Harbans Singh v. Commissioner Of Income Tax, Patiala

ITA No. 260 of 2013 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 260 of 2013 Date of Decision: 2.12.2015 Harbans Singh ....Appellant. Versus Commissioner of Income Tax, Patiala ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? Yes 3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE RAMENDRA JAIN. PRESENT: Mr. Manjit Singh Sarao, Advocate for the appellant. Mr. Zora Singh Klar, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This order shall dispose of a bunch of three appeals bearingITA Nos. 260, 261 and 269 of 2013 as according to learned counsel forthe parties, similar questions of law and facts are involved in all theappeals. For brevity, the facts are being extracted from ITA No. 260 of2013. 2.ITA No. 260 of 2013 has been filed by the assessee underSection 260A of the Income Tax Act, 1961 (in short “the Act”) against theorder dated 27.12.2012 (Annexure A-3) passed by the Income TaxAppellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafterreferred to as “the Tribunal”) in ITA No. 758/CHD/2012 for the ITA No. 260 of 2013 assessment year 2008-09. The appeal was admitted by this Court videorder dated 10.3.2014 for determination of the following substantialquestions of law:- i. Whether the Hon'ble ITAT Chandigarh Bench'B', Chandigarh was justified in confirming theorder of learned CIT(Appeals) and orders ofAssessing Officer making additions of` 11,002/- on account of Gratuity and ` 37,012/-on account of Leave Encashment claimedexempt by the assessee? ii. Whether the Hon'ble ITAT Chandigarh Bench'B' Chandigarh confirming the order of learnedCIT (Appeals) that Assessing Officer wasjustified in calculating the amount of Gratuityexempt under Section 10(10) and Leave Salaryexempt under Section 10(10AA) of the IncomeTax Act, 1961 by treating Salary for the purposeof calculation of exempted amount of Gratuityand Leave encashment as that Salary means“basic plus DA and excludes all otherallowances as per clause (h) of Rule 2 of Part Aof the Fourth Schedule” whereas in clause 2(h)of Part A of the Fourth Schedule it is no whereprovided that Salary means only basic pay anddoes not include Special Pay, Fixed PersonalPay, Professional Pay as in case of theappellant? ITA No. 260 of 2013 iii.Whether the ITAT has rightly taken support bythe decision of the Hon'ble Madras High Courtin case of K. Gopal Krishan v. Central Board ofDirect Taxes (1994) 206 ITR 183? ITA No. 260 of 2013 iii.Whether the ITAT has rightly taken support bythe decision of the Hon'ble Madras High Courtin case of K. Gopal Krishan v. Central Board ofDirect Taxes (1994) 206 ITR 183? 3.A few facts necessary for adjudication of the present appealas narrated therein are that the assessee had retired from the servicesof the State Bank of Patiala under 'Exit Option Scheme' floated by theBank vide circular dated 30.9.2006 and is having income from retiralbenefits and from other sources during the year in question. He has filedhis return on 31.7.2008 for the assessment year 2008-09 declaringincome at ` 7,95,394/-. Thereafter, he filed the revised return on4.6.2009 declaring income at ` 2,93,850/- by claiming exemption of ` 5lacs under Section 10(10C) of the Act. The case of the assessee wastaken up for scrutiny and notice under Section 143(2) of the Act wasissued. The Assessing Officer framed the assessment under Section143(3) of the Act vide order dated 28.12.2010 (Annexure A-1) at a totalincome of ` 8,41,860/-. The Assessing Officer made additions of ` 5lacs claimed exempt under Section 10(10C) of the Act being amount ofex-gratia received under the Scheme of Voluntary Retirement from theState Bank of Patiala declaring it as not in conformity with the Rule 2BAof the Income Tax Rules, 1962 (in short “the 1962 Rules”), ` 11,002/- onaccount of excess amount of gratuity and ` 37,102/- being excessamount of leave encashment both claimed exempt under Section 10(10AA) of the Act. Feeling aggrieved, the assessee filed an appealbefore the Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”]. The CIT(A) vide order dated 25.5.2012 (Annexure A-2) partlyallowed the appeal and deleted the disallowance of exemption under ITA No. 260 of 2013-4- Section 10(10C) of the Act. However, the disallowance of claim` 11,002/- on account of gratuity and ` 37,012/- of leave encashmentunder Section 10(10AA) of the Act were upheld by the CIT(A). Stilldissatisfied, the assessee filed an appeal before the Tribunal who videorder dated 27.12.2012 (Annexure A-3) upheld the order of the CIT(A)and dismissed the appeal. Thereafter, the assessee filed an applicationbearing MA No. 25/Chd/2013 for recalling the order dated 27.12.2012(Annexure A-3) before the Tribunal. The said application was dismissedby the Tribunal vide order dated 21.6.2013 (Annexure A-4). Hence, thepresent appeal. 4.After hearing learned counsel for the parties, we do not findany merit in the appeals. 5.The bone of contention between the parties in theseappeals relates to whether any benefit or allowance other than dearnessallowance is to be included in the basic salary of the assessee forcomputation of gratuity and leave encashment under Section 10(10) and10(10AA) of the Act respectively. 