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TMI Blog1981 (4) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... gratuity to the assessee's employees, we may dispose of the other ground arising in this appeal. 2. The first ground is on the point as to whether the provisions of s. 52(2) of the IT Act. 1961 (hereinafter referred to as "the Act) stand attracted in regard to the charge of capital gains on the sale of a flat in "Darshan Apartment" which was sold by the assessee to Mrs. P, wife of one of the Officers of the assessee company who was occupying the flat at the relevant time as the employee of the company. The flat was originally purchased by the assessee on 31st Oct., 1970 for Rs. 70,000 and was being used as a resident by the said employee Depreciation was being written off in respect of this flat and its depreciated value as per books at the time of sale was Rs. 64,745. The flat was sold to Mrs. P at this written down value as per its books. The IAC considered that having regard to the area of the flat, garage, its ideal location, the relation between the purchaser and the seller and the prevailing market rate, the flat had been sold at a price much below its fair market value. He therefore made a reference to the Deptl. V.O. and on the basis of the report of V.O. dt. 25th March, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a notice to the V.O. giving him an opportunity of being heard, as required under s. 55A of the IT Act, 1961 read with s. 23(3A)(a) of the WT Act." It is stated that the additional ground sought to be raised involves only a pure question of law and does not require any further investigation or inquiry and that it is only an amplification of the ground No. 1 already raised. At the time of hearing it was submitted that it was incumbent on the CIT (Appeals) to give a notice to the V.O. of being heard as per s. 55A of the Act read with s. 23(3A)(a) of the WT Act, 1957. It was the submission of the ld. Deptl. Rep. That for the purpose, the matter may be remitted to the CIT (Appeals) to enable him to hear the Deptl. V.O. before finally disposing of the appeal. 7. The ld. Counsel for the assessee, on the other hand, supported the order of the CIT (Appeals) as to the inapplicability of s. 52(2) of the Act to the facts in this case. In the first place, he pointed out that the Tribunal in Bombay, has been uniformly holding that, in the absence of any finding as to understatement of consideration declared in the instrument of transfer, the provisions of s. 52(2) are not attracted and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion that the value so claimed is less than its fair market value. In this case, there is no question of the assessee making a claim as to the value of the asset being in accordance with the estimate made by the Registered Valuer because what the assessee claimed in the return is the actual sale price and not any other value. The assessee has, no doubt, submitted the valuation report of a Registered Valuer dt. 4th Nov., 1976. Mr. Jamshed Burjor Aga of M/s. Shapoorjee N. Chandabhoy Co., Bombay, according to which the cost of the flat and garage is shown at Rs. 55,500 but it is submitted on behalf of the assessee that this valuation report has submitted in the course of the hearing before the IAC of Income-tax as required by him to support the reasonableness of the sale price and it is not the value claimed by the assessee. It is submitted that the provisions of cl. (i) are contemplated to cover cases like the case of a partner withdrawing from a partnership firm and where an estimate has to be made of the assets for the purpose of division of property to him and other such circumstances. It is further submitted that according to the opinion recorded by the IAC of Income-tax in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) in this case because the stage of adjudicating the market value determined in this case by the CIT (Appeals) upheld the assessee's claims to the inapplicability of s. 52(2) in this case. It was therefore contended that there is no merit in the additional ground sought to be raised by the Department and no useful purpose would be served by this ground. 10. The Depl. Rep. in reply reiterated his contention that s. 52(2) will stand attracted even in the absence of understatement of consideration according to the express language of the section and pointed out in this connection that the decision of the Kerala High Court in (1973) 91 ITR 49 (Ker) has reviewed its earlier decision and the subsequent decision of the said High Court in CIT vs. N.S. and North Malabar Public Conveyance (P) Ltd. (1976) 102 ITR 36 (Ker) reiterates the view taken in the decision in (1973) 91 ITR 49 (Ker). It was submitted that the Board's circular relied on by the assessee merely of a clarificatory nature and has no binding force as no directions can be given to override the specific provisions giving the authority to Act in the manner prescribed therein. In this case, it is submitted, the IAC has invoke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that is the reason for the provisions of reference to Valuation Officer and an opportunity being given to him. As regards the contention of the assessee that the occasion for extending an opportunity to the V.O. did not arise in this case because of the decision of the CIT (Appeals) on the question of applicability of s. 52(2), it is argued that under the provisions of the section, namely, 23(3A) of the WT Act, it is mandatory to give a hearing to the Valuation Officer if the valuation of the property is objected to in the appeal. As the assessee had objected to the value determined by the Valuation Officer in this case, it was submitted, it was compulsory for the CIT (Appeals) to have granted an opportunity to the V.O. before disposing of the appeal. 