TMI Blog1980 (4) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2 to s. 7(1) of the Indian I.T. Act, 1922. However, it appears that the Legislature did not then intend to bring commuted pension to tax, for, s. 23 of the Finance (No. 2) Act, 1965, declared : " Notwithstanding anything contained in the Indian Income-tax Act, 1922 (11 of 1922), any sum due to or received by any person in commutation of pension shall not be included and shall be deemed never to have been includible in computing the total income of such person under the provisions of that Act." The language of s. 17(3) of the I.T. Act, 1961, corresponds to that of Expln. 2 to s. 7(1) of the 1922 Act but the Finance (No. 2) Act of 1965, introduced a limited exemption regarding commuted pension with retrospective effect from April 1, 1962, the date of commencement of the 1961 Act. The exemption, couched in guarded language is in respect of: Section 10(10A)(i): " Any payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner would be entitled to pro rata pension and death-cum-retirement gratuity based on the length of his qualifying service in the Government till the date of permanent absorption in the ONGC under the normal rules applicable to Govt. servants. However, cl. (v) proceeded to say: " (v) The officer will exercise an option, within six months of the date of issue of this letter, for either of the alternatives indicated below (a) Receiving the pro rata monthly pension and death-cum-retirement gratuity as admissible under clauses (ii), (iii) and (iv) above under the Government of India Rules; (b) Receiving the pro rata gratuity and a lump sum amount in lieu of pension worked out with reference to commutation tables obtaining on the date from which pension will be admissible and Payable under option orders." (Underlining ours). Clause (vi) stated that the petitioner would be eligible for family pension to the extent permissible under the Central Civil Services (Pension) Rules, 1972 (hereinafter referred to as the " Pension Rules ") and other Govt. orders bearing on the subject. Clause (viii) stated: " In case Sri Karunakaran opts to receive pension as in para. (v)(a) but wish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly owned or controlled by the Government or in or under a body controlled or financed by the Government shall, if such absorption is declared by the Government to be in the public interest, be deemed to have retired from service from the date of such absorption and shall be eligible to receive retirement benefits which he may have elected or deemed to have elected, and from such date as may be determined, in accordance with the orders of the Government applicable to him: Provided that the Government shall have no liability for the payment of family pension in such a case : Provided further that no declaration regarding absorption in the public interest in a service or post in or under such corporation, company or body shall be required in respect of a government servant whom the government may by order, declare to be a scientific employee. 37A. Payment of lump sum amount to persons on absorption in or under a corporation, company or body.-(1) Where a Government servant referred to in rule 37 elects the alternative of receiving the death-cum-retirement gratuity and a lump sum amount in lieu of pension, he shall, in addition to the death-cum-retirement gratuity, be granted : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rules accordingly which, as noted earlier, was done on April 9, 1973, with the benefit covering all cases of retirement after July 24, 1971. The above position regarding taxability was also reiterated in a memorandum issued by the same Ministry on April 13, 1973, explaining the newly introduced r. 37A and, again, in a memo issued on April 8, 1976. (3) After the above memo of 1971 became operative, the question of taxability of the lump sum received by such an employee came up for consideration before the Bombay Bench of the Tribunal in Murlidharan's case, earlier referred to, and was decided in November, 1974, holding in favour of complete exemption. Since this decision would affect a large number of cases, the Central Board of Revenue had to take a decision whether it should be accepted or taken up on reference to the High Court. On May 20, 1976, it seems, the Board decided to accept the decision " as laying down the correct position in law ". This appears from a letter of the Commissioner of Income-tax dated September 10, 1976 (placed before us by the counsel for the appellant) which proceeds further to direct the ITO not only to apply the decision in future but also to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 757 (Delhi)] accepted the contention of the respondents. It appears that before the learned judge it was the common case of the parties that the payment made under cl. (a) of r. 37A(1) of the Pension Rules is exempt from tax and that the dispute was as to whether the terminal benefit, in addition to the above payment, to which the petitioner was entitled under cl. (b) of the said rule would also qualify for exemption. Further, it was also not disputed that " rule 37A was added primarily to introduce uniformity in the matter of exemption under s. 10(10A) of the Income-tax Act, because, but for this rule, the entire amount in lieu of pension receivable by a civil servant on absorption would be exempt from tax while the exemption in the case of an ordinary retiring civil servant would be confined to the commuted value of one-third of the pension ". The argument for the writ petitioner appears to have been that while the payment under cl. (a) was exempt under the opening words of s. 10(10A)(i) " as a payment in commutation of pension received under the Commutation Rules of the Central Government " the payment under cl. (b) would be exempt under one of the other categories mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smissed. Realising, perhaps, the inherent weakness of the arguments addressed on behalf of the writ petitioner before Anand J., Shri 0. P. Vaish, counsel for the appellants, took a different line of argument before us. He contended that it was not correct to break up and consider the two components of the payment under r. 37A, treating one as a payment under the Commutation Rules and the other as some other payment in the nature of terminal benefit. His argument was that the Commutation Rules applied to a person only when he retired in the normal course and was permitted to commute 33 1/3 or 50% of the pension, as the case may be. Persons in the position of the present appellant, who exercised the option for lump sum payment, were not governed by these rules but were governed by different but similar scheme envisaged by rr. 37 and 37A of the Pension Rules. Such a person was permitted to commute the entirety of his Pension. This was partly by way of concession given to him in view of the fact that he is forced to retire from service much earlier than he would have normally retired and partly intended to enable the Government to square up once and for all the accounts of an employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Rules or the death-cum-retirement gratuity plus a lump sum in lieu of pension. In other words, the employees are either governed by the Commutation Rules or by the alternative, but similar, scheme of r. 37A. In the latter case, they cannot be said to be governed by the Commutation Rules which permit the commutation only of a part of the pension. To say that they are governed by the Commutation Rules in part for purposes of cl. (a) and not governed by them so far as cl. (b) is concerned is to introduce an artificial dichotomy into a straight alternative provided between two different schemes. Secondly, full effect should be given to the use of the words " lump sum in lieu of pension " in the main part of the rule. Clauses (a) and (b) only provide that this lump sum is to be computed in two stages. The first stage is to calculate the lump sum which the employee would have been entitled to receive had he been commuting one-third of the pension on the basis of the Commutation Rules. In other words, the reference to the commutation rules is only to provide the measure of the lump sum payable under cl. (a). The effect of it is not that the employee would be governed by the Commutati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some difficulty may be felt in placing the above construction by reason of the memoranda dated July 24, 1971, April 13, 1973, and April 8, 1976, which indicate that the intention of the Government was that only the amount calculated under cl. (a) should be eligible for exemption. It has also been argued for the respondent that the bifurcation by r. 37A itself of the lump sum contemplated to be paid under it has no meaning except in the context of such an intention. We have, however, come to the conclusion, after some thought, that this should no stand in the way of the acceptance of the contention urged on behalf of the appellant. In the first place, the rule-making authority may well have thought that, since the normal practice was to commute only one-third of the pension, it would be easier to describe the lump sum payable by reference to this amount instead of using more involved language which may give rise to difficulties. Secondly, the memoranda only express the Government's interpretation of the impact of r. 37A on the issue of income-tax exemption and cannot be considered conclusive. Thirdly, the Government itself was speaking in two voices about the scope of the exemption, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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