Tax Case (Appeal) No. 983 of 2004

Decided on December 6, 2004

The Judgment of the Court was delivered by

Markandey Katju, C.J:— This appeal is filed under section 260A of the Income-tax Act, 1961 (in short “the Act”) against the order of the Income-tax Appellate Tribunal, Madras “C” Bench. Heard learned counsel for the parties.

2. The substantial question of law arising in this appeal is as follows:

“Whether in the facts and circumstances of the case, the Tribunal was right in holding that the assessee is eligible to claim simultaneous benefit under section 10(10C) as well as section 89(1) in respect of the compensation received under the voluntary retirement scheme ?”

3. The Assessing Officer disallowed the relief under section 89(1) of the Act in addition to the exemption allowed under section 10(10C) of the Act. However, the Commissioner of Income-Tax (Appeals) held in favour of the assessee, and the Tribunal also has confirmed the order of the Commissioner of Income-tax (Appeals). Hence, this appeal. The facts in this appeal are that for the assessment year 2001-02, the assessee G.V Venugopal filed return of income on July 5, 2001, declaring the total income of Rs. 3,33,280. The Assessing Officer held that the asses-see has made inadmissible claim for relief under section 89(1) on the amount received from the employer in excess of Rs. 5,00,000 in lieu of the assessee's voluntary retirement/separation from the employment.

4. The assessee had been an employee of the State Bank of India and had opted for voluntary retirement and was paid Rs. 5,85,072 by the employer under the special scheme of VRS framed in accordance with the guidelines described under rule 21A of the Income-tax Rules (In short “the Rules”). This amount received by the assessee under the special VRS package was in addition to the regular retirement benefits such as gratuity, leave encashment salary, etc. The assessee claimed exemption of income of Rs. 5 lakhs from the said VRS amount under section 10(10C) of the Act and offered balance amount for tax as income from the salary. At the same time, the assessee also claimed relief of Rs. 8,883 under section 89(1) on this amount by spreading the same in three preceding assessment years as provided in rule 21A of the Rules.

5. The question in this appeal is as to whether the assessee was entitled to relief under section 89(1)?

6. Section 89(1) reads as follows:

“Where an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance or is in receipt, in any one finan-cial year, of 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 total 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.”

7. Section 10 of the Income-tax Act states:

“In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—….

(10C) any amount received or receivable by an employee of—

(i) a public sector company; or

(ii) any other company; or

(iii) an authority established under a Central, State or Provincial Act; or

(iv) a local authority; or

(v) a co-operative society; or

(vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or

(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961); or

(viia) any State Government; or

(viib) the Central Government; or

(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or

(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 accord-ance 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 assess-ment year.”

8. The Assessing Officer held that:

“Thus section 10(10C) gives a one time relief of maximum of Rs. 5 lakhs out of retirement benefit but it is restricted to one year only. Now the assessee is trying to claim further relief out of retirement benefit not only over and above Rs. 5 lakhs, but spread over earlier three assessment years also. Hence, the proviso to section 10(10C) is clearly violated if the assessee's version is accepted.”

9. In appeal the Commissioner of Income-tax (Appeals) was of the view that the Assessing Officer was not justified in disallowing the relief under section 89(1) in addition to exemption allowed under section 10(10C). The Commissioner of Income-tax (Appeals) held as under:

“5.1 The next question is whether the appellant is simultaneously entitled to exemption under section 10(10C) as well as relief under section 89(1) in respect of VRS payment. The Assessing Officer has followed the clarification issued by the Central Board of Direct Taxes to the Chief Commissioner of Income-tax-III, Bangalore vide letter dated April 23, 2001, which is reproduced as under:

‘I am directed to say that the amount up to 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 pro-vided under section 10(10C) which says…. no exemption there-under 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 provi-sions.’

5.2 In the above clarification reference has been made to the pro-viso to section 10(10C) which says that no exemption ‘thereunder’ shall be allowed to the assessee in relation to any other assessment year. This proviso is reproduced as under:

‘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 assess-ment year.’

