Wp/20186/2004 Of G.nageswara Rao v. Deputy Commissioner Of Income Tax

THE HON’BLE SRI JUSTICE BILAL NAZKIANDTHE HON’BLE SRI JUSTICE G.CHANDRAIAH WRIT PETITION Nos.20173 of 2004, 20179, 20180, 20182, 20183, 20186, 21895, 21898 and 21905 of 2004; 2807 and 2810 of 2005 and 4189 of 2006 AND I.T.T.A.Nos.47 of 2003, 15, 47, 219, 220, 222, 223, 224, 225, 240, 250,257, 258, 264, 265, 266, 267, 275, 278, 279, 280, 281, 283, 284, 285,288, 289, 291, 293, 294, 295, 296, 297, 300, 301, 302, 303, 304, 309,312, 313, 314, 315, 316, 317, 321, 322, 324, 326, 327, 328, 329, 331,332, 335, 337, 338, 339, 340, 342, 344, 348, 349, 351, 352, 353, 355,357, 358, 360, 361, 362, 363, 364, 365, 366, 367, 368, 369, 370, 372,373, 374, 376, 377, 380, 381, 383, 384, 385, 386, 391, 395, 396, 397,399, 400, 402, 403, 404, 405, 407, 408, 411, 413, 415, 417, 418, 419,420, 421, 435 and 440 OF 2005; 3, 5, 6, 9, 12, 13, 14, 15, 16, 17, 18,19,20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36,37,38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50,51, 52, 53, 54, 55, 56,57, 58, 59, 60, 61, 62, 63, 64, 65, 66,67, 86, 87, 88, 89, 90, 91, 93, 94,95, 96, 97, 98, 99, 100, 101,103,104, 105, 106, 107,108, 109, 110, 111, 112, 113, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125,126, 127, 129,130, 131, 138, 139, 140, 141, 142, 143, 189, 190,218,220, 223,258, 260, 262, 275, 288, 290, 292, 295, 298, 299, 300, 301 and302 of 2006 Date: 24.10.2006 W.P.20173 of 2004 Between: M.V.Chinna Rao & others. …Petitioners And Deputy Commissioner of Income Tax, Circle-1, Eluru &Others. THE HON’BLE SRI JUSTICE BILAL NAZKIANDTHE HON’BLE SRI JUSTICE G.CHANDRAIAH WRIT PETITION Nos.20173 of 2004, 20179, 20180, 20182, 20183, 20186, 21895,21898 and 21905 of 2004; 2807 and 2810 of 2005;and 4189 of 2006 AND I.T.T.A.Nos.47 of 2003, 15, 47, 219, 220, 222, 223, 224, 225, 240, 250, 257, 258, 264, 265,266,266, 267, 275, 278, 279, 280, 281, 283, 284, 285, 288, 289, 291, 293, 294, 295, 296, 297, 300, 301, 302, 303, 304, 309,312,312, 313, 314, 315, 316, 317, 321, 322, 324, 326, 327, 328, 329, 331, 332, 335, 337, 338, 339, 340, 342, 344, 348, 349,351,351, 352, 353, 355, 357, 358, 360, 361, 362, 363, 364, 365,366,366, 367, 368, 369, 370, 372, 373, 374, 376, 377, 380, 381,383,383, 384, 385, 386, 391, 395, 396, 397, 399, 400, 402, 403,404,404, 405, 407, 408, 411, 413, 415, 417, 418, 419, 420, 421,435435 and440 OF 2005; 3, 5, 6, 9, 12,13,14,15,16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65,66,67, 86, 87, 88, 89, 90, 91, 93, 94, 95, 96, 97, 98, 99, 100,101, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113,114,115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125,126,127, 129, 130, 131, 138, 139, 140, 141, 142, 143, 189,190,218, 220, 223, 258, 260, 262, 275, 288, 290, 292, 295,298,299, 300, 301 and 302 of 2006 COMMON JUDGMENT:(Per Hon’ble Sri Justice BilalNazki) These writ petitions and I.T.T.As. raise commonquestions of law and fact therefore, they have been heardtogether and are being disposed of by this commonjudgment. For appreciation of facts, we are taking thepleadings in Writ Petition No.4189 of 2006, as it is morecomprehensive and in this case, the Circular of theCentral Board of Direct Taxes in F.No.174/5/2001, dated23.04.2001 has also been challenged. The petitioner in this case took voluntary retirement from Andhra Bank after putting in requisite number ofyears of service. Consequent to his retirement, hereceived a sum of Rs.11,14,241/- as ex-gratia. In thereturns filed by him for the assessment year 2001-02 on30.03.2002, he claimed exemption under Section 10(10C)of the Income Tax Act, 1961 (hereinafter referred to as‘the Act’) to the extent of rupees five lakhs as permitted bythe Statute. He also claimed relief under Section 89 of theAct on the balance figure of Rs.3,32,010/-, which comesout to be Rs.46,315/-. He claimed a refund of Rs.38,425/- . The petitioner in this case took voluntary retirement from Andhra Bank after putting in requisite number ofyears of service. Consequent to his retirement, hereceived a sum of Rs.11,14,241/- as ex-gratia. In thereturns filed by him for the assessment year 2001-02 on30.03.2002, he claimed exemption under