Although all those who take premature retirement from the central government services are entitled to 100 per cent exemption from income tax on their retirement benefits, there was a Rs 500,000 ceiling in the case of employees opting for voluntary retirement schemes from public and private sectors enterprises.

But, there is some good news for them.

The Income Tax Appellate Tribunal, in a recent order, has held that such private sector employees opting for VRS are also eligible for relief under Section 89(1) over and above Rs 500,000 which is exempt under Section 10(10C) of the Income Tax Act.

Giving relief under section 89(1) involves spread-over of the VRS amount to three assessment years with a consequential tax relief. ITAT has held that the assessee was indeed eligible for relief under section 89(1) and merely because the assessee was allowed exemption under section 10(10C), this relief could not have been declined to the assessee.

It was further held that the amount received by an employee, under voluntary retirement scheme, is nothing but 'compensation on termination of service' for the purposes of the IT Act.

The assessee was in the employ of Union Bank of India, and in the relevant previous year, the assessee received a sum of Rs 7,50,592 as an ex-gratia amount (i.e. VRS compensation) on account of leaving employment under the VRS package.

While filing the income-tax return, the assessee claimed, inter-alia, exemption of the ex-gratia amount to the extent of Rs 500,000, under section 10(10C) of the Act, and also relief under section 89(1) in respect of ex-gratia amount received in excess of Rs 500,000.

The assessee's claim was that the exemption for ex-gratia amount received as VRS compensation was available up to Rs 500,000 only, the balance amount was subject to normal taxability which, inter alia, meant admissibility of relief under section 89(1), if otherwise eligible.

It was further pleaded that the requirements of section 89(1) as also rw. 21A and 21AA were fully satisfied in his case. The AO was, however, not impressed and he rejected the claim by observing as follows:

"In this case, the assessee has opted for voluntary retirement scheme of the bank and the ex-gratia amount received will qualify for exemption under section 10(10C) of the Act up to Rs 500,000. Rule 21A states that the relief under section 89 is to be allowed after 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 AO. Aggrieved, assessee carried the matter in appeal before the CIT(A) who reversed the action of the AO by observing as follows:

"I have carefully considered the submissions of the counsel of the appellant and also the reasons given by the AO 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 section 89(1). Section 10(10C) speaks about the total exemption from income-tax of the compensation received up to Rs 500,000."

"The balance of amount if any, over the above the exemption limit of Rs 500,000 is taxable in the hands of the appellant as profit in lieu of salary under section 17(3). Since this amount is to be taxed under the head 'salary,' the same is also entitled for all relief/deductions available for computation of income under that head. There is nothing either in section 10(10C) or in section 89(1) that make them mutually exclusive. They are two independent sections and as contended by the appellant's counsel that none of the them are worded in such a fashion as to deprive the benefit of the other section. The provisions contained in section 10(10C) and section 89(1) of the IT Act are quite independent from each other and there is no overlapping in this regard.''

The Bench further observed that "It has been held by the Supreme Court in the case of CIT Vs. Kalu Valley Transport Co. (P) Ltd. (2002-TAXINDIAONLINE-169-SC-IT), that if the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, the construction which favours the assessee must be adopted. If two view are possible, the view favourable to the assessee must be adopted. If two views are possible, the view favourable to the assessee must be accepted while construing the provisions of a taxing statute. In the case of the appellant, I am of the considered opinion that section 10(10C) and relief under section 89(1) are both available. As regards applicability of proviso to section 10(10C), relied upon by the AO, is concerned, the same prohibits the assessee in claiming the similar exemption in subsequent or any other assessment years. In other words, the assessee can claim exemption under section 10(10C) only once in his life time and no one can claim the same exemption on receipt of compensation or otherwise in future."

"Accordingly, in my opinion, the AO is not justified in denying the relief under section 89(1) of the IT Act to the appellant. The AO is directed to compute the total income of the appellant by allowing appropriate relief under section 89(1) of the IT Act, 1961."

Revenue relied upon the Board's instructions contained in letter F. No. 174/5/2001-ITA, dated April 23, 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 r. 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 receipts ; (c) in case of commutation of pension; (d) in case of compensation received on termination of service; and (e) in any other case when the CBDT so decided. It was further pointed out that admittedly the case before us, (a), (b), (c) and (e) above are not applicable which leaves us with only cl. (d) above which pertains to "compensation received on termination" of service 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 cl. (3) section 17 is a profit in lieu of salary", his income is "assessed at a rate higher than that at which it would otherwise have been assessed, the AO shall, on an application made to him in this behalf, grant such relief as may be prescribed."

