Rebello F.I., J.
1. Rule. Heard forthwith.
2. The following issue arises in this petition :
Are the respondents right in changing profession tax under the provisions of the Maharashtra State Tax on Professions, Traders Callings and Employment Act, 1975 from the petitioners on the basis of ex gratia received under a scheme of optional voluntary retirement, even after the relationship of employee, employer has come to an end on the employee retiring under the scheme of voluntary retirement on the ground of drawing constructive service between the date of voluntary retirement and the actual date of superannuation.
3. All the petitioners were working with the Reserve Bank of India at its Nagpur Branch. The Reserve Bank of India floated a scheme known as Optional Early Retirement Scheme. The salient features of the scheme were that it was introduced with effect from 16th May, 2002 and was applicable to employees who have completed 25 years of full time regular service in the bank and have also completed 50 years of age. It was further clarified that only an employee who has completed 25 years of service and 50 years of age as on 1st August, 2003 (for convenience), will be eligible to apply for retirement under the Optional Early Retirement Scheme. Under Clause (g), income tax was to be deducted at source on the entire amount payable as ex gratia. Clause 5 of the scheme reads as under :
Ex gratia payable.- Upon acceptance of the application for early retirement under the scheme, the employee will be eligible for ex gratia amount equal to pay plus defames allowance for the number of years of actual service rendered at 60 days for each completed year of service or part thereof in excess of six months or pay plus defames allowance for remaining months of service reckoned upto the date on which the employee would retire on superannuation, whichever is less.
As noted earlier the ex gratia amount was payable in one lump-sum subject to recovery of income tax which was to be borne by the employee.
4. All the petitioners herein opted under the optional early retirement scheme, 2003. The Reserve Bank of India at the time of payment of ex gratia deducted certain amount by way of profession tax from the gross amount payable to each of the petitioners under the provisions of the Maharashtra State Tax on Professions, Trade Callings and Employment Act, 1975, which hereinafter shall be referred to as the Act. The tax in most cases has been deducted at source, but in some cases the demand has been raised after retirement and such erstwhile employees were compelled to make the payment. It is this illegal deduction of profession tax, which is the subject-matter of the present petitions. The petitioners sought legal advice based on which they correspond with the respondent authorities. They also applied under Section 12-A of the Act, calling on the Commissioner to determine the question whether the tax was payable on such ex gratia. As no reply was received various reminders were sent to respondent No. 2. The petitioners finally received a communication dated 19th November, 2004 intimating that writ petitions had been filed on the very issue and were pending at various Benches of this Court and as such the issue of levy of profession tax on Optional Early Retirement Scheme is kept pending till the decision of the High Court. It is only after this, have the petitioners approached this Court by the present petitions. It may be mentioned that the application had been made under Section 12-A of the Act, have been kept pending by respondent No. 2 on that count. A show cause notice came to be issued on 15th May, 2005 to each of the petitioners. In that it was pointed out that the applicability of profession tax on compensation received from voluntary retirement scheme had been raised in Vazir Glass Works Limited. The Additional Commissioner of Sales Tax, Maharashtra State by an order dated 30th March, 1998 had held that the compensation amount is liable to profession tax and is covered under the term salary and/or wages. Against that order an appeal was preferred to the Maharashtra Sales Tax Tribunal. The Tribunal by order dated 21st September, 2001 dismissed the appeal and upheld the order of the Additional Commissioner of Sales Tax. In response the petitioners filed a reply pointing out that considering the provisions of scheme no profession tax was payable after the petitioners had ceased to be the employees of respondent No. 4. It was also mentioned therein that further representation would be sent after receiving a copy of the order in Vazir Glass Works Limited. On receipt of the copy of the order on behalf of the petitioners it was represented to respondent No. 2 that there were clear distinguishable features in both the cases. It was pointed out that in so far as Vazir Glass Works Limited is concerned, the compensation is paid monthly as per agreement in the year 1977 whereas the petitioners were paid ex gratia in lumpsum. In Vazir Glass Works Limited the deeming provisions of deemed employer and employee are applicable. In so far as the petitioners were concerned that was not so as relationship of employer and employee no longer subsisted and had been extinguished. It was, therefore, submitted that the said decision would not apply in so far as the petitioners are concerned.
