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TMI Blog2014 (12) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... s/workmen in the company. Relying upon COMMISSIONER OF INCOME-TAX Versus KOODATHIL KALLYATAN AMBUJAKSHAN [2008 (7) TMI 259 - BOMBAY HIGH COURT] - Rule 2BA laid down the guidelines for the purpose of Sec. 10(10C) of the Act but the Rule, will have to be read borne in mind the object of Sec. 10(10C) itself - the term “overall” is a general in nature but from the said term no interference can be made that irrespective of the fact whether there is a surplus employees are not the employer must reduce the workers or employees in all the Sections and Departments of his undertaking - the scheme was initiated for the economic survival of the company and reduction in the cost - the condition in Clause-(ii) is also fulfilled - there is overall reduction in the existing strength of the employees of the company which is discussed while deciding Condition No.-(ii) of Rule 2BA - The next condition is that the employer company should not fill up the vacancies caused by the VRS - it was claimed before the AO that after declaring the VRS subsequently the company was closed down and to that effect an affidavit is also filed before us - once the assessee stated that he has not been employed in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Kirloskar Copeland Ltd., Karad- Dhebawadi Road, Karad, Distt.-Satara. The Kirloskar Copeland Ltd. formulated and declared Voluntary Retirement Scheme (VRS) offering the different monetary benefits to the employees/workers working in the said company and who were permanent employees. All these employees opted for the Voluntary Retirement under the VRS- 2000 declared by the company and they were compensated in terms of the money as per the scheme formulated by their company. All these assessees claimed the exemption of ₹ 5,00,000/- u/s. 10(10C) of the Act towards the retirement benefits paid to them under the VRS by their company. 3. In the first round of appeal before the Tribunal though the appeals filed by these assessees were dismissed but subsequently the Tribunal recalled the order on the applications made by these assessees u/s. 254(2) of the Income-tax Act as at the time the order passed by the Tribunal, the judgment of the Hon'ble jurisdictional High Court in the case of CIT Vs. Koodathil Kallyatan Ambujakshan (2008) 219 CTR (Bom) 80 was not available. The Tribunal restored the mater back to the file of the Assessing Officer with the direction to the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT(A). In Para No. 4.1 the Ld. CIT(A) has narrated the case of the Assessing Officer for not giving the benefits of Sec. 10(10C) of the Act to these assessees. The Ld. CIT(A) has given the following reasons for confirming stand taken by the Assessing Officer: 6.5 The above clause in the Scheme clearly shows that the Voluntary Retirement Scheme, 2000 issued by the Kirloskar Copeland Ltd. was not drawn to result in overall reduction in the existing strength of the employees i.e. not at rightsizing or downsizing and the employer did not extend the scheme to executives or engineers or managers, working in the said company. Thus, clause (ii) of the guidelines prescribed in Rule 2BA is not satisfied in the case of the said scheme. It is precisely for this reason that the Company itself has clarified in the scheme itself that the scheme does not comply with Rule 10(10C) and tax was deducted at source on the ex-gratia amount paid to the employees who exercised the Exit Option. The relevant paragraphs of the Scheme reads as under;- TAX APPLICABILITY UNDER INCOME TAX ACT. 1961 The computation of income as per income Tax act will be made by the Accounts Department considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, amends section 10(1C) of the IT Act to provide Income tax exemption to any amount received by the employee of the public sector company or any other company at the time of his voluntary retirement in accordance with any scheme or scheme of voluntary retirement. The scheme of the said companies are to be in accordance with guidelines prescribed which may include the criteria of economic viability. In the case of the companies other than the public sector companies, the schemes are to be approved by the Chief Commissioner or Director-General. This amendment takes effect from the 1st April, 1993, and will, accordingly, apply to assessment year 1993-94 and the subsequent assessment years. 6.6.1. However, later on the requirement of taking approval of the Chief Commissioner or Director General of Income Tax was dispensed with effect from A.Y. 2001-02 and subsequent years. This intention is reiterated in the Memorandum explaining the provisions to Finance Act, 2001, which interalia states; TAXPAYER FRIENDLY MEASURES Exemption of amount received on Voluntary Retirement Under the existing provisions of clause (10C) of section 10 of the Income-tax Act, any amount received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, be clear that judicial notice was taken by the Supreme Court that the very object in enacting the provisions was to downsize the employees strength so that unwanted personnel could seek voluntary retirement thereby enabling the public sector to achieve the true object for (which) it was established. This would indicate that the provisions of section itself contemplate a scheme whereby there has to be downsizing on account of surplus or the like........... The section, therefore, speaks of a scheme for voluntary retirement or termination of service. The section does not provide for any predicates. Normally, therefore, the scheme ought to be read as a scheme framed by the company or authority set out under section 10(1 OC) of the Act. Rules, however, have been made which are known as guidelines for the purpose of section 10(10C). The guidelines are not under challenge before us. We, therefore, proceed on the basis that these guidelines also will have to be fulfilled. The rule, however, will have to be read bearing