TMI Blog2005 (9) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... DATTU., H. N. NAGAMOHAN DAS. JUDGMENT The judgment of the court was delivered by H.L. Dattu J.- Since the issues involved in these two appeals are inter-related, they are heard together and disposed of by this common judgment. The facts in I.T.A. No. 189 of 2005 are as under: The assessee was an employee of Canara Bank, which is a nationalised bank. The bank had floated a scheme called "Canara Bank Employees Special Voluntary Retirement Scheme" ("Voluntary Retirement Scheme" for short). The objective of the scheme is to have an ideal man power for the bank and to have optimum human resources in keeping with the business strategies, skill profile towards achieving a balanced age profile and meeting the latest requirements of the bank. The scheme, apart from others, provides eligibility criteria, benefits available under the scheme, and other general conditions. The scheme is available to all permanent workmen/officer 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would merely constitute invitation to treat and not an offer." Proceeding further, the court has observed: "We, therefore, have no hesitation in coming to the conclusion that the voluntary scheme was not a proposal or an offer but merely an invitation to treat and the applications filed by the employees constituted 'offer'." The court has concluded: "The scheme is contractual in nature. The contractual right derived by the concerned employees, therefore, could be waived. The employees concerned having accepted a part of the benefit could not be permitted to approbate and reprobate nor can they be permitted to resile from their earlier stand." Now having noticed the scheme floated by the bank and its limited operation in so far as contractual relationship between the employer and the employee is concerned, we proceed to narrate the facts in brief for the disposal of these appeals. The assessee had offered for voluntary 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 10(10C) of the Act on the said amount, the action of the assessee in naming the balance portion of the amount after exemption under section 10(10C) of the Act out of the total amount received as "ex gratia" or "compensation" is nothing but a unilateral action of the assessee, which has no sanction under the provisions of the Act. The intent of the Legislature also appears to be that providing the assessee with a deduction from the tax liability arising out of voluntary retirement scheme amount for one assessment year only as is evident from the second proviso to section 10(10C) of the Act and giving relief under section 89(1) of the Act involves spreading over of the income from the voluntary retirement scheme amount to the earlier three assessment years with a consequential tax relief and this is besides what has been given under section 10(10C) of the Act and the claim goes against the spirit of the tax relief granted 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, the assessee having availed of the benefits under section 10(10C) of the Act in respect of a sum of Rs. 5,00,000 under the voluntary retirement scheme is restrained from claiming any other benefit for any other assessment year in view of the prohibition contained under the second proviso to section 10(10C) of the Act? III. Whether, the assessee is entitled to claim relief under section 89(1) of the Act in respect of a sum received under the voluntary retirement scheme over and above a sum of Rs. 5,00,000 which is not prescribed under section 89(1) of the Act nor under any of the prescribed categories as per rule 21A of the Income-tax Rules? IV Whether, the appellate authorities being the last finding authority was bound to record a finding on facts after considering the controversy before it in the case of the assessee?" Facts in I.T.A. No. 75 of 2005 are as under: This appeal is filed by the Income-tax Department under section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act was wrongly allowed, the Assessing Officer had initiated proceedings under section 201(1) read with section 201(1A) of the Act against the respondent-bank for violating the provisions of sections 192, 192(2A) read with section 194 of the Act. The Assistant Commissioner of Income-tax (TDS), after considering the reply filed by the respondent-bank to the show-cause notice issued, has confirmed the proposal made in the show-cause notice and in that has observed, that there was short deduction of tax at source, since the relief under section 89(1) of the Act has been wrongly allowed and, secondly, that the second proviso to section 10(10C) of the Act allows exemption up to Rs. 5 lakhs and therefore, no other exemption thereunder can be allowed to an employee of the bank, who has taken voluntary retirement from service under the voluntary retirement scheme in relation to any other assessment year, relying on the letter of the Board in No. 174/5 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic objective and under the scheme, the employees receiving benefit under the voluntary retirement scheme enter into specific agreement with the respective employer, i.e., the employees sheds all his rights under the statutory regulations and enters into a new contract as per the provisions of the Indian Contract Act. Under the scheme, what was agreed to be paid by the