2024 (11) TMI 1061 - AT - Income Tax

Default u/s 201 - deducting TDS on certain payment of leave encashment to certain employee - Revenue held that the payments are in excess of Rs. 3 lakhs, and since the recipients are neither State Government nor Central Government employees, hence the exemption limit cannot exceed Rs. 3 lakhs and accordingly the tax has to be deducted by the disbursing authorities - HELD THAT - Section 10(10AA) specifically deals with tax exemption of the leave encashment at the time of retirement. Clause (i) of sub-section (10AA) deals with employees of Central Govt. or State Govt. Clause (ii) of sub-section (10AA) deals with employees other than Central Govt. or State Govt. The sub-section (10AA) specifically deals with Govt. and Non-Govt. employees under two different clauses. Sub-section 10CC includes all employees who are individuals deriving income other than by way of monies. This includes every employee irrespective of category of employers. Leave encashment at the time of retirement, benefits received at the time of voluntary retirement or termination of services, and perquisites received by the employees are all defined and subjected to various provisions of the Act, namely 10(10AA) for leave salary, 10C for retirement benefits and 10CC - for perquisites etc. In the governance of the Nation, three arms work in tandem namely Union Govt., State Govt. and Local Authorities. We have also gone through the notification issued by the Dy. Secretary, Govt. of Gujarat, Panchayat, Housing and Urban Development Department dated 30th January, 1978 which has transferred some functions and also included some villages near Vadodara to carve out Vadodara Development Authority from the erstwhile Vadodara Municipal Corporation. Even on that lines, the VUDA will become a subset of local authority. The municipal corporations, panchayats, district boards, cantonment boards are part of local authorities as per sub-section 10(20) of the Income Tax Act, and under clause (d) and (e) of Article 234 and Article 234P of the Constitution. Thus, the local bodies are distinct from State and Central Govt. Since the exemption given on account of leave encashment, retirement and perquisites varies according to the category of employees and since exemption of leave encashment is allowed to State and Central Govt. employees in full and exemption to other than State and Central Govt. employees is upto Rs. 3 lakhs as per the provisions of Section 10(10AA), it is hereby held that the assessee is liable to deduct tax on the payments made against leave encashment to their employees. The Revenue Authorities shall re-compute the quantum of tax deductible taking into consideration the exemption limit of Rs. 3 lakhs prescribed by the Act. Appeals of the assessee are dismissed.

Summary

Issues:
Appeals against orders treating assessee as in default for non-deduction of TDS on leave encashment payments for multiple assessment years.

Analysis:
The assessee, a Local Authority under the Gujarat Town Planning & Urban Development Act, paid leave encashment to retirees without deducting TDS, leading to default under Section 201(1) & 201(1A) of the Income-tax Act, 1961. The Revenue Authorities held the payments exceeding Rs. 3 lakhs to be taxable since recipients were not State or Central Government employees. The CIT(A) upheld the addition, stating the employees were not Govt. employees. The Tribunal heard arguments citing Section 10(10AA) & Section 10(10C) and past cases, but ultimately held the assessee liable to deduct tax on leave encashment payments due to differing exemptions for Govt. and non-Govt. employees under Section 10(10AA), directing re-computation of tax deductible based on the Rs. 3 lakhs exemption limit.

The Tribunal analyzed Section 10(10AA) which exempts leave encashment at retirement, distinguishing between Govt. and non-Govt. employees. Section 10(10C) extends exemptions to employees of various entities beyond Govt. employees, broadening the scope of tax benefits. Additionally, Section 10CC covers perquisites taxation for all employees receiving non-monetary benefits. The judgment emphasized the distinct treatment for leave encashment, retirement benefits, and perquisites based on employee categories, highlighting the role of Union Govt., State Govt., and Local Authorities. The assessment considered the definition of local authorities under the Income Tax Act and Constitutional provisions, affirming the assessee's obligation to deduct tax on leave encashment payments due to varying exemption limits for different employee categories.

Ultimately, the Tribunal dismissed all appeals, affirming the assessee's liability to deduct tax on leave encashment payments and instructing the Revenue Authorities to recalculate the tax deductible based on the prescribed Rs. 3 lakhs exemption limit.