11. Having considered the facts and the rival contentions of the parties in this connection, we find no merit in the Department's objection in its first ground of appeal against the finding of the CIT (Appeals) that the assessing officer was not justified in applying the provisions of s. 52(2) of the Act and consequently deleting the addition of Rs. 1,15,200. As against the Full Bench of the Kerala High Court relied on by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifiably invoked in this case, the CIT (Appeals) felt it unnecessary to go into the dispute as to the fair market value determined of the property concerned. Consequently, there is no need for him to extend an opportunity to the V.O. In this view of the matter, it is unnecessary for us to dwell at length on the other rival contentions taken by the parties or to give any finding thereon. In the circumstances, we do not see any justification for admitting this additional ground at this stage and even if we were to admit, the only finding that we can give in the facts of this case in regard to the additional ground is that since the ground is of pure academic interest and does not in any way affect the final order of the CIT (Appeals), the same is rejected as infructuous. 13. The second ground in the Departmental's appeal is against the deletion of the amount of Rs. 5,255 determined as assessable under s. 41(2) of the Act. It is common ground that the amount came to be assessed following the determination of the market value of the property for the purpose of capital gains charge raised in ground No. 1 and as a consequence of the substituted value in the place of actual consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e objection of the Department. 15. Lastly we come to the ground No. 3 concerning retirement gratuity for the purpose of disallowance under s. 40A(5). The assessee paid during the relevant year a total amount of Rs. 66,745 to an employee Mr. M. Who retired from its employment on 30th Sep., 1974, a date falling within the previous year ended 31st Oct., 1974, material for the asst. yr. 1975-76 in appeal before us. This amount included a sum of Rs. 33,410 as retirement gratuity. The IAC of Income-tax limited the total admissible amount by reference to s. 40A(5), cl. (c) to Rs. 60,000 and disallowed the balance of Rs. 6,745. In the appeal preferred by the assessee before the CIT (Appeals), it was the assessee's claim that death cum-retirement gratuity paid to employees is not to be considered for the purpose of working out the disallowance under s. 40A(5). The CIT (Appeals), however, held that the assessing officer was wrong in taking into consideration the entire amount of gratuity and that only the amount which is in excess of the amount exempt under s. 10(10) of the Act should be considered. Aggrieved by his order, the Department has come in appeal claiming that the entire amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It is further stated that at the relevant time, the assessee did not have any formal scheme, of gratuity but there was a sort of general announcement according to which one month's basic salary and dearness allowance per year of service was payable where an employee left the service or the employer terminated his service, after 10 years, subject to a maximum of 15 months basic salary and dearness allowance. A note incorporating the principles on which gratuity was being paid has been furnished at the time of hearing. 18. Taking the first issue passed by him, the ld. Counsel contended with reference to the provisions of s. 40A(5) and cl. (c) thereof that the limit prescribed in cl. (c) talks, in regard to the expenditure falling within sub-cl (i) thereof of an amount calculated @ Rs. 5,000 for each month or part thereof comprised in the period of employment during the relevant previous year. Thus, according to the ld. Counsel's submission, the calculation of the limit is directly related to the length of service rendered by an employee during the previous year. Therefore, it is argued, the expenditure contemplated is the periodical payment by a way of monthly salary with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of the term "gratuity" in the following dictionaries: (1) Chambers; (2) concise Oxford; (3) Black's Law; (4) Jowitts' Dictionary of English Law; and (5) Short Oxford. He then referred to the provisions of s. 17(3) of the Act stating the meaning of the expression "profits in lieu of salary" which is part of the salary under s. 17(1)(iv) and pointed out that there is a specific exclusion in cl. (ii) of any payment referred to in cl. (10) and other clauses of s. 10 which is clearly indicative, according to the ld. counsel, of the exclusion from the meaning of the term "salary" or gratuity and other payments which have no relation to the period of service rendered by an employee during the year. According to the ld. counsel's submission, the exclusion of the payments of various clauses under s. 17(3) is indicative of the intention of the Legislature to exclude altogether payments and not merely with reference to the extent