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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM:
These appeals filed by the Revenue are directed against the different orders of
the CIT(A), Kottayam dated 03/09/2018 and pertain to the assessment years 2016-
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 17 and 2017-18. The assessee has also filed Cross Objections in C.O. Nos. 01 &
02/Coch/2019.
The Revenue has raised the following common grounds of appeal:
The order of the Learned Commissioner of Income Tax (Appeals), Kottayam in ITA No.KT-15/CIT(A)/KTM/2017-18 dated 03-09-2018 is opposed to law, facts and evidences of the case.
The learned Commissioner of Income Tax (Appeals) has erred in deleting the demand raised u/s 201(1) & u/s 201 (1A) of the IT Act, 1961 amounting to Rs.59,65,182/-.
The learned Commissioner of Income Tax (Appeals) erred in holding that university employees were to be considered as government employees and were therefore eligible for exemptions under sections 10(10)(i), 10(10A)(i) and 10(AA)(i).
The learned Commissioner of Income Tax (Appeals) overlooked that employees of a university are not holders of civil posts and are therefore not government employees.
The learned CIT(Appeals) erred in treating University as part of "State" even though the Income Tax Act in several sections such as section 192(2A) and section 10(10C) clearly distinguishes a university from government.
The Learned CIT(Appeals) overlooked that employees of Universities are neither recruited by the State PSC nor paid from the consolidated fund of the State Government. They are employees of the University and not of the Government.
The Learned CIT(Appeals) overlooked that a University does not perform any sovereign function of the State; rather a university is a product of a statue of the State. 8. The Learned CIT(Appeals) overlooked that definitions of 'government1 such as those available in General Clauses Act does not include a university as part of the government.
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 9. The Ld. CIT(A) overlooked that in State of Maharashtra & Ors. vs. Nowrosjee Wadia College & Ors., the Hon’ble Supreme Court has held that teachers of universities and affiliated colleges are not government employees.
The facts of the case are that the assessee is a University established under the
Mahatma Gandhi University Act, 1985 passed by the Kerala Legislature. The
Assessing Officer during the course of enquiry noticed that the assessee was
discharging the TDS liability on the payments made to employee on the Death cum
Retirement Gratuity (DCRG), Commutation of Pension and leave salary after
allowing exemption provided u/s. 10(10)(iii), 10(10A)(ii) and 10(10AA)(ii) of the Act.
The Assessing Officer rejected the arguments of the assessee that the assessee is
covered under the definition of “State”. According to the Ld. AR, section 192(2A)
of the Income Tax Act, for TDS purposes, has clearly mentioned an employee of the
University separately from a Government servant. The section starts as, "where the
assessee, being a Government Servant or an employee in a company, cooperative
society, local authority, university, institution,....". This clearly emphasises the
legislative intention to treat the University as a separate entity than State or local
authorities. Further, as per the explanation to Section 192(2A),
"University" means a University established or incorporated by or under a Central,
State or Provincial Act...... Nowhere in the Income Tax Act, the University
has been classified under Government. The Assessing Officer observed that
the Income Tax Act clearly distinguishes a University from State Government or
Central Government as is evident from section 10(10C) of the Income tax Act, which
is reproduced here under:- 3
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 "10. In computation of the total income of a previous year of any person, any income falling within any of the following clauses shall not be included.
[(10C) any amount received (or receivable] by an employee of— (i) a public sector company ; or
(ii any other company ; or
(iii) an authority established under a Central, State or Provincial Act; or
(iv) a local authority ; or
(v) a co-operative society ; or
(vi) 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, (3 of 1956) ; or .
(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or
(viia) any State Government; or
(viib) the Central Government; or
(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette sppecify in this behalf; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf; or [on his] [voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in sub-clause (i), a scheme of voluntary separation, to the extent such amount does not exceed five lakh rupees:
Provided that the schemes of the said companies or authorities or societies or Universities or the Institutes referred to in sub-clauses (vii) and (viii)], as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed:
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 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 relation to any other assessment year:
Provided also that where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other, assessment year;
3.1 According to the Assessing Officer, in section 10(10C), the University find
separate place other than the State/Central Government etc. Even though the
above section i.e. Section 10(10C) of the Income tax Act, 1961 has no direct nexus
with the present issue, it provides a meaningful insight that an employee of a
central or a state Government is totally different from the employee of a University
established or incorporated by or under a Central, State or Provincial Act or other
bodies for income tax purposes. If that would not have been, the case, there was
no need to incorporate the university as separate entity than the central or state
Government. Therefore, according to the Assessing Officer, it was crystal clear that
the status of the University is neither that of a State/Central government nor its
employees are the employees of Central government.
3.2 The Assessing Officer relied on the judgment of the Supreme Court in the case
of Shashikant Laxman Kale & Anr Vs Union Of India 185 ITR 104 wherein the Court
upheld the constitutional validity of Section 10(10C) which gives distinct treatment
to public sector and private sector employees on the plea of violation of article 14
and held that the provision to be neither discretionary nor arbitrary. The Assessing 5
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 Officer relied on the judgment of the Supreme Court in the case of Mafatlal
Industries Vs Union of India (1997) 5 SCC 536 that the legislature can make
reasonable discrimination and make a choice in respect of districts, objects,
persons, methods and even rates of taxation.
