Retirement includes resignation in section 10(10AA) and 10(10)(iii)

Retirement includes resignation

Q Whether  per the provisions of section 10(10AA)(ii ) (Leave Encashment) and section 10(10)(iii) (Gratuity) the exemption is available only on retirement and not on resignation ?

Both “retirement” and “resignation” result in the conclusion of the service career. In fact resignation from service is also one of the modes of retirement from service. Resignation is a voluntary act of the employee to retire from service. Once an employee resigns, his service stand terminated from the date on which his letter of resignation is accepted by the appropriate authority, unless there is any law or statutory rule governing the conditions of service to the contrary. In other words, on acceptance of resignation, the employee stands retired from service. The word “retirement” has not been used in clause (10AA) in the restricted sense to mean “retirement on superannuation”. On the other hand, it is clear from the language of clause (10AA) itself that it has been used in the widest possible terms to mean and include all cases of retirement, whether on superannuation or otherwise. What is relevant is “retirement” – how it took place is immaterial for the purpose of this clause. It is, therefore, clear that if on retirement, even on resignation by the employee, an employee gets by way of leave encashment any amount, section 10(10AA) would apply and the assessee will be entitled to the benefit of the said clause to the extent mentioned therein.

Section 10(10AA) : Incomes not included in total income:- (Leave Encashment)

(10AA) (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise ;

(ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government :

Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause shall not exceed the limit so specified :

Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause shall not exceed the limit so specified, 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.—For the purposes of sub-clause (ii),—

the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;

Section 10(10)(iii):  Incomes not included in total income (Grautity)

 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 ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government :

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 the limit so specified :

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 the limit so specified 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, and in clause (10AA), “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule ;

IN THE ITAT MUMBAI BENCH ‘G’

Manish Chhabra*

v.

Assistant Commissioner of Income-tax, Circle 20(2), Mumbai

D.K. AGARWAL, JUDICIAL MEMBER AND R.K. PANDA, ACCOUNTANT MEMBER

IT APPEAL NO. 2046 (MUM.) OF 2010

[ASSESSMENT YEAR 2005-06]

MAY 27, 2011

1. Gopal and Jitendra Singh for the Appellant. R.K. Gupta for the Respondent.

ORDER

Shri D.K. Agarwal, Judicial Member. – This appeal preferred by the assessee is directed against the order dated 3-12-2009 passed by the Learned Commissioner of Income-tax (A) for the assessment year 2005-06.