in mind the object of section 10(10C) itself. Under the rules a scheme framed must be in accordance with the requirements as set out therein. The scheme, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no other company or concern belonging to the same management. The fifth requirement has also been satisfied. The sixth requirement has also been satisfied as in the instant case what is offered is two months' salary for each completed year of service. Thus the scheme expressly or impliedly satisfied all the requirements of the section as well as the guidelines framed for the purpose of section 10(10C) namely rule 2BA. 6.7.1. In the above case, it was observed by the Hon'ble High Court that the material placed on record indicated that the employees had been rendered surplus on account of various steps taken by the employer and therefore, the Scheme was meant for an overall reduction in the existing strength of the employees. It was also observed that there was material on record which showed that the scheme basically was to reduce the employee strength as posts had become surplus on account of reorganization and one cannot fill in the posts which have become surplus as the posts have become redundant. The High Court, on reaching these conclusions, was persuaded by the judicial notice taken by the highest court of the land, in the case of Shashikant Laxman Kale vs UOI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions specified in Rule 2BA and is not qualified for exemption u/s 10(10C) of the IT Act, 1961. Moreover as per the terms of the scheme, the retiring employees were paid 50% of the tax due on the retirement benefits over and above the eligible benefits. For example, if an employee was entitled to receive a sum of ₹ 4 lakhs and the tax payable thereon came to ₹ 1 lakh, then the employee was paid ₹ 4,50,000/- being the total amount of the dues of ₹ 4 lakhs and 50% of the tax payable on ₹ 4 lakhs. It was also asserted by the company that the employees were made aware of the effect of VRS including the fact that the company would be bearing 50% of the tax due on the retirement benefits. The letter dated 20.08.2000 filed by the employee with the employer was also brought on record to show that the employee himself requested the employer to permit him to take the benefit under the scheme voluntarily. Therefore, it can be stated that condition (vi) of Rule 2BA is also not met in the facts and circumstances of the present case. 6.9 On a cumulative appraisal of the Voluntary Retirement Scheme, 2000 issued by the Kirloskar Copeland Ltd, as directed by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomic viability and cost control. However, it does not state that he vacancy caused as a consequence of VRS shall not be filled up. Sub clause (v) stipulates that the retiring employees shall not be employed even in another company or concerned belonging to the same management. The learned DR pointed out that Kirloskar group controls a number of companies which function under the same management. The VRS does not contain any stipulation that the employees, after getting VRS, will not be employed in any other company belonging to the same management, Sub clause (vi) deals with the benefit receivable on account of voluntary retirement. It provides for a choice between two alternatives, viz. a) one depending upon the completed years of service and b) the other depending upon the balance service left. The VRS provide a hybrid formula under which the benefit is computed by taking into account the years of completed service and also the years of balance service. Over and above this, the VRS provides this additional benefit by way meeting 50% of the tax liability arising out of payment in case of the workmen invests in the eligible investments to get maximum rebate under the Income Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the scheme to the CCIT or DGIT, prior to the date of retirement of the assessee, which was a mandatory requirement under the 1st proviso to section 10(10C) in respect of private sector companies. This decision of the single Judge of Delhi High Court has since being reaffirmed by a Division Bench of Delhi High Court that is reported in 244 ITR 786. The decisions of the Delhi and Bombay High Courts in these cited cases show that the terms of each VRS has to be examined independently, in order to see whether the conditions specified by Rule 2BA are met or not, which the ITAT Pune has itself done in the order dated 20.04.2006 (supra). 6.12 The AR has also placed reliance on the Hon'ble ITAT, Pune decision in the case of Maruti Somapa Gheji (case of retired employee of SBI) in ITA No.578/PN/2010 for A.Y. 2007-08 wherein, following the above decision of the Bombay High Court referred to supra, the Hon'ble ITAT held as under:- 2. We find that the jurisdictional High Court in the case of CIT Vs. Koodathil Kallyatan Ambujakshan (2009) 309 ITR 113 wherein the amount received under optional early retirement scheme, which is floated by RBI was held to be applicable to all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O [ITA/1498/Pn/2011] (xx) Smt Medhora Havovi Cawas vs. ITO [ITA/13/Pn/2012] (xxi) Shri Avanish V. Badve vs. ITO [ITA/29/Pn/2012] (xxii) Shri Prakash S. Jaguste vs. ITO [ITA/1280/Pn/2011] (xxiii) Shri Vijay S. Jog vs. ITO [ITA/1461/PN/2011] 6.14 As could be seen from the decisions of the Hon'ble ITAT, Pune in the above cases, nothing contrary was brought on record before the Bench to distinguish the facts in the case of Koodathil Kallyatan Ambujakshan and in that context, the Hon'ble Bench has taken a view that the facts being similar, the scheme of SBI also satisfied the conditions prescribed in Rule 2BA. The points of distinction which were discussed hereinabove while referring to the decision of the Bombay High Court in the case of Koodathil Kallyatan Ambujakshan were not brought to the notice of the Hon'ble Bench and the Bench did not have the benefit of perusal of various clauses in the Exit Option Scheme of the SBI. The SBI Scheme was aimed at