Computation of benefit of gratuity & leave encashment is to be based on definition of salary under expl. to S. 10(10)

IN THE ITAT CHANDIGARH BENCH ‘B’

Gurmit Singh

Versus

Income-tax Officer, Ward 6, Patiala

IT APPEAL NOS. 756 TO 758 (CHD.) OF 2012

[ASSESSMENT YEAR 2008-09]

DECEMBER 27, 2012

ORDER

Mehar Singh, Accountant Member

The present appeals filed by different assessees are directed against the order dated 25.05.2012 passed by the ld. CIT(A) u/s 250(6) of the Income-tax Act, 1961 (in short ‘the Act’).

2. In these appeals, the assessees have raised similar grounds of appeal, except variation in amount of additions. Therefore, Grounds of Appeal, as raised by the assessee in ITA No. 756/Chd/2012, are reproduced hereunder as an illustrative case :

“1.  The word salary has nowhere in the Income Tax Act has been defined as Basic (+) DA. Section 17 of the Act defines, salary includes wages. Wages has been defined in the Minimum Wages Act-1948 and Payment of Gratuity Act, 1972 and by different IT Deptt. Circulars (Cir. No/46 dated 14.09.1970 and Cir No./90 dated 18.05.1973).

 2.  (a) Clause 2(h) of Part A of Fourth Schedule of the Act, the words are, “Salary includes dearness allowance, if the terms of the employment so provides.”

(b) Section 2(s) of the Gratuity Act defines “All emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment, xxxx”.

3.  There is a stress on the terms and conditions of the employment. Her terms of employment are given in and governed by Bipartite settlements:- Clause 6 of the Bipartite settlement define pay as “Pay for the purpose of D.A, HRA and Superannuation benefits shall mean Basic Pay, Stagnation Increments Special Pay, Graduation Pay, Professional Qualification Pay, Officiating Pay and Fixed Personal Pay, if any.

Relief Prayed

(1) The orders of Hon’ble CIT(A), Patiala, regarding salary terminology are bad in law and beyond all cannons of law and justice, may kindly be set aside. The meaning of the term salary has wrongly and arbitrarily has been held as basic (+) DA and not other pays, which has been & are still being considered while allowing superannuation benefits to the retirees.

(2) That additions of Rs. 35000/- on account of Gratuity & Rs. 29060/- on account of Leave encashment may kindly be exempted

It is, therefore, humbly prayed that the orders of the CIT(A) Patiala disallowing above prays may kindly be set aside with cost.”

3. In the course of present appellate proceedings, ld. ‘AR’ referred to tripartite Agreement to support his contentions. Ld. ‘AR’, further, referred to section 10(10) and section 10(AA) of the Act and Rule 2(h), as contained in Schedule IV, Part-A. For the sake of ready reference, the said Rule is reproduced hereunder :

“(h) “Salary” includes dearness allowance, if the terms of employment so provide, but exclude all other allowances and perquisites.”

4. Ld. ‘DR’, on the other hand, placed reliance on the order passed by the lower authorities.

5. We have carefully perused and considered the rival submissions, facts of the case and the relevant records. The issue involved in these appeals, pertain to computation of gratuity and leave encashment. The AO has included basic pay + Dearness Allowance and applied the formula, as applicable to the gratuity and leave encashment, for the purpose of working out the eligible amount of gratuity and leave encashment. The relevant findings of the AO, are reproduced in para 5 & 6 of the order dated 27.10.2011, for the assessment year 2008-09, passed u/s 143(3) red with section 147 of the Act. The relevant part of the impugned order is reproduced hereunder :