Section 10(10C)of the Income Tax Act, 1961 (hereinafter referred to as‘the Act’) to the extent of rupees five lakhs as permitted bythe Statute. He also claimed relief under Section 89 of theAct on the balance figure of Rs.3,32,010/-, which comesout to be Rs.46,315/-. He claimed a refund of Rs.38,425/- . The income tax return was processed under Section143(1) of the Act, accepting the income and disallowingthe relief claimed under Section 89 and the Income-taxDepartment raised a demand of Rs.11,380/-. Thepetitioner filed an application under Section 154 of the Act,seeking rectification of the assessment. It was rejected bythe Assessing Officer by an order dated 30.11.2004. Thepetitioner filed a revision under Section 264 of the Actbefore the Commissioner of Income-tax. Revision wasrejected on 18.10.2005 and the said order is alsochallenged in the writ petition besides the circular of theCentral Board of Direct Taxes, to which a reference hasbeen made hereinabove. Once relief is granted under Section 10 (10C) of theAct, whether further relief can be granted to assesseesunder Section 89 of the Act, is the question, which willhave to be gone into in this writ petition and other writpetitions and I.T.T.As. In I.T.T.As., the appellants went up to the Income-taxTribunal and Income-tax Tribunal also rejected theirpleas. Facts are almost same in all the petitions and arenot at dispute. The arguments made at the bar by the learnedcounsel on behalf of the petitioners are that therespondents failed to see that the compensation receivedby the assessees on their voluntary retirement is in thenature of profit in lieu of salary. The amount so receivedwould normally be assessed at a higher rate of tax as isshown in the computation submitted for the purpose ofclaiming Section 89 relief. It is further submitted thatSection 10 (10C) and Section 89 of the Act operate in twodifferent areas and once benefit under Section 10 (10C) isgranted, that would not close doors for benefits availableto the assessees. Section 10 (10C) of the Act deals withexemptions whereas Section 89 of the Act grants reliefunder certain circumstances with respect to salary incomeoffered to tax after claiming the exemption. According to the petitioners, Rule 21A(1)(c) clearly stipulates that if anassessee receives in any financial year any paymentwhich under Section 17 (3) is a profit in lieu of salary, thenthe relief to be granted under Section 89 can be inaccordance with sub-rule (4) of Rule 21A. On the otherhand, the respondents contended that Section 10 (10C)and Section 89 of the Act are no doubt two distinct andindependent provisions, providing for meeting twodifferent situations and they operate in different realmsand are mutually exclusive. While Section 10 (10C) of theAct is an exclusive provision for granting relief to theemployees receiving compensation in the context ofVoluntary Retirement Scheme, Section 89 of the Act is ageneral provision granting relief to the employeesreceiving arrears or advance of salary, or profits in lieu ofsalary etc. It is further contended by respondents thatSection 10 (10C) of the Act has been specifically broughton Statute books for the purpose of granting exemption toa specific limit in respect of compensation received at thetime of voluntary retirement or termination in accordancewith a scheme formulated by the employer. Section 10(10C) of the Act is a self-contained provision and as such,the claim for relief in respect of compensation received inthe context of Voluntary Retirement Scheme has to beconsidered under the same provision, but not under anyother provision. A person availing the benefit of Section 10 (10C) of the Act to an extent of rupees five lakhs wouldnot be able to claim further reliefs under Section 89 of theAct in respect of the balance amount. The learnedcounsel for the parties have also relied on some of thejudgments. But, before that, a look on relevant provisionsof the Act would be necessary. Section 10 (10C) of theAct lays down— Section 10 (10C) of the Income Tax Act, 1961 readsas under: “10(10C) Any amount received (orreceivable) by an employee of– (i)a public sector company; or (ii)any other