The use of the word ‘thereunder’ in the above proviso means that once exemption is allowed, again no exemption ‘thereunder’, i.e, under section 10(10C) shall be allowed in relation to any other assess-ment year. The word ‘thereunder’ referred to in this proviso cannot mean any section other than section 10(10C). This view draws support from the Central Board of Direct Taxes Circular No. 657 dated August 30, 1993 (see [1993] 204 ITR (St.) 106). In paragraph 16 to 16.3 of this circular while explaining the scope and effects of the amendment introduced by the Finance Act, 1993, in section 10(10C) it has been stated as under (page 113):

‘Extending the tax exemption on payments under voluntary retirement schemes to employees of certain authorities.

16.1 The guidelines prescribed by the Board, specify that the amount receivable on account of voluntary retirement of an employee should not exceed five hundred thousand rupees. The intention was to restrict the benefit of income-tax exemption under section 10(10C) to the aforesaid amount in the case of an employee. The Finance Act incorporates the aforesaid intention in the law itself by providing that the amount exempt under section 10(10C) shall not exceed five lakh rupees.

16.2 The guidelines prescribed by the Board for framing the schemes of voluntary retirement further specify that the employee should not have availed of the benefit of any other voluntary retire-ment scheme in the past. It may be difficult for the employers to com-ply with this requirement where the employees do not disclose the fact of their having availed of such benefit in the past. It has, there-fore, been provided that where exemption has been allowed to an employee under section 10(10C) for any assessment year, no exemp-tion shall be allowed to him “thereunder” in relation to any other assessment year.’

5.3 Thus, ‘thereunder’ does not mean any section other than sec-tion 10(10C). This means the appellant is entitled for relief under sec-tion 89(1). Further, there is no specific or express provisions laid down in the Act that when exemption is allowed under section 10(10C), relief under section 89(1) is not allowable. In this connection, refer-ence can be made to other provisions of the Act where twin or double benefits have been curtailed by the statute wherever the statute has specifically so intended. For example, where a deduction has been allowed under section 80CCC, a rebate with reference to such amount cannot be allowed under section 88. In respect of the amount received under voluntary retirement scheme there is no such specific curtailment of benefits regarding exemption under section 10(10C) and relief under section 89(1). Basically relief contemplated under section 89(1) is aimed to mitigate hardship that may be caused on account of high incidence of tax due to progressive increase in tax rates. This can never be considered as a deduction or exemption like that of section 10(10C).

6. The Assessing Officer has relied on the letter of the Central Board of Direct Taxes addressed to the Chief Commissioner of Income-tax, Karnataka and Goa. However, this is not a circular which can be said to be binding on the Assessing Officer. In any case, this is not binding on the appellate authorities. Reliance is placed on the decision of the hon'ble Supreme Court in the case of CIT v. Hero Cycles P. Ltd., [1997] 228 ITR 463. In view of this, I hold that the above circular is not applicable to the case of the assessee.”

10. The appeal of the Department to the Tribunal was dismissed and hence, this appeal under section 260A of the Act.

11. Before dealing with the submissions of learned counsel for the Depart-ment, we would like to mention that there are two well settled principles in tax law:

(i) There is no equity in tax, and the principle of strict or literal con-struction applies in interpreting tax statutes. Hence, on the plain language of the statute, if the assessee is entitled to two benefits, he has to be granted both these benefits.

(ii) If there are two reasonable interpretations of taxing statutes, the one in favour of the assessee has to be accepted.

12. The principle of strict interpretation of taxing statutes was best enun-ciated by Rowlatt, J. in his classic statement : (Cape Brandy Syndicate v. IRC, [1921] 1 KB 64, 71)

“In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

13. In A.V Fernandes v. State of Kerala, [1957] 8 STC 561 (SC); AIR 1957 SC 657, the Supreme Court of India stated the principles as follows: If the Revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the sub-stance of the matter.