employer was an incentive and the same is received by the employee. Therefore, the amount is received as per the agreed terms of contract/scheme and not as per the terms and conditions of employment. Therefore, the amount received by the assessee is a lawful consideration as per the terms of the contract. It is further submitted, that once the voluntary retirement scheme is considered as a contract, the benefit derived by the employee under the said scheme is only lawful consideration, therefore, the consideration received by the employees requires to be termed as "profits in lieu of 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 Shriya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and the balance amount, if any, over and above Rs. 5 lakhs was liable to be taxed, especially in view of the proviso to section 10(10C) of the Act, which contemplates that such a benefit cannot be extended to any other assessment year once it is availed of. Reliance is also placed on the observations made by the apex court in the cases of CIT v. E.D. Sheppard [1963] 48 ITR (SC) 237 and V. D. Talwar v. CIT [1963] 49 ITR (SC) 122 in aid of his submissions. Sri Sarangan learned senior counsel for the assessee, would contend, that section 89 of the Act expressly provides for tax relief in respect of a sum which falls within "profits in lieu of salary" as defined in section 17(3) of the Act. The crucial words in section 17(3) of the Act are "the amount of any compensation at or in connection with the termination of employment". The expression "compensation" is judicially interpreted in the context of Explanation 2 to section 7 of the 1922 Act. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in pursuance of a scheme, whereby the invitation to the employee to opt for termination has been provided for and such termination is ultimately occasioned on account of the acceptance of the employee's option by the employer, who has agreed to give compensation at or in connection with such termination according to the terms of the scheme. The scheme is thus intended to bring about cessation of employment as the employer terminates the services with the consent of the employee, giving a go-by to the service contract earlier entered into between the employer and employee. Thus, the termination squarely falls within the provisions of section 17(3) of the Act and once the compensation received is in accordance with section 17(3) of the Act, it is profits in lieu of salary to which the provisions of section 89 of the Act are applicable. In view of the above, the termination contemplated in section 17(3) of the Act includes even a termination on account of 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e raised by the Revenue is, that in accordance with the second proviso to section 10 (10C) of the Act, the amount that is not exempted under section 10(10C) is not to be considered for giving relief under section 89(1) of the Act. On a plain reading of the proviso, it is clear, that what the proviso bars is an allowance under this section, viz., section 10(10C) of the Act for any other assessment year when the assessee makes such claim in the event of getting further compensation from the same or any other employer. Nowhere in the section is the relief to be granted under any of the provisions of the Act barred. In fact, what is contemplated under section 10(10C) of the Act is an exemption, under section 89(1) of the Act, what the assessee gets is relief. There is no exemption with regard to the income, which is required to be assessed as "profits in lieu of salary". In fact, where the Legislature intended to bar a specific relief under other provisions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll not be included. The several clauses in section 10 of the Act specify different incomes, which would ordinarily be included in the total income of the assessee for the purpose of taxation but for such provision. Clause (10C) of the Act is inserted by the Finance Act, 1987, with effect from April 1, 1987. The reason for introducing this provision is contained in the circular of the Central Board of Direct Taxes explaining the Finance Act, 1987-([1987] 168 ITR (St.) 94). This clause provides that any amount received by an employee of a public sector; or any other company; or a local authority; or a co-operative society; or a university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956; or an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961; or any State Government ; 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 institu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 243 ITR 143. In that decision, the court has observed: "A reading of clause (1) of section 17 of the Act makes it abundantly clear that the word 'salary' is given an exhaustive meaning as stated in sub-clauses (i) to (vii). The inclusive definition of the word 'salary' given in section 17 provides that apart from salary received by the employee, it includes wages, any annuity or pension, any gratuity, any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, any advance of salary, any payment received by an employee in respect of any period of leave not availed of by him and other payments mentioned in sub-clauses (va), (vi) and (vii). These sub-clauses (i) to (vii) of clause (1) indicate that the Legislature intended to include in salary the