“5. Gratuity : The assessee received gratuity of Rs. 350000/-which has been claimed as exempt u/s 10(10) of the Income-tax Act, 1961. The exempt amount of gratuity in the case of assessment was worked out at Rs. 255015/- by taking half month’s average salary on the basis of last ten months’ salary drawn multiplied by no. of years of service rendered and the assessee was asked vide note sheet entry dated 14.10.2011 to explain as to why gratuity of Rs. 94985/- may not be added to his income. The assessee vide his reply dated 20.10.2010 has furnished a copy of bank’s letter dated 19.10.2011 stating that gratuity has been paid to the assessee under the Gratuity Act, 1972. Since the gratuity has been paid to the assessee under the Gratuity Act as confirmed by the bank in its letter, the gratuity allowable u/s 10(10) is worked out under Gratuity Act, 1972 by accepting the version of the assessee. On the date of hearing itself i.e. 20.10.2011, it was pointed out to the assessee that gratuity allowable as per Gratuity Act, 1972 works out to Rs. 315000/- by taking the last month’s salary drawn – Rs. 19500/- in this case – i.e. Rs. 14890 basic + Rs. 4610 D.A. multiplied by completed years of service (28 years in this case) divided by 15/26 i.e. 19500x28x15/26 resulting in an addition of Rs. 35000/- (350000 – 315000) to which no reply could be furnished by him. Therefore, an addition of Rs. 35000/- as worked out above is made to the returned income of the assessee. As the assessee has concealed the particulars of his income of Rs. 35000/-, penalty proceedings are initiated u/s 271(1)(c).

6. Leave encashment : The assessee had received an amount of Rs. 175772/- as leave encashment which was claimed as exempt u/s 10(10AA) of Income-tax Act, 1961. The exempt leave encashment in this case was worked out at Rs. 146712/- by taking one month’s average salary on the basis of last ten months’ salary drawn multiplied by no. of days of leave at his credit divided by 30. Salary for this purpose includes basic pay and dearness allowance and excludes all other allowances. In the present case, average basic pay & dearness allowance for one month comes to Rs. 18990/- (14746 basic plus 4444 DA) and the assessee had at his credit leave of 233 days. Thus, the exempt leave encashment works out to Rs. 146712/- i.e. 18890/30×233. Vide note sheet entry dated 14.10.2011, the assessee was confronted with the calculations of allowable exempt leave encashment u/s 10(10AA) and it was pointed out to him that an addition of Rs. 29060/- (i.e. 175772-146712) is to be made on account of excess leave encashment claimed exempt and the case was adjourned to 20.10.2011. On 20.10.2011, no reply was furnished by the assessee. Therefore, an addition of Rs. 29060/- is made to the assessee’s income being excess leave encashment claimed exempt by him. As the assessee has concealed the particulars of income, penalty proceedings u/s 271(1)(c) are initiated separately.”

6. The findings of the AO were upheld by the CIT (Appeals) and the same are reproduced hereunder, for the purpose of proper appreciation of the same :

“5.1 The facts of the case is that the assessee received gratuity of Rs. 3,50,000/- which was claimed as exempt u/s.10(10). As contended by the appellant before the AO, the gratuity was paid as per Gratuity Act and therefore the AO recomputed the exempt amount by taking half months average salary on the basis of last ten months salary drawn (basic plus D.A) multiplied by number of years of years of service rendered. When confronted as to why the excess gratuity claimed be not disallowed, the appellant did not offer any comment. The excess claim of Rs. 35,000/- was therefore disallowed. Before me the appellant contended that bank salary mean basic pay, special pay, fixed personal pay, professional pay and DA.

5.3 I have gone through the submissions made and I am of the opinion that the AO has rightly computed the amount of gratuity exempted under the Act by following definition of salary as per Fourth Schedule, Part A Rule 2(h) which defines salary for the purpose of this Act.

5.4 In view of this part of the ground no. 2 is dismissed.

6. The third part of the 2nd ground of appeal contests the disallowance of Rs. 29,060/- out of leave encashment under the provisions of section 10(10AA) of the IT Act.

6.1 The brief facts of the case is that the appellant received an amount of Rs. 1,75,722/- as leave encashment and claimed this as exempt u/s 10(10AA). The AO held that salary for this purpose means basic pay and DA and excludes all other allowances. The AO recomputed the leave encashment exempt on the basis of definition of salary as above and disallowed the excess claim of Rs. 29,060/- When confronted before making the impugned addition, the appellant did not offer any comment before the AO.

6.2 Before me the appellant contended that bank salary includes basic pay, special pay, fixed personal pay, professional pay and DA as per Bank’s scheme. I have gone through the submissions and I am of the opinion that the AO has rightly computed the extent of exemption available u/s 10(10AA) by adopting definition of salary as per clause (h) of Rule 2 of para A of Fourth schedule which defines salary for the purpose of this Act.

