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2022 (8) TMI 1232 - HC - Income TaxRecovery of amount not deducted as TDS from the retired employee - Benefit of exemption u/s 10(10AA)(i) - surrender of leave salary (SLS) - petitioners are employees of the Tamil Nadu Agricultural University (University/TNAU) - employees had retired from service in the year 2017 and at the time of retirement had been granted SLS - Audit objections issued by local fund audit calling upon the petitioners to remit income tax on surrender of leave salary (SLS) on the ground that tax has not been deducted at source in terms of the Income Tax Act, 1961 - HELD THAT - There are vital distinctions between the employers in that case and that in the present one. Firstly, PSUs are constituted under the provisions of the Companies Act, 1956, whereas, the Tamil Nadu Agricultural University is constituted under a State enactment coming directly within and under the control of the State. PSUs are independent companies and regulation by the Government is restricted. As far as Banks are concerned, the regulatory agency is the Reserve Bank of India. TNAU is managed, administered and substantially funded out of Government funds and grants, while PSUs are commercially run companies and have independent sources of revenues. So too with Banks that have a direct source of revenue. The TNAU is administered and managed by Regulations framed by the Statute and relatable to State power. This is not the case with PSUs and banks that are managed by Boards of Directors who exercise independent control over the management. Though a government nominee may be envisaged as part of the Board, their presence is in addition, and supplemental to several other professionals and Directors. The degree of control and oversight by the State in the management of PSUs and Banks is restricted whereas, in the case of the TNAU, such power of the State is overarching. As far as payment of gratuity, pension and provident fund are concerned, the provisions of Tamil Nadu Pension Code including the Tamil Nadu Liberalised Pension Rules, 1960 and Family Pension Rules, 1964 of the Tamil Nadu Government are stated to apply to TNAU employees in terms of Chapter XII of the TNAU Rules. Likewise, provident fund is governed by the General Provident Fund Rules of the Tamil Nadu Government. The rate of interest to be paid to subscribers to the General Provident Rules are the same as adopted by the Tamil Nadu Government from time to time. There are a slew of decisions of the Income Tax Appellate Tribunal, wherein in the context of Section 10(10AA) of the Act, employees of several Universities, such as the Haryana Agricultural University and Mahatma Gandhi University, have been held to be holding civil posts under the State Government. No doubt in my mind that the petitioners, employees of Tamil Nadu Agricultural University are Government servants, entitled to the benefit of exemption under Section 10(10AA)(i) of the Act. Impugned circular dated 17.02.20215 and consequent communications dated 30.10.2018, 19.03.2019 and 14.11.2016 issued to the petitioners by the University, are contrary to law and are set aside. WP allowed.
Issues Involved:
1. Whether the petitioners, employees of Tamil Nadu Agricultural University (TNAU), are considered government servants for the purpose of Section 10(10AA) of the Income Tax Act, 1961. 2. The applicability of tax exemption on surrender of leave salary (SLS) for TNAU employees. Issue-wise Detailed Analysis: 1. Classification of TNAU Employees as Government Servants: The petitioners, employees of TNAU, challenged audit objections requiring them to remit income tax on SLS due to non-deduction at source as per the Income Tax Act, 1961. The petitioners argued that TNAU, being constituted under a State Act, should treat its employees as government servants, thereby exempting their SLS from tax under Section 10(10AA)(i) of the Act. The Income Tax Department, however, clarified that there are no instructions or notifications from the CBDT treating university employees as government employees. The Department's stance was that TNAU employees fall under Section 10(10AA)(ii), which limits the tax exemption for non-government employees. 2. Applicability of Tax Exemption on SLS: Section 10(10AA) has two clauses: Clause (i) exempts SLS for Central/State Government employees from tax, while Clause (ii) imposes a pecuniary limit on SLS for other employees. The petitioners contended that TNAU employees should be treated similarly to government employees due to their employment conditions, payment of gratuity, and provident fund being akin to those applicable to government servants. They cited several decisions of the Income Tax Appellate Tribunal supporting the view that employees of agricultural universities should be considered state government employees. Court's Observations and Decision: The court noted that TNAU is a statutory body under a State Act, with its employees' conditions of service, including pension, gratuity, and provident fund, governed by state rules. The State exercises significant control over TNAU, including funding and management, making it an extension of the State. The court distinguished TNAU from Public Sector Undertakings (PSUs) and nationalized banks, emphasizing the pervasive control and funding by the State in TNAU's case. The court referenced various judicial precedents and observed that TNAU employees are entitled to the same benefits as government servants due to the statutory and regulatory framework governing their employment. Consequently, the court concluded that TNAU employees are government servants for the purposes of Section 10(10AA)(i) of the Income Tax Act, entitling them to tax exemption on their SLS. Conclusion: The court held that the petitioners, as employees of TNAU, are government servants entitled to the benefit of tax exemption under Section 10(10AA)(i) of the Income Tax Act. The impugned circular and communications requiring tax on SLS were set aside, and the writ petitions were allowed with no costs.
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