerned office. AO however based on a letter F. No. 174/5/2001-ITA.I, dt. 23rd April, 2001 issued by the CBDT to the Chief CIT, Bangalore issued notices to all the employees and initiated proceedings against the retired employees of the several branches of the bank under s. 201(1A) of the Act stating that the employees are not entitled to relief in excess of Rs. 5 lakhs granted under s. 10(10C)(viii) and hence no relief could be granted under s. 89(1) r/w r. 21A/Appendix II in respect of the ex gratia of golden handshake payment effected under VRS in excess of Rs. 5 lakhs. AO also imposed penalty and levied tax on the said amounts due.
The AO also issued notice to the employer under s. 201(1A) of the IT Act stating that the bank had not complied with the abovementioned statutory provisions and hence threatened to impose penalty and levy of interest on the amounts paid to the employees. State Bank of Travancore has therefore filed OP No. 8150 of 2002 challenging the action of the Department in taking action against the employer and also for a declaration that the bank has rightly deducted the amount while granting benefits to its employees on their voluntary retirement. Employees who had availed of the benefit of the VRS have also questioned the circular and prayed for a direction to the Department not to levy, impose or demand tax from the petitioners by denying the reliefs under s. 89(1) of the Act and also for other consequential reliefs.
We heard senior counsel Sri Pathrose Matthai, who appeared for the bank and Sri Mathews V. Jacob appearing for the employees and also heard senior standing counsel for IT Department Sri P.K. Ravindranatha Menon.
6. Counsel appearing for the petitioners submitted that the deduction by way of relief under s. 89 (1) is distinct and different from the exclusion or exemption from the total income under s. 10 (10C). Counsel submitted that the respondent had failed to appreciate the provisions of s. 10(10C) which excludes substantial amount of the total income for the purpose of IT Act and that the petitioners are legally entitled to get the benefit of s. 89(1) r/w r. 21A/Appendix II and under the provisions of cl. (3) of s. 17 of the Act. Senior counsel appearing for the IT Department on the other hand contended that relief under s. 89(1) r/w s. 17(3) of the Act applies only in the case of termination of service of an employee. Counsel submitted that the amount is received in connection with the termination of employment is a capital receipt and in the nature of retrenchment compensation and not a profit in lieu of salary. Counsel submitted relief under s. 89(1) can be claimed only when portion of the assessee’s salary is received as arrears or in advance for a period of more than twelve months in a financial year or the amount received is a profit in lieu of salary under s. 17(3). Counsel further submitted relief under s. 89(1) is admissible only when compensation is received in connection with employment and in the case of voluntary retirement there is no termination of employment.
The question that falls for consideration in these cases, as we have already indicated, is whether ex gratia compensation received by the petitioners on their voluntary retirement as per the VRS are entitled to relief under s. 89(1) of the IT Act r/w s. 17(3)(i) of the Act. Madras High Court in CIT vs. G.V. Venugopal (2005) 193 CTR (Mad) 661 : (2005) 273 ITR 307 (Mad) had occasion to consider whether employees who had availed of the VRS are entitled to exemption under s. 10 (10C) as well as relief under s. 89(1) in respect of payment under the VRS. Assessing authority in that case placed reliance on the clarification issued by the CBDT addressed to the Chief CIT-III, Bangalore vide letter dt. 23rd April, 2001, so also in the present case. We may also extract the relevant portion of that clarificatory letter : “I am directed to say that the amount upto Rs. 5 lakhs received under VRS is exempt as per the provisions of s. 10(10C)(iii) and after allowing this exemption the balance amount of Rs. 5 lakhs is not eligible for relief under s. 89(1) as per the proviso provided under s. 10(10C) which says………. no exemption thereunder shall be allowed to him in relation to any other assessment year. Thus, distributing the amount of compensation in more than one assessment year is not permissible as per the existing provisions.” Interpreting the above clarification, the Court in G.V. Venugopal’s case (supra) held as follows : “…We are of the opinion that the view taken by the AO is clearly incorrect. The second proviso to s. 10(10C) only refers to exemption claimed in any other assessment year. It is well settled that every assessment year is a self-contained unit. The assessment year in question in the present case is 2001-02 and the exemption claimed is in respect of this assessment year, although the exemption granted under s. 89(1) has been spread over several assessment years. The mere fact that the relief has been spread over several years, does not mean that the relief is not in respect of a particular assessment year.
