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Income Tax Appellate Tribunal, DELHI BENCH “F” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
ORDER
PER I.C. SUDHIR: JUDICIAL MEMBER The assessee has questioned revisional order passed by Learned CIT on the following grounds:
1. That the Learned CIT-XV, New Delhi has erred in law and facts of the case in passing the order dated 03.03.2011 under sec. 263 of the Income-tax Act, 1961. The order of assessment made under sec. 143(3) dated 16.10.2008 at income of Rs.1,17,391 was not erroneous order, therefore, the action of the Learned CIT-XV, New Delhi under sec. 263 is uncalled for and the order passed u/s. 263 deserved to be cancelled.
2. That the Learned CIT-XV, New Delhi has wrongly and illegally directed the Assessing Officer to make addition of Rs.5,00,000 in 2 the income of the assessee by not allowing exemption of Rs.5,00,000 under sec. 10(10C) of the Income-tax Act, 1961 which was righty allowed by the Assessing Officer in his order dated 16.10.2008 passed under sec. 143(3) of the Income-tax Act, 1961.
Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
The facts in brief are that the assessee-appellant during the year under consideration was having salary income being head of account in Cambridge Primary School, New Delhi run by a society for the advancement of education. The assessee had received gratuity, leave encashment and compensation as well due to compulsory early retirement. The assessment was framed under sec. 143(3) of the Income-tax Act, 1961 and the returned income was accepted. The Learned CIT invoking the provisions of sec. 263 of the Act issued notice there under and being not satisfied with the cause shown by the assessee held the assessment order as erroneous and prejudicial to the interest of Revenue. The Learned CIT set aside the assessment order with the direction to the Assessing Officer to revise the order by disallowing the claim of deduction amounting to Rs.5 lacs allowed
3 under sec. 10(10C) of the Act. This action of the Learned CIT has been questioned by the assessee on the above grounds.
In support of the grounds, the Learned AR submitted that assessee was appointed as senior accountant in Cambridge Sr. Secondary School, Srinivaspuri, New Delhi on 30.8.1999. The said school is an unaided school recognized by the CBSE and governed by the Delhi Education Act, 1972. It is bound to follow Directorate of Education Rules and Regulations including implementing of government pay scales and other rules regarding provident fund, gratuity, leave travel concession etc. After completing one year probation on the post, the assessee was issued a fresh appointment letter on 01.09.2000 designated the assessee and head of account (Head Clerk) and this post exists in government school. In January 2005, the assessee was transferred to another branch of Cambridge Preparatory School, New Rohtak Road, New Delhi. As per the assessee, the state transfer was illegal and hence he approached the Hon'ble Delhi High Court. The Hon'ble High Court was pleased to protect the status and service of the assessee by its order, that preparatory school cannot terminate the services of the assessee, as the management of dispute was different from that of original appointee management in Srinivaspuri School. Due to harassment by the school to the 4 assessee, the assessee accepted the offer of the school to resign from his service. The issue was settled and the management offered voluntary retirement compensation of Rs.5 lacs to the assessee. If the assessee would not have sought early voluntary retirement, he would have retired in the year 2025. The post of the assessee as head clerk was recognized by the Directorate of education as a permanent post. The management agreed that the assessee should be compensated with early voluntary retirement and Rs. 5 lacs in lieu thereof was paid as a settled amount to the assessee. This settlement between the school management and the assessee was duly recorded by the Hon'ble High Court to avoid any further litigation and counter claims by either party in whatsoever circumstances. The assessee filed his income-tax return and the said sum of Rs. 5 lacs was included in Form 16 duly attached with the return of income. The employer had deducted an amount of Rs.1,36,950 as TDS. When the assessee reminded the management of the school regarding the settlement scheme for grant of compensation, the assessee was told that the TDS had to be deducted by them as per rules and the assessee should apply for a refund as the amount was under a mutually agreed VRS settlement. 4.1 The Learned AR submitted further that the assessee had submitted all the necessary information and documents whatever asked by the Assessing
5 Officer during the course of assessment proceedings for the assessment year 2007-08. Being fully satisfied about the facts of the case, the Assessing Officer framed assessment under sec. 143(3) of the Act on 16.10.2008 by accepting the return of income filed by the assessee besides making addition on account of saving bank interest. The Assessing Officer also issued the refund as the assessee was assessed as per the said assessment order. The Learned AR contended merely because the Learned CIT is having different opinion on a particular income/exemption cannot be a basis for invocation of the provisions laid down under sec. 263 of the Act for the revision of the assessment order. It is not the case of the Learned CIT that assessee had concealed any material facts of the case from the Assessing Officer during the assessment proceedings. The claim of the assessee as exempted income of the compensation received on compulsory retirement was duly accepted by the Assessing Officer while passing the assessment order under sec. 143(3) within the provisions of sec. 10(10C) of the Income-tax Act. The Learned AR submitted that section 10(10C) of the Act uses the expression “any amount received by an employee at the time of his voluntary retirement in accordance with any scheme or schemes of voluntary retirement. Rule 2BA of the I.T. Rules is mean for guidelines for the purpose of sec. 10(10C) of the Act. Rule 2BA was inserted by IT(16th amendment) Rules 1992 with 6 intention to make voluntary retirement more attracted and beneficial to the employees opting for voluntary retirement. Therefore, it has to be interpreted in a manner beneficial to the optee for voluntarily retirement. The Learned AR contended that when there is specific decision and the common interpretation is that the act has to prevail over the rule Rules are procedural which can be amended or which require be amended on allowing reasonable opportunity.