A plain reading of this provision makes it clear that it is sufficient for the eligibility of relief under section 89(1) that:

- the assessee has received a payment which, under the provisions of section 17(3), constitutes 'profit in lieu of salary' ; and

- as a result of assessee' having received the aforesaid 'profit in lieu of salary' his income is assessed at a rate higher than the rate at which it would otherwise have been assessed.

ITAT observed that as far as the amount being in the nature of "profit in lieu of salary" is concerned, it is not even in dispute that the VRS compensation received is taxed by the Revenue as a profit in lieu of salary because in the impugned assessment order, the AO himself has taxed it so. Under section 17(3)(i) 'profit in lieu of salary' includes, inter alia, the following receipts by an assessee:

(i) the amount of any compensation due to or received by an assessee from his employer or former employer at, or in connection with, termination of his employment or the modification of the terms and conditions relating thereto:

The aforesaid provisions of section 17(3)(i) are in pari materia with the provisions of Expln. 2(i) to section 7 of the IT Act, 1922, which provided as follows:

For the purpose of this section, 'profits in lieu of salary' includes:

(i) the amount of any compensation due to or received by an assessee from his employer or former employer at, or in connection with, the termination of his employment; whether solely as compensation for loss of employment or for any other consideration.

It is thus clear that barring the deletion of words "whether solely as compensation for loss of employment or for any other consideration" and insertion of words "or the modification of the terms and conditions relating thereto", which have no material bearing in the present context, the provisions of Expln. 2(i) to section 7 in 1922 Act and provisions of section 17(3)(i) of the 1961 Act are similar in effect.

ITAT did not 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 under in Expln. 2 to section 7 in 1922 Act. It held that "in the case of CIT Vs. Visalakshi (2003-Taxindiaonline-64-HC-MAD-IT), the Madras High Court has observed that "the question whether the assessee is entitled to relief under section 89(1) would depend on the interpretation to be placed on the words "termination of employment' occurring in sub-clause (3)(i) of section 17 of the Act" and that "it is necessary to bear in mind that termination of service can take place either by dismissal or by compulsory retirement or on attaining superannuation."

In this background their Lordships then expressed the view that "there is no justification to confine the meaning of the word "termination" only to the cases of either voluntary retirement or superannuation, as is the stand taken by the Department". Their Lordship then held that the ex gratia amount received by the assessee even on his resignation constitutes 'compensation on termination of service' and is eligible for relief under section 89(1)."

The Tribunal held that "in case an assessee is allowed an exemption under section 10(10C) in one assessment year, such an assessee is not entitled to exemption under section 10(10C) in any other assessment year. In other words, the benefit under section 10(10C) is a one time benefit. In their wisdom, legislature has used the expression "no exemption thereunder shall be allowed. . . in relation to any other assessment year", and the words 'thereunder' unambiguously refers to section 10(10C). As a matter of fact, it is difficult for us to comprehend as to what is the relevance of this proviso for the purpose of relief under section 89(1).

Section 10(10C) and section 89(1) are two different sections and the reference is specifically for section 10(10C). In any case section 89(1) does not grant an exemption. the distinction between an 'exemption' and a 'relief' cannot be ignored or just washed away.

Even if these restrictions be said to be desirable for proper working of the section and in harmony with the intent of legislature, as is strenuously argued by the learned senior departmental representative, it is not open to us to supply the casus omissus (broadly refers to the principle that a matter which has not been provided in the statute but should have been there, cannot be supplied by us, as, to do so will be clearly beyond the call and scope of our duty which is only to interpret the law as it exists)."

As J Rowlatt has said, in Cape Brady Syndicate vs. IRC 1 KB 64, "In a taxing statute, one has to look merely at what is clearly said ; there is no room for any intendment. . ." The temptation of resorting to a rather creative process of an aggressive interpretation of statutes, which allows us to read between the lines, therefore, must be resisted. Even as we say so, we are also of the view that, in any event, there is nothing between the lines to justify such an interpretation either. The only effect of exemption under section 10(10C) is that to the extent of Rs 5,00,000, as is specified in section 10(10C), VRS compensation received by the assessee does not from part of the total income, but once the balance amount is eligible to tax under section 17(3), all other consequences under the Act, including eligibility to relief under section 89(1), follows."

See full text of Judgement in 2004-Taxindiaonline-28-Itat-Panaji in Legal Corner

Powered by