1995 (10) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of encashment of unavailed leave at the time of retirement under the Income-tax Act, 1961.
2. Applicability of Section 89(1) of the Income-tax Act for relief on encashment of leave salary.

Detailed Analysis:

1. Taxability of Encashment of Unavailed Leave:

The primary issue in this case was whether the sum of Rs. 22,730 received by the assessee on account of encashment of unavailed leave at the time of retirement was taxable under the Income-tax Act, 1961. The assessee, an individual who retired from Madras Fertilizers Ltd., received this amount upon retirement and included it in his income return, claiming it should be spread over several years under Section 89(1) of the Act. The Income-tax Officer disallowed this claim, treating the entire amount as taxable in one year.

The Appellate Assistant Commissioner upheld the Income-tax Officer's decision, stating that the encashment of leave is a benefit derived from employment and thus constitutes salary. The assessee's appeal to the Appellate Tribunal resulted in the Tribunal concluding that the encashment of leave salary is not income and, therefore, not taxable under Section 17(3) of the Act before the amendment.

The Tribunal provided several reasons for its decision:
- Encashment is not a pensionary benefit or retirement benefit.
- The amount received has no direct connection to the employment.
- The accumulated leave is an asset that can be encashed or not.
- The receipt of the encashment is non-recurring and not a certainty.

However, this view was challenged by the Revenue, which argued that the encashment of leave salary falls under Section 17(3)(ii) of the Act and is taxable as profit in lieu of salary. The Revenue cited the Andhra Pradesh High Court's decision in M. Krishna Murthy v. CIT, which held that encashment of leave salary is taxable as it is a recompense for services rendered and not a casual, non-recurring receipt.

The Karnataka High Court in Patil Vijaykumar v. Union of India and the Allahabad High Court in All India Defence Accounts Association, In re: Shailendra Kumar v. Union of India also held that encashment of leave salary is taxable as profit in lieu of salary under Section 17(3)(ii) of the Act.

The High Court of Madras, considering these precedents, concluded that the Tribunal was incorrect in holding that encashment of leave salary is not income chargeable under the Act. The Court held that the encashment of leave salary is profit in lieu of salary and is taxable under Section 17(3) of the Act prior to the amendment.

2. Applicability of Section 89(1):

The assessee alternatively claimed relief under Section 89(1) of the Act, which allows for spreading the income over several years to mitigate the tax burden. The Tribunal had initially rejected this claim, stating it was not tenable.

However, the High Court noted that if the encashment of leave salary is considered taxable, the assessee should be allowed to seek relief under Section 89(1). The Court directed that if the assessee makes such a request, the Tribunal should consider it on its merits, in accordance with the law, and after giving the assessee a proper opportunity to be heard.

Conclusion:

The High Court of Madras answered the question in the negative and in favor of the Department, holding that the encashment of leave salary is taxable as profit in lieu of salary under Section 17(3) of the Income-tax Act, 1961. The Court also allowed the assessee the opportunity to seek relief under Section 89(1) if such a request is made.