of exemption provided in s. 10. In any event it is submitted, where an employee is concerned, the limit prescribed at particular amount per month for the total period of his service during the year does not cover the gratuity payment but only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court decision in the case of Delhi Cloth General Mills Co. vs. Its Workmen, reported in Supreme Court's Labour Law Journal II, 1969, an extract of which has been furnished, and contended that the object of providing the gratuity scheme is to provide a retiring benefit to a workman for long and meritorious service rendered, and therefore, it is a payment on cessation of employment. Reference was also made to second proviso to s. 40A(5), cl. (iii) which provides for certain exclusions from the computation of the expenditure u/cl (i) or cl. (ii) of s. 40A(5)(a) which it would be seen, are specific payments covered by s. 36(1), cl. (iv) or (v). If we refer to s. 36(1)(iv) or (v), it will be seen, they are payments by way of contribution to a recognised provident fund or to an approved gratuity fund u/cl (v). It is argued that the exclusion of these payments from the computation of the limit is consistent with the principle that these recurring payments are regarded as periodic payments which but for this exclusion would have fallen within the provision and have, therefore, to be excluded and this reiterates that lump sum payment not related to any particular period of service i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not referable to services for which periodic payment is indicated; and (3) that the reference is periodic in the section is a measure which indicates the object of the enactment as covering only a remuneration or monthly salary for services rendered. 22A. The ld. Deptl. Rep. on the other hand vehemently opposed the contentions of the assessee. With regard to the assessee's claim that the gratuity does not at all fall within the scope of s. 40A(5), it was argued by him that this contention does not arise out of the order of the CIT (Appeals) as no such contention has been urged before the CIT (Appeals). It was reiterated that cl. (iii) of s. 17(1) is wide enough to cover any type of gratuity; that "profits in lieu of salary" in cl. (iv) necessarily, therefore, excludes gratuity, and consequently, s. 17(3) clarifying what "profits in lieu of salary" means, refers only to payments other than those by way of gratuity. The exclusion of death-cum-retirement and other gratuities covered by s. 10(10) of the Act in cl. (ii) of s. 17(3) is therefore, he argued, in keeping with the scheme of including every gratuity under s. 17(1)(iii). It was submitted that any considerations of inequity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) In the case of expenditure on payments by way of salary whether periodical like monthly salary and allowances or by way of lump sum payments like gratuity or compensation due to individuals who were in employment with the assessee but ceased to be in such employment for any reason, such as retirement of termination of service etc., in the course of previous year, is a separate limit of Rs. 60,000 applicable in so for as the payments are due to them after the cessation of their employment, it is the overall limit of Rs. 60,000 calculated Rs. 5000 per month applicable to the amount of expenditure on the payments due to them for the whole year? 25. There can be no dispute or quarrel with the general principles of construction of statutes canvassed by either party such as that the words should be construed or understood according to the subject matter of enactment; that any such construction should not lead to an inconvenient or unreasonable result; but considerations of hardship or integrity should not inhibit construction based upon express language and plain meaning of the words used; that there is a presumption against intending injustice or absurdity and therefore any con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the standard, the rule or measure of the limits specified in cl. (c). The scheme expresses in clear and unequivocal terms by the Expln. 2 what `salary' is, and to ascertain the meaning of the term `salary' therefore, we have only to look to s. 17, as slightly modified by the Explanation. Now, when we turn to s. 17 of the Act which defines the terms "salary", "perquisites" and "profits in lieu of salary", salary includes, inter alia, any fees, commissions, perquisites or `profits in lieu of or in addition of any salary or wages" u/cl (iv) of sub.s. (3) to that section. Sub-s. (3) states the meaning of the expression of phrase `profits in lieu of salary" as including, in cl. (1), the amount of any compensation due to or received by an assessee from his employer or former employer and/or in connection with the termination of his employment or the modification of the terms and conditions referred thereto and u/cl (ii) any payment excluding payment in cl. (10), among others, of s. 10, due to or received by an employee from his employer or former employer and even payment received from provident fund or other fund excluding an approved super-annuation fund, in so far a it does not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the term `salary' for the purpose of s. 40A(5) includes not merely the periodic payments monthly or otherwise of salary, wages and allowance but also every payment due, payable or paid by an assessee to an employee or a former