14. Hence, in taxing statutes the language cannot be strained (State of Pun-jab v. Jullundur Vegetables Syndicate, [1966] 17 STC 326 (SC); AIR 1966 SC 1295). If the words of a taxing statute fail, so must the tax. The courts cannot, except rarely and in clear cases, help the draftsman by a favourable construction Income Tax Officer, Tuticorin v. T.S Devinath Nadar & Others, [1968] 68 ITR 252 (SC); AIR 1968 SC 623 and CIT v. Elphinstone Spg. and Wvg. Mills Co. Ltd., [1960] 40 ITR 142 (SC); AIR 1960 SC 1016. However, a fair and reasonable con-struction must be given : CWT v. Kripashankar Dayashanker Worah, [1971] 81 ITR 763 (SC); (1971) 2 SCC 570 : AIR 1971 SC 2463 and R.B Jodha Mai Kuthiala v. CIT, [1971] 82 ITR 570 (SC)).

15. In Innamuri Gopalam and Maddala Nagendrudu v. State of A.P, [1963] 14 STC 742 (SC); [1964] 2 SCR 888 the exemption was denied to the asses-see on the ground that the intention of the notification was to avoid double taxation, and as this was not a case of double taxation no exemption could be granted. The Supreme Court held that on the plain language of the notification, the assessee was entitled to exemption, and since the inten-tion was not reflected in plain words, it could not be taken into consi-deration.

16. It is the first principle of interpretation that a statute should be read in its ordinary, natural and grammatical sense. As observed by the Supreme Court of India:

“In construing a statutory provision the first and foremost rule of construction is the literary construction. All that the court has to see at the very outset is what does the provision say. If the provision is unambiguous and if from the provision the legislative intent is clear, the court need not call into aid the other rules of construction of statutes. The other rules of construction are called into aid only when the legislative intent is not clear.”

17. This principle is applied with particular emphasis while interpreting tax-ing statutes vide Income Tax Officer, Tuticorin v. T.S Devinath Nadar & Others, [1968] 68 ITR 252 (SC); AIR 1968 SC 623 and the fundamental principle of interpreting taxing stat-utes is the principle of strict construction. In this respect taxing statutes are to be interpreted differently from beneficial legislation (e.g, labour laws) Surendra Kumar Verma v. Central Government Industrial Tribunal-cum-Labour Court, [1980] 57 FJR 67; (1980) 4 SCC 443 : AIR 1981 SC 422 or the State Trading Corpn. Of India Ltd. v. Cto, [1963] 33 Comp Cas 1057; AIR 1963 SC 1811), where the principle of liberal interpretation applies.

18. In CIT v. G. Hyatt, [1971] 80 ITR 177 (SC); (1971) 1 SCC 466 : AIR 1971 SC 725 the ques-tion was whether under section 17(3) of the Income-tax Act, 1961, the interest on the assessee's own contribution to an unrecognized provident fund could be treated as salary. The Supreme Court of India held that the language of section 17(3) was plain and un-ambiguous, and hence the said amount was not salary but income from other sources and taxable under section 56.

19. In Polyester and Co. Ltd. v. Addl. CST, [1978] 41 STC 409; (1978) 1 SCC 636 : AIR 1978 SC 897 the question was whether sales outside Delhi would also be included in taxable income. The Supreme Court held that the section used the word “resale” simpliciter, and hence it referred to all resales and could not be limited to resales within Delhi alone. Thus, the Supreme Court went by the plain language of the statute, and did not speculate on the intention of the Legislature.

20. In Hemraj Gordhandas v. H.H Dave, Assistant Collector, [1978] 2 ELT 350, the Supreme Court of India considered the language of a notification under the Central Excise Tariff and held that all that was required for claiming an exemption was that the cotton fabric must be produced on power looms owned by the co-operative society. There was no further requirement in the language of the notification that the cotton fabric must be produced by the society for itself. The Supreme Court refused to go into the question of the intention behind the exemption since the language of the notification was clear.

21. In Assessing Authority-cum-Excise and Taxation Officer v. East India Cotton Mfg. Co. Ltd., [1981] 48 STC 239 (SC) the concessional rate under the Punjab sales tax was payable if certain raw materials were used in the manufacture of goods for sale. The contention of the assessee was that the word used in the Act was “for sale” and not “for sale by him” and hence the goods sold by a third party were also covered by the provision. This contention was accepted by the Supreme Court which followed the literal rule of interpretation.

