Income-tax---

----Exemption---Gratuity received from statutory corporation or, private employer---Ceiling for exemption---Law applicable---Effect of amendment of S.10(10) in 1974---Retirement gratuity received from more than one employer---Provision that amount exempted in earlier year will be taken into account in computing ceiling---Provision applicable to retirement gratuity received .prior to 1-4-1975---C.B.T. Circular No.108, dated 20-3-1973-- Indian Income Tax Act, 1961, S.10(10).

A bare reading of section 10(10) of the Income Tax Act, 1961, as it stood before the amendment by the Finance Act, 1974, shows that gratuity payable to the employees of he 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 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. Section 10(10) as amended by the Finance Act, 1974, consists of three sub clauses. Retirement gratuities received by the employees of the Central Government, State Government and local authorities are fully exempted under sub-clause (i), whereas under sub-clause (ii) the tax exempt gratuity is put under ceiling. Under section 10(10)(ii), as amended, gratuity received by an employee under section 4 of the Payment of Gratuity Act, 1972, is exempted from income-tax, whereas under section 10(10)(iii) any other retirement gratuity exceeding 15 days' salary for each year of completed service is subject to a maximum of thirty thousand rupees or twenty months' salary, whichever is less. In this context, one has to see the two provisos to section 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 later 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 section 10(10)(iii) whether received from the statutory corporations or private employers. The amendment made by the Finance Act, 1974, has come into force with effect from April 1, 1975. The expression "this clause" in the second proviso to section 10(10) applies only to sub-clause (iii) of section 10(10) and not to all the three sub-clauses of section 10(10). The ceiling limits prescribed by each of the sub-clauses vary. The object of the amendment clearly was to remove anomalies in the old section 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 under the first part of the old section 10(10)-stand removed and brought into sub-clause (iii) of section 10(10) so that the gratuities payable to employees of statutory corporations and employees in the private sector are subjected to a common ceiling limit. Looking to the object of the amendment, there is no merit in the contention that the Finance Act, 1974, cannot apply to gratuities received by employees of statutory corporations prior to April 1; 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 later 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, dated March 20, 1973.

The assessee retired from Air India on August 1, 1968. At that time, the assessee availed of the full exemption of Rs.30,000 under section 1.0(10) as it then stood. In June, 1976, he retired from R. In June, 1976, he received gratuity of Rs.47,250. This time the assessee claimed Rs.23,333 as exempt under section 10(10)(iii). The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim but the Tribunal allowed it. On a reference:

Held, that the assessee had fully availed of the exemption under section 10(10) when he received gratuity from Air India and, accordingly, the entire gratuity received from R was taxable under sub-clause (iii) of clause (10) of section 10 read with the second proviso.

B.M. Chatterjee with R. V. Desai instructed by L.S. Sherry for the Commissioner.

J.D. Mistry instructed by Crawford Bayley & Co. for the Assessee.

JUDGMENT

S. H. KAPADIA, J.---At the instance of the Department, the Income-tax Appellate Tribunal has referred the following question for the opinion of this Court in respect of the assessment ,year 1977-78, under section 256(1) of the Income Tax 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 Rallis 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 section 10(10)(iii) of the Income Tax Act, 1961, in his assessment for the assessment year 1977-78?"

The assessee is an individual. He retired from Air India on August 1, 1968. At that time, the assessee availed of full exemption of Rs.30,000 under section 10(10) as it then stood. In June, 1976, he retired from Rallis India Limited. In June, 1976, he received gratuity of Rs.47,250. This time, the assessee claimed Rs.23,333 as exempt under section 10(10)(iii). This was denied by the Assessing Officer vide order, dated March 18, 1980. This order was passed under section 143(3) of the Income-tax Act. The assessee preferred an appeal against an order of the Assessing Officer, to the Appellate Assistant Commissioner who vide his order, dated December 10, 1980, confirmed the disallowance made by the Assessing Officer. Thereafter, the appeal came to be preferred to the Income-tax Appellate Tribunal. Vide Order bearing No.I.T.A./353/Bom. of 1981 the order passed by the authorities below came to be set aside. The Tribunal allowed the claim of the assessee for exemption under section 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 the provisions of section 10(10) as it stood during the assessment year 1977-78.

In order to decide the above question, it would be relevant to quote section 10(10) of the Income Tax 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 months' 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;."

