2009 (7) TMI 1255 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to tax exemption u/s 10(10C) of the Income Tax Act, 1961 for compensation under the Optional Early Retirement Scheme (OERS) of RBI.
2. Validity of reassessment proceedings initiated by the Assessing Officer.
3. Compliance of OERS with Rule 2BA of the Income Tax Rules, 1962.

Summary:

1. Entitlement to Tax Exemption u/s 10(10C):
The primary issue was whether the petitioners, ex-employees of the Reserve Bank of India (RBI), were entitled to tax exemption for compensation up to Rs. 5 lakhs under the Optional Early Retirement Scheme (OERS). The petitioners argued that the OERS was a voluntary retirement scheme and thus eligible for tax exemption u/s 10(10C) of the Income Tax Act, 1961. The court noted that the scheme was indeed voluntary and the term "early" was superfluous. The petitioners had claimed this exemption in their tax returns for the financial year 2003-2004, which was initially accepted by the tax authorities.

2. Validity of Reassessment Proceedings:
The Assessing Officer later issued notices u/s 148 of the Income Tax Act, alleging that the petitioners' income had escaped assessment. This was based on a circular from RBI, which, relying on an opinion from M/s. Choksi & Co., Chartered Accountants, claimed that the OERS did not comply with Rule 2BA of the Income Tax Rules. The court found that there were no new materials before the Assessing Officer except the RBI circular, which had no binding value. The court held that the opinion of a Chartered Accountant or RBI could not be grounds for reassessment.

3. Compliance with Rule 2BA:
The court examined whether the OERS complied with Rule 2BA of the Income Tax Rules, 1962. It found that the OERS met the requirements of Rule 2BA, including clauses (i), (iii), and (iv). The scheme applied to employees who had completed over ten years of service and were over forty years of age, aimed at reducing overall employee strength, and did not contemplate filling vacancies caused by voluntary retirement. The court referenced a composite decision of the Income Tax Appellate Tribunal, which had ruled in favor of the assessees, confirming that the sums in question were exempt u/s 10(10C) up to Rs. 5 lakhs.

Conclusion:
The court allowed the writ application, setting aside and quashing the impugned assessment orders. It held that Section 10(10C) of the Income Tax Act, 1961, was applicable to the OERS introduced by RBI, and the petitioners were entitled to the tax exemption claimed. The court also noted that the orders of the Tribunal and Commissioner (Appeals) in favor of the assessees were binding on the Assessing Officer.