1988 (3) TMI 98 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of gratuity received by legal heirs.
2. Applicability of Section 10(10) exemption.
3. Interpretation of Section 15 regarding the due date of gratuity.
4. Relevance of estate duty assessment.
5. Interpretation of Schedule IV, Part 'C' of the IT Act.
6. Applicability of Board Circular letter No. F. 35/1/65.

Detailed Analysis:

1. Taxability of Gratuity Received by Legal Heirs:
The core issue in this appeal is the taxability of the gratuity amount of Rs. 2,21,250 received by the legal heirs of the deceased employee. The Income Tax Officer (ITO) initially taxed the entire amount, but the Income Appellate Commissioner (IAC) later directed the ITO to tax the gratuity for the period ending 1st September 1980.

2. Applicability of Section 10(10) Exemption:
The CIT(A) held that gratuity is taxable under the head 'salaries' and cited Section 10(10), which exempts gratuity only up to a specified limit, implying that the excess amount is taxable. However, the Tribunal agreed with the assessee's counsel that Section 10(10) is an exemption section and does not necessarily mean that non-exempt receipts are chargeable to tax. The Tribunal emphasized that to assess an item, the charging section must be referred to.

3. Interpretation of Section 15 Regarding the Due Date of Gratuity:
The assessee argued that Section 15, which deals with the chargeability of salary, applies only if the gratuity had become due or was received during the employee's lifetime. The Tribunal noted that the gratuity became payable only after the death of the employee and thus could not be assessed as having become due on 1st September 1980. The Tribunal examined the rules and regulations of the company, particularly Clauses 4, 16, and 18, which state that gratuity is payable on death and held in trust for the nominee.

4. Relevance of Estate Duty Assessment:
The CIT(A) considered the fact that the gratuity was included for estate duty purposes as evidence that it had accrued to the deceased. However, the Tribunal found this irrelevant for income tax purposes, stating that estate duty assessment does not necessarily mean the amount was due to the deceased before death.

5. Interpretation of Schedule IV, Part 'C' of the IT Act:
The Tribunal referred to Schedule IV, Part 'C' of the IT Act, which deals with the approval of gratuity funds. Clause 5 indicates that gratuity paid during an employee's lifetime is treated as salary, suggesting that gratuity not paid during the employee's lifetime may not be treated as salary for tax purposes.

6. Applicability of Board Circular Letter No. F. 35/1/65:
The Tribunal also considered the Board Circular letter 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, as it supports the view that gratuity payable after death is not taxable as salary.

Conclusion:
The Tribunal concluded that the gratuity was not due to the deceased while he was alive and became due and payable only upon his death to the legal heir or appointee. Therefore, it was wrongly brought to tax by the ITO. The appeal was allowed, and the gratuity amount was deemed non-taxable in the hands of the legal heirs.