company; or(iii)an authority established under aCentral, State or Provincial Act; or (iv)a local (authority; or) (v)a co-operative society; or (vi)a University established orincorporated by or under a Central,State or Provincial Act and aninstitution declared to be a Universityunder section 3 of the UniversityGrants Commission Act, 1956 (3 of1956); or (vii)an Indian Institute of Technologywithin the meaning of clause (g) ofsection 3 of the Institutes ofTechnology Act, 1961 (59 of 1961);or [(viia) any State Government; or] [(viib) the Central Government; or] [(viic) an institution, having importancethroughout India throughout India or in any State or States, as theCentral Government may, bynotification in the Official Gazette,specify in this behalf; or]Central Government may, bynotification in the Official Gazette,specify in this behalf; or] (viii) such institute of management asthe Central Government may, bynotification in the Official Gazette,specify in this behalf;]the Central Government may, bynotification in the Official Gazette,specify in this behalf;] [on his] [voluntary retirement ortermination of his service, inaccordance with any scheme orschemes of voluntary retirement or inthe case of a public sector companyreferred to in sub-clause (i), ascheme of voluntary separation, tothe extent such amount does notexceed five lakh rupees]: Provided that the schemes of thesaid companies or authorities [orsocieties or Universities or theInstitutes referred to in sub-clauses(vii) and (viii)], as the case may be,governing the payment of suchamount are framed in accordancewith such guidelines (including interalia criteria of economic viability) asmay be prescribed: Provided further that where exemption hasbeen allowed to an employee under thisclause for any assessment year, no exemption thereunder shall be allowed tohim in relation to any other assessmentyear;]” Under Section 17(3) of the Act, “profits in lieu of salary”—includes (i)the amount of any compensation dueto or received by an assessee from hisemployer or former employer at or inconnection with the termination of hisemployment or the modification of theterms and conditions relating thereto;(ii)any payment (other than anypayment referred to in clause (10)[,clause (10A)] [,clause (10B)], clause(11), [clause (12) [,clause (13)] orclause (13A)] of section 10), due to orreceived by an assessee from anemployer or a former employer or froma provident or other fund, to the extentto which it does not consist ofcontributions by the assessee or[interest on such contributions or anysum received under a Keymaninsurance policy including the sumallocated by way of bonus on suchpolicy; Explanation – For the purposes of this sub-clause, the expression “Keyman insurancepolicy” shall have the meaning assigned to itin clause (10D) of section 10;]” Section 89 of the Act is part of the Chapter ‘Relief for Income-tax’ under the title ‘Relief when salary, etc., is paidin arrears or in advance’. It lays down— Explanation – For the purposes of this sub-clause, the expression “Keyman insurancepolicy” shall have the meaning assigned to itin clause (10D) of section 10;]” Section 89 of the Act is part of the Chapter ‘Relief for Income-tax’ under the title ‘Relief when salary, etc., is paidin arrears or in advance’. It lays down— “Where an assessee is in receipt of a sum inthe nature of salary, being paid in arrears or inadvance or is in receipt, in any one financialyear, of salary for more than twelve months ora payment which under the provisions ofclause (3) of section 17 is a profit in lieu ofsalary, or is in receipt of a sum in the nature offamily pension as defined in the Explanation toclause (iia) of section 57, being paid in arrears,due to which his total income is assessed at arate higher than that at which it wouldotherwise have been assessed, the AssessingOfficer shall, on an application made to him inthis behalf, grant such relief as may beprescribed]” Rule 21 of the Income-tax Rules also is framedunder the heading “Relief when salary is paid in arrears orin advance, etc”. Rule 21A (1)(c) lays down— “Where the payment is in the nature ofcompensation received by the