3.3 The Assessing Officer was of the view that when there is specific provision &
separate treatment provided for in the Income Tax Act to tax the retirement
benefits of the University employees than the Government servants, Article 12,
which deals with the fundamental rights is not attracted. Therefore, the Assessing
Officer reiterated that the assessee cannot be treated as part of Government and
the employees of Mahatma Gandhi University do not fall under the category of
Government Employees and as such the exemptions available to the Government
employees will not be applicable to the University employees. Hence, TDS is to be
made on taxable portion of the payment of DCRG, Commutation of pension & leave
salary. The Assessing Officer passed the order u/s. 201(1) and 201(1A) of the Act
raising the demand of Rs.59,65,182/-.
On appeal, the CIT(A) held that the assessee is to be treated as “State” for the
purpose of application of TDS provisions by relying on the decision of the ITAT,
Delhi in the case of Ram Kanwar Rana in ITA No.1307/Del/2016 dated 16/06/2016
wherein it was held as under:
I have heard the rival submissions and perused the relevant material on record. The controversy in this appeal can be viewed separately in respect of receipt of gratuity amount and leave encashment. In so far as the addition on 6
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 account of gratuity received by the assessee amounting to Rs.6,50,000/- is concerned, it is found that the case of the assessee is that this amount falls u/s 10(10)(i) of the Act. On the contrary, the Revenue has treated it as a case falling u/s 10(10)(iii). In order to appreciate the rival contentions in right perspective, it will be apposite to set out the relevant parts of section 10, as under :-
`(10) (i) any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, 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 persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of gratuity received under the Pension Code or Regulations applicable to the members of the defence services ;
(ii).....
(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs,subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government :
.....
Provided further that where any such gratuity or gratuities was or were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this clause shall not exceed the limit so specified as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.’
A careful perusal of the above provision indicates that if a case falls under clause (i) of section 10(10), the entire amount of death-cum-retirement gratuity becomes exempt. Au contraire, if a case falls under sub-clause (iii) of section 10(10), then, the exemption is limited to the amount as the Central Government 7
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 may notify in official gazette. It is an accepted position that the Notification u/s 10(10)(iii) issued on 24.5.2010 raised the ceiling of exemption from Rs.3,50,000/- to Rs.10 lac. Since the original amount was received by the assessee during the currency of an earlier year on his retirement, the exemption limit prevalent at that time at Rs.3,50,000/- was used by the assessee. It is nobody’s case that the extended limit of exemption can be applied to the assessee, because of his retirement which took place much before the cut-off date. To be more specific, the question is as to whether the extant case falls under clause (i) or clause (iii) of section 10(10). If a case does not fall under clause (i), it will automatically go to clause (iii). On a specific query from the Bench, the ld. AR submitted that the case of the assessee should be considered under sub-clause (i) of section 10(10) as a ‘holder of civil post under a State.’ In order to construe any person as a holder of civil post under a State, two requirements must be fulfilled viz., first that the employee should be holding a civil post and, second, such civil post must be under a State.
The first condition is that the employee should be holding a civil post. The assessee was appointed as a Research Assistant in December, 7 1971, who eventually rose to the post of Head of Department, Plant Breeding Department at the time of his retirement. Page 32 of the paper book is copy of the assessee’s Pension Payment Order, which depicts the assessee’s designation as Sr. Scientist, Department of Plant Breeding. On the ‘Pensioner’s Portion’ of this document, there is a reference to Rule 10, 11 and note thereunder of Civil Services Rules (CSR) V.II. As the assessee’s pension has been computed under Civil Services Rule, it goes to show that the assessee was holding a ‘civil post’ at the time of his retirement. No other contrary material has been placed on record by the ld. DR to show that the assessee was holding a post other than civil post.
The second requirement is that such civil post must be under a State. Page 20 of the paper book is a copy of Haryana and Punjab Agricultural University Act, 1970, which was passed by the Parliament and received the assent of the President on 2nd April, 1970. Under this Act of Parliament, two independent agricultural universities in place of the hitherto Punjab Agricultural University, were established. Section 5 of this Act sets out the name of CCSU as the agricultural university to function within the territories of State of Haryana. This proves that the CCSU was established by an Act of Parliament. Page 29 of the paper book is a document which shows that the assessee is a State University covered under University Grants Commission (UGC). It is undisputed that the entire funding of the CCSU is done by the State Government. Page 25 is a copy of Notification issued by the Haryana Government increasing the maximum limit of death-cum-retirement gratuity at Rs.10 lac, under which the assessee has received the arrears of retirement gratuity under this scheme only. The above facts amply demonstrate that CCSU is covered under the expression ‘State.’ This is further corroborated from Article 12 of the Constitution of India which states that: ‘In this part, unless the context otherwise requires, ‘the State’ includes the 8
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 Government and Parliament of India and the Government and the legislature of each of the States either local or other authorities within the territory of India or under the control of the Government of India.’ The expression ‘other authorities’ has been interpreted in Umesh v. Singh A 1967 Pat. 3(9) F.B. as including: ‘a Board, a University, the Chief Justice of a High Court, having the power to issue rules, bylaws or regulations having the force of law.’ The above discussion manifests that CCSU is covered within the meaning of ‘State’.