6.Firstly, reference is made to the relevant statutory provisionsto analyze the legal position. Section 10 of the Act deals with incomewhich are not included in total income for the purposes of income tax.Under sub-section (10) of Section 10 of the Act, any death-cum-retirement gratuity received by the assessee is exempt from payment ofincome tax to the extent specified therein on fulfillment on conditionsenumerated in that provision. Similarly, Section 10(10AA) of the Actprescribes that cash equivalent of leave salary in respect of the period ofearned leave is not to be included in his taxable income to the extentspecified therein where the assessee fulfills the conditions stated thereunder. According to Explanation appended to Section 10(10) of theAct, “salary” in clauses (10) and (10AA) to Section 10 of the Act shallhave the meaning assigned to it in clause (h) of Rule 2 of Part A of theFourth Schedule of the Act which reads thus:- “2(h) “Salary” includes dearness allowance, if theterms of employment so provide, but excludes allother allowances and perquisites.” thereunder. According to Explanation appended to Section 10(10) of theAct, “salary” in clauses (10) and (10AA) to Section 10 of the Act shallhave the meaning assigned to it in clause (h) of Rule 2 of Part A of theFourth Schedule of the Act which reads thus:- “2(h) “Salary” includes dearness allowance, if theterms of employment so provide, but excludes allother allowances and perquisites.” 7.A plain reading of Clause (h) of Rule 2 of Part A of FourthSchedule to the Act clearly spells out that for determining the extent ofexemption in case of receipt of death-cum-retirement gratuity and alsoleave encashment on retirement, the salary shall include dearnessallowance only if the terms of employment so provide but shall excludeall other allowances and perquisites. Though salary has also beendefined in Section 17 of the Act but that is restricted for the purposes ofSections 15 and 16 of the Act and would not govern provisions ofSections 10(10) and 10(10AA) of the Act. Thus, for quantifying theamount exempt under Sections 10(10) and 10(10AA) of the Act, the“salary” shall be determined as referred in Rule 2(h) of Part A of FourthSchedule of the Act and no other payment or allowance other thandearness allowance if the terms of employment so permit, shall be takeninto consideration. 8.Having enunciated the legal position as noticed above, weproceed to examine the factual matrix involved herein. The assesseeretired from the service of State Bank of Patiala under 'Exit OptionScheme' floated by the said Bank vide circular dated 30.9.2006 andclaimed exemption under Section 10(10C) of the Act amounting to ` 5lacs on account of ex-gratia. The Assessing Officer disallowed the claim of the assessee and made addition of ` 5 lacs by observing that the saidscheme was not in conformity with Rule 2BA of the 1962 Rules. Theclaims of the assessee regarding gratuity and leave encashment underSections 10(10) and 10(10AA) of the Act were partially disallowed by theAssessing Officer and additions of ` 11,002/- and ` 37,012/- on thataccount were made. On appeal, the CIT(A) upheld the order of theAssessing Officer except deleting the disallowance of the assesseeunder Section 10(10C) of the Act made by the Assessing Officer. Thepartial additions of ` 11,002/- and ` 37,012/- made on account of gratuityand leave encashment were sustained by the CIT(A) by holding that thecomputation of benefit of gratuity and leave encashment under Sections10(10) and 10(10AA) of the Act are to be governed by the definition of'salary' as per Rule 2(h) Part A, Fourth Schedule under which it isprovided that what it includes and what it does not include. The relevantfindings recorded by the CIT(A) read thus:- “5.4. I have considered the submissions made and Iam of the opinion that the A.O. has rightly computedthe amount of gratuity exempted under the Act byfollowing definition of salary as per Fourth Schedule,Part A, Rule 2 (h) as under this schedule properdefinition of salary for the purpose of this Act is givenas to what it includes and what it does not include.Further, the circular No. 46 also says that salarywould include only the periodical payments made tothe employee by the employer as compensation forhis service and any payments made by the employerto the employee by way of allowances or perquisites etc. is not to be taken into consideration as salary forthe purpose of Section 10(10) and that if, however, DAis merged with salary it no longer remains dearnessallowance but becomes salary and is then includiblein the term salary for the purposes of Section 10(10)of the I.T. Act, 1961. 5.5 to 6.2XXXXXX6.3.I have gone through the submissions and asdiscussed above, I am of the opinion that the A.O. hasrightly computed the extent of exemption available u/s10(10AA) by adopting definition of salary as perclause (h) of Rule 2 of Part A of Fourth Schedule.” etc. is not to be taken into consideration as salary forthe purpose of Section 10(10) and that if, however, DAis merged with salary it no longer remains dearnessallowance but becomes salary and is then includiblein the term salary for the purposes of Section 10(10)of the I.T. Act, 1961. 5.5 to 6.2XXXXXX6.3.I have gone through the submissions and asdiscussed above, I am of the opinion that the A.O. hasrightly computed the extent of exemption available u/s10(10AA) by adopting definition of salary as perclause (h) of Rule 2 of Part A of Fourth Schedule.” 