employee. We say at this stage note in passing an ideal occasion to bring into play one of the principles of construction postulated by the learned counsel for the assessee that when any part of the definition of salary in s. 17 does not fir in with the intent, purpose and scope of the general scheme of s. 40A(5), it has to be ignored. Thus, it would appear that though payment received by an employee or ex-employee from a provident or other fund may be part of his salary chargeable in his hands according to s. 17(3), it would go out of the concept of salary for the purpose of s. 40A(5) because such a payment would not be an expenditure incurred by the assessee at the time of such payment. It would be a payment by a different entity and it stands to reason that the limit provided in s. 40A(5) on expenditure incurred by the assessee cannot apply to items which do not represent expenditure incurred by assessee. Another aspect of the scheme may, in this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject of the enactment should be avoided unless compelled to do so by the clear and unequivocal language of the enactment. In the light of the scheme of the section, as already set out above, the only way, according to us, in which we can give a reasonable, cogent and meaningful as well as purposeful interpretation in regard to the language employed in cl. (c) of s. 40A(5) is that it prescribed, whether Rs. 5,000 per month calculated for the period of service of an employee or a lump sum amount of Rs. 60,000 the method of calculating the limit or ceiling or permissible expenditure in computing the assessee's profits and does not indicate the nature of the expenditure sought to be limited. Otherwise the clause would lose its purport and object and would render the provisions of Expln. 2 to the section as purposeless and ineffective and would lead to construction defeating the very scheme and object of the section. As a matter of fact, the extract furnished by the assessee from the Supreme Court decision in Delhi cloth General Mills Co. vs. Its Workmen reported in Supreme Court Labour Law Journal II, 1969, itself shows that gratuity is not paid to the employee gratuitously or merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of his life etc. 29. As regards reference made in the course of the argument to cl. (iii) of the second proviso for supporting the assessee's contention that it excludes periodical payments which but for such exclusion would have come within the scope of the disallowable limit, we can only point out that it does not necessarily establish the assessee's contention. As we already stated the items excluded by this clause are the amount of contributions by an employer towards recognised provident fund or approved superannuation fund in cl. (iv) of s. 36 and contribution towards an approved gratuity fund in cl. (v). In the first place, there is nothing to indicate that the contribution referred to in these clauses are monthly or periodical contributions and, according to us, it would refer to the contribution for the entire previous year concerned, though it may in conceivable case be paid periodically. Secondly it is to be noted that the payment is not to an employee but to a fund set up for a specified purpose and the benefit of such contribution may not be normally available to the employee immediately, depending upon the rules prescribed for each fund. Furthermore, the very p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of disallowance. It also takes out of the scope of its mischief the amount provided for payment of any gratuity that has become payable during the concerned previous year. Moreover, the provisions of s. 40(7) were specifically enacted to cover a particular situation or contingency and according to the speech of the Finance Minister the object of the enactment is to obviate a doubt then existing that under the relevant provisions as then worded provisions made in the books of account by tax payers would also qualify for deduction which is not the intention, since the employer continues to have control over the funds. It is specifically to overcome this situation that the provisions of s. 40A(7) were introduced and enacted. 31. One of the reasons for the contention that lump sum payments like gratuity are not contemplated to be included in the expression "salary" for the purpose of this section is that it is not relatable to any period of service of the employee during the relevant previous year but referable to the entire service spread over a period of several years and therefore it does not fit in with the supposed scheme of coverage the remuneration for services rendered for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the period of six months would be permissible as a deduction, because the limit of Rs. 5,000 will not come into play at all as the salary payment for each month is below the ceiling. (2) Another employee is paid salary on Rs. 4.000 for the first six months of the year and Rs. 6,000 for the later half the total salary payable to the employee would come to Rs. 60,000 which prima facie, is permissible under this calculated @ Rs. 5,000 per month for the purpose of fixing the limit. But if we were to go by the actual salary the total amount admissible will only be Rs. 54,000 made up of the salary @ Rs. 4,000 per month for the first six months and @ Rs. 5,000 for the next six months, resulting in disallowance of Rs. 6,000. 