As the assessee is found to be an employee holding a civil post under a State, in my considered opinion, the provisions of section 10(10)(i) are fully attracted in this case entitling him to exemption for the amount under consideration. Once a case falls under clause (i) of section 10(10), the same cannot be brought within the purview of clause (iii) of section 10(10). I, therefore, hold that the assessee is entitled to exemption u/s 10(10)(i) in respect of gratuity amount received in total upto Rs.10 lac, which covers a sum of Rs.6,50,000/- received during the year. Overturning the impugned order on this score, I allow exemption u/s 10(10)(i) to the arrears of gratuity received by the assessee at Rs.6,50,000/- during the instant year.
As regards the second amount of Rs.1,88,720/- received by the assessee during the year towards the arrears of leave encashment, it is noticed that the assessee claimed exemption u/s 10(10AA)(i) which was refused by the AO by holding the case to be covered under sub-clause (ii) of section 10(10AA). The ld. CIT(A) affirmed the view taken by the AO on this point, thereby denying the benefit of exemption in respect of the arrears of leave encashment received during the year.
I have heard the rival submissions and perused the relevant material on record. The ld. AR submitted that there is not much difference in the language of section 10(10)(i) and 10(10AA)(i) and the view taken in respect of arrears of gratuity u/s 10(10) should be followed for arrears of leave encashment u/s 10(10AA). The ld. DR supported this proposition. As both the sides are consensus ad idem on the position that the view taken in the context of section 10(10) as applicable to leave gratuity be followed here in the context of section 10(10AA) in the context of leave encashment, I am desisting from independently examining the later provision. In view of the fact that I have held the assessee to be entitled to exemption u/s 10(10)(i) in respect of arrears of gratuity, following the same, I extend the benefit of 11 exemption u/s 10(10AA)(i) in respect of arrears of leave encashment. This ground is allowed.”
4.1. The CIT(A) also relied on the decisions of the ITAT, Delhi in the case of Dr.
S.B. Kalidhar in ITA No.1087/Del/2016 dated 28/09/2016 and Raghubir Singh
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 Panghal in ITA No. 1308/Del/2016 dated 16/06/2016 wherein it was held that leave
encashment paid to employees of University formed under a Central Act was
exempted u/s. 10(10AA)(i) of the Act. Thus, the CIT(A) held that the assessee is to
be treated as “State” for the purpose of application of TDS provisions.
Against this, the Revenue is in appeal before us. The Ld. DR relied on the order
of the Assessing Officer.
The Ld. AR submitted that the assessee, Mahatma Gandhi University was
established as per the Mahatma Gandhi University Act 1985 passed by the Kerala
Legislature and hence is a statutory body formed by an Act of the State legislature.
It was submitted that as per the Act and Statutes, the Government of Kerala
exercises direct control over the financial and administrative matters of the
university and the Governor of Kerala is the Chancellor of the University, who shall
appoint the Vice Chancellor of the University. It was submitted that the University
was created by the State Government to discharge one of its sovereign function of
imparting higher education in the State. The Ld. AR referred to the preamble to
the MG University Act, 1985, which states as follows:
"WHEREAS it is considered necessary to establish a new teaching and affiliating University in the State to provide for the urgent development of higher education in the areas comprised in the Kottayam, Ernakulam and Idukki revenue districts, the Kuttanad taluk of the Alleppey revenue district and the Kozhencherry, Mallappally, Thiruvalla and Ranni taluks of the Pathanamthitta revenue district of the State;".
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 6.1 Further, the Ld. AR submitted that the university was established by the
government as an autonomous institution, (like RBI, SEBI, ISRO, C&AG, IRDA. TRAI
etc.) to deliver the services that the government had approved as part of its policy
frame work. It was submitted that it is a government organization and the
government frames the policy and autonomous institutions implement it. It was
submitted that the income of the University is exempt u/s 10(23C)of the Income
Tax Act. According to the Ld. AR, the State Government exercises power in
appointing staff to posts in the University. The Statute and the State Government
ensured that the recruitments to all non teaching posts were filled through selection
conducted by the State Public Service and the senior administrative posts such as
Registrar, Controller of Examinations and Finance Officer were also selected by the
Government.
6.2 It was submitted that the first statute passed by the Legislature ensured that
the service conditions are managed in accordance with the provisions of the Kerala
Service Rules, 1959, Kerala State and Subordinate Service Rules 1958 and the
Government Servants Conduct Rules, 1960. Statute 40 of Chapter 4 of the MGU
Statute 1997 brings the employees under the ambit of Kerala Public Servants
(inquiries) Act 1963.
6.3 The Ld. AR referred to Para 78 of the MG University Act which states as
follows:
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 "Reservation of appointments.-In making appointments by direct recruitment to posts in any class or category under the University or to posts of non- teaching staff in the University, the University shall mutates mutandis observe the provisions of clauses (a), (b) and (c) of rule 14 and rules 15, 16, 17 and 17A of the Kerala State and Subordinate Service Rules, 1958, as amended from time to time."