4.2 The Learned AR further contended that if two views are possible while interacting the provisions, a view which is favourable to the assessee has to be adopted. He submitted that the Hon'ble Calcutta High Court in the case of SAIL DSP (V.R employees Association 1998 vs. Union of India (2003) – 262 ITR 638 (Cal.) has been pleased to hold that the provisions of sec. 10(10c) are t o be interprettred liberally in a manner which is beneficial to retired employee. He placed reliance of the following decisions: i) CIT Sourastra Cement Ltd. (2010) – 325 ITR 422 (SC); ii) Anunbhai R. Naik vs. ITO, /tax appeal No. 23 of 2004- judgment dated 12.10.2015 (Hon'ble Gujarat High Court iii) CIT vs. Sharda Sinha – 471 ITR (2003) – order dated 22.12.2015 (Delhi High Court).
7 5. The Learned CIT(DR) on the other hand placed reliance on the revisional order in question. He submitted that the decisions cited by the Learned AR having distinguishable facts are not helpful to the assessee. He submitted that the assessee was not eligible for claiming exemption under sec. 10(10C) of the Act as he was not fulfilling all the conditions laid down under Rule 2BA of the Income-tax Rules.
After having gone through the above cited decisions by the Learned AR, we find that in the case of Arun Bhai R. Naik Vs. ITO (supra) almost similar facts were there as in the case of assessee before us. The question raised before the Hon'ble High Court was as to “whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that the amount of Rs.3,51,308 received by the appellant in accordance with the High Court’s judgment was income liable to tax under sec. 17(3) of the Income-tax Act, 1961?”.
6.1 In the above case before the Hon'ble Gujarat High Court, the Assessing Officer noted that assessee had received an amount of Rs.3,51,308 being ex gratia compensation on premature cessation of his services. In the foot note of the return of income, the assessee has stated that since neither
8 the terms of employment nor the service rules of the company provide for making ex gratia payment, this claim as capital receipt is not liable to tax as the same is not paid as retrenchment compensation either under labour laws or under the terms of the employment. The matter ultimately reached to the Hon'ble High Court and the Hon'ble High Court after discussing the issue in detail has decided the issue in favour of the assessee holding that the ITAT was not justified in arriving to the conclusion that the amount of Rs.3,51,308 received by the assessee pursuant to the judgment of the Hon'ble High Court was income liable to tax under sec. 17(3) of the Act. The relevant para Nos. 10 to 13 of the decision of the Hon'ble Gujarat High Court in the above stated case of Arun Bhai R. Naik vs. ITO (supra) are being reproduced hereunder: “10. This court is in agreement with the view adopted by the Calcutta High Court and the Delhi High Court in the above decisions The question that arises in the aforesaid legal backdrop is whether the payment received by the appellant - assessee from his employer was a voluntary payment given by the employer or was it in the nature of compensation. As noticed earlier, the Managing Director of Gujarat State Fertilizers Company Limited, viz., the company where the assessee was employed, passed an order dated 6th May, 1984 discharging the assessee from service under rule 44 of the Service Rules which provides for discharge of an employee for sufficient reasons by the competent appointing authority after giving three
9 months’ notice in writing in that behalf or by payment of three months’ basic pay and Dearness Allowance as in force from time to time in lieu of such notice. Against the order of termination, the assessee preferred an appeal to the higher authority in the company, but did not succeed. He, therefore, approached this court by way of a writ petition under Article 226 of the Constitution of India being Special Civil Application No.5039/1984 challenging the discharge. The said petition came to be allowed by the learned Single Judge holding that (1) the employer was a State within the meaning of Article 12 of the Constitution, and (2) the order of discharge was by way of a punishment and the assessee was entitled to reinstatement of his services. The employer challenged the order in letters patent appeal before a Division Bench of this court, which held that the employer - Gujarat State Fertilizer Company Limited was not a State or authority under Article 12 of the Constitution and allowed the appeal. However, the court recorded the agreement arrived at between the parties as reproduced hereinabove and disposed the appeal in terms of the agreement. It is pursuant to the above agreement that the amount in question came to be paid to the appellant.