The Tribunal has rightly pointed out that in the IT Act, there are several provisions granting twin or double benefits, while in other provisions, twin or double benefit has been specifically prohibited. There is no prohibition to the twin benefits in respect of the amount received under the VRS. The relief contemplated under s. 89(1) of the Act is aimed to mitigate hardship that may be caused on account of the high incidence of tax due to progressive increase in tax rates. Hence, we entirely agree with the view taken by the Tribunal.” (Emphasis, italicised in print, supplied)
We are in this case also concerned with the question as to whether employee who has taken retirement under the VRS is entitled to get relief under s. 89(1) r/w s. 17(3)(i) of the IT Act. Senior counsel appearing for the Revenue submitted that relief under the abovementioned provision would be available only with regard to the compensation received by an employee in connection with the termination of the employment and not in a case where compensation received by way of voluntary retirement. Counsel submitted that the legislature is well aware of the distinction between the expressions ‘voluntary retirement’, ‘termination of employment’ and ‘retirement’ when it used the expression voluntary retirement under s. 10(10C)(viii) of the Act. We may for easy reference extract the abovementioned provision. Sec. 10(10C)(viii) which stood at the relevant assessment year reads as follows :
“10. Incomes not included in total income.—In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— xxxxxx (10C) ‘any amount received’ or receivable by an employee of— (i) a public sector company; or xxxxxx (viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf, on 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-cl. (i), a scheme of voluntary separation, to the extent such amount does not exceed five lakh rupees : Provided that the schemes of the said companies or authorities or societies or Universities or the institutes referred to in sub-cls. (vii) and (viii), as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed : Provided further 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.” The term ‘voluntary retirement’ finds a place in s. 10(10C) of the IT Act, but in s. 89(1) of the Act which stood then reads as follows : “Where, by reason of any portion of an assessee’s salary being paid in arrears or in advance or by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of cl. (3) of s. 17 is a profit in lieu of salary, or is in receipt of a sum in the nature of family pension as defined in the Explanation to cl. (iia) of s. 57, being paid in arrears, due to which his income is assessed at a rate higher than that at which it would otherwise have been assessed, the AO shall, on an application made to him in this behalf, grant such relief as may be prescribed.” Sec. 17(3) of the Act is also relevant for our decision hence the same is also extracted below : “17. For the purposes of ss. 15 and 16 and of this section,— xxxxxx (3) ‘profits in lieu of salary’ includes— (i) the amount of any compensation due to or 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; (ii) any payment (other than any payment referred to in cl. (10), cl. (10A), cl. (10B), cl. (11), cl. (12), cl. (13) or cl. (13A) of s. 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.—For the purposes of this sub- clause, the expression ‘Keyman insurance policy’ shall have the meaning assigned to it in cl. (10D) of s. 10; (iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person— (A) before his joining any employment with that person; or (B) after cessation of his employment with that person.” Sub-cl. (iii) of s. 17(3)(i) was inserted by the Finance Act, 2001 w.e.f. 1st April, 2002.
9. The Revenue has already raised a contention that since the term ‘voluntary retirement’ has not been used by the legislature in s. 89(1) r/w s. 17(3)(i), benefit available under s. 89(1) r/w s. 17 (3) and r. 21A of the IT Rules is available only to those employees whose services have been terminated. Further, it was pointed out that the words ‘termination of employment’ have been used in s. 17(3) of the Act and therefore, the amount received by the employee from the employer at or in connection with the termination of employment whether due to disciplinary proceedings or otherwise, would alone be entitled to get relief under s. 89(1) of the Act.
