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TMI Blog2004 (1) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... g after the exempted income under section 10(10C) is compensation covered within the meaning of section 17(3)(i) of the Act and rule 21A(1)(c) of the Rules. (iv) The learned CIT(A) erred in holding that the VRS amount received by assessee, reduced by the exempted income under section 10(10C) constitute compensation received for surrender of the right of the assessee for continuing in employment that would have earned the assessee income from "salary". (v) The learned CIT(A) erred in applying the ratios of decisions of Hon'ble Madras High Court in the case of CIT v. J. Visalakshi [1994] 206 ITR 531 and others referred to in the order for giving a finding that the VRS amount after exemption under section 10(10C) received by the assessee is the compensation to be treated as profit in lieu of salary under section 17(3)(i) of the Act and eligible for relief under section 89(1) r/w rule 21A(1)(c) of the Rules. (vi) The learned CIT(A) erred in holding that the amount received by the assessee from the VRS after the exemption under section 10(10C) is the compensation received on termination of service. (vii) The learned CIT(A) erred in holding that the amount received by assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bifurcating the total salary paid in arrears or advance to the previous three years. Rule 21A does not say that relief under section 89 is to be allowed after allowing the exemption available. Section 10(10C), an exemption section which has clearly prescribed the amount qualify for exemption. The proviso to section 10(10C) also specifically clarifies that where exemption has been allowed to an employee under this clause for any other assessment year. Hence, the assessee's plea that relief under section 89 is to be allowed bifurcating the balance amount to the previous three years after allowing the exemption under section 10(10C) is not acceptable." The assessee's claim for relief under section 89(1) was thus declined by the Assessing Officer. Aggrieved, assessee carried the matter in appeal before the CIT(A) who reversed the action of the Assessing Officer by observing as follows: "I have carefully considered the submissions of the counsel of the appellant and also the reasons given by the Assessing Officer to deny the relief under section 89(1) to the appellant. I find that there is enough force in the argument of the appellant that he is entitled for relief under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the appellant is entitled to relief under section 89(1) in respect of the balance amount of compensation received on voluntary retirement from service over and above Rs. 5 lakhs exempt under section 10(10C). Though the amount received by the appellant at the time of voluntary retirement under the VRS cannot be treated as arrears of salary or advance salary but it is surely in the nature of compensation received for surrendering the right of continuing in service, which partakes the character of salary to the appellant. Further, the provisions of rule 21A(1)(c) clearly cover the cases of compensation which is eligible for relief under section 89(1) of the Income-tax Act, 1961. Rule 21A(1)(c) provides as follows:- 'Where the payment is in the nature of compensation received by the assessee from his employer or former employer at or in connection with the termination of his employment after continuous service for not less than three years and where the unexpired portion of his term of employment is also not less than three years in accordance with the provisions of sub-rule (4).' 5.3 It has been held by the Supreme Court in the case of CIT v. Kulu Valley Transport Co. (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax liability arising out of VRS amount for one assessment year only as evident from the second proviso to section 10(10C) and giving relief under section 89(1) involves spread-over of the VRS amount to three assessment years with a consequential tax relief. According to the learned Departmental Representative, this tax relief is besides what has been given on account of exemption under section 10(10C) and, therefore, it goes against the said provision. Learned Departmental Representative also relied upon the Board's instructions contained in letter F.No. 174/5/2001-ITA, dated 23rd April, 2001 addressed to the Chief CIT (Karnataka & Goa) wherein it is clarified by the Board that the VRS amount received by an assessee in excess of Rs. 5,00,000 is not eligible for relief under section 89(1) as distributing the VRS amount in more than one year is not permissible as per the existing provisions. It was then pointed out that rule 21A, which is the rule setting out the application of relief under section 89(1), prescribes five situations wherein relief under section 89(1) can be granted, namely: (a) when the salary is received in advance or in arrears; (b) in case of gratuity receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 89(1) just as much as any other amount is eligible for that relief, and it makes no difference whether or not the aforesaid amount is received under the VRS scheme or whether it has been granted partial exemption under section 10(10C). It is also submitted that section 10(10C) clearly states that '...or termination of service in accordance with any scheme/schemes of voluntary retirement...' which demonstrates that the schemes of voluntary retirement envisage termination. Learned