6.3 In view of this, this part of ground no. 2 is dismissed.“

7. For the purpose of proper appreciation of the relevant statutory provisions of section 10(10) and 10(AA), it is relevant to reproduce the Explanation to section 10(10) of the Act :

“Explanation – “[In this clause and in clause 10(AA), “salary” shall have a meaning assigned to it in clause (h) of Rule 2 of Part-A of the Fourth Schedule;]

8. In view of the Explanation, the computation of benefit of gratuity and leave encashment, as contemplated u/s 10(10) and 10(AA) are to be governed by the definition of ‘salary’ contained in the above Explanation and not by any agreement, as contended by the ld. ‘AR’, viz 8th Bipartite Settlement on wage revision and other similar conditions between Indian Banks’ Association and their Workmen. The definition of ‘salary’ as reproduced above is squarely and specifically applicable to section 10(10) and 10(AA) of the Act and, hence, any other definition of ‘salary’ cannot be imported and applied to such sections.

8(i) This view is, further, supported by the direct decision of the Hon’ble Madras High Court in the case of K. Gopal Krishan v. Central Board of Direct Taxes [1994] 206 ITR 183. The Hon’ble Madras High Court has specifically dealt with the definition of ‘salary’ in the context of section 10(10) and 10(10AA) of the Act. The head-notes of the decision are reproduced hereunder :

“Exemption-Constitutional Validity of Provision-Gratuity-Exemption Granted by Sections 10(10) and 10(10AA) – Difference Between Employees of Government and Statutory Corporations and Employees in Private Sector – Provisions do not Offend Article 14 – Provisions are Valid-Meaning of “Salary” For Purposes of Sections 10(10) and 10(10AA)- No General Definition of Salary in the Income-tax Act Applicable for all Provisions-Definition of Salary in Sections 10(10) and 10(10AA) is Valid-Income-tax Act, 1961, ss. 10(10), 10(10aa)- Constitution of India, Arts. 14, 226.”

8(ii) The Hon’ble Madras High Court further held as under:

“There is no general definition of the word “salary” applicable for all the provisions of the Income-tax Act. The Explanation to section 10(10) states that, “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 to the Income-tax Act”. Clause(h) of rule 2 of Part A of the Fourth Schedule reads that “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. There is no ambiguity whatever in the definition contained in the above clause, and it is the said definition which should be applied while construing section 10(10) and section 10(10AA).”

8(iii) In the ultimate analysis, Hon’ble High Court concluded the matter as under :

“Hence, the contention of the petitioner that the expression “salary” found in section 10(10) and section 10(10AA) of the Income-tax Act should be given a wider meaning than found in clause (h) of rule 2 of Part A of the Fourth Schedule is wholly untenable. Thus, the petitioner is not entitled to the grant of any part of the prayer made by him in the writ petition.”

8(iv) Hon’ble Madras High Court has categorically and clearly held that expression ‘salary’ appearing in section 10(10) and 10(10AA) cannot be given a wider meaning than that found in clause (h) of Rule 2 of Part A of the Fourth Schedule.

9. As the issues in question are covered by the above decision of the Hon’ble Madras High Court and also by the plain language of the statutory provisions and the relevant Rule, the contention of the appellants is not legally and factually tenable. Respectfully following the ratio of the decision of the Hon’ble Madras High Court, as reproduced above, the grounds of appeal of the appellant are dismissed and findings of the CIT (Appeals) are upheld.

10. As the issues involved in ITA No. 757/Chd/2012, A.Y. 2008-09, in the case of Paramjit Kaur Sarao and ITA No. 758/Chd/2012 A.Y. 2008-09, in the case of Shri Harbans Singh, are identical to the issues adjudicated by us in ITA No. 756/Chd/2012 A.Y. 2008-09, in the case of Shri Gurmit Singh, these appeals are also dismissed, following the findings recorded in ITA No. 756/Chd/2012 in the case of Shri Gurmit Singh.

11. In the result, all the appeals of the assessees are dismissed.