2005 (12) TMI 64 - HC - Income Tax

Whether the voluntary retirement from service would fall under the term termination of employment within the meaning of section 17(3) of the Income-tax Act, 1961, and the relief under section 89(1) is admissible after the grant of exemption under section 10(10C)(viii) - held that the compensation amount received by the employees under the voluntary retirement scheme from the bank is entitled to get relief under section 89(1) read with section 17(3)(i) of the Act over and above the exemption granted under section 10(10C)(viii) and the Letter No. F. 174/5/2001-ITA-I, dated April 23, 2001, issued by the Central Board of Direct Taxes, Bangalore, would stand quashed

Summary

Issues Involved:
1. Whether voluntary retirement from service falls under the term "termination of employment" within the meaning of section 17(3) of the Income-tax Act, 1961.
2. Whether relief under section 89(1) is admissible after the grant of exemption under section 10(10C)(viii) of the Income-tax Act.

Detailed Analysis:

Issue 1: Voluntary Retirement as "Termination of Employment"
The primary question was whether voluntary retirement qualifies as "termination of employment" under section 17(3) of the Income-tax Act, 1961. The petitioners, employees of the State Bank of Travancore who opted for the Voluntary Retirement Scheme (VRS), argued that the compensation received should be considered under the term "termination of employment" and thus be eligible for relief under section 89(1).

The court noted that the term "termination of employment" is used in a broad sense in section 17(3)(i) and includes various forms of ending employment, such as voluntary retirement, superannuation, compulsory retirement, resignation, and dismissal. The court referenced the Madras High Court's decision in CIT v. J. Visalakshi [1994] 206 ITR 531, which held that the term "termination" should not be confined only to cases of voluntary retirement or superannuation. The judgment emphasized that beneficial clauses like section 89(1) should be interpreted broadly to achieve their intended purpose.

Issue 2: Relief Under Section 89(1) Post Exemption Under Section 10(10C)(viii)
The second issue was whether the relief under section 89(1) could be claimed after availing of the exemption under section 10(10C)(viii). The Central Board of Direct Taxes (CBDT) had issued a letter stating that the amount exceeding Rs. 5 lakhs received under VRS is not eligible for relief under section 89(1). The Assessing Officer followed this directive and denied the relief, imposing penalties and additional taxes.

However, the court referred to the Madras High Court's decision in CIT v. G.V. Venugopal [2005] 273 ITR 307, which held that there is no prohibition against claiming both exemptions under section 10(10C) and relief under section 89(1). The court pointed out that the relief under section 89(1) is aimed at mitigating the hardship caused by the high incidence of tax due to progressive tax rates, and that spreading the relief over several years does not mean it is not for a particular assessment year.

The court concluded that the compensation received under VRS should be treated as "salary" under section 17, which includes "profit in lieu of salary." Therefore, the employees are entitled to relief under section 89(1) in addition to the exemption under section 10(10C)(viii).

Conclusion:
The court allowed the writ petitions, holding that the compensation received by the employees under the VRS is entitled to relief under section 89(1) read with section 17(3)(i) of the Income-tax Act, over and above the exemption granted under section 10(10C)(viii). The CBDT's letter denying such relief was quashed.