counsel submitted that the respondent had sought voluntary retirement in accordance with the VRS scheme framed by the bank, which results in 'termination of employment', and, therefore, it could not be said that the ex gratia was not received on account of termination of employment. It was also submitted that section 10(10C) and section 89 are two independent sections, and that in any case section 89(1) does not grant any exemption but reduces the percentage rate at which tax is charged. It was then pointed out that taxation at lower rate has distinct connotations than connotations of the expression 'exemption'. In this view of the matter, according to the learned counsel, merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirm the order of the CIT(A) and decline to interfere in the matter. As a somewhat half-hearted alternate plea, it was argued that now that the CBDT itself has taken a stand, vide Circular No. 200/79/2000-ITA(1), dated 23rd January, 2001, that the payment of VRS compensation of banking sector is a capital expenditure, the entire VRS receipt is to be taken as a capital receipt beyond the purview of taxation. However, no further arguments were made on these lines, and learned counsel concluded by urging us to confirm the order of the CIT(A). In rejoinder, learned Departmental earlier in this order. 6. We have given our thoughtful consideration to the rival submissions made by the learned representatives and to the notes filed by them. We have also carefully perused the material before us and duly considered the factual matrix of the case as also the applicable legal position. 7. We find that under section 89(1) of the IT Act, where, by reason of, inter alia, an assessee's having received in any one financial year a payment which "under the provisions of clause (3) of section 17 is a profit in lieu of salary", his income is "assessed at a rate higher than that at which it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 7 in 1922 Act, were examining the proposition whether the scope of expression 'compensation' is confined to "compensation which is payable or compellable at law". Their Lordships had, by majority opinion, rejected this proposition, and approved Hon'ble High Court's observation that " . . . the expression 'compensation for loss of employment' used in Expln. 2 to section 7 refers to any payment made, whether under a legal liability or voluntarily, to compensate as a solatium for the loss of employment suffered by the employee". Hon'ble Supreme Court was of the considered opinion that what one has to look to the nature of receipt in the hands of the assessee, "irrespective of any considerations as to what was actuating in the mind of the other party". In this view of the matter, we are unable to approve the stand of the Revenue that the payment under VRS cannot be termed as compensation for 'termination of service', as also was the expression used in Expln. 2 to section 7 in 1922 Act. In the case of J. Visalakshi Hon'ble Madras High Court has observed that "the question whether the assessee is entitled to relief under section 89(1) would depen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in connection with the termination of his employment after continuous service for not less than three years and where the unexpired portion of his term of employment is also not less than three years in accordance with the provisions of sub-rule (4)". On these facts, in our considered view, the conditions laid down under section 89(1) are satisfied and, from this point of view, the assessee is eligible for relief. Let us now examine the impact of exemption under section 10(10C) and the restrictions for further relief placed therein. 9. There is no dispute about the admissibility of exemption upto an amount of Rs. 5 lakhs, out of the sum received by the assessee under the VRS, under section 10(10C). It provides that any amount received by an employee of any company at the time of his voluntary retirement, in accordance with the scheme of voluntary retirement, to the extent such amount does not exceed Rs. 5 lakhs. The objection taken by the Revenue relates to second proviso to this section which provides as follows: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total income, but once the balance amount is exigible to tax under section 17(3), all other consequences under the Act, including eligibility to relief under section 89(1), follows. We, therefore, reject Revenue's contention that in view of the contents of, and intent of, second proviso to section 10(10C), relief under section 89(1) is not admissible. One of the points made by the learned Departmental Representative is that Hon'ble Madras High Court's judgment are not relevant because they did not take into account the provisions of section 10(10C) but then it proceeds on the fallacy that exemption under section 10(10C) has any relevance for the purpose of relief under section 89(1). We, therefore, reject this plea also. As for learned Departmental Representative's reliance on the CBDT communication, we hardly need to state that law is trite that a circular, even under section 119, cannot be thrust upon the assessee. The assessee can derive advantage from a circular but it does not bind the assessee in any way nor can it impose any taxability on the assessee. The assessee is entitled to ignore a circular if its terms are beyond the provisions of the Act. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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