9.On further appeal, the Tribunal has noticed that theAssessing Officer has included basic pay plus dearness allowance andapplied the formula as applicable to the gratuity and leave encashmentfor working out the eligible amount of gratuity and leave encashment.Further, it was held by the Tribunal that the computation of benefit ofgratuity and leave encashment under Section 10(10) and 10(10AA) ofthe Act are to be governed by the definition of 'salary' contained inExplanation to Section 10(10) of the Act. The Tribunal has recorded asunder:- “7.For the purpose of proper appreciation of therelevant statutory provisions of section 10(10) and 10(AA), it is relevant to reproduce the Explanation tosection 10(10) of the Act:- “Explanation – In this clause and in clause 10(AA), “salary” shall have a meaning assigned to it in clause (h) of Rule 2 of Part-A of the FourthSchedule.” 8.In view of the Explanation, the computation ofbenefit of gratuity and leave encashment, ascontemplated u/s 10(10) and 10(10AA) are to begoverned by the definition of 'salary' contained in theabove Explanation and not by any agreement, ascontended by the ld. AR, viz. 8[th] Bipartite Settlementon wage revision and other similar conditionsbetween Indian Banks' Association and theirWorkmen. The definition of 'salary' as reproducedabove is squarely and specifically applicable tosection 10(10) and 10(AA) of the Act and, hence, anyother definition of 'salary' cannot be imported andapplied to such sections.” 10.The authorities below on appreciation of material on recordhave concurrently recorded that the computation of benefit of gratuityand leave encashment under Sections 10(10) and 10(10AA) of the Actare to be governed by the definition of 'salary' as per Rule 2(h) Part A,Fourth Schedule. Learned counsel for the assessee was not able todemonstrate that the approach of the authorities below was erroneous orperverse or that the findings of fact recorded were based on misreadingor misappreciation of evidence on record so as to warrant interferenceby this Court. 11.Further, the Madras High Court in K. Gopalakrishnan v.Central Board of Direct Taxes and others (1994) 206 ITR 183 (Mad)while interpreting the term 'salary' under Sections 10(10) and 10(10AA) of the Act has held that there is no general definition of the word “salary”applicable for all the provisions of the Act. The Explanation to Section10(10) provides that “in this clause and in clause (10AA) 'salary' shallhave the meaning assigned to it in clause (h) of Rule 2, Part A of FourthSchedule to the Act. As per clause (h), “salary” includes dearnessallowance, if the terms of employment so provide, but excludes all otherallowances and perquisites. There was no ambiguity in the said clauseand it is the said definition which should be applied while construingSections 10(10) and 10(10AA) of the Act. It was observed as under:- “15. ......We are unable to accept his contention inview of the Explanation found in section 10(10) of theAct. It reads thus : of the Act has held that there is no general definition of the word “salary”applicable for all the provisions of the Act. The Explanation to Section10(10) provides that “in this clause and in clause (10AA) 'salary' shallhave the meaning assigned to it in clause (h) of Rule 2, Part A of FourthSchedule to the Act. As per clause (h), “salary” includes dearnessallowance, if the terms of employment so provide, but excludes all otherallowances and perquisites. There was no ambiguity in the said clauseand it is the said definition which should be applied while construingSections 10(10) and 10(10AA) of the Act. It was observed as under:- “15. ......We are unable to accept his contention inview of the Explanation found in section 10(10) of theAct. It reads thus : "In this clause, and in clause (10AA) 'salary'shall have the meaning assigned to it in clause(h) of rule 2 of Part A of the Fourth Schedule." 16. Clause (h) of rule 2 of Part A of the FourthSchedule reads that "salary" includes dearnessallowance, if the terms of employment so provide, butexcludes all other allowances and perquisites. Thereis no ambiguity whatever in the definition contained inthe above clause, and it is the said definition whichshould be applied while construing section 10(10) andsection 10(10AA) of the Income-tax Act. It is to benoted that there is no general definition of the word"salary" applicable for all the provisions of the Income-tax Act. Section 17 of the Income-tax Act contains adefinition for the purpose of section 15, 16 and 17 of the Act. Explanation 1 to section 36(1)(iia) of theIncome-tax Act is to the effect that the expression"salary" in that clause includes the pay, allowances,bonus or commission payable monthly or otherwise.Hence, the contention of the petitioner that theexpression "salary" found in section 10(10) andsection 10(10AA) of the Income-tax Act should begiven a wider meaning than found in clause (h) of rule2 of Part A of the Fourth Schedule is wholly untenable.Thus, the petitioner is not entitled to the grant of anypart of the prayer made by him in the writ petition.” 12.In view of the above, the substantial questions of law asreproduced above are answered against the appellant-assessee and infavour of the revenue. Accordingly, finding no merit in the appeals, thesame are hereby dismissed. (AJAY KUMAR MITTAL) JUDGE December 2, 2015gbs (RAMENDRA JAIN) JUDGE