22. In Commissioner Of Wealth Tax, Gujarat-Iii, Ahmedabad v. Ellis Bridge Gymkhana, [1998] 229 ITR 1 (SC); (1998) 1 SCC 384 : AIR 1998 SC 120, the Supreme Court held that the word “individual” in the charging section could, not be stretched to include an association of persons. The court held that the charging section had to be construed strictly, and if a person could not be brought within the ambit of the charging section by clear words, he could not be taxed at all.

23. Where a product is equally covered by clear wording of the amended item, reference to the past history of the unamended item is irrelevant (Reliance Silicon (I) Pvt. Ltd. v. Collector, Central Excise, Thane., [1997] 1 SCC 215).

24. A liberal interpretation of a taxing provision cannot be adopted on the plea that this would advance the purported object of the Act by encour-aging the establishment of industrial undertakings in backward areas (CIT v. N.C Budharaja and Co., [1993] 204 ITR 412 (SC); 1994 Supp (1) SCC 280 : AIR 1993 SC 2529).

25. In Steel Authority of India Ltd. v. CCE, (1996) 5 SCC 484 : AIR 1996 SC 2544 the question was whether raw naphtha intended for use in the manufacture of fertilizers was exempted although it was not actually used. It was held that the exemption notification only required proof that the raw naphtha was intended for use in the manufacture of fertilizer, and there was no further requirement that it was actually so used. Hence if it was purchased with the intention to be used for the manufacture of fertilizer, it was exempt, even though it could not be used for some reason subsequently.

26. In Partington v. Attorney General, [1869] LR HL 100, Lord Cairns observed thus:

“If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judi-cial mind. On the other hand if the court seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

27. Thus in interpreting a taxing statute one cannot go by the notion as to what is just and expedient (CIT v. Shahzada Nand and Sons, [1966] 60 ITR 392 (SC); AIR 1966 SC 1342). In IRC v. Hinchy, [1960] AC 748 (HL), the House of Lords held that a provision in the Income-tax Act, 1952 for a stat-utory penalty (for making an incorrect return of income) of 20 pounds and trebling “the tax which he ought to be charged under this Act” referred not to the tax on the amount which the taxpayer had failed to declare, but to the whole tax which he ought to be charged for the relevant year, not-withstanding the extravagant consequences which flowed from giving the words their natural meaning.

28. The Supreme Court of India has held that equity is out of place in tax laws (CIT v. V. MR.P Firm, Muar, [1965] 56 ITR 67 (SC); AIR 1965 SC 1216. See also Smt. Tarulata Shyam v. CIT, [1977] 108 ITR 345 (SC)). In Commissioner Of Income Tax, Lucknow v. Sh Madho Pd. Jatia., [1976] 105 ITR 179 (SC); [1976] SCC 92 it held that there could be no consideration of equity if the language of the provision was plain and clear, but where it was not, and two interpretations were possible, the one in consonance with equity and fairness should be pre-ferred.

29. Where the language of a provision is plain, courts cannot ordinarily con-cern themselves with the policy behind the provision, (Baidyanath Ayurved Bhawan P. Ltd. v. Excise Commissioner, (1971) 1 SCC 4 : AIR 1971 SC 378) or the intention of the Legislature (Income Tax Officer, Tuticorin v. T.S Devinath Nadar & Others, [1968] 68 ITR 252 (SC); AIR 1968 SC 623). (See also Gursahai Saigal v. CIT, [1963] 48 ITR (SC) 1; AIR 1963 SC 1062). As Lord Watson said in Salomon v. Salo-mon and Co. Ltd., [1897] AC 22 (HL) “intention of the Legislature is a com-mon but slippery phrase”. In Income Tax Officer, Tuticorin v. T.S Devinath Nadar & Others, [1968] 68 ITR 252, 257 (SC); AIR 1968 SC 623, 629, the Supreme Court of India observed that the rule that “we must look to the general scope and purview of the statute, and at the remedy sought to be applied, and consider what was the former state of the law, and what it was that the Legislature” contemplat-edly (Lord Hatherley in Pardo v. Bingham, [1869] 4 Ch 735) was made while construing a non-taxing statute. The said rule had only a limited application in interpreting a taxing statute. It follows from this decision that the mischief rule laid down in Heydon's case (1584 3 Co Rep 7a) has only a limited application to taxing statutes.