A bare reading of the above section as it stood before the amendment by the Finance Act, 1974, shows that gratuity payable to the 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, section 10(10) read as follows (luring the relevant assessment year 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 Penstion 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 provisions of subsections (2) and (3) of section 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 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 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 clause (h) of rule 2 of Part A of the Fourth Schedule:"

On reading the abovementioned section 10(10) in juxtaposition to unamended section 10(10), it is clear that gratuity received by an employee of the statutory corporation is now brought under sub-clause (iii) of clause (10) of section 10. Prior to the said amendment, gratuity received by an employee of a statutory corporation was equated to gratuity received by the employees of the Central Government, State Government or local authority. Section 10(10) as amended by the Finance Act, 1974, consists of three sub-clauses. Retiring gratuities received by the employees of .the Central Government, State Government and local authority are fully exempted under sub-clause (i) whereas under sub-clause (ii) the tax exempt gratuity is put under ceiling. Under section 10(10)(ii), as amended above, gratuity received by an employee under section 4 of the Payment of Gratuity Act is' exempted from income-tax, whereas under section 10(10)(iii) any other retirement gratuity exceeding 15 days' salary for each year. of completed service was subject to a maximum of thirty thousand rupees' or twenty months' salary, whichever is less. In this context, one has to see the two provisos to section 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 later year. In the case of the first proviso it is clear that the maximum amount o1 gratuity exempt from Income-tax will not exceed Rs.30,000 whereas in the case of 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 section 10(10)(iii) whether received from the statutory corporations or private employers. The Finance Act, 1974, has come into force with effect from April 1, 1975.

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

Mr. Chatterjee, 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 the assessment year 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 Rallis India Limited. He contended that clause (10) of section 10, inter alia, consists of three sub-clauses. He contended that the first proviso refers to gratuity in the 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 clause (10) of section 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-clause (iii) of clause (10) of section 10, the expression "this clause" in the second proviso cannot apply to all three sub clauses of section 10(10). He further contended that the assessee, in the present case, availed of the full exemption of Rs.30,000 in 1968 under section 10(10) as it then stood. He further contended that the Finance Act of 1974 came. into force only with effect from April 1, 1975. He contended that since in 1968 section 10(10), as it then stood, gave full exemption to gratuity received from the statutory corporation, the Finance Act, 1974, which came into force on April 1, 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 section 10(10) whereas after the section came to be amended with effect from April 1, 1975, employees receiving gratuity from the statutory corporation are brought under sub-clause (iii) of section 10(10). Hence, according to learned counsel for the assessee, would not be open to the Revenue to aggregate the amount of tax exempt gratuities as provided for in the second proviso to section 10(10)(iii).

Dealing with the contentions advanced on behalf of the Revenue that the expression "this clause" in the second proviso to section 10(10) be applicable to all the three sub-clauses, we are of the view that the said expression in the second proviso applies only to sub-clause (iii) of section 10(10) and not to all the three sub-clauses of section 10(10). As stated above, section 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-clause (i) deals with retiring gratuities received by the employees of the Government/local authority whereas sub-clause (ii) deals with gratuity payable under the Payment of Gratuity Act. On the other hand, sub-clause (iii) refers to all other types of gratuities which are not falling under section 10(10)(i) and section 10(10)(ii). 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 section 10(10) of the Income-tax Act. In the circumstances, it is not possible to accept the contention advanced on behalf of the Revenue that the expression "this clause" in the second proviso should be read to apply to all the three sub-clause. 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 Rallis India Limited. As discussed hereinabove, prior to the Finance Act, 1974, gratuities received by the employees of the statutory corporations fell within the first part of the above-quoted old section 10(10) whereas under the Finance Act, 1974, such gratuities fall under the expression "any other gratuity" referred to in sub-clause (iii) of section 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 section 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 under the first part of the old section 10(10) stand removed and brought into the sub -clause (iii) of section 10(10) so that the gratuities payable to the employees of the statutory corporations and the employees in the private sector are subjected to a 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 the statutory corporations prior to April 1, 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 later year, the ceiling limit of RsJ0,000 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 the statutory corporations or the private employers. To that effect is also the circular by the Board bearing No.108, dated March 20, 1973. Hence, for different reasons given hereinabove, the Assessing Officer as also the Appellate Assistant Commissioner were right in coming to the conclusion that the assessee had fully availed of the exemption under section 10(10) when he received gratuity from Air India and accordingly the entire gratuity received from Rallis India Limited is taxable under sub -clause (iii) of clause (10) of section 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.

M.B.A./31/FC

Order accordingly.