specified or named amount paid to the employee in respect of the services rendered by him. Sub-clause (iv) of clause (1) provides for inclusion of four types of payments in the word '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 considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Legislature again uses the expression "includes" immediately after the expression "profits in lieu of salary" to include any amount of compensation due 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. Sub-clause (ii) refers to any other payment other than payments which are excluded under the clause itself, due to or received by an assessee from his employer or former employer or from the provident fund to the extent to which such payment does not consist of contributions of the assessee or interest on such contributions. Under sub-clause (i) of section 17(3) of the Act, the amount of compensation due to or received by an assessee from his employer at or in connection with the termination of his employment is regarded as "profits in lieu of salary". The key words are, "any compensation due to or received by an assessee from 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) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to leave the services of his employer. The next pre-requisite under section 17(3) of the Act is that the compensation that is due or received by the assessee from his employer or former employer must be in connection with the termination of his employment or modification of the terms and conditions of the employment. At this stage, we are required to focus on the expressions "at or in connection with the termination of employment or the modification of the terms and conditions of employment". The word "termination from employment" has different shades of meaning. In Service Law Jurisprudence, the words "termination from service" is understood as cessation of jural relationship of employer and employee based on the provisions of terms of service or the rules or regulations. When a termination is made in accordance with the contractual terms or the rules, it is known as "termination simpliciter". Termination from service could be by way of compulsory retirement, voluntary 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 rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t need not be at the instance of the employer only. It would cover cases of voluntary retirement of an employee under a scheme framed by the employer. The apex court in the case of CIT v. E.D. Sheppard [1963] 48 ITR (SC) 237 (SC), has observed that even the cases of "voluntary separation" are covered by the scope and connotations of the expression "termination from service". The Supreme Court in the case of Santosh Gupta v. State Bank of Patiala [1980] 56 FJR 594; AIR 1980 SC 1219, has noticed that the term "termination" embraces not merely the act of termination by the employer, but the fact of termination howsoever produced. The Madras High Court in the case of CIT v. J. Visalakshi [1994] 206 ITR 531 has observed that the termination of service can take place either by resignation or by dismissal or by compulsory retirement or on attaining superannuation. There is no justification to confine the meaning of the word "termination" only to cases of either voluntary retirement or 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 "termina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination of his employment whether solely as compensation for loss of employment or for any other consideration. When the Income-tax Act, 1961, was introduced in the year 1962, there is a significant omission of the words, compensation for loss of employment or for any other consideration as found in Explanation 2 to section 7 of the Indian Income-tax Act, 1922 in sub-clause (i) of clause (3) of section 17 of the Act." In P. Arunachalam v. CIT [2000] 241 ITR 827, the Madras High Court has stated: "The provisions of section 17(3)(i) of the Act are clear that any compensation received at or in connection with the termination of the employment by its employer, is liable to be treated as profit in lieu of salary. It is not disputed that the amount received is compensation and it was received by the assessee from his employer in connection with the termination of his employment. The conditions prescribed under section 17(3)(i) of the Act are fully satisfied in this case and the amount 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an assessee is computed by the Assessing Officer in the manner prescribed under rule 21A of the Rules. The relief to be granted under section 89(1) of the Act shall be, where any portion of the assessee's salary is received in arrears or in advance, in accordance with the provisions of sub-rule (2); where the payment is in the nature of gratuity in respect of past services of the assessee extending over a period of not less than five years, in accordance with the provisions of sub-rule (3); 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); where the payment is in commutation of pension, in accordance with the provisions of sub-rule (5); and where the payment is not in the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, cannot be accepted. The submission of learned counsel that once the employee receives the benefit under the voluntary retirement scheme, he enters into a separate agreement with