According to the Ld. AR, as stated in Part II if the Mahatma Gandhi University
statutes 1997, the employees belonging to Classes I and II shall have the status of
Gazetted Officers of the Kerala Government Service and accordingly, the pay of the
employees of the university is fixed and also revised in accordance with and at par
with pay revision of the state government employees. It was submitted that the
employees of this university are also governed by the Kerala Government Pension
Rules. These Rules are the same as the Central Civil Services (Pension) Rules 1972
(CCS Pension Rules 1972). The salary, pension and retirement benefits are paid
from the consolidated fund of the state government and the grant for payment of
salary and retirement benefits are provided by the Legislature through the budget of
the State. The amount is specifically provided under the head 'salaries' in the state
budget which was placed on record. Thus, there exists an employer employee
relationship between the 'payer' and 'payee' i.e. the government and the employee.
It was submitted that the state government retains complete and direct control over
the expenditure of the university. The salary, pension and retirement benefits were
directly credited to the account of the employees by the Treasury Officer.
6.4 The Ld. AR referred to Article 12 of the Constitution of India which reads as
follows: 12
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 "Definition In this part unless the context otherwise requires, the State includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India".
The definition paraphrased is as under:
a) The Government and Parliament of India;
b) The Government and the Legislature of each of the States;
c) All local and other authorities within the territory of India; and
d) All local and other authorities under the control of the Government of India.
It was submitted that the assessee had been allowed exemption on these payments
while estimating the income of the employees for all the prior years which were
accepted by the department.
6.5 It was submitted that the CIT(A) had considered two requirements which
must be fulfilled as per Section 10(10) ie. first that the employee should be holding
a civil post and second such civil post must be under the State. As regards the first
point, the CIT(A) stated that in the pension payment order of one of the employees
of the appellant, in the ' Pensioner's portion' there was a reference to Rule 10,11
and note thereunder to the Civil Services Rules. The Ld. AR submitted that as the
employee's pension is under the Civil Services Rules , it showed that the employee
was holding a 'civil post' and no contrary material has been placed on record by the
Ld. DR to show that the employee holds a post other than a civil post. As regards
the second requirement, the CIT(A) stated that in the case of CCSU which is a 13
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 University formed by an Act of Parliament was held to be covered under the
expression 'State'. Article 12 of the Constitution of India includes 'other authorities'
under the definition of the word "State". It was submitted that the word" Other
authorities has been interpreted in Umesh vs. Singh A 1967 Pat. 3(9) F.B. to include
'a Board, University, The Chief Justice of a High Court, having powers to issue rules,
bylaws or regulations having the force of law'. Hence it was concluded that the
employee of the assessee was an employee holding a civil post under the State.
The Ld. AR submitted that consequently, the view taken for Section 10(10)(i) was
extended to Section 10(AA)(i) stating that there was not much difference in the
language of the both the sections and hence, the view taken with regard to section
10(10) was to be followed for section 10(10AA). The CIT(A) relied on the decision
of ITAT, Delhi SMC Bench, in the case of Ram Kanwar Rana cited supra and allowed
the appeal of the assessee.
6.6 It was submitted that the Supreme Court while interpreting the expression
“other authorities” in the case of Som Prakash Rekhi vs. Union of India AIR 1981 SC
212 had culled out certain tests to determine as to when a Corporation should be
said to be an instrumentality or agency of the Government. The Ld. AR
summarised the tests laid down by the Apex Court with regard to how the
conditions are satisfied in the case of the assessee as follows:
a) If the entire share capital of the corporation is held by the Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of the Government.
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 The University is formed under a State Act and the revenue nd capital requirements of the University is allotted from the State Budget by the State Government as planned and unplanned expenditure.
b) Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality.
The creation and operation of the University is entirely based on a statute/Act that has been enacted by the State Government. The Financial and Administrative control over the University is with the State Government.
c) Whether the Corporation enjoys monopoly status which is State conferred or State protected.
Yes. The University enjoys monopoly status conferred by the State with respect to collegiate education and powers conferred on the university with respect to functions to be performed by it is exclusive and not available with any other agency or institution.
d) If the functions of the corporation are of public importance and closely related to governmental functions. It would be a relevant factor in classifying the corporation as an instrumentality or agency of the Government. The University is carrying out one of the State Government's function of imparting higher education and hence is of utmost public importance and closely related to the functions of the Government.
e) If a department of a Government is transferred to a corporation, it wou ld be a strong factor supporting this inference of the corporation being an instrumentality or agency of the Government."
