JUDGMENT K.S. Radhakrishnan, J.
1. Whether the voluntary retirement from service would fall under the term "termination of employment" within the meaning of Section 17(3) of the Income-tax Act and the relief under Section 89(1) is admissible after the grant of exemption under Section 10(10C)(viii) of the Income-tax Act is the question that arises for consideration in these cases.
2. Petitioners were officers and employees of State Bank of Travancore who had availed of the benefit of voluntary retirement scheme (in short VRS) framed by the Bank in accordance with the guidelines prescribed under Rule 21-A of the Income Tax Rules. Altogether 915 employees had opted for the benefit of the Scheme and retired from service with effect from 31.3.2001. Bank had deducted at source the income-tax on the taxable income for the year 2000-2001 after excluding five lakhs under Section 10(10-C)(viii) of the Income-tax Act. After excluding that amount the Bank arrived at the tax payable by each of the employees taking into account the allowances and reliefs and such other deductions under Chapter VI A to Chapter X. Employees who took voluntary retirement therefore were found entitled to relief under Section 89(1) of the Income-tax Act in respect of payment under the provisions of Clause (3) of Section 17.
3. Employees later filed their return for the assessment year 2001-2002 to the concerned office. Assessing Officer however based on a letter F.No 174/5/2001-ITA.I dated 23.4.2001 issued by the Central Board of Direct Taxes to the Chief Commissioner of Incometax, Bangalore issued notices to all the employees and initiated proceedings against the retired employees of the several branches of the Bank under Section 201(1A) of the Act stating that the employees are not entitled to relief in excess of Rs. 5 lakhs granted under Section 10(10C)(viii) and hence no relief could be granted under Section 89(1) read with Rule 21A/Appendix Two in respect of the ex gratia of golden hand shake payment effected under VRS in excess of Rs. 5 lakhs. Assessing officer also imposed penalty and levied tax on the said amounts due.
4. The assessing officer also issued notice to the employer under Section 201(1A) of the Income-tax Act stating that the Bank had not complied with the above mentioned statutory provisions and hence threatened to impose penalty and levy of interest on the amounts paid to the employees. State Bank of Travancore has therefore filed O.P. No. 8150 of 2002 challenging the action of the Department in taking action against the employer and also for a declaration that the Bank has rightly deducted the amount while granting benefits to its employees on their voluntary retirement. Employees who had availed of the benefit of the voluntary retirement scheme have also questioned the circular and prayed for a direction to the Department not to levy, impose or demand tax from the petitioners by denying the reliefs under Section 89(1) of the Act and also for other consequential reliefs.
5. We heard Senior Counsel Sri Pathrose Mathai, who appeared for the Bank and Sri Mathews V. Jacob appearing for the employees and also heard Senior Standing Counsel for Income-tax Department Sri. P.K. Ravindranatha Menon.
6. Counsel appearing for the petitioners submitted that the deduction by way of relief under Section 89(1) is distinct and different from the exclusion or exemption from the total income under Section 10(10C). Counsel submitted that the respondent had failed to appreciate the provisions of Section 10(10C) which excludes substantial amount of the total income for the purpose of Income-tax Act and that the petitioners are legally entitled to get the benefit of Section 89(1) read with Rule 21 A/Appendix II and under the provisions of Clause (3) of Section 17 of the Act.
7. Senior Counsel appearing for the Income-tax Department on the other hand contended that relief under Section 89(1) read with Section 17(3) of the Act applies only in the case of termination of service of an employee. Counsel submitted that the amount is received in connection with the termination of employment is a capital receipt and in the nature of retrenchment compensation and not a profit in lieu of salary. Counsel submitted relief under Section 89(1) can be claimed only when portion of the assessee's salary is received as arrears or in advance for a period of more than twelve months in a financial year or the amount received is a profit in lieu of salary under Section 17(3). Counsel further submitted relief under Section 89(1) is admissible only when compensation is received in connection with employment and in the case of voluntary retirement there is no termination of employment.
