Commissioner of Income Tax vs P.M. Mehra

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, made at the instance of the Commissioner, the Income Tax Appellate Tribunal, Bombay Bench has referred the following question to us for opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the words ''completed service'' occurring in section 10(10) of the Income Tax Act, 1961, should be interpreted to mean an employee''s total service under two different employers including the employer other than the one from whose service he retired for the purposes of the calculation of the period of years of his completed service, provided he was not paid gratuity by the former employer ?"

The assessee is an individual and the relevant assessment year is 1974-75. The previous year is the financial year ending on March 31, 1974. During this financial year, the assessee retired from service from the firm of Messrs. Danfoss (India) Limited of which he was an employee for ten years. It is an accepted position that before joining Messrs. Danfoss (India) Limited, he was in the employment of another company, viz., Messrs. Industry and Export Risk Insurance Corporation Private Limited, where he served for eight years. He, however, did not get any gratuity from the said employer as he had put in service of less than ten years. It is also an accepted position that he joined the new employment on the condition that the new employer company would pay gratuity to him on retirement by taking into account the total service that he would have put in under both the companies taken together.

On his retirement, he was paid gratuity by the later company amounting to Rs. 17,100 calculated by taking into account the period of service both under the then employer and the former employer. The assessee claimed exemption from Income Tax in respect of the amount of gratuity by virtue of section 10(10) of the Act, but the Income Tax Officer confined the exemption only to the gratuity which related to the period of service rendered by him to the then existing employer from whose employment he had retired. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income Tax Officer.

However, on further appeal, the Income Tax Appellate Tribunal accepted the assessee''s claim and directed the Income Tax Officer to give exemption in respect of the entire amount of Rs. 17,100 u/s 10(10) of the Act. The Tribunal held that the words, each year of completed service used in section 10(10) of the Act cannot be confined to the completed years of service under one employer. It may be under one employer or more than one employer, but the aggregate amount cannot exceed the ceilings mentioned in the Act. The Commissioner applied for reference to this court and the Tribunal has accordingly referred the aforesaid question for opinion u/s 256(1) of the Act.

We have heard learned counsel for the Revenue, Mr. Jetley. Section 10 of the Act in its various clauses specifies clauses specifies the income which is not to be included in computing the total income of any person. Clause (10) thereof deals with gratuity. The relevant provision of section 10(10) applicable in the instant case is one contained in sub-clause (iii) thereof which, so far as relevant, as it stood at the relevant time, reads as follows :

"(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 dependants 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 twenty-four thousand rupees or fifteen 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 twenty-four thousand rupees :

Provided further that where any such gratuity or gratuities was or where 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 twenty-four 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."

A plain reading of the aforesaid provision makes it clear that gratuity received by employee on his retirement, etc., is not included in his total income to the extent mentioned therein. The extent is that it should not exceed one-half month''s salary for each year of completed service calculated on the basis of average salary for the three years immediately preceding the year in which the gratuity is paid and that the maximum amount should not exceed Rs. 24,000 or 15 months'' salary. The lower of the two is the ceiling.

It is evident that this clause only restricts the gratuity exempt from tax to "one-half month''s salary for each year of completed service." It nowhere speaks of service with the same employer who pays the gratuity. Payment of gratuity by the employer depends upon the terms of employment or the relevant service rules. Where a person, who is already employed somewhere, leaves such service to join a new employer, it may be agreed under the terms of the new employment, as in the present case, that the period of service under the former employer would also be taken into account in calculating the gratuity due to him on retirement etc. Once he agrees to do so and takes that period into consideration, at the time of his retirement for calculation of gratuity, in limitation can be imported while granting relief u/s 10(10) of the Act in the absence of any specific limitation contained in that provision itself already indicated, section 10(10)(iii) does not contain any such words of limitation. It only refers to "completed years of service". It will be against all canons of interpretation to add to it the words "with the same employer".

We are, therefore, of the clear opinion that there is no such limitation u/s 10(10) of the Act, The period of employment may by under one employer or more than one employer. It is the total period that is material. However, if the person concerned has already received gratuity from the previous employer for any period of service, such period cannot again be computed from the purpose of calculating the amount of gratuity for the purposes of clause (10).

In the instant case, admittedly, no gratuity was received by the assessee from his previous employer. Under the circumstances, we answer the question referred to his in the affirmative and in favour of the assessee.

We make no order as to costs.