The University is under the direct control of the Department of Higher Education of the Government of Kerala
6.7 It was submitted that the University falls under the category "Other
Authorities" in the definition of the State as per Article 12 of the Constitution of
India and it was to be treated as part of State for the purpose of exemption under
the Income Tax Act. The University is a constitutional / statutory authority on whom
powers are conferred by law. Reliance was placed on decision of the Supreme Court 15
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 in the case of Rajasthan State Electricity Board, Jaipur V Mohanlal (1967 AIR 1857)
wherein it was held that the Board formed under a Central Act is other authority as
per Article 12 of the Constitution and hence, is to be treated a State. The Ld. AR
submitted that exemption u/s. 10(10)(i) and 10(10A)(i) of the Act is available to
holders of civil posts under a “State”. It was the submission of the Ld. AR that it is a
State as defined in Article 12 of the Constitution since it falls under the category
“other authority” being an authority created by a statute. Reliance was also placed
on the decision of the ITAT, Pune in the case of Smt. Sapna Sanjay Raisoni vs ITO
(2016) 70 taxmann.com 7 (Pune-Trib.) wherein it was held that Maharashtra State
Electricity Board (MSEB) which was established under the Road Transport Act 1950
was considered State as per Article 12 of the Constitution and hence, payment to
MSEB would be exempted u/s. 40A(3) of the IT Act. The Supreme Court in the case
of Rajasthan State Electricity Board cited supra held that the words "other
authorities" occurring in Article 12 of the Constitution should be given their full
dictionary meaning. The expression 'other authorities' in Article 12 will include all
constitutional or statutory authorities on whom powers are conferred by law. Any
public authority created by the statute on whom powers are conferred by law must
be held to be a State irrespective of whether the functions of that authority are
sovereign functions or non-sovereign functions.
6.8 It was submitted that the department had taken a ground that since "state
government" and "university" are shown separately in section 10(10C) of the IT Act
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 and section 192(2A) of the IT Act, the words University and state government are
different and not same which has no merits for the following reasons:
In section 10(10C) what is contemplated is all employees of universities established under a state act are eligible for exemption even if such universities are not substantially funded by the Government of Kerala. Eg. Kerala University of Health Sciences is a university established under a State Act but not substantially funded by the Govt. of Kerala. Hence these are shown separately.
Under section 192(2A) of the Income Tax Act, a similar explanation is added as under Section 10(10C)of the Income Tax Act.
6.9 Notwithstanding the above, it was submitted that these employees are the
employees of the State Government and not of the M. G. University for the reason
that the salary is paid by the Kerala Government. Reliance was placed on the
decision of the ITAT Chandigarh in the case of ITO(TDS) vs. Supdtt. Engineer
wherein the employees of Bhakra Beas Management Board(BBMB) which is a
statutory body formed under the Punjab Reorganization Act were to be treated as
employees of the State Government since BBMB was functioning under the direct
control of the Government. The Ld. AR submitted that the assessee is also formed
under a State Act and is working under the direct supervision of the State Govt.
The Chancellor of the University is the Governor of Kerala and the Pro Chancellor is
the Education Minister of the State. All the administrative matters of the University
are controlled by the State Government.
6.9.1 Regarding decision of the Supreme Court in the case of State of Maharashtra
vs. Nowrosjee Wadia College & Others relied on by the Department, the Ld. AR
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 submitted that it is on a different context and facts. It was submitted that the facts
in the case of Nowrosjee Wadia College was that the decision was under the
Maharashtra Universities Act. In this case, the decision was on the validity of the
directives issued by the State Government and not on income tax. The question in
this case was whether the university teachers are employees of the government and
the question whether the university can claim reimbursement from government for
leave encashment paid to its employees. However, in the case of the assessee
herein, it is under the Mahatma Gandhi University Act. In the case of the assessee
herein, the question was on the provisions of the Income Tax Act. The question was
whether the university employees are employees of State. In the case of the
assessee herein, the State Government had already reimbursed all the benefits to
the employees of M.G. University by accepting that they are the employees of the
State.
We have heard the rival submissions and perused the record. The main
contention of the assessee is that the employees of the assessee are holding civil
posts under the State Government. As such, the provisions of section 10(10)(i),
10(10A) and 10(10AA) of the Act are applicable to the assessee’s case. Accordingly,
the assessee is not liable to deduct TDS on the payment of death cum retirement
gratuity, commutation of pension and leave salary to its employees. The issue to be
considered is whether the provisions of sections 10(10)(i), 10(10A) and 10(10AA) of
the Act are applicable or not. For this, two requirements must be fulfilled as per
section 10(10) i.e., first that the employee should be hold a civil post and second 18
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 such civil post must be under the State Government. The assessee herein Mahatma
Gandhi University was formed as per the Mahatma Gandhi University Act, 1985
passed by the Kerala Legislature and hence, it is a statutory body formed by an Act
of the State Legislature. As per the Act and Statutes, the Government of Kerala
exercises direct control over the financial and administrative matters of the
university and the Governor of Kerala is the Chancellor of the University, who shall
appoint the Vice Chancellor of the University. The University was created by the
State Government to discharge one of its sovereign function of imparting higher
education in the State.
7.1 The preamble to the MG University Act, 1985 states as follows:
"WHEREAS it is considered necessary to establish a new teaching and affiliating University in the State to provide for the urgent development of higher education in the areas comprised in the Kottayam, Ernakulam and Idukki revenue districts, the Kuttanad taluk of the Alleppey revenue district and the Kozhencherry, Mallappally, Thiruvalla and Ranni taluks of the Pathanamthitta revenue district of the State;".
7.2 The university was established by the government as an autonomous
institution, (like RBI, SEBI, ISRO, C&AG, IRDA. TRAI etc.) to deliver the services
that the government had approved as part of its policy frame work. It is a
government organization and the government frames the policy and autonomous
institutions implement it. The income of the University is exempt u/s 10(23C) of the
Income Tax Act. The State Government exercises power in appointing staff to posts
in the University. The Statute and the State Government ensured that the
recruitments to all non teaching posts were filled through selection conducted by 19
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 the State Public Service and the senior administrative posts such as Registrar,
Controller of Examinations and Finance Officer were also selected by the
Government.