8. The question that falls for consideration in these cases, as we have already indicated, is whether ex gratia compensation received by the petitioners on their voluntary retirement as per the voluntary retirement scheme is entitled to relief under Section 89(1) of the Income-tax Act read with Section 17(3)(1) of the Act. Madras High Court in Commissioner of Income Tax v. G.V. Venugopal had occasion to consider whether employees who had availed of the voluntary retirement scheme is entitled to exemption under Section 10(10C) as well as relief under Section 89(1) in respect of payment under the voluntary retirement scheme. Assessing authority in that case placed reliance on the clarification issued by the Central Board of Direct Taxes addressed to the Chief Commissioner of Incometax-III, Bangalore vide letter dated 23rd April 2001, so also in the present case. We may also extract the relevant portion of that clarificatory letter.
I am directed to say that the amount upto Rs. 5 lakhs received under VRS is exempt as per the provisions of Section 10(10C)(iii) and after allowing this exemption the balance amount of Rs. 5 lakhs is not eligible for relief under Section 89(1) as per the proviso provided under Section 10(10C) which says...no exemption thereunder shall be allowed to him in relation to any other assessment year. Thus, distributing the amount of compensation in more than one assessment year is not permissible as per the existing provisions.
Interpreting the above clarification, the court in G.V. Venugopal's case, supra (2005 (273) ITR 307) held as follows:
We are of the opinion that the view taken by the Assessing Officer is clearly incorrect. The second proviso to Section 10(10C) only refers to exemption claimed in any other assessment year. It is well settled that every assessment year is a self contained unit. The assessment year in question in the present case is 2001-02 and the exemption claimed is in respect of this assessment year, although the exemption granted under Section 89(1) has been spread over several years. The mere fact that the relief has been spread over several years, does not mean that the relief is not in respect of a particular assessment year.
The Tribunal has rightly pointed out that in the Income-tax Act, there are several provisions granting twin or double benefits, while in other provisions, twin or double benefit has been specifically prohibited. There is no prohibition to the twin benefits in respect of the amount received under the voluntary retirement scheme. The relief contemplated under Section 89(1) of the Act is aimed to mitigate hardship that may be caused on account of the high incidence of tax due to progressive increase in tax rates. Hence, we entirely agree with the view taken by the Income Tax Tribunal.
(emphasis added) We are in this case also concerned with the question as to whether employee who has taken retirement under the voluntary retirement scheme is entitled to get relief under Section 89(1) read with Section 17(3)(i) of the Income tax Act. Senior Counsel appearing for the Revenue submitted that relief under the above mentioned provision would be available only with regard to the compensation received by an employee in connection with the termination of the employment and not in a case where compensation received by way of voluntary retirement. Counsel submitted that the Legislature is well aware of the distinction between the expressions "voluntary retirement", "termination of employment" and "retirement" when it used the expression voluntary retirement under Section 10(10C)(viii) of the Act. We may for easy reference extract the above mentioned provision. Section 10(10C)(viii) which stood at the relevant assessment year reads as follows:
Incomes not included in total income.-
10. In computing the total income of previous year of any person, any income falling within any of the following clauses shall not be included-
XXX XXX XXX (10 C) "any amount received" (or receivable) by an employee of - (i) a public sector company; or XXX XXX XXX viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf; on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in Sub-clause (i), a scheme of voluntary separation, to the extent such amount does not exceed five lakh rupees.
Provided that the schemes of the said companies or authorities or societies or Universities or the Institutes referred to in Sub-clauses (vii) and (viii), as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed:
Provided further that where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year.
Where, by reason of any portion of an assessee's salary being paid in arrears or in advance or by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of Clause (3) of Section 17 is a profit in lieu of salary, or is in receipt of a sum in the nature of family pension as defined in the Explanation to Clause (iia) of Section 57, being paid in arrears, due to which his income is assessed at a rate higher than that at which it would otherwise have been assessed, the assessing officer shall, on an application made to him in this behalf, grant such relief as may be prescribed.
Section 17(3) of the Act is also relevant for our decision hence the same is also extracted below:
XXX XXX XXX (3) "profits in lieu of salary" includes- (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;
(ii) any payment other than any payment referred to in Clause (10), Clause (10A), Clause 10(B), Clause (11), Clause (12), Clause (13) or Clause (13A) of Section 10, due to or received by an assessee from an employer or a former employer or from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation-- For the purposes of this sub-clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in Clause (10D) of Section 10.
(iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person--
(A) before his joining any employment with that person; or (B) after cessation of his employment with that person.