2. Briefly stated facts of the case are that the assessee an individual derives income from salary, house property, business income as partner in the firms, capital gain and income from other sources. The return was filed declaring total income of Rs. 49,84,640. During the course of assessment proceedings, the Assessing Officer inter alia observed that the assessee in Form No. 16 attached with the return of income from M/s Hygenic Research Institute claimed an exemption of Rs. 6,50,000 under section 10 of the Income-tax Act, 1961 (the Act). The assessee was asked to explain as to how the exemption of Rs. 6,50,000 has been claimed from the income salary. In response, it was submitted by the assessee that the assessee has resigned as CEO of M/s Hygenic Research Institute with effect from 31-12-2004. Thereafter, the assessee was admitted a partner in the same firm M/s Hygenic Research Institute with effect from 1-1-2005 in the capacity as Karta of Kailash Chabra HUF videpartnership deed dated 14-3-2005. The assessee on resignation has received gratuity and leave encashment amounting to Rs. 6,50,000 i.e., Rs. 3,00,000 as leave encashment and further Rs. 3,50,000 as gratuity, which was claimed exempted under section 10(10AA)(ii) and under section 10(10)(iii) of the Act, respectively. In the assessment the Assessing Officer has observed that as per the provisions of section 10(10AA)(ii ) and section 10(10)(iii) the exemption is available only on retirement and not on resignation. It was further observed that as per the assessee’s letter dated 23-10-2007 he has resigned as CEO of M/s Hygenic Research Institute, which cannot be termed as retirement. For this proposition, the Assessing Officer has relied on the order of the Tribunal in the case of ITO v. Capt. S.S. Dhillon [1987] 27 TTJ 156, wherein it has been observed that the term retirement when read with superannuation has a clear meaning that a person retires after completion a period of service which entitles him to certain retirement benefits like pension, gratuity etc. The section, however envisages retirement other than the superannuation. However, it is not the same that as resignation from the contract service fit in the words retirements otherwise than on superannuation, because resignation and retirement are not the same thing. Accordingly, the Tribunal has held that the appellant in that case, is not eligible for exemption under section 10(AA)(i) or (ii) of the Act. The Assessing Officer has also distinguished the case laws cited by the AR of the assessee in the case of CIT v. D.P. Malhotra [1998] 229 ITR 394 / 98 Taxman 138 and CIT v. R.J. Shahney [1986]159 ITR 160 on the ground that the facts of the two decisions are different. He has also negated the contention of the assessee regarding the application of Boards notification dated 19-6-1973. Ultimately, the Assessing Officer has held that the assessee himself has agreed that he has continued with the same job profile in which he was working prior to his resignation. Therefore, according to the Assessing Officer, the entire arrangement is merely a ploy to evade the tax. He has further held that exemption under sections 10(10) and 10(AA) are available only in case of retirement or termination of employment. Since the assessee’s job profile has not changed and he has continued without any break in the same firm working under same capacity the assessee is not eligible for exemption as claimed. Accordingly, the exemption claimed was disallowed.
3. On appeal, the learned Commissioner of Income-tax (A) while agreeing with the views of the Assessing Officer in making the disallowance made by him also relied on the decision of the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 / 122 Taxman 111 for the proposition that the entire arrangement made by the appellant is only to reduce his tax liability which is a colourable device and hence, he confirmed the disallowance made by the Assessing Officer.
4. Being aggrieved by the order of the learned Commissioner of Income-tax (A), the assessee is in appeal before us challenging in ground Nos. 1.1 to 1.3, sustenance of disallowance of Rs. 6,50,000 made by the Assessing Officer.
5. At the time of hearing, the learned counsel for the assessee while reiterating the same submissions as submitted before the Assessing Officer and the learned Commissioner of Income-tax (A) strongly relied on the decision of the Hon’ble Jurisdictional High Court in the case of D.P. Malhotra (supra), wherein it has been held that the word “retire” under section 10(10AA) of the Act is of wide import and includes retirement by resignation thus leave encashment on resignation is therefore eligible for exemption under section 10(10AA). He, therefore, submits that the facts of the assessee’s case are similar to the case decided by the Hon. jurisdictional High Court, therefore following the same the exemption of Rs. 6,50,000 as claimed by the assessee be allowed in full. With regard to the decision in the case of McDowell & Co. Ltd. (supra) relied on by the learned Commissioner of Income-tax (A), he submits that in view of the above decision (supra), the reliance placed by the learned Commissioner of Income-tax (A) in the case of McDowell & Co. Ltd. (supra) is not applicable.
6. On the other hand, the learned DR supports the order of the Assessing Officer and the learned Commissioner of Income-tax (A).
7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as there is no dispute that the assessee was in service with M/s Hygenic Research Institute since 1-7-1991 and has resigned from the firm on 31-12-2004 and as retirement benefits the assessee received Rs. 3,00,000 as leave encashment which he claimed as exempt under section 10(10AA)(ii) of the Act and also received gratuity of Rs. 3,50,000 and claimed as exempt under section 10(10)(iii) of the Act. However, the Assessing Officer disallowed the same on the ground that as per the assessee’s letter dated 23-10-2007, the assessee has resigned as CEO of M/s Hygenic Research Institute which cannot be termed as retirement and for this proposition, the reliance was also placed by the Assessing Officer in the case of Capt. S.S. Dhillon (supra). Per contra, the case of the assessee is that in view of the decision of the Hon’ble jurisdictional High Court in the case of D.P. Malhotra (supra) the word “retire” under section 10(10AA) is of wide import and includes retirement by resignation, therefore following the same the leave encashment and gratuity on resignation are allowable as exemption under section 10(10AA)(ii) and under section 10(10)(iii) of the Act.
8. In D.P. Malhotra’s case (supra) the issue before their Lordships was as under :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the decision of the CIT(A) allowing deduction under section 10(10AA) of the Income-tax Act, 1961 even though the assessee resigned from the employment as per the salary certificate issued by the employer, viz., Shipping Corporation of India Ltd. ?”

It has been held as under :

“6. Thus both “retirement” and “resignation” result in the conclusion of the service career. In fact resignation from service is also one of the modes of retirement from service. Resignation is a voluntary act of the employee to retire from service. Once an employee resigns, his service stand terminated from the date on which his letter of resignation is accepted by the appropriate authority, unless there is any law or statutory rule governing the conditions of service to the contrary. In other words, on acceptance of resignation, the employee stands retired from service. The word “retirement” has not been used in clause (10AA) in the restricted sense to mean “retirement on superannuation”. On the other hand, it is clear from the language of clause (10AA) itself that it has been used in the widest possible terms to mean and include all cases of retirement, whether on superannuation or otherwise. What is relevant is “retirement” – how it took place is immaterial for the purpose of this clause. It is, therefore, clear that if on retirement, even on resignation by the employee, an employee gets by way of leave encashment any amount, section 10(10AA) would apply and the assessee will be entitled to the benefit of the said clause to the extent mentioned therein.