assesseefrom his employer or former employer ator in connection with the termination ofhis employment after continuous servicefor not less than three years and wherethe unexpired portion of his term ofemployment is also not less than threeyears, in accordance with the provisionsof sub-rule (4)” The learned senior counsel for Department submitsthat the requirements of the law under Section 89 are thatthe salary should be paid which was in arrears or advanceand Rule 21A of Income-tax Rules applies only if it was acase of advance salary or arrears of salary. Section 17(3)of the Act defines profits in lieu of salary and includes theamount of any compensation due to be received by anassessee from his employer in connection withtermination of his employment or the modifications of theterms and conditions relating thereto. By no stretch ofimagination, a person receiving benefits under a voluntaryretirement scheme would fall within the purview of Section89 of the Act because, Section 10 (10C) does not talk ofany salary or any profits in lieu of salary. It talks of anamount received by an employee under a scheme forvoluntary retirement or termination of service. Section 10(10C) is a special provision enacted to benefit those whoretire or whose services are terminated in accordance witha scheme and it also provides under second provisionthat where exemption has been allowed to an employeeunder the class for any assessment year, no exemptionthereunder would be allowed to him relating to any otherassessment year. Mr. S.R. Ashok further submits thatfrom a bare perusal of these provisions of law, it becomesclear that once benefits have been taken under Section 10 (10C) of the Act under a voluntary retirement scheme, no further relief can be granted under Section 89 of theAct, and if benefits are taken under Section 10 (10C) ofthe Act, there is no question of having been paid anysalary in arrears or in advance. Sections 89 and 10 of theAct operate in altogether two different fields and Section10, as a matter of fact, grants relief in many manysituations including a situation in which assesses retireunder a voluntary retirement scheme. The learned counsel for petitioners howevercontend that what is required under Section 89 of the Actis that the amounts receivable should be either arrears oradvance and if it is interpreted in terms of the definition to‘Profits in lieu of salary’, then it would be quite clear thatwhatever is being received by a retired employee, is profitin lieu of salary. Coming to the judgments, the first judgment relied The learned counsel for petitioners howevercontend that what is required under Section 89 of the Actis that the amounts receivable should be either arrears oradvance and if it is interpreted in terms of the definition to‘Profits in lieu of salary’, then it would be quite clear thatwhatever is being received by a retired employee, is profitin lieu of salary. Coming to the judgments, the first judgment relied on by the petitioners is Sant Raj v. O.P.Singla[[1]].Thiswas a case where the question considered by SupremeCourt was, “Whethker the termination of service of S/ShriSant Raj and Itwari Lal Sherya is illegal and/or unjustifiedand if so to what relief are they entitled ?”. The SupremeCourt found that the termination was illegal. It also foundthat the persons concerned were out of job for twelveyears and it was in their own interest that instead of reinstatement under an unwilling and hostile employer,they should be provided adequate compensation whichwould meet the ends of justice. Accordingly, the SupremeCourt held them to be entitled to back wages in full for aperiod of twelve years and each one was entitled to getRs.1,50,000/- towards back wages and Rs.50,000/- wasgiven as compensation in lieu of reinstatement and in all,each one of the appellants were given Rs.2,00,000/-.Taking note of Section 89 of the Act, the Supreme Courtheld that in terms of Section 89 of the Act read with Rule21A of the Income-tax Rules, salary should be spreadover a period of twelve years and as also thecompensation in lieu of reinstatement relief. This case, assuch, is not relevant for the purposes of