the respective employer and sheds all his rights under statutory regulations, in our view, has neither any legal foundation nor is envisaged under the Service Law Jurisprudence. The voluntary retirement scheme that is floated by the bank is an option given to an employee during the tenure of his service. If the offer to permit to retire from service is made and is accepted by the employer, apart from other terminal benefits, an ex gratia amount is paid and it has all the characteristics of compensation amount paid at the time of termination of employment. May be at the most by introducing the voluntary retirement scheme, a new service condition might be brought into effect by an executive order or by issuing a circular and would remain in force as long as it is not repealed or till the time stipulated in the instruction 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 prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luntary retirement scheme is not an arrear or advance of salary, not a gratuity, pension or compensation in connection with the termination of service envisaged under rule 21A of the Rules, but comes under "profits in lieu of salary" under the inclusive provisions of sub-clause (iv) of clause (1) of section 17 of the Act and is assessable under the head "Income from salaries" and, therefore, the assessee is not entitled for the relief under section 89(1) of the Act. According to the assessing authority, section 10(10C) of the Act read with rule 2BA of the Rules speaks of voluntary retirement or voluntary separation and not "termination" from service. The assessing authority, in our view, was wholly unjustified in arriving at this conclusion. Section 10(10C) was inserted by the Finance Act, 1987, with effect from April 1, 1987, to exempt from income-tax any payment received at the time of his voluntary retirement by an employer in accordance with any scheme which the Central Government may having 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 compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any payment received by an employee from the employer specified in the section at the time of his voluntary retirement from service in accordance with any scheme approved by the Central Government. The scheme itself provides that the amount so paid is "ex-gratia" amount for seeking voluntary retirement from service and its acceptance by the employee. Therefore, this reasoning of the assessing authority also cannot be accepted by us. Thirdly, the assessing authority observes in his order that the exemption for payment of income-tax can be claimed by the assessee under section 10(10C) of the Act only once in view of the second proviso appended to the section. In our view, the second proviso prohibits an employee receiving the exemption under section 10(10C) of the Act more than once. The reason being simple, rule 2BA of the Rules, which prescribes certain conditions for a scheme of voluntary retirement, prohibits an employer for filling up the vacancies caused after accepting the option exercised 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the sum of Rs. 25,000 is the salary calculated for the twelve month notice period as per the terms of contract and the said sum was compensation for loss of employment and the tax amounting to Rs. 7,103-15-0 should be refunded to him. This claim was rejected by the Income-tax Officer and in the order of assessment passed, he held that the sum of Rs. 25,000 is a revenue receipt and the same is liable to be taxed under the provisions of the Income-tax Act. The assessee was successful in convincing the first appellate authority, who held that though a sum of Rs. 25,000 was calculated on the basis of twelve times his monthly salary, the same is nothing but compensation for loss of service and therefore, not taxable as income in the shape of salaries. This view was reversed by the Tribunal by holding that the amount paid to the assessee is a salary in lieu of twelve months notice and, therefore, the amount was liable to be taxed under the provisions of the Income-tax Act. Before the apex court, 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 capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the assessee retires from service on attaining the age of superannuation. If that were to be his conclusion, possibility could have been that the assessee by offering to retire from service voluntarily under the scheme, there was no loss of service, since he was fully compensated with the salary he would have earned during the remaining years of service. Even that also may not be possible because during the remaining years of service, there could be possibility of enhancement of salary and he would be deprived of all that, since he has opted out of service prematurely. Therefore, in the present case, the employee of the bank by offering to take the benefit under the scheme and its acceptance by the employer, there is loss of service of the employee and the amount paid in this regard can be characterised only as "compensation for loss of service." Learned counsel for the Revenue has also placed reliance on the observations made by the apex court in the case of CIT v. E.D. Sheppard [1963] 48 ITR (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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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