Voluntary retirement compensation and chargeability to tax if payment is stretched over a period of years
SUMMARY OF CASE LAW
Benefit in lieu of salary payable to an employee opting for voluntary retirement is exempted from being charged to tax to the extent of Rs. 5 lakhs by reason of section 10(10C); even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year.
CASE LAW DETAILS
Decided by: HIGH COURT OF CHHATISGARH, In The case of: ITO v. Dhan Sai Srivas, Appeal No.: Tax Case No. 15 of 2007, Decided on: JUNE 16, 2009
Section 10 (10C) of the Act was inserted in order to make voluntary retirement attractive so as to reduce human complements for securing economic viability of certain companies. It was intended to make voluntary retirement more attractive and beneficial to the employees opting for voluntary retirement. Therefore, this has to be interpreted in a manner beneficial to the optee for voluntary retirement, if there is any ambiguity.
12. Section 15 (a) of the Act provides for chargeability of salary to tax as soon it becomes due, though not paid. As soon the salary becomes due, the incurring of the liability is complete. As soon the liability is incurred, it becomes a deemed payment in view of definition of ‘pay’ defined under Section 43(2) of the Act. In the present case, though the amount of monthly benefit payable under the voluntary retirement scheme consists of salary or benefit in lieu of salary, as defined in Section 17(1) or (3) read with Section 43(2) of the Act. Prior to amendment in the Act, 2003, any amount “received” by an employee on his voluntary retirement in accordance with any scheme of voluntary retirement, was not to be included in computing his total income for the previous year. Exemption is available to the extent of Rs.5,00,000/ -. Under the scheme liability to pay was incurred and the amount became payable at the time when the employee was released having opted for the voluntary retirement under the scheme. Therefore, this is an amount, which is receivable by the employee at the time of voluntary retirement according to the scheme and become chargeable to tax under clause (a) of Section 15 of the Act, even though not paid.
13. Section 10 (10C) of the Act specifies that in computing total income received by any category of employee described in the section at the time of his voluntary retirement or termination of his service, along with a scheme or schemes of voluntary retirement, is not to be included to the extent of such amount does not exceed Rs.5 Lac. The second proviso to the section further lays that where exemption has been allowed to an employee under that clause for any assessment year, no exemption thereunder shall be allowed to him in relation to another assessment year. Section 15 of the Act is couched in the widest possible terms to include within its ambit every kind of remuneration of every kind of servant, however highly or lowly placed he may be. It brings to charge (1) any salary due, in the previous years, whether paid or not; (2) advance salary; and (3) arrears of salary. Thus, the amount payable under the voluntary retirement scheme is salary within the meaning of Section 17 (1) or (3) read with Section 43(2) of the Act.
17. The core question for our consideration in these appeals is the interpretation of expression “amount received” in Section 10 (10C) of the Act prior to Amendment, 2003.
18. Expression used in the statute is not always to be interpreted literally or grammatically. Sometimes it has to be interpreted having regard to context in which expression is used and having regard to the object and purpose for which the same is enacted. Tax laws have to be interpreted reasonably and in consonance with justice adopting pervasive approach. Contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.
19. It is well recognized principle that subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon the earlier Act where the earlier Act is obscure or ambiguous or readily capable of more than one interpretation. (State of Bihar Vs. S.K. Roy, AIR 1966 SC 1995). While interpreting the words “refunded” as used in clause (b) of Section 15 of the Central Sales Tax Act, 1956 the Hon’ble Apex Court in the matter of Thiru Manickam and Co, Versus The State of Tamil Nadu reported in (1977) 1 SCC 199 held that ambiguity in the language of clause (b) of Section 15, as it existed at the relevant time, the matter is made clear by the amendment made in the Central Act by the Central Sales Tax (Amendment) Act, 1972. It has been held that the fact that the amendment of clause (b) Section 15 was not like some other provisions given retrospective effect, would not materially affect the position. As already mentioned above, the legislature as a result of the amendment, clarified what was implicit in the provisions as they existed earlier. An amendment which is by way of clarification of an earlier ambiguous provision can be useful aid in construing the earlier provision, even though such amendment is not given retrospective effect.
20. It could not be the intention of the legislature to extend benefit under Section 10 (10C) of the Act to the employees, who retired before 1.4.2004, to restrict the sum to the extent the amount actually received by them at the time of voluntary retirement for that particular assessment year and to other employees of the some organization who opted for voluntary retirement after 1.4.2004 to extend that benefit for the amount received by them as well as the amount receivable by them in the subsequent financial years. Therefore, we are of the considered opinion that amendment was clarificatory and curative in nature.
21. Therefore, to the extent of Rs.5 Lac, the said amount is exempted from being charged to tax by reason of Section 10 (10C) of the Act. Even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year. An amount becomes chargeable once it is earned whether it is received or not. Since the employee was not in service, therefore, the deferred payment will not continue and it would not be a salary from service, neither a deferred payment of salary nor arrear payment of salary, since the scheme postulates an one time payment in consideration of voluntary retirement though the payment is deferred in five installments. Therefore, it would not be a payment of salary outside the scope of Section 10 (10C) of the Act. The characteristic cannot be changed because of stretching over of the period of payment of dues under the scheme.
22. On the basis of aforesaid discussions, we hold that salary or benefit in lieu of salary payable to an employee opting for voluntary retirement is chargeable to tax under Section 15 (a) as soon as it became due, though not paid. The amount so received is exempted from being charged to tax to the extent of Rs.5,00,000/ – by the reason of Section 10 (10C) of the Act. Even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year.