Thus, the assessee’s services came to be terminated by the order dated 6th May, 1984 under rule 44 of the relevant Service Rules after giving three months’ pay. Therefore, insofar as the obligation of the employer to pay any amount to the assessee in relation to the termination of his services, the same came to an end in view of the discharge of his services under rule 44. While the assessee succeeded 10 in the writ petition filed by him, the letters patent appeal preferred by the employer came to be allowed. Therefore, the discharge of the assessee’s services by the employer attained finality. However, during the pendency of the letters patent appeal, the assessee and the employer arrived at a settlement, in terms whereof, the amount was to be computed in the manner stated therein and was to be paid to the assessee. Therefore, the services of the assessee came to be terminated in terms of the rules, and the amount in question was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee in terms of the service rules. The employer, voluntarily at its discretion, agreed to pay the amount in question to the assessee with a view to bring an end to the litigation. There was no obligation cast upon the employer to make such payment and, therefore, the same would not take the colour of compensation as envisaged under section 17(3)(i) of the Act. The amount in question would, therefore, not fall within the ambit of the expression “profits in lieu of salary” as contemplated under section 17(3)(i) of the Act.
It has been contended on behalf of the revenue that the manner of computation of the amount to be paid to the appellant under the settlement, reveals that the same is in the nature of terminal benefits on account of bringing an end to the services of the appellant. In the opinion of this court, the manner of computation of the amount payable to the assessee in terms of the settlement, would not change the character of the payment, inasmuch as, the same being voluntary in nature and without any obligation on the part of the employer, would not amount to compensation in terms of section 17(3)(i) of the 11 Act. The Tribunal was, therefore, not justified in holding that the amount of Rs.3,51,308/- received by the appellant pursuant to the judgment of the High Court was income liable to tax under section 17(3) of the Act.
The question stands answered accordingly, in favour of the appellant assessee and against the revenue. The appeal is accordingly allowed. The impugned order passed by the Tribunal is hereby quashed and set aside and the order passed by the Commissioner (Appeals) deleting the addition made by the Assessing Officer is, hereby restored”.
In the above decision of the Hon'ble Gujarat High Court, a reference of the decision of Hon’ble jurisdictional High Court of Delhi in the case of CIT vs. Deepak Verma (2011) – 339 ITR 475 (Del.) has also come. The Hon'ble Gujarat High Court has been pleased to note the observation of Hon'ble Delhi High Court in the above cited case on the word “compensation”. The Hon'ble Delhi High Court has been pleased to observe that the word “compensation” is not defined under the Income-tax Act, 1961. Therefore, one has to take into consideration the ordinary connotation of this expression in common parlance. The court after referring to the dictionary meaning of “compensation” observed that it is clear that when the payment is to be received as “compensation”, the employee would have a right to receive such payment. If the employee has no right, it cannot be treated as 12 “compensation”. The court held that it is for this reason that if the payment is made ex-gratia or voluntarily by an employer out of his own sweet will and not conditioned by any legal beautify or legal obligation, whether on sympathetic reasons or otherwise, such payment is not to be treated as “profit in lieu of salary” under clause (i).
6.2 The ratio laid down by the Hon'ble Delhi High Court in the case of CIT vs. Sarda Sinha (supra) is also helpful to the assessee in the present case. In that case, before the Hon'ble High Court, the question raised was “whether the ITAT was correct in law in holding that the compensation of Rs.53,82,000 received by the assessee from the German Publisher was a capital receipt not chargeable to tax under Income-tax Act, 1961?”
The Hon’ble Court concur with the conclusion of the Learned CIT(Appeals) that the sum paid to the assessee was “to compensate for the abrupt loss of source of income” and that the termination of contract had fatally injured the appellant’s only source of income for the last 20 years. The mere fact that the assessee was free to earn through other sources would not make a difference to this position. The question was thus answered in affirmative that in favour of the assessee and against the Revenue.
6.3 When we examine the facts of the present case before us in view of the ratios laid down in the above cited decisions, we find substance in the contention of the Learned AR that a possible view to treat the compensation of Rs.5 lacs received by the assessee from its employer was not liable to tax under sec. 17(3) of the Income-tax Act, 1961 was certainly there. Hence, it cannot be said that the assessment order allowing exemption on the said receipt of Rs.5 lacs was erroneous and thus prejudicial to the interest of Revenue as well. We thus while setting aside order in question passed under sec. 263 of the Act restore the assessment order granting the above relief on the receipt of Rs.5 lacs as compensation. The grounds involving the issue of validity of revisional order passed under section 263 of the Act are accordingly allowed.
In result, the appeal is allowed. Order pronounced in the open court on 16.08.2016
( L.P. SAHU ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 16/08/2016 Mohan Lal