LT.As. Nos. 1920/LB,1934/LB, 1913/LB, 2183/LB to 2191/LB of 2001, decided on 30th October, 2003. VS LT.As. Nos. 1920/LB,1934/LB, 1913/LB, 2183/LB to 2191/LB of 2001, decided on 30th October, 2003., 2004 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 762 (2003)

(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 16‑‑‑Salary‑‑‑Golden Hand Shake Scheme‑‑‑Approved funds Surrender of service‑‑‑Figures which were not compensation in lieu of surrender of service and were in fact deposits of the assessee in various approved funds required a separate treatment.

2003 PTD (Trib.) 909 rel.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑‑S. 16‑‑‑C.B.R. Circular No.15 of 1997, dated 6‑11‑1997‑‑‑Salary‑‑ Golden ' Hand Shake Scheme‑‑‑Termination of service‑‑‑Leave encashment‑‑‑Treatment‑‑‑While calculating leave encashment the amount could not be presumed. to have covered as various allowances in terms of house rent allowance, conveyance allowance etc ' ‑‑‑Leave encashment was entirely a separate payment which was compensation against leave not availed by the assessee during the service he had done‑‑‑Leave encashment was a separate compensation which had got nothing to do with the termination of the service.

Writ Petition No. 14026 of 2000 and 2002 PTD 562 ref.

2003 PTD (Trib:) 909 rel.

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 16‑‑‑Salary‑‑‑Leave encashment‑‑‑Allowances‑‑‑Concept of allowance etc. etc. would not exist in case of leave encashment‑‑‑Such amount shall either be treated as chargeable to tax or not chargeable to tax as a whole.

Muhammad Asif, D.R. for Appellant (in I.T.A. No.1920/LB, 1934/LB, 1913/LB, and 2183 to 2191/LB of 2001).

Abdul Qaddus Mughal for Respondent (in I. T. A. No. 1920/LB of 2001).

Ch. Mubarik Ali, F.C.A. . for Respondent (in I.T.As. Nos. 1934/LB and 1913/LB of 2001)

Muhammad Arif (Assesse) in person (in I.T.A. No.2190/LB of 2001).

Date of hearing: 30th October, 2003.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑In all the above cases petitioner is the Department.

Brief facts leading to these appeals are that the above assessees, were bank employees who proceeded on retirement under Golden Hand Shake Scheme during the relevant assessment year. The bank as a compensation to their premature retirement paid a fixed amount. The sum received by the said employees being in lieu of surrender, of their service was considered as salary by the Assessing Officers and were accordingly taxed.

It was challenged before the First Appellate Authority under the argument that the compensation in lieu of surrender of service is not synonymous to the compensation for termination of service. In this regard the famous judgment given by Mr. Justice Malik Muhammad Qayyum in Writ Petition No. 14026 of 2000, dated 3‑11‑2000 was referred with advantage. In the said judgment learned Mr. J. held that the respondent Income Tax Department is not entitled to charge income tax on the amount paid under the Golden Hand Shake Scheme. The CIT(A) followed the same and after remarking that the Assessing Officer himself has mentioned that the amount received by the assessee is a benefit in lieu of surrender of the remaining service‑ and not for the past service; was not a "Salary". Further the appellant's initial contract of employment did not include the terms relating to Golden Hand Shake Scheme by virtue of which the appellant was obliged to quit his job. Since the receipts were received under new terms, which did not form part of the contract sighed by the employee with the employer at the time of joining service, it was beyond the said contractual relationship. This was called to be as a windfall, an amount of causal nature having been paid not for doing something but for surrender of the future secured job. The learned CIT(A), therefore, ultimately held that this amount of tax was not supported by any legal context and was, therefore; deleted.

Further to above the amount of leave encashment had also been brought to tax by holding that the same too forms part of the definition of salary. The CIT(A) appreciated that a part of the assessee salary paid earlier were inclusive of house rent allowance and. other perquisite and a percentage of said amount is exempt. He, therefore, set aside the same for reconsideration of the amounts, which are exempt and form part of the compensation received by the assessee in lieu of leave encashment. ,

