COMMISSIONER OF INCOME TAX vs N.J. PAVRI

S.H. KAPADL4, J.:

At the instance of the Department, the Tribunal has referred the following question for the opinion of this Court in respect of asst. yr. 1977-78, under s. 256(1) of the IT Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that out of gratuity of Rs. 47,250 received from Rallies India Ltd., by the assessee, an amount of Rs. 23,333 was not liable to be included in the total income of the assessee under s. 10(10)(iii) of the IT Act, 1961, in his assessment for the asst. yr. 1977-78 ?

The assessee is an individual. He retired from Air India on lst Aug., 1968. At that time, the assessee availed of full exemption of Rs. 30,000 under s. 10(10) as it then stood. In June, 1976, he retired from Rallies India Ltd. In June, 1976, he received gratuity of Rs. 47,250. This time, the assessee claimed Rs. 23,333 exempt under s. 10(10)(iii). This was denied by the AO vide order dt. 18th March, 1980. This order was passed under s. 143(3) of the IT Act. The assessee preferred an appeal against an order of AO to AAC who vide his order dt. 10th Dec., 1980, confirmed the disallowance made by the AO. Thereafter, appeal came to be preferred to Tribunal. Vide order bearing No. ITA/353/Bom/1981 the order passed by the authorities below came to be set aside. The Tribunal allowed the claim of the assessee for exemption under s. 10(10)(iii) of Rs. 23,333. Consequently, the present reference has come before this Court.

At the outset, it may be mentioned that in this present case we are concerned with provisions of s. 10(10) as it stood during the asst. yr. 1977-78.

In order to decide the above question, it would be relevant to quote s. 10(10) of the IT Act, 1961, as originally enacted.

"(10) any death- cum-retirement gratuity received under the revised Pension Rules of the Central Government or under any similar scheme of a State Government, a local authority or a corporation established by a Central, State or Provincial Act or any payment of retiring gratuity received after the first day of June, 1953, under the New Pension Code applicable to the members of the Defence Services; or any other gratuity not exceeding one-half month''s salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity is the paid, subject to a maximum of twenty-four thousand rupees or fifteen months salary so calculated, whichever is less; "

A bare reading of the above section as it stood before amendment by Finance Act, 1974, shows that gratuity payment to employees of the Government, local authority or a statutory corporation was totally exempted from payment of Income Tax whereas any other gratuity not exceeding 15 days'' salary for each year of completed service stood exempted subject to a maximum of twenty-four thousand rupees or fifteen months'' salary, whichever is less. The Finance Act, 1974 was brought into force to remove anomalies in the above provision. Accordingly, after the Finance Act, 1974 s.10(10) read as follows during the relevant asst. yr. 1977-78 :

"(10) (i) any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations, applicable to the members of the defence services;

(ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated in accordance with the provisions of sub-ss. (2) and (3) of s. 4 of that Act;

(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or* on termination of his employment, or any gratuity received by his widow, children or dependents on his death, to the extent it does not, in either case, exceed one-half month''s salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity is paid, subject to a maximum of thirty thousand rupees or twenty months'' salary so calculated, whichever is less;

Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from Income Tax under this clause shall not exceed thirty thousand rupees :

Provided further that where any such gratuity or gratuities was or were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assessee of such previous year or years, the amount exempt from Income Tax under this clause shall not exceed thirty thousand rupees as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years :

Explanation : In this clause, "salary" shall have the meaning assigned to it in cl. (h) of r. 2 of Part A of the Fourth Schedule; "

On reading the above-mentioned s. 10(10) in juxtaposition to unamended s. 10(10), it is clear that gratuity received by an employee of statutory corporation is now brought under sub-cl. (iii) of cl. 10 of s, 10. Prior to the said amendment, gratuity received by an employee of a statutory corporation was equated to gratuity received by employees of Central Government, State Government or local authority. Sec. 10(10) as amended by the Finance Act, 1974, consists of three sub-clauses. Retiring gratuities received by the employees of Central Government, State Government and local authority are fully exempted under sub-cl. (i) whereas under sub-cl. (ii) the tax exempt gratuity is put under ceiling. Under s. 10(10)(ii), as amended above, gratuity received by an employee under s. 4 of the Payment of Gratuity Act is exempted from Income Tax whereas under s. 10(10)(iii) any other retirement gratuity exceeding 15 days'' salary for each year of completed service was subject to maximum of thirty thousand rupees or twenty months'' salary whichever is less. In this context one has to see the two provisos to s. 10(10). The provisos refer to an employee working successively or simultaneously with more than one employer. The first proviso deals with a case where gratuity is received by an employee from two or more employers in the same year whereas the second proviso deals with a case where an employee who has received gratuity in an earlier year from a former employer receives gratuity from another employer in a latter year. In the case of the first proviso it is clear that the maximum amount of gratuity exempt from Income Tax will not exceed Rs. 30,000 whereas in the case of the second proviso it is clear that the ceiling limit of Rs. 30,000 shall be reduced by the amount of gratuity which has been exempted in the earlier year(s). Therefore, the overall monetary ceiling limit of Rs. 30,000 will apply in relation to all other gratuities under s. 10(10)(iii) whether received from statutory corporations or private employers. The Finance Act, 1974, has come into force w.e.f. 1st April, 1975.