7.3 The first statute passed by the Legislature ensured that the service conditions
are managed in accordance with the provisions of the Kerala Service Rules, 1959,
Kerala State and Subordinate Service Rules 1958 and the Government Servants
Conduct Rules, 1960. Statute 40 of Chapter 4 of the MGU Statute 1997 brings the
employees under the ambit of Kerala Public Servants (inquiries) Act 1963.
7.4 Para 78 of the MG University Act states as follows:
"Reservation of appointments.-In making appointments by direct recruitment to posts in any class or category under the University or to posts of non- teaching staff in the University, the University shall mutates mutandis observe the provisions of clauses (a), (b) and (c) of rule 14 and rules 15, 16, 17 and 17A of the Kerala State and Subordinate Service Rules, 1958, as amended from time to time."
7.5 As stated in Part II if the Mahatma Gandhi University statutes 1997, the
employees belonging to Classes I and II shall have the status of Gazetted Officers of
the Kerala Government Service and accordingly, the pay of the employees of the
university is fixed and also revised in accordance with and at par with pay revision
of the state government employees. The employees of this university are also
governed by the Kerala Government Pension Rules. These Rules are the same as
the Central Civil Services (Pension) Rules 1972 {CCS Pension Rules 1972). The 20
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 salary, pension and retirement benefits are paid from the consolidated fund of the
state government and the grant for payment of salary and retirement benefits are
provided by the Legislature through the budget of the State. The amount is
specifically provided under the head 'salaries' in the state budget which was placed
on record. Thus, there exists an employer employee relationship between the
'payer' and 'payee' i.e. the government and the employee. The state government
retains complete and direct control over the expenditure of the university. The
salary, pension and retirement benefits were directly credited to the account of the
employees by the Treasury Officer.
7.6 Article 12 of the Constitution of India reads as follows:
"Definition In this part unless the context otherwise requires, the State includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India".
The definition paraphrased is as under:
a) The Government and Parliament of India;
b) The Government and the Legislature of each of the States;
c) All local and other authorities within the territory of India; and
d) All local and other authorities under the control of the Government of India.
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 7.7 The word “Other Authorities” has been interpreted in Umesh vs. Singh A 1967
Pat. 3(9) F.B. to include a Board, University, The Chief Justice of a High Court,
having powers to issue rules, bye laws or regulations having the force of law. The
above decision provides that the assessee is covered under the expression ‘State’.
In our opinion, the employees of the assessee are found to be holding civil posts
under the State Government, therefore, the provisions of section 10(10)(i), 10(10A)
and 10(10AA) of the Act are fully attracted. Once the assessee falls under the
above provisions of the Act, the same cannot be subject to TDS. We, therefore hold
that payments made by the assessee to its employees towards death cum
retirement gratuity, commutation of pension or leave salary shall not be liable for
TDS to the extent permitted under the provisions of section 10(10)(i), 10(10A) and
10(10AA) of the Act. Accordingly, we confirm the order of the CIT(A) on this issue.
Hence, the appeals of the Revenue are dismissed.
C.O. Nos. 01 & 09/Coch/2019:Assessee
The assessee has raised the following common grounds in its Cross Objections:
1) If for any reason the appeal filed by the department is allowed in favour of the appellant, since the Respondent had deducted tax from the employees on the bonafide and honest belief that they are State Government employees, whether tax can be levied u/s.201 of the Income tax Act by treating the Respondent as an assessee is default.
2) Whether the responsibility to assess tax on the salary income of the assesssee is on the assessing officer of the employee concerned and whether the Respondent can be treated as an assessee in default for the reason that there is a legal interpretation regarding an item of payment made by the assessee to the employee.
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 9. There was delay of 25 days in filing the Cross Objection by the assessee before
the Tribunal. The assessee has filed a petition, accompanied by affidavit explaining
the reasons for delay in filing the Cross Objections before this Tribunal as follows:
The Petitioner is an University formed under the Mahatma Gandhi University Act.
Since the income of the University is fully exempt from tax u/s.10 of the Income tax Act, the University had not filed its return of income (except in few years when refund were due) and did not have any income tax consultant or a division on a regular basis. 3. For the Assessment years 2016-17 & 2017-18, the ITO (TDS) initiated proceedings u/s.201 and 201(1A) of the Income tax Act for the alleged short deduction of tax at source, vide orders dt.31/08/2017 and 31/01/2018
On appeal before the CIT(A), the order of the ITO (TDS) was reversed and the demand raised was cancelled, vide orders dt. 03-09-2018.
Department filed appeals before the Bench against the orders of the CIT(A), which are posted for hearing before the Bench on 27-02-2019.
The Petitioner was under the bonafide belief that no action is required on receipt of the notice and had engaged M/s. Varma & Varma, Chartered Accountants, Kochi, to enter appearance before the Bench.
The Petitioner is now advised that a Cross Objection u/s. 253(4) of the Income tax Act ought to have been filed within 30 days of the receipt of the notice.
