1988 (3) TMI 97 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of gratuity amount received by legal heirs.
2. Applicability of Section 10(10) of the Income-tax Act.
3. Interpretation of the Rules & Regulations of the Gratuity Fund.
4. Timing of when the gratuity becomes due and payable.
5. Relevance of estate duty assessment.
6. Applicability of Board Circular No. F. 35/1/65.

Detailed Analysis:

1. Taxability of Gratuity Amount Received by Legal Heirs:
The primary issue in this appeal is whether the gratuity amount of Rs. 2,21,250 received by the legal heirs of the deceased employee is taxable. The Income-tax Officer initially brought the entire amount to tax, but the Commissioner of Income-tax (Appeals) directed that the gratuity should be taxed for the period ending on the date of death. The Tribunal ultimately held that the gratuity was not due to the deceased during his lifetime and became payable only after his death to the legal heirs, thus it should not be taxed.

2. Applicability of Section 10(10) of the Income-tax Act:
Section 10(10) of the Income-tax Act provides an exemption for gratuity up to a specified limit. The Commissioner of Income-tax (Appeals) argued that the excess amount over the exempted limit is taxable. However, the Tribunal clarified that merely because a part of the gratuity is exempt under Section 10(10), it does not imply that the excess amount is automatically taxable. The Tribunal emphasized the need to refer to the charging section to determine taxability.

3. Interpretation of the Rules & Regulations of the Gratuity Fund:
The Tribunal examined the Rules & Regulations of the Gratuity Fund, particularly Clause 18, which stipulates that gratuity becomes payable upon the death of the employee and is held in trust for the appointed nominee. The Tribunal concluded that the deceased had a right to the gratuity amount before his death, but it became due and payable only upon his death to the nominee.

4. Timing of When the Gratuity Becomes Due and Payable:
The Tribunal focused on the timing of when the gratuity becomes due and payable. Citing the Supreme Court's interpretation in Kesoram Industries & Cotton Mills Ltd. v. CWT, the Tribunal distinguished between debts due and debts payable upon a contingency. It held that the gratuity became due and payable immediately upon the death of the employee, and not during his lifetime.

5. Relevance of Estate Duty Assessment:
The Commissioner of Income-tax (Appeals) considered the inclusion of the gratuity amount for estate duty purposes as indicative of it accruing to the deceased. However, the Tribunal dismissed this relevance, stating that estate duty assessment does not necessarily mean the amount was due to the deceased at the time of his death.

6. Applicability of Board Circular No. F. 35/1/65:
The Tribunal referred to Board Circular No. F. 35/1/65, which states that leave salary paid to legal heirs is not taxable as salary. The Tribunal found this circular relevant, noting that the gratuity was not due to the deceased during his lifetime but became payable only upon his death, aligning with the principles outlined in the circular.

Conclusion:
The Tribunal concluded that the gratuity amount of Rs. 2,21,250 received by the legal heirs was not due to the deceased during his lifetime and became payable only upon his death. Therefore, it should not be taxed in the hands of the legal heirs. The appeal was allowed, and the Income-tax Officer's decision to tax the amount was overturned.