presentcontroversy. Admittedly the Supreme Court grantedarrears of salary of twelve years and as such theappellants before the Supreme Court were entitled to reliefunder Section 89 of the Act because, what they weredrawing in terms of the orders of the Supreme Court werearrears of the salary and in any case, they had not got anybenefit under Section 10 (10C) of the Act. Again the same question in similar circumstances,was decided by Supreme Court in a judgment inK.C.Joshi v. Union of India[[2]]. The question in Commissioner of Income-tax v. Visalakshi[[3]]was, “Whether the Appellate Tribunal wasright and had valid materials to hold that the ex-gratiacompensation of Rs.63,230 received by the assesseeconsequent on his resignation from the employment isentitled to the relief under section 89(1) of the Income-taxAct ?”. From the question itself which the Supreme Courtdecided, it is discernable that it was an ex-gratiacompensation granted to the employee consequent to hisresignation and not cessation of service in terms of ascheme formulated under Section 10 (10C) of the Act. Another judgment relief upon by the appellants is Ganti (V.R) v. Commissioner of Income-tax[[4]]. Thiswas also a case where employer paid to the assesseeRs.10,500/- being salary for four months as ex-gratia inaddition to the terminal benefits. Therefore, admittedly,what the assessee received in this case was salary. Appellants also rely on Commissioner of Income- tax v. M.Raman[[5]]. This is a very short judgment anddoes not lay down any precedent. Next judgment relied upon by the appellants isY.S.C.Babu v. Chairman and Managing Director, .Syndicate Bank[[6]] This judgment is relevant for thepurpose of present case to the extent that the entirecompensation/ex-gratia payable to the petitioner underthe VRS was salary in terms of Section 17(3) of the Act,but this declaration was made in the context as to whetherDeduction at Source could be made under Section 192 ofthe Act or not. Learned counsel for appellants also relied onjudgments in (1) Commissioner of Income-tax v.G.V.Venugopal[[7]], (2) Income-tax Officer v. DilipShirodkar[[8]], (3) Commissioner of Income-tax v.P.Surendra Prabhu[[9]]and (4) State Bank ofTravancore v. Central Board of Direct Taxes[[10]]. Out of these judgments, Commissioner of Income- Next judgment relied upon by the appellants isY.S.C.Babu v. Chairman and Managing Director, .Syndicate Bank[[6]] This judgment is relevant for thepurpose of present case to the extent that the entirecompensation/ex-gratia payable to the petitioner underthe VRS was salary in terms of Section 17(3) of the Act,but this declaration was made in the context as to whetherDeduction at Source could be made under Section 192 ofthe Act or not. Learned counsel for appellants also relied onjudgments in (1) Commissioner of Income-tax v.G.V.Venugopal[[7]], (2) Income-tax Officer v. DilipShirodkar[[8]], (3) Commissioner of Income-tax v.P.Surendra Prabhu[[9]]and (4) State Bank ofTravancore v. Central Board of Direct Taxes[[10]]. Out of these judgments, Commissioner of Income- tax v. P.Surendra Prabhu (9 supra) needs a mentionbecause, in this case, the Karnataka High Courtconsidered almost the similar question which is before us. The Karnataka High Court, while dealing with the similarquestion, held— “In conclusion, it is contended that there is noquarrel or issue as to the applicability ofsection 10(10C) of the Act. The bank hastaken into account the exemption undersection 10(10C) of the Act, without any demur from the Revenue, for the purposes ofdetermination of tax to be deducted at source. Further what is being taxed as “profits in lieu ofsalary” is the compensation received inaccordance with the scheme which is inexcess of Rs.5 lakhs. It is undisputed fact, thateven the Revenue has assessed the same as“profits in lieu of salary” in the cases ofemployees. The only dispute raised by theRevenue is, that in accordance with thesecond proviso to section 10 (10C) of the Act,the amount that is not exempted under section10(10C) is not to be considered for giving reliefunder section 89(1) of the Act. On a plainreading of the proviso, it is clear, that what theproviso bars is an