9. The Revenue has already raised a contention that since the term "voluntary retirement" has not been used by the Legislature in Section 89(1) read with Section 17(3)(i), benefit available under Section 89(1) read with Section 17(3) and Rule 21-A of the Income-tax Rules are available only to those employees whose services have been terminated. Further it was pointed out that the words "termination of employment" have been used in Section 17(3) of the Act and therefore the amount received by the employee from the employer at or in connection with the termination of employment whether due to disciplinary proceedings or otherwise, would alone be entitled to get relief under Section 89(1) of the Act.
10. Section 89 finds a place in Chapter VIII of the Income tax Act which deals with rebates and reliefs. Part A relates to rebate of income tax and Part B deals with relief for income tax. Provisions contained in Chapter VIII deal with rebates and reliefs which are beneficial provisions applicable to employees or persons in service. Courts strongly lean against construction which reduces the statute to a futility and when two interrelations of a taxing statute is possible, the one in favour of the assessee has to be accepted and the courts should give effect to the purpose and object of the said provision. Status of an employee whose service has been terminated by way of disciplinary proceedings cannot be on a higher pedestal than a person who took voluntary retirement. Compensation received by an employee by way of termination of service would get the benefit of Section 89(1) of the Act, then we fail to see why the benefit be not extended to employees who receive compensation by way of voluntary retirement. Literally termination means ending, consequence is the same, the employee is ceased to be in employment either by way of disciplinary proceeding or by availing the benefit of voluntary retirement scheme.
11. Termination of employment may be due to various reasons; by way of resignation, dismissal, compulsory retirement, superannuation or even by voluntary retirement. Reasons for termination of service is not material. Reference may be made to the decision of the Madras High Court in C.I.T. v. J. Visalakshi . The Court while interpreting Section 89(1) of the Act read with Section 17(3) held that there is no justification to confine the meaning of the word "termination" only to the cases of voluntary retirement or superannuation. The court held that Section 89(1) read with Section 17(3) of the Act are beneficial clauses intended to grant certain benefits to employees or persons in service and therefore while placing interpretation on such clauses, the object with which such clauses are provided in the Act must be borne in mind, the object being to grant certain benefit to the person whose service is terminated. The court took the view that if the meaning of the word "termination" is confined to cases of voluntary retirement or superannuation only, the object of the clause will not be fully achieved and it would amount to restricting the scope of the beneficial clause. We are in full agreement with the reasoning of the Madras High Court in Visalakshi's case, supra . The Madras High Court in C.I.T. v. Raman held that the Tribunal was right in holding that the amount received by the employee at the time of voluntary retirement of service would be regarded as salary and the relief under Section 89 of the Act would be admissible in respect of the amount received by the assessee from his employer at the time of voluntary retirement. Similar is the view taken in C.I.T. v. G. Venugopal (2005) 273 ITR 397.
12. Section 89(1) is a beneficial provision which has been placed under Chapter VIII dealing with Rebates and Reliefs and therefore has to be interpreted in tune with the object and purpose for which those provisions have been incorporated. If Section 89(1) read with Section 17(3)(1) of the Act is intended to give benefit to employees on the amount of compensation received from the employer on termination of service, we fail to see why compensation received by an employee on voluntary retirement be not given the same benefit. There is no intelligible differentia between the employees who receive compensation by way of termination of service and on voluntary retirement with the object sought to be achieved. The object sought to be achieved is to mitigate or alleviate the hardship that may be caused on account of high incidence of tax due to progressive increase of tax. The word "salary" used in Section 17 includes profit in lieu of salary, which has been defined in Section 17(3) to include any amount of compensation due or received by the assessee from the employer in connection with the termination of service. Payment received by way of voluntary retirement scheme also is covered by the word "salary", which has to be given a wider meaning. In our view, the word termination of service is used in Section 17(3)(i) in a liberal sense so as to take all categories of cases, such as voluntary retirement, superannuation, compulsory retirement, resignation, dismissal and so on.
13. We are therefore inclined to allow all these Writ Petitions and hold that compensation amount received by the employees under the voluntary retirement scheme from the Bank are entitled to get relief under Section 89(1) read with Section 17(3)(1) of the Act over and above the exemption granted under Section 10(10C)(viii) and the letter No. F. 17415/2001-ITA-1 dated 23.4.2001 issued by the Central Board of Direct Taxes, Bangalore would stand quashed.