7. We are supported of our above opinion by the decision of the Madras High Court in CIT v. R.J. Shahney[1986] 159 ITR 160 (Mad.) : TC 32R.558. In that case also the assessee had resigned and retired from employment. The contention of the revenue was that since the words “whether on superannuation or otherwise” qualified retirement, unless it was a case of retirement from service on attaining a particular age, or some other reason, a case of resignation would not take in. Repelling this contention of the revenue, the Madras High Court held :

The retirement may be of various kinds. It may be on superannuation or voluntary. If there is any voluntary retirement from service, we are satisfied that the provisions of section 10(10AA) would apply.

8. In view of the above, we answer the question referred to us in the affirmative and in favour of the assessee.”
9. In CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2009] 310 ITR 421 (Bom.) it has been observed and held as under (page 443) :

“….Strong reliance was placed by the counsel for the revenue on the decision of the Apex Court in the case ofMcDowell & Co. [1985] 154 ITR 148 in support of his intention that the transaction in question was a colourable transaction entered into solely for the purpose of creating artificial loss and thereby reduce the tax liability. That decision has no relevance to the facts of the present case. In that case the assessee therein was liable to pay the excise duty on the total sale consideration. However, by an amicable device, the assessee therein made the buyer to pay excise duty. Since the buyer was not liable to pay excise duty, it was evident that the amount of excise duty paid by the buyer to the department was nothing but the sale price liable to be included in the sale consideration. In that context, it was held that the transaction was a colourable device. In the present case, none of the transactions are found to violate any of the legal provisions. Therefore, the decision of the Apex Court in the case of McDowell & Co. Ltd. does not support the case of the revenue.

It is pertinent to note that the Apex Court in the case of Azadi Bachao Andolan [2003] 263 ITR 706 has held that every transaction or arrangement which is perfectly permissible in law, but has the effect of reducing the tax burden of the assessee cannot be treated as illegitimate and ignored. In the present case, the assessee has demonstrated that the units were purchased for earning dividend income and that the sale of the units immediately after receiving the dividend was a commercial decision taken by the assessee. Even the majority decision in the case of Griffiths [1965] 58 ITR 328 (PC) supports the case of the assessee that the transaction in question was a trading transaction and in the absence of any allegation that it was a sham transaction, the assessee was entitled to claim set off of the loss irrespective of the fiscal impact. The minority view in Griffiths case which was followed in Finsburry Securities [1966] 43 TC 591 (HL) and Lupton [1971] 47 TC 580 (HL) would make no difference, because, the facts in those cases are wholly distinguishable. The decision of the Apex Court in the case of CCE v. Modi Alkalies & Chemicals Ltd. (171 ELT 155) is also distinguishable on facts because, in that case, the finding recorded was that both the entities were interdependent and there was common financial management. In the present case, admittedly mutual fund and the assessee are two independent and wholly unconnected entities.”

10. In the present case merely because the assessee has joined the said firm as partner in the capacity of Karta of HUF with effect from 1-1-2005 after resigning as CEO from M/s Hygenic Research Institute on 31-12-2004 does not mean that there is a colourable device as the exemption of retirement benefits i.e., leave encashment and gratuity was claimed by the assessee under the relevant provisions of the Act, supported by the decision of the Hon. Jurisdictional High Court in the case of D.P. Malhotra (supra) and moreover it is not the case of the revenue that the firm is not a genuine firm or the assessee’s HUF is bogus or the assessee even after resignation is working as CEO of the firm. This being so, we are of the view that the learned Commissioner of Income-tax (A) has erred in applying the decision in the case of McDowell & Co. Ltd. (supra). In this view of the matter and in the absence of any distinguishing feature or contrary decision placed on record by the revenue, we respectfully following the decision of the Hon’ble jurisdictional High Court (supra ) hold that since the assessee has resigned from M/s Hygenic Research Institute on 31-12-2004, the assessee is entitled to the exemption of leave encashment under section 10(10AA)(ii) and gratuity under section 10(10)(iii) of the Act. However, in the absence of any calculation and the limit as provided by the Central Government by notification in the official gazette as mentioned in the respective sub-sections, we are of the view that the matter should go back to the file of the Assessing Officer to examine the same afresh in the light of our directions given hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The grounds taken by the assessee are, therefore, partly allowed for statistical purpose.
11. Ground Nos.2 and 3 are against the levy of interest under sections 234A and 234B.
12. After hearing the rival parties and perusing the material available on record and keeping in view the submissions of the learned counsel for the assessee that the consequential relief be allowed to the assessee in respect of levy of interest under sections 234A and 234B, we hold and order accordingly. The grounds taken by the assessee are therefore partly allowed.
13. In the result, the assessee’s appeal stands partly allowed for statistical purpose.