5. On behalf of respondent Nos. 1 to 3 a reply has been filed by respondent No. 3. It is pointed out that as per the Optional Early Retirement Scheme, 2003 the petitioners were entitled to get certain amounts by way of ex gratia for remaining the period of their respective services on being discharged. It is pointed out that by virtue of Section 4 of the Act it is the liability on the employer to deduct and pay tax on behalf of the employees. The tax is payable by any person earning salary or wages which shall be deducted by his employer from the salary or wage payable to such person before such salary or wages paid to him. Reference is made to Section 17(3) of the Income-tax Act to contend that what the petitioners have received are profits in lieu of salary which includes any amount of compensation due 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. By adopting the definition of salary from the income tax, under the profession tax, the legislature has included the compensation received by those who have opted for Optional Voluntary Retirement Scheme. Because of this provision the person concerned would not only be deemed to have tendered constructive services during this period, but will also be deemed to be in a constructive employment of his former employer. If the period works out to be five years, then the profession tax payable for five years will have to be deducted and paid by the employer at the time of payment of compensation to the employee. It was, therefore, set out that the employer under the Voluntary Retirement Scheme is liable to pay profession tax, not only for the month of payment, but for the entire amount received. It is set out that just as the petitioners have received in the present the total amount of salary which they would have received had they continued in service, in the same way the profession tax may be levied on the said amount in the present. It is, therefore, submitted that the petition should be dismissed.
6. We may now consider the issue Article 276 of the Constitution of India, permits the State to levy taxes on professions, trades, callings and employment. Presently the amount cannot be more than Rs. 2,500/- per annum. Pursuant to this power, the Act has been enacted in 1975 and its preamble states that it is being enacted for the benefit of the State for raising additional resources needed for implementing the employment guarantee scheme of the State Government and to provide for establishment of employment guarantee fund and for matters connected therewith. We may also refer to some of the provisions, including the definitions in the Act, which are relevant for the purpose of this discussion. Employee has been defined under Section 2(b) to mean a person employed on salary or wages. It includes various categories set out therein. Section 2(c) defines an employer to mean a person or an officer who is responsible for disbursement of such salary or wages, and includes the head of the office or any establishment as well as the manager or agent of the employer. We then have Section 2(ca), which reads as under:
'Engaged' in relation to any profession, trade, calling or employment, means occupied fully or otherwise in such profession trade, calling or employment, whether any pecuniary benefit of any nature whatsoever, actually accrues or not to a person from such occupation.
Section 2(e) defines person to mean any person who is engaged actively or otherwise in any profession, trade, calling or employment. Section 2(h) defines salary or wages to include pay or wages, defames allowance and all other remunerations received by any person on regular basis, whether payable in cash or kind and also includes prerequisites and profits in lieu of salary as defined in Section 17 of the Income-tax Act, but does not include bonus in any form and on any account or gratuity. Section 3(2) is relevant. We may reproduce the same.
3(2). Every person excluding firms whether registered under the Indian Partnership Act, 1932, or not and Hindu undivided family engaged actively or otherwise in any profession, trade callings or employment and falling under one of the other of the classes mentioned in the second column of Schedule 1 shall be liable to pay to the State Government the tax at the rate mentioned against the class of such persons in the third column of the said Schedule.' The proviso further provides that the tax so payable in respect of any one person shall not exceed two thousand and five hundred rupees in any year.
Section 4 enjoins upon the employer to deduct any tax payable by any person earning a salary or wage from the salary or wage payable to such person before such salary or wage is paid to him and such employer shall, irrespective of whether such deduction has been made or not, when the salary or wage is paid to such person, be liable to pay tax on behalf of all such persons. Section 5 provides for registration and enrolment. It is not necessary to advert to the other provisions.
7. The entire submission of the petitioners is based on the definition of salary or wage. Section 2(h) also includes prerequisites and profits in lieu of salary as defined in Section 17 of the Income-tax Act. Section 17(3) would include 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. It would thus be clear that, the compensation received by the assessee from his employer or former employer in connection with the termination of his employment would fall