2021 (8) TMI 678 - SC - Income Tax

Scope of amendment of the Gratuity Act - Applicability of Payment of Gratuity (Amendment) Act, 2010 from 1.1.2007 - Government of India approved enhancement of gratuity to the executives and Non-Unionized Supervisors of Central Sector Enterprises such as the Coal India Limited where the appellants were employed - ceiling of the gratuity was raised to ₹ 10 lakhs w.e.f. 1.1.2007 in terms of office memorandum of Government of India dated 26.11.2008 - grievance of the appellants is that the tax has been deducted at source when the gratuity was paid to the appellants before the commencement of the Amending Act - order passed by the High Court of Jharkhand whereby the claim of the appellants to declare the applicability of Payment of Gratuity (Amendment) Act, 2010 from 1.1.2007 was declined - HELD THAT - What is exempt from the Income Tax Act is the amount of gratuity received under the Gratuity Act to the extent it does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of Section 4 of the Gratuity Act. The Gratuity Act contemplated rupees ten lakhs as the amount of gratuity only from 24.5.2010. Such gratuity is the amount payable only once. Thus, the cut-off date cannot be said to be illegal, it being one-time payment. Therefore, such amendment in the Gratuity Act cannot be treated to be retrospective. Therefore, the provisions of the statute cannot be said to be retrospective In a recent judgment reported as Himachal Road Transport Corporation Anr. v. Himachal Road Transport Corporation Retired Employees Union 2021 (2) TMI 1190 - SUPREME COURT in the case of payment of increased quantum of death-cum-retirement gratuity, it was held that the cutoff date cannot be said to be arbitrary which was fixed keeping in view financial constraints Thus we find that the date of commencement fixed by the Executive in exercise of power delegated by the Amending Act cannot be treated to be retrospective as the benefit of higher gratuity is one-time available to the employees only after the commencement of the Amending Act. The benefit paid to the appellants under the office memorandum is not entitled to exemption in view of specific language of Section 10(10)(ii) of the Income Tax Act. No error in the order passed by the High Court.

Issues Involved:
1. Applicability date of the Payment of Gratuity (Amendment) Act, 2010.
2. Tax deduction on gratuity paid before the commencement of the Amending Act.
3. Classification of employees based on the cut-off date.
4. Retrospective application of the Amending Act.
5. Exemption under the Income Tax Act, 1961.
6. Validity of the cut-off date fixed by the executive.

Issue-wise Detailed Analysis:

1. Applicability date of the Payment of Gratuity (Amendment) Act, 2010:
The appellants challenged the High Court's decision to decline their claim to declare the applicability of the Payment of Gratuity (Amendment) Act, 2010 from 1.1.2007. The Amending Act, which received the President's assent on 17.5.2010, was notified to come into force on 24.5.2010.

2. Tax deduction on gratuity paid before the commencement of the Amending Act:
The appellants argued that tax was deducted at source when gratuity was paid to them before the commencement of the Amending Act. They asserted that the effective date should be 1.1.2007, which would exempt them from tax deductions on the gratuity amount.

3. Classification of employees based on the cut-off date:
The appellants contended that the cut-off date of 24.5.2010 created two categories of employees—those who retired before and those who retired after the date. They argued that this classification was illegal and arbitrary. However, it was countered that pensioners receive recurring benefits, unlike the one-time payment of gratuity, making the classification rational.

4. Retrospective application of the Amending Act:
The appellants cited the case of Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited to argue for the retrospective application of beneficial provisions. However, it was held that the amendment in the Gratuity Act, being a one-time payment, could not be treated as retrospective.

5. Exemption under the Income Tax Act, 1961:
The court noted that the Income Tax Act exempts gratuity received under the Gratuity Act to the extent it does not exceed the amount calculated per subsections (2) and (3) of Section 4 of the Gratuity Act. Since the Gratuity Act contemplated ?10 lakhs as the payable amount only from 24.5.2010, the appellants were not entitled to tax exemption for gratuity paid before this date.

6. Validity of the cut-off date fixed by the executive:
The court referenced several judgments to uphold the validity of the cut-off date fixed by the executive, emphasizing that such delegation of power to determine the commencement date of the Act was not excessive. The cut-off date was deemed rational and not arbitrary, considering financial constraints and the nature of gratuity as a one-time payment.

Conclusion:
The Supreme Court found no error in the High Court's order and dismissed the appeal, concluding that the commencement date of the Amending Act could not be treated as retrospective. The appellants were not entitled to tax exemption on gratuity paid before 24.5.2010, and the classification of employees based on the cut-off date was upheld as rational and lawful.

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