The Petitioner had received the notice of filing the appeal on 04/01/2019 and hence the Cross Objection ought to have been filed on 03/02/2019. Consequently there is a delay of 24 days.
The delay was caused only due to ignorance of the requirement since the Petitioner is a charitable entity and is not benefitted by the advice of any consultant/expert on matters relating to income tax on a regular basis.
lt is respectfully prayed that the delay of 24 days may kindly be condoned and the Cross Objection may please be taken on record and disposed off on merits.
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 9.1 We have gone through the petition. We find that there is sufficient and
reasonable cause for delay in filing the Cross Objections. Accordingly, we condone
the delay of 25 days in filing the Cross Objections before the Tribunal and admit the
Cross Objections for adjudication.
Coming to the grounds in the Cross Objections, without prejudice to the above
appeals of the Revenue, the Ld. AR submitted that the provisions of section 201(1)
and 201(1A) of the Act are not attracted in the present case because non-deduction
of tax at source by the university is based on a bonafide estimate of the tax liability
of its employees. According to the Ld. AR, the obligation of the employer u/s 192 is
only to deduct tax on the estimated income of the Assessee under the head salaries
for that financial year. If the estimate is made bonafide and tax is deducted on such
bonafide estimate then there can be no proceedings u/s 201(1) and 201(1A),
treating the person responsible for deducting tax at the time of payment as
Assessee in default. As far as the assessee is concerned, his obligation is only to
make an "estimate" of the income under the head "Salaries" and such estimate has
to be bonafide estimate.
10.1 According to the Ld. AR, Section 192 of the Act uses the word" estimate" and
therefore the statutory intention is that it should be an approximation. The Ld. AR
placed reliance on the decision of the ITAT, Bangalore in the case of Karnataka
Power Transmission Corporation Limited (2019) 102 taxmann.com 245 (Bangalore
Trib.) wherein it was held that Section 192 used word 'estimate’ and, therefore, 24
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 statutory intention is that it should be an approximation. It was further held that
where the assessee was under bonafide belief that its employees were to be
regarded as employees of State Government and were entitled to exemption of
entire sum of unutilized leave encashment u/s. 10(10AA)(ii), it had discharged its
obligation u/s. 192 and, hence, proceedings u/s. 201(1) and 201(1A) deserved to be
quashed. It was submitted that the assessee is also under the bona fide belief that
its employees are State Government employees and has been deducting tax
accordingly u/s. 192 and filing its TDS return for all the past years.
10.2 The Ld. AR submitted that the primary liability of the payee to pay tax remains
and Section 191 confirms this. It was submitted that in a situation of honest
difference of opinion, it is not the deductor that is to be proceeded against but the
payees of the sums. Hence, it was submitted that no tax can be recovered from the
employer on account of short deduction of tax at source under section 192 if a
bonafide estimate of salary taxable in the hands of the employee is made by the
employer and the tax assessment of the employee has become invalid.
10.3 The Ld. AR placed reliance on the following decisions of the Tribunal wherein
the appellate authorities had taken a view that if tax is deducted based on a
bonafide estimate or if there is no observation that the estimate is not honest or
fair, the deductor cannot be held to be assessee in default u/s. 201(1). It was also
held that deduction of tax at source by an employer is always a tentative deduction
of income-tax subject to regular assessment in the hands of the payee/recipient: 25
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019
Business India Television International Ltd. vs. ACIT ([2007] 11 SOT 486 (Delhi).
Orient Paper & Industries Ltd. vs. CIT 12 Taxman 348 (MP)
JCIT vs. Nestle India Ltd. 109 Taxman 403 (Delhi)
Gwalior Rayon Silk Co. Ltd. vs. CIT 14 Taxman 99 (MP)
DCIT vs. Excel Industries Ltd (2006) 5 SOT 235 (Mum.)
Nishith M Desai vs. Income Tax Officer (TDS) (2006) 9 SOT 42 (Mum.)
CIT (TDS) vs. Oracle India Pvt Ltd (2013) 37 taxmann.com 327 (Bangalore -Trib.).
ACIT vs SAP Labs India Pvt Ltd ([2013] 36 taxmann.com 200 (Bangalore -Trib.)
ACIT(TDS) vs. Infosys BPO (2013) 37 taxmann.com 53 (Bangalore -Trib.)
CIT vs Kannan Devan Hill Produce Co. Ltd (1987) 30 Taxmann 460 (Ker.).
Aligarh Muslim University vs. Income Tax officer(TDS), Aligarh (2017] 83 taxmann.com 364 (Agra-Trib.))
P.V Rajagopal vs. Union of India ((1998) 99 taxman 475 (AP).
ACIT (TDS) vs. CISCO Systems Asia Services (2013) 38 Taxmann.com 381 (Bangalore-Trib.)
ACIT vs. Thomson Corporation (International) Pvt Ltd. (2013) 37 taxmann.com 383(Bangalore -Trib).
Karnataka Power Transmission Corporation Ltd. (2019) 102 taxmann.com 245 (Bangalore Trib.)
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 The Ld. AR submitted that there has been no observation by the ITO that the
estimate of salary made by the assessee was not honest or fair. Also, the assessee
had deducted tax on the basis of a bonafide estimate of the salary of its employees.