improving the morale of the frustrated employees and not aimed at downsizing or rightsizing the existing strength of the employees. As held by the Hon'ble Supreme Court in the case of Shanmugavel Nadar vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as source on amounts paid over and above the amount admissible as exemption under the provisions of section 10(10C) r. w. Rule 2BA. The facts were that the assessee, Naruti Udyog had paid a sum of ₹ 73.60 crore to the employees which had been amortized under Section 35 DDA of the Income Tax Act, 1961. On perusal of the Scheme, the assessing officer observed that the assessee company had paid certain additional benefits also to the retiring employees along with VRS. After analyzing the features of VRS of Maruti Udyog and discussing the provisions of Section 35DDA, Section 10(10C) and Rule 2BA of Income Tax Rules, the assessing officer arrived at a conclusion that the scheme floated by the assessee was not in conformity with Rule 2BA of the Income Tax Rules and, therefore, benefit of Section 10(10C) was not available. Since Section 10(10C) was not available, the assessee was liable to deduct the tax at source on the payments made to the employees. As the assessee had failed to deduct the tax at source, assessing officer determined the assessee M/s. Maruti Udyog to be assessee in default. It was found on the facts of the case by the High Court that while assessing the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it is held that there is no infirmity in the action of the Assessing Officer in denying the exemption u/s. 10(10C) in respect of ex-gratia payments received by the appellant on his retirement from the company. The disallowance is, accordingly, upheld. Grounds of appeal nos. 1 to 4 stand dismissed. Now, all these assessees are in appeal before us. 5. We have heard the rival submissions of the parties and perused the record. We have to examine the Scheme of the VRS-2000 framed by Kirloskar Copeland Ltd. in context of Sec. 10(10C) r.w. Rule 2BA of the Income-tax Rule, 1962. Sec. 10(10C) of the Act reads as under: (10C) any amount received or receivable by an employee of (i) a public sector company ; or (ii) any other company ; or (iii) an authority established under a Central, State or Provincial Act or (iv) a local authority ; or [(v) a co-operative society ; or (vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 (3 of 1956) ; or (vii) an Indian Institute of Technology within the meaning of clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or (viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf, at the time of his voluntary retirement or voluntary separation shall be exempt under clause (10C) of section 10 only if the scheme of voluntary retirement framed by the aforesaid company or authority [or co-operative society or University or institute], as the case may be [or if the scheme of voluntary separation framed by a public sector company], is in accordance with the following requirements, namely: (i) it applies to an employee 10b[* * *] who has completed 10 years of service or completed 40 years of age; [(ii) it applies to all employees (by whatever name called) including workers and executives of a company or of an authority or of a co-operative society, as the case may be, excepting directors of a company or of a co-operative society;] (iii) the scheme of voluntary retirement 10aa[or voluntary separation] has been drawn to result in overall reduction in the existing strength of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord also by the Ld. CIT(A) before making such observations at least calling the data from the company whether in fact there was no overall reduction in the employees/workmen in the company. 8. In the case of Koodathil Kallyatan Ambujakshan (supra) while considering the provisions of Sec. 10(10C) has observed that Rule 2BA laid down the guidelines for the purpose of Sec. 10(10C) of the Act but the said Rule, however, will have to be read borne in mind the object of Sec. 10(10C) itself. In the said decision nowhere it is observed by their Lordships that the VRS Scheme should be made applicable to employees working in all the Departments. The observation of their Lordships in the said decision that the OERS of the RBI was overall applicable is made in the context of the Scheme framed by the RBI. The term overall is a general in nature but from the said term no interference can be made that irrespective of the fact whether there is a surplus employees are not the employer must reduce the workers or employees in all the Sections and Departments of his undertaking. On perusal of the scheme itself make it clear that the said scheme was initiated for the economic survival of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance months of service left considering the date of his retirement on superannuation. 10. On perusal of the scheme framed by the employer company in these cases, we find that there is a maximum ceiling of ₹ 5,00,000/- on the monetary benefits/compensation to be paid to the worker/employee. The Ld. CIT(A) has only seen that how much compensation is paid to the employee in respect of balance service left considering the age of superannuation of the employee/worker but on the plain reading of the Condition-(vi), it is seen that the monetary benefit/compensation can be to the extent of three months salary of the completed years of service. The expression completed years of service is defined in the scheme in Clause-(j) of the definition section. In the scheme apart from the compensating the employee in respect of the balance service left (of course after considering the age on date of superannuation as per the (industrial employees stand orders or otherwise), they are also paid at par ₹ 445/- for each completed year of service, the amount offered for the each completed year of service is mentioned in the sum but it is not known whether the said amount is equivalent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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