The Department now before us says that after the judgment of the Single Bench as is referred above so many more decisions have come into field. Among all these decisions the most recent is reported 2002 PTD 562. It was said that above judgment has come in supersession to all earlier findings on the subject as The Honourable High Court has taken due cognizance of all the decisions announced prior to the same. The Honourable High Court in unequivocal terms has held the amount received by the assessee for surrender of his service to be as profit in lieu ea salary and thus "salary". The assessee having received this salary in lump sum was definitely liable to tax thereon as a salaried person. However, since the C.B.R. itself has, through Circular No.15 of 1997, dated 6‑11‑1997 directed for distribution of salary to three years the amount should be apportioned accordingly. Such an apportionment shall reduce the rate of tax and obviously shall provide some relief to said retired employees of the banks. The judgment has set the controversy at rest as a result of which‑now amount received by an assessee against termination of service have been held to be as `salary'. The CIT(A) order to that extent, therefore, stands reversed. There are, however, certain exceptions to. the finding. Firstly the Department has taken the entire amount as a whole and has ignored that as a result of the contract the compensation was inclusive of various personal deposits including Provident Fund, Benevolent Fund, Group Insurance etc.. These amounts have been specifically exempted from charge of tax which aspect stands ignored as the orders earlier framed were without proper service to the assessees.

Before proceeding ahead reference to the relevant para. of the above judgment shall be of help. It speaks as follows:‑‑

"Therefore, we are of the considered view that payments received by the petitioners from their employers are covered by the definition of the word "salary" which is one of the heads given in section 15 under which such receipts are to be taxed. In the given situation, however, we are of the view that C.B.R. Circular No. 15 of 1997, dated 6‑11‑1997 whereby amounts in hands of an employee were directed to be assessed in the light of earlier Circular No.l/65, dated July 1, 1965 was clearly bene ficial. Accordingly all petitioners and those placed in similar situation will be entitled to the benefits of Circular No.1 of 1965. The declaration made by this Court in various judgments against issuance of Circular No.1 of 1997 operates only to the extent of the advise given by the C.B.R. to the Assessing Officers as to the taxability of the receipt. The later part of the circular extending concession of Circular No. 1/65 shall however remain intact and shall be available to all those who wish to avail it."

Obviously in the presence of above finding we 'now have no reason before us to give much thought to the arguments of the assessee with regard to the treatment of the amount on termination of service. However, so far as the amounts which were in fact assessee deposits and which in any case they were to draw even if they were not to be compensated against the period of surrender of services, deserve a separate treatment. We have not been provided the contract of Golden Hand‑Shake Scheme and in fact in some of the above cases the assessees have requested for set aside so as to settle these aspects at the subordinate level. We obviously have no option in the absence of facts of each case as well as the copy of the contract under Golden Hand Shake Scheme. However, we feel convinced that the figures which are not compensation in lieu of surrender of service and were in fact deposits of the assessee in various approved funds require a separate treatment. In this regard we are fortified from our own judgments given in the case of Ittehad Chemicals (Pvt.) Limited reported as 2003 PTD (Trib.) 909 wherein on the basis of contract between the company and its employee we have held a part of the compensation to be as not covered within the definition of salary. The 'ratio of said judgment is as follows:

"The case is set aside for determination of the following:‑

(i) The total amount of gratuity paid and to what extent it' is exempt, whole or partly;

(ii) How many payments are, above the threshold on which tax was deductible;

(iii) How many employees have paid taxes on this amount by themselves.

All those figures which are covered in the above three categories shall be reduced from the figure after verification. The balance if any shall be added in the income. of the assessee under section 24(c)".

The case of the assessee, therefore, with regard to the amounts, which are not covered within the ratio of the judgment of the Honourable High Court, therefore, shall be treated separately in each case in view of separate exemption provided by law respectively in each case on each issue. In this regard, however, it does not sound correct that while calculating leave encashment the amount should be presumed to have covered as various allowances in terms of house rent allowance conveyance allowance etc. This is entirely a separate payment which is compensation against leave not availed by the assessee during the service he has done. This is a separate compensation which has got nothing to do with the termination of the service hence obviously is not covered within the judgment of the High Court above and the other cases on this point. Moreover, there is no concept of allowance of rebate of perquisite therein. However, if there is some specific exemption available to the said figure under law anywhere in the Income Tax Ordinance obviously it shall not be denied to the assessee, therefore, we partly agree with the Department that in the leave encashment the concept of allowances etc etc. does not exist. This amount shall either be treated as chargeable to tax or not chargeable to tax as a whole and the observation of the CIT(A) with regard thereto is a misconception. In one of the cases it was said that the average rate of tax has not properly been calculated. This argument also stands covered, by out discussion above. We, therefore, do not need any further dilation into it: Obviously if after reassessment some of the payments received by the assessee are found to be beyond the scope of the decisions of the Honourable, High Court as well as ITAT the average rate of tax shall be reduced.

The fate of all the above judgment is obvious. The Department succeeds to the extent of charge of the compensation received in lieu of termination of service being salary, however, subject to the exceptions detailed supra. All the appeals, therefore, stand decided accordingly.

C.M.A./1029/Tax (Trib.)Order accordingly.