11 The ld. DR relied on the order of the Assessing Officer.
We have heard the rival submissions and perused the record. We are of the
view that the facts and circumstances of the present case are identical to the case
of Indian Institute of Science vs. DCIT in ITA No.1589/Bang/2014 dated 27/02/2015
for the AY 2010-11 decided by the ITAT, Bangalore. In the said case, the issue was
with regard to deduction of tax at source u/s.192 of the Act on the rent free
accommodation provided to employees of a statutory corporation such as the
assesses. The assesses in that case took similar plea of bonafide belief as raised in
the case of Karnataka Power Transmission Corporation Ltd. (102 taxmann.com
245)(Bangalore Trib.) in the present proceedings. The Tribunal considered the
submissions and firstly found that the law on the issue of bonafide belief in the
matter of estimating of income under the head "salaries" for the purpose of
Secc.192 of the Act, was explained in a decision of ITAT Bangalore in the case of
ACIT Vs. lnfosys BPO Ltd. 150 ITD 132/53 CCH 602 (Bang) in the following manner:
“26. It is no doubt true that TDS is to be made at the time of payment of salary and not on the basis of salary accrued. Sec. 192(3) of the Act permits the employer to increase or reduce the amount of TDS for any excess or deficiency. We have already noticed that the fact that bills/evidence to substantiate incurring of expenditure on medical treatment up to Rs.15,000/- and the availing of the LTC by the employees and the fulfilment of the conditions contemplated by Sec. 10(5) of the Act for availing exemption by the employees so availing LTC, have 27
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 not been disputed by the AO. Even assuming the case of the AO, that at the time of payment the Assesses ought to have deducted tax at source, is sustainable; the Assessee on a review of the taxes deducted during the earlier months of the previous year is entitled to give effect to the deductions permissible under proviso (iv) to Sec. 17(2) or exemption u/s.10(5) of the Act in the later months of the previous year. What has to be seen is the taxes to be deducted on income under the head 'salaries ' as on the last date of the previous year. The case of the AO is that LTC and Medical reimbursement should be paid at the time the expenditure is incurred or after the expenditure is incurred by way of reimbursement and not at an earlier point of time. If it is so paid, then, even though the payment would not form part of taxable salary of an employee, the employer has to deduct tax at source treating it as part of salary, is contrary to the provisions of Sec. 192(3) of the Act and cannot be sustained. The reliance placed by the AO on the expression "actually incurred" found in Sec. 10(5) of the Act and proviso (iv) to Sec. 17(2) of the Act, in our view cannot be sustained. In any event, the interpretation of the word "actually paid" is not relevant while ascertaining the Quantum of tax that has to be deducted at source u/s.192 of the Act. As far as the Assessee is concerned, his obligation is only to make an "estimate" of the income under the head "salaries" and such estimate has to be a bonafide estimate.
The primary liability of the payee to pay tax remains. Section 191 confirms this. In a situation of honest difference of opinion, it is not the deductor that is to be proceeded against but the payees of the sums. To reiterate, the payment towards medical expenditure and leave travel is made keeping in view the employee welfare. The exclusion in respect of payment towards medical expenditure and leave travel is considered after verifying the details and evidence furnished by the employees. No exemption is granted in the absence of details and/or evidence. The exemption in respect of medical expenditure is restricted to expenditure actually incurred by the employees, or Rs. 15,000/- whichever is lower. The exemption is granted even if the payment precedes the incurrence of expenditure. The requirements/conditions of section 10(5) and proviso to section 17(2) are meticulously followed before extending the deduction/exemption to an employee. No tax can be recovered from the employer on account of short deduction of tax at source under section 192 if a bona fide estimate, of salary taxable in the hands of the employee is made by the employer, is the ratio of the following decisions…………………………”.
12.1 In the present case, as pointed out by the Ld. AR, there has been no
observation by the Assessing Officer with regard to estimate of salary made by the
assessee. Further, the assessee has deducted tax on the basis of bona fide
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019 estimate of the salary to its employees. The various case laws cited by the
assessee also supports the contentions of the assessee. In view of the above
decisions of the Tribunal, if tax is deducted based on a bonafide estimate or if there
is no observation that the estimate is not honest or fair, the deductor cannot be
held to be assessee in default u/s. 201(1). Thus, in our opinion, deduction of tax at
source by an employer is always a tentative deduction of income-tax subject to
regular assessment in the hands of the payee/recipient. Accordingly, the Cross
Objections filed by the assessee are allowed.
In the result, the appeals of the Revenue are dismissed and the Cross
Objections of the assessee are allowed. Order pronounced in the open Court on this 14th May, 2019
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi Dated: 14th May, 2019 GJ Copy to: 1. Mahatma Gandhi University, Priyadarsini Hills P.O., Kottayam-686 560. 2. The Income Tax Officer(TDS), Kottayam. 3. The Commissioner of Income-tax(Appeals), Kottayam. 4. The Pr. Commissioner of Income-tax, Kottayam. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order
(ASSISTANT REGISTRAR) I.T.A.T., Cochin
I.T.A. Nos.555&556/Coch/2018 & C.O. Nos. 01&09/Coch/2019