2003 (2) TMI 46 - HC - Income Tax

Claim for exemption - In this case the petitioner-appellants were subjected to voluntary retirement pursuant to a Voluntary Retirement Scheme (Scheme) by the employer respondent. The scheme appears at page 21 of the paper book (annexure B to the writ petition). The respondent authority had been deducting tax at source under the provisions of section 192 of the Income-tax Act, 1961. This seems to have been clarified by the employer through annexure C at page 24 of the paper book. This has since been challenged by the employees association, the petitioners/appellants, as not chargeable to tax in view of clause (10C) of section 10 of the Income-tax Act. Held that, It is a deferred payment of the benefit receivable under the voluntary retirement scheme. Therefore, it would not be payment of salary outside the scope of section 10(10C). The characteristic cannot be changed because of stretching over the period of payment of dues under the scheme.

Issues Involved:
1. Conflict between the Voluntary Retirement Scheme (VRS) and Rule 2BA of the Income-tax Rules, 1962.
2. Tax exemption eligibility under Section 10(10C) of the Income-tax Act, 1961.
3. Applicability of the second proviso to Section 10(10C).
4. Estoppel due to acceptance of the scheme with modifications.

Detailed Analysis:

1. Conflict between the VRS and Rule 2BA of the Income-tax Rules, 1962:
The court examined the respondents' contention that the VRS did not conform to Rule 2BA. The court concluded that the scheme was in compliance with Rule 2BA. Specifically, the court noted that the prohibition of re-employment within the same management as stipulated in the scheme was consistent with Rule 2BA. Additionally, the court found that the benefits provided under the scheme, such as the monthly benefit based on a percentage of basic pay and dearness allowance, did not conflict with the requirements of Rule 2BA. The court held that the scheme was not in conflict with Rule 2BA and thus fell within the scope of Section 10(10C).

2. Tax exemption eligibility under Section 10(10C) of the Income-tax Act, 1961:
The court interpreted the term "amount received" under Section 10(10C) to mean compensation payable on account of cessation of employment, excluding terminal benefits like provident fund, gratuity, and leave encashment, which an employee is entitled to upon cessation of employment regardless of the VRS. The court emphasized that Section 10(10C) was intended to make voluntary retirement attractive and should be interpreted in a manner beneficial to the employee. The court concluded that only the monthly benefit under clause 4.1(i) of the scheme, to the extent it does not exceed Rs. 5 lakhs, qualifies for exemption under Section 10(10C).

3. Applicability of the second proviso to Section 10(10C):
The court examined whether the second proviso to Section 10(10C), which limits the exemption to one assessment year, would apply to payments stretched over multiple years. The court held that the liability to pay under the scheme was incurred at the time of voluntary retirement, making the amount chargeable to tax under Section 15(a) as soon as it became due, though not paid. Therefore, the exemption under Section 10(10C) applies to the entire amount receivable under clause 4.1(i) of the scheme, even if the payment is spread over multiple years. The court concluded that the deferred payment of the benefit under the scheme retains its character as exempt under Section 10(10C).

4. Estoppel due to acceptance of the scheme with modifications:
The court rejected the argument that employees were estopped from claiming tax exemption under Section 10(10C) because they accepted the scheme with modifications. The court stated that what is not otherwise taxable cannot become taxable due to the assessee's admission or waiver. Chargeability to tax is determined by the charging section and cannot be altered by the assessee's acceptance of modifications. The court cited the decision in CIT v. Bhaskar Mitter to support this view.

Conclusion:
The appeal succeeded to the extent that the amount receivable under clause 4.1(i) of the scheme, up to Rs. 5 lakhs, qualifies for exemption under Section 10(10C). The respondents were directed to adjust the tax already deducted and refund any balance to the employees. The court did not grant a stay on the judgment's operation, noting the long period provided for refunds.

← Previous Next →