allowance under thissection, viz., section 10(10C) of the Act for anyother assessment year when the assesseemakes such claim in the event of gettingfurther compensation from the same or anyother employer. Nowhere in the section is therelief to be granted under any of the provisionsof the Act barred. In fact, what is contemplatedunder section 10(10C) of the Act is anexemption, under section 89(1) of the Act,what the assessee gets is relief. There is noexemption with regard to the income, which isrequired to be assessed as “profits in lieu ofsalary”. In fact, where the Legislature intendedto bar a specific relief under other provisions ofthe Act once some relief is obtained under anyprovision, it is made specific in the sectionitself.” We are in respectful agreement with the opinion of the judgment of the Karnataka High Court. The judgment of Kerala High Court in State Bank of Travancore v. Central Board of Direct Taxes (10 supra)has also directly considered this question. In thisjudgment, the Court, however, held that when there aretwo interpretations possible, one in favour of assesseemust be accepted, to which, an exception has been takenby Mr.S.R.Ashok, Senior Advocate appearing for the otherside. But without going to the question whether twointerpretations are possible, we feel that where anemployee has taken retirement under the VoluntaryRetirement Scheme or is otherwise terminated fromservice, what he receives is compensation in lieu ofservice in terms of Section 17(3) of the Act and what hasbeen barred by second proviso to Section 10(10C) of theAct is an exemption and not a relief. The relief underSection 89 of the Act is available to everybody andexemptions are available to the classes which have beenmentioned in various provisions of the Act. In any case,Section 89 does not grant any exemption. The KeralaHigh Court stated – “The status of an employee whose service hasbeen terminated by way of disciplinaryproceedings cannot be on a higher pedestalthan a person who took voluntary retirement. Compensation received by an employee by “The status of an employee whose service hasbeen terminated by way of disciplinaryproceedings cannot be on a higher pedestalthan a person who took voluntary retirement. Compensation received by an employee by way of termination of service would get thebenefit of Section 89(1) of the Act, then we failto see why the benefit be not extended toemployees who receive compensation by wayof voluntary retirement. Literally terminationmeans ending, the consequence is the same,the employee is ceased to be in employmenteither by way of disciplinary proceeding or byavailing of the benefit of voluntary retirementscheme.” However, Mr.S.R.Ashok submits that a person whois terminated from service would not get any benefit underSection 10(10C) of the Act. That may be true, but that is aprovision enacted for encouraging voluntary retirements inpublic sector in order to meet the efficiency and as amatter of fact, Section 10(10C) is by way of an incentive. The learned senior counsel Mr.S.R.Ashok relies ona judgment of Supreme Court in Commissioner ofIncome-tax v. Venkateswara Hatcheries (P) Ltd.[[11]]tocanvass that the basic rule of interpretation was that thepurport and object of the Act must be given its full effectand the entire Statute must be read as a whole andpurpose construction should be given to the Legislation. There is no quarrel with that principal and that principlehas not been given a go-bye while deciding this case. Infact, Section 10 (10C) has been created to give an added relief to those who come under a voluntary schemeframed under the provisions and Section 89 of the Act isapplicable to everybody and is not by way of any relief,whereas Section 10 (10C) gives a relief. For these reasons, we allow the writ petitions, quashthe impugned orders and dismiss the I.T.T.As. ________________ (BILAL NAZKI, J) ___________________ (G. CHANDRAIAH, J) 24[th] October 2006 ajr [1]163 ITR 588. [2]163 ITR 597 [3]206 ITR 531(MADRAS) [4]216 ITR 48 (AP) [5] 245 ITR 856 (MADRAS) [6]253 ITR 1 (AP) [7]273 ITR 307 [8]274 ITR (A.T) 6 [9]279 ITR 402 (KARNATAKA) [10]282 ITR 587 (KERALA) [11](1999) 3 SCC 632