In the light of the above discussion, submissions made by the learned counsel for the parties may be seen.

Mr. Chatterlee, learned counsel appearing on behalf of the Department contended that the total exemption that could be claimed in respect of the gratuity received from more than one employer was Rs. 30,000 and exemption to the extent of this amount had already been obtained by the assessee in asst. yr. 1969-70 in respect of the gratuity received from Air India and consequently no more exemption could be claimed in respect of the gratuity received from M/s Rallies India Ltd. He contended that cl. (10) of s. 10 inter alia consists of three sub-clauses. He contended that the first proviso refers to gratuity in second proviso which uses the expression "this clause". Accordingly, it was argued that the expression "this clause" in the second proviso would cover the entire cl. (10) of s. 10. Consequently, the gratuity of Rs. 30,000 received from Air India should be taken into consideration in working out the maximum amount of exemption under the second proviso and when that gratuity is taken into account, no more exemption was admissible. Mr. Mistry, learned counsel appearing on behalf of the assessee contended that under the above scheme of sub-cl. (iii) of cl. 10 of s. 10, the expression "this clause" in the second proviso cannot apply to all three sub-clauses of s. 10(10). He further contended that the assessee, in the present case, availed of the full exemption of Rs. 30,000 in 1968 under s. 10(10) as it then stood. He further contended that the Finance Act of 1974 came into force only w.e.f. Ist April, 1975. He contended that since in 1968 s. 10(10), as it then stood, gave full exemption to gratuity received from statutory corporation, the Finance Act, 1974, which came into force on 1st April, 1975, cannot be read retrospectively. He pointed out that when the gratuity was paid by Air India in 1968, the amount received by the employee from the statutory corporation stood fully exempted under the first part of s. 10(10) whereas after the section came to be amendment w.e.f. 1st April, 1975, employees receiving gratuity from statutory corporations are brought under sub-cl. (iii) of s. 10(10). Hence, according to the learned counsel for the assessee, it would not be open to the Revenue to aggregate the amount of tax exempt gratuities as provided for in the second proviso to s. 10(10)(iii).

Dealing with the contentions advanced on behalf of the Revenue that the expression "this clause" in the second proviso to s. 10(10) be that as applicable to all the three sub-clauses, we are of the view that the said expression in the second proviso applies only to sub-cl. (iii) of s. 10(10) and not to all the three sub-clauses of s. 10(10). As stated above, s. 10(10) as amended by the Finance Act, 1974, consists of three sub-clauses. Each of the sub-clauses deals with different types of gratuities. Sub-cl. (i) deals with retiring gratuities received by the employees of the Government/local authority whereas sub-cl. (ii) deals With gratuity payable under the Payment of Gratuity Act. On the other hand, sub-cl. (iii) refers to all other types of gratuities which are not falling under s. 10 (10) (i) and s. 10(10Xii). Moreover, the three gratuities covered by the three sub-clauses prescribe three different ceiling limits. If the above argument advanced on behalf of the Revenue is accepted it would defeat the scheme of the above s. 10(10) of the IT Act. In the circumstances, it is not possible to accept the contention advanced on behalf of the assessee (sic-Department) that the expression "this clause" in the second proviso should be read to apply to all the three sub-clauses. The question still remains as to whether under the second proviso gratuity received from Air India by the assessee in 1968 should be aggregated with the gratuity received from Rallies India Ltd. As discussed hereinabove, prior to the Finance Act, 1974, gratuities received by the employees of statutory corporations fell within first part of the above quoted old s. 10(10) whereas under the Finance Act, 1974, such gratuities fall under the expression "any other gratuity" referred to in sub-cl. (iii) of s. 10(10). To repeat, the ceiling limits prescribed by each of the sub-clauses vary. The object of the amendment clearly was to remove anomalies in the old s. 10(10) between the employees in the private sector and the employees in the statutory corporations. It is for this reason that the gratuities falling tinder the first part of old s. 10(10) stand removed and brought into the sub-cl. (iii) of s. 10(10) so that the gratuities payable to employees of statutory corporations and employees in private sector are subjected to common ceiling limit. Looking to the ''object of the amendment, we do not find merit in the contention advanced on behalf'' of the assessee that the Finance Act, 1974, cannot apply to gratuities received by the employees of statutory corporations prior to 1st April, 1975, in the matter of aggregation of tax exempt gratuities. The Finance Act, 1974, has made a specific provision to secure that the aggregate amount of tax exempt gratuity in such cases does not exceed Rs. 30,000. In cases where an employee who has received gratuity in an earlier year from a former employer or employers receives gratuity from another employer in a latter year, the ceiling limit of Rs. 30,000 will be reduced by the amount of gratuity which has been exempted in any earlier year or years. The overall monetary ceiling limit of Rs. 30,000 will apply in relation to all gratuities received from statutory corporations or private employers. To that effect is also the circular by the Board bearing No. 108, dt. 20th March, 1973. Hence, for different reasons given hereinabove, the AO as also AAO were right in coming to the conclusion that the assessee had fully availed himself of the exemption under s. 10(10) when he received gratuity from Air India and accordingly the entire gratuity received from Rallies India Ltd. is taxable under sub-cl. (iii) of cl. (10) of s. 10 read with the second proviso.

Accordingly, the above question is answered in the negative and against the assessee.

Reference stands accordingly disposed of with no order as to costs.