Provisions of sec.10(10A)(i) of the Income Tax Act. - Income Tax - 1191/CBDT

INSTRUCTION NO. 1191/CBDT Dated : July 1, 1978 Section(s) Referred: 10(10A)(i) Statute: Income - Tax Act, 1961 A question has been raised, whether the total amount paid in lieu of entire pension to a Government servant who is allowed to retire prematurely and is permitted to be absorbed in a service or post in or under a corporation or company wholly or substantially owned or controlled by the Government or in or under a body controlled or financed by the Government is exempt from income-tax in view of the provisions of sec.10(10A)(i) of the I.T.Act. Claim of the exemption of such amount is made on the basis of the decision of the ITAT Bombay bench in the case of sri.P.Murlidharan, wherein it was held that the payment made to him in lieu of the entire pension was under a scheme similar to the scheme under Civil Pension Rules and as such exempt u/s.10(10A)(i) of the I.T.Act, 1961. 2. A self contained set of rules dealing with pension, death cum-retirement gratuity etc. based on the various decisions, clarifications etc. issued under the civil services regulations were codified into the Central Civil Services rules, 1972 which came into effect from 1-6-72. These rules spell out the conditions governing the grant of pension to the central government servants. Rule 37 of the CCS(Pension) Rules, 1972 authorises the grant of pension to a government servant who is allowed to be absorbed in a public sector undertaking. Such a person would be deemed to have retired from service from the date of absorption and would be eligible to receive retirement benefits in accordance with the orders of the government. A new rule 37A inserted by CCS (Pension) rules 1973 w.e.f.21-4-73 provides that where a government servant referred to in rule 37 elects the alternative of receiving the death-cum-retirement gratuity and a lumpsum amount in lieu of pension, he shall be entitled to the amounts as under: a) On an application made in this behalf a lumpsum amount not exceeding the commuted value of one-third of his pension as may be admissible to him in accordance with the provisions of Civil Pension Rules; and b) a terminal benefit equal to twice the amount of the lumpsum referred to in clause 'a' subject to the conditions that the Government servant surrenders his right of drawing two-thirds of his pension. The Government vide notification No.44(1)-EV/71 dated 9-4-73 further clarified that lumpsum payment made to any Government servant referred to in rule (i.e.21-4-73) shall be deemed to have been made in accordance with the said rule. 3. The Board have examined the question in consultation with the Ministry of Law. The Board have been advised that only the lump sum amount not exceeding the commuted value of one-third of pension admissible to a government servant in accordance with the provisions of the Civil Pensions (Commutation) Rules under clause(1)(a) of rule 37 A would be excludible from the total income u/s.10(10A) of the I.T.Act. 4.The terminal benefit under rule 37A(1)(b) even though it is calculated with reference to the lumpsum amount under clause(1)(a) of the commuted value of the one-third of the pension, cannot be regarded as payment in commutation of pension as the same is in lieu of surrender of the right to two-thirds of pension. The mere adoption of a formula for calculation of terminal benefit, would not, convert its character into that of the commuted pension since the other essential ingredients are absent. 5. Thus in the case of a government servant absorbed in a public undertaking on or after 24-7-71 the amount that would qualify for tax exemption under the provisions of sec.10(10A)(i) of the I.T.Act, 1961 is only the amount representing the commuted value of 1/3rd of the pension. The remaining two-thirds amount received by the person by way of terminal benefit would be includible in the total income subject to relief u/s.89(1) of the I.T.Act, 1961 read with Rule 21 A of the I.T.Rules, 1962. This position has also been clarified by the Government of India, vide its O.M.No.44(1)-EV/71 dated 13-4-73. 6. The above position may be brought to the notice of the officers working in your charge. In cases where the entire amount of commuted pension has been exempted u/s.10(10A)(i) of the I.T.Act, suitable remedial action to revise the assessment preferably u/s.263 may be taken immediately. The result of such action taken should be intimated to the Board by 30th September, 1978.