30. In Bank of Chettinad Ltd. v. CIT, [1940] 8 ITR 522 (PC); AIR 1940 PC 183 (approved in A.V Fernandes v. State of Kerala, [1957] 8 STC 561 (SC); AIR 1957 SC 657) the Privy Council protested against the suggestion that in revenue cases “the substance of the matter” may be considered as against the strict legal position.

31. In Commissioner Of Income Tax, Gujarat Ii v. B.M Kharwar, [1969] 72 ITR 603 (SC); AIR 1969 SC 812 the assessee transferred some machinery of a firm to a private limited com-pany. He sought to avoid the liability to be taxed on the excess realized over the written down value of the machinery on the plea that the sub-stance of the transaction was only a step to readjust the business relation of the partners inter se. The Supreme Court of India rejected this contention holding that while the taxing authorities were entitled to determine the true legal relation resulting from a transaction to unravel the device adopted by a party, the legal effect of a transaction could not be displaced by probing the “substance of the transaction”.

32. Having laid down the above general principles relating to the interpre-tation of taxing statutes, we may now come to the facts of the case on hand.

33. In the present case, all the authorities have agreed that the assessee is entitled to exemption to the extent of Rs. 5 lakhs as contemplated by sec-tion 10(10C) of the Act. The only question, therefore, remains is whether the assessee is also entitled to exemption under section 89(1) of the Act?

34. We have already observed that notions of equity do not apply in taxing statutes. Hence, if the assessee is entitled to two benefits on the plain language of the statute, he has to be granted both those benefits.

35. The Assessing Officer in his assessment order observed that once exemption is allowed under section 10(10C) no further exemption can be allowed in relation to any other assessment year in view of the proviso to section 10(10C). 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 sec-tion 89(1) has been spread over several assessment 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.

36. The Tribunal has rightly pointed out that in the Income-tax Act, there are several provisions granting twin or double benefits, while in other pro-visions, 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.

37. The word “salary” as defined in section 17 of the Act includes any profit in lieu of salary, which has been defined in section 17(3) of the Act to include any amount of compensation due or received by the assessee from his employer or former employer in connection with the termination of his employment. Hence, payment under the voluntary retirement scheme is covered by the word “salary”, which has been given a very wide definition in section 17. Since the assessee is covered by section 89, he will get both the benefits, which he has claimed for.

38. Apart from the above, it is well settled that if two reasonable interpre-tations of taxing statutes are possible, the one in favour of the assessee should be accepted vide CIT v. Naga Hills Tea Co. Ltd., [1973] 89 ITR 236 (SC); (1973) 4 SCC 200 : AIR 1973 SC 2524 (see also CIT v. Shahzada Nand and Sons, [1966] 60 ITR 392 (SC); AIR 1966 SC 1342; CIT v. Kulu Valley Transport Co. P. Ltd., [1970] 77 ITR 518 (SC); CIT v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC); CED v. R. Kanakasabai, [1973] 89 ITR 251 (SC) and Sun Export Corporation v. Collector of Customs, [1997] 6 SCC 564). Thus, where the question was whether an assessee who has sustained a loss could validly file a return after the expiry of the period specified in sec-tion 22(1) of the Indian Income-tax Act, 1922, but before the assessment was made, the answer was given in the affirmative relying on the above principle vide (CIT v. Kulu Valley Transport Co. P. Ltd., [1970] 77 ITR 518 (SC)). Where the expression “company in which the public are substan-tially interested” in the Income-tax Act had two interpretations, the one in favour of the assessee was preferred vide Addl. CIT v. Hindustan Milk Food Mfg. Ltd., [1975] 98 ITR 441 (Punj). In CED v. R. Kanakasabai, [1973] 89 ITR 251 (SC) at page 257 it was held that the phrase “of any benefit to him by contract or otherwise” in section 10 of the Estate Duty Act had two interpretations, and hence the one in favour of the assessee should be pre-ferred.

39. In view of the above, we do not find any merit in this Department appeal and the appeal is dismissed.