10. Sec. 89 finds a place in Chapter VIII of the IT Act which deals with rebates and reliefs. Part A relates to rebate of income-tax and Part B deals with relief for income-tax. Provisions contained in Chapter VIII deal with rebates and reliefs which are beneficial provisions applicable to employees or persons in service. Courts strongly lean against construction which reduces the statute to a futility and when two interpretations of a taxing statute are possible, the one in favour of the assessee has to be accepted and the Courts should give effect to the purpose and object of the said provision. Status of an employee whose service has been terminated by way of disciplinary proceedings cannot be on a higher pedestal than a person who took voluntary retirement. Compensation received by an employee by way of termination of service would get the benefit of s. 89(1) of the Act, then we fail to see why the benefit be not extended to employees who receive compensation by way of voluntary retirement. Literally termination means ending, consequence is the same, the employee is ceased to be in employment either by way of disciplinary proceedings or by availing the benefit of VRS. Termination of employment may be due to various reasons; by way of resignation, dismissal, compulsory retirement, superannuation or even by voluntary retirement. Reasons for termination of service are not material. Reference may be made to the decision of the Madras High Court in CIT vs. J. Visalakshi (1994) 120 CTR (Mad) 248 : (1994) 206 ITR 531 (Mad). The Court while interpreting s. 89(1) of the Act r/w s. 17(3) held that there is no justification to confine the meaning of the word ‘termination’ only to the cases of voluntary retirement or superannuation. The Court held that s. 89(1) r/w s. 17(3) of the Act are beneficial clauses intended to grant certain benefits to employees or persons in service and therefore, while placing interpretation on such clauses, the object with which such clauses are provided in the Act must be borne in mind, the object being to grant certain benefit to the person whose service is terminated. The Court took the view that if the meaning of the word ‘termination’ is confined to cases of voluntary retirement or superannuation only, the object of the clause will not be fully achieved and it would amount to restricting the scope of the beneficial clause. We are in full agreement with the reasoning of the Madras High Court in J. Visalakshi’s case (supra). The Madras High Court in CIT vs. M. Raman (1999) 152 CTR (Mad) 497 : (2000) 245 ITR 856 (Mad) held that the Tribunal was right in holding that the amount received by the employee at the time of voluntary retirement of service would be regarded as salary and the relief under s. 89 of the Act would be admissible in respect of the amount received by the assessee from his employer at the time of voluntary retirement. Similar is the view taken in CIT vs. G.V. Venugopal (supra). Sec. 89(1) is a beneficial provision which has been placed under Chapter VIII dealing with rebates and reliefs and, therefore, has to be interpreted in tune with the object and purpose for which those provisions have been incorporated. If s. 89(1) r/w s. 17(3)(i) of the Act is intended to give benefit to employees on the amount of compensation received from the employer on termination of service, we fail to see why compensation received by an employee on voluntary retirement be not given the same benefit. There is no intelligible differentia between the employees who receive compensation by way of termination of service and on voluntary retirement with the object sought to be achieved. The object sought to be achieved is to mitigate or alleviate the hardship that may be caused on account of high incidence of tax due to progressive increase of tax. The word ‘salary’ used in s. 17 includes profit in lieu of salary, which has been defined in s. 17 (3) to include any amount of compensation due or received by the assessee from the employer in connection with the termination of service. Payment received by way of VRS also is covered by the word ‘salary’, which has to be given a wider meaning. In our view, the word ‘termination’ of service is used in s. 17(3)(i) in a liberal sense so as to take all categories of cases, such as voluntary retirement, superannuation, compulsory retirement, resignation, dismissal and so on.
13. We are, therefore, inclined to allow all these writ petitions and hold that compensation amount received by the employees under the VRS from the bank are entitled to get relief under s. 89(1) r/w s. 17(3)(i) of the Act over and above the exemption granted under s. 10(10C)(viii) and the letter No. F. 174/5//2001-ITA-I, dt. 23rd April, 2001 issued by the CBDT, Bangalore would stand quashed.
[Citation : 282 ITR 587]