32. There is also no merit in another argument of the assessee that since s. 40(c) which is said to be more rigid and strict cannot comprehend within its scope gratuity in the expression "remuneration" for the purpose of the said section, the provisions of s. 40A(5), being more liberal and applicable to the case of employees, should be held not to include in considering the expenditure for the purpose of the said section retirement gratuity, as the argument pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in s. 10(10) would have been covered by the term 'any payment' and the Legislature would not have excluded death-cum-retirement gratuity from profits in lieu of salary unless it was otherwise covered by its normal meaning. The construction placed by us does not also in any way run counter to the principles of construction stated in the decisions of T.T. Pvt. Ltd. vs. ITO (1980) 12 ITR 551 (Kar) and CIT vs. Avon Cycles (P) Ltd. (1980) 126 ITR 448 (P H) referred to by the ld. counsel for the assessee in the course of the argument. 34. At this stage, it is necessary to consider the Department's stand that the inclusion of any gratuity including the retirement gratuity within the meaning of "salary" is provided by s. 17(1) in its cl. (iii) and that such gratuity having already been provided for inclusion in cl. (iii), the same necessarily has to be excluded in considering the meaning of the term `profits in lieu of salary'" which is sought to be included by cl. (iv) and therefore, there is no scope for any exclusion also of any amount coming within the term "profits in lieu of salary" as stated in sub-cl. (ii) of sub-s. (3). We do not find any substance in this contention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to income-tax. Short Oxford Dictionary : A gift in return for services, the amount depending on the inclination of the giver, a tip. The provisions of s. 17(1), cl. (iii) and cl. (iv) and provisions of s. 17(3) can and have therefore to be reconciled and construed harmoniously by holding that the payment of gratuity as contemplated by s. 10(10), that is to say, payment by way of death-cum-retirement gratuity does not fall u/cl (iii) but only within the meaning of expression "profits in lieu of salary" as explained in s. 17(3). This according to us, is the only possible and reasonable view because there is no reason why it should be assumed that the expression "profits in lieu of salary" would otherwise include "any gratuity referred in cl. (iii) and not other items like fees, commissions, accumulations to the credit balance of an employee in a provident fund etc. In cls. (iv), (vi), etc. particularly because it is an inclusive definition and not an exhaustive one and if it includes these items, it should likewise provide for exclusion of such items also as having already been brought within the definition of "salary" under the various clauses of s. 17(1). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limit specified therein, the necessary implication being that any excess over the limit thereof is liable to inclusion in total income of the recipient employee. Such excess amount will therefore become chargeable to tax unless otherwise exempted by any other provision of the Act under the appropriate head of income specified in the statute. We have already seen that s. 17(3), but for the exclusion in cl. (ii) would comprehend the entire gratuity. It must therefore follow as a necessary consequence that the excess over the limit specified in s. 10(10) becomes chargeable as "profits in lieu of salary" falling within the scope of s. 17. Otherwise it will mean rendering the concerned provisions incongruous, a result which we must avoid attributing to the Legislature as its intention unless compelled to do so by the express, clear and unequivocal language of the statute, bearing in mind that a cardinal rule of construction of the provisions of a statute on a given subject matter is that all the connected and relevant provisions have to be interpreted in a harmonious and reasonable manner so as to achieve the intention of the Legislature and make its scheme workable and an interpretatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the services rendered during the previous year but also include lump sum payments by way of bonus, commission, compensation, gratuity, provident fund balance etc. Otherwise, it is difficult to see how an employer-assessee can be said to incur expenditure resulting in the payment of salary to a former employee, because salary payment as ordinarily understood is remuneration for services rendered under contract of employment and a payment to any person who is not an employee will not be regarded as salary except under an express provision such as the definition contained in s. 17 of the Act. The Legislature, therefore, has, in our view, provided two separate limits, one in regard to expenditure on salary to an employee calculated @ Rs. 5,000 per month or part of the month covered by the period of his employment and in the case of an ex-employee a ceiling on the amount of payment at Rs. 60,000. It may be noted that in either case, the real or effective limit after taking into consideration the gratuity paid or payable by an assessee is not merely the one calculated by cl. (c) of s. 40A(5) but increased by the amount exempt under s. 10(10) of the Act which, according to us, ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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