2004 (10) TMI 270 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement to relief under section 89 of the Income-tax Act, 1961 for compensation received under Voluntary Retirement Scheme (VRS).

Detailed Analysis:

1. Entitlement to Relief under Section 89 of the Income-tax Act, 1961:
The core issue in these appeals is the denial of relief under section 89 of the Income-tax Act, 1961 to the assessees who received compensation under the Voluntary Retirement Scheme (VRS) from the State Bank of India. The assessees claimed exemption under section 10(10C) up to Rs. 5 lakhs and offered the balance compensation for taxation, seeking relief under section 89 which was denied by the revenue.

Arguments by the Assessees:
The assessees contended that they are entitled to relief under section 89 as the compensation received is taxable under section 17(3) as "profits in lieu of salary." They relied on several judicial precedents, including:
- G.N. Badami v. CIT [1999] 240 ITR 263 (Madras High Court)
- P. Arunachalam v. CIT [2000] 241 ITR 827 (Madras High Court)
- CIT v. J. Visalakshi [1994] 206 ITR 531 (Madras High Court)
- CIT v. S.N. Chadha [2001] 249 ITR 312 (Delhi High Court)
- ITO v. Dilip Shirodkar [2004] 82 TTJ (Panaji) 869 (ITAT)

Arguments by the Revenue:
The revenue argued that section 89 is not applicable to compensation received on voluntary retirement, distinguishing it from termination of service. They cited judicial precedents such as:
- Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC)
- CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 (SC)
- Coal India Ltd. v. Jt. CIT [2004] 88 ITD 514 (Kol.)

The revenue also pointed to the proviso to section 10(10C), which restricts exemption to Rs. 5 lakhs and argued that further relief under section 89 is not permissible.

Tribunal's Analysis:
The Tribunal examined the nature of the compensation received under VRS, noting that it is taxable under section 17(3) as "profits in lieu of salary." It emphasized that section 10(10C) grants exemption up to Rs. 5 lakhs, but does not preclude relief under section 89, which provides for a reduction in the rate of tax rather than total exemption.

The Tribunal referred to Rule 21A of the Income-tax Rules, 1962, which outlines the quantification of relief under section 89, specifically addressing compensation received on termination of employment. The Tribunal concluded that the compensation received under VRS qualifies for relief under section 89, as it is considered "termination of service."

Judicial Precedents:
The Tribunal cited several judicial precedents supporting the assessees' claim for relief under section 89:
- G.N. Badami v. CIT: Held that voluntary retirement amounts to termination of service for purposes of section 17(3).
- M. Raman's case: Reiterated that relief under section 89 is allowable for compensation received under VRS.
- S.N. Chadha: Confirmed that section 89 relief is applicable to payments received as "profits in lieu of salary."

Conclusion:
The Tribunal held that the assessees are entitled to relief under section 89 for the taxable portion of the compensation received under VRS. The appeals filed by the assessees were allowed, providing them the sought relief.

Result:
The appeals filed by the assessees were allowed, granting them relief under section 89 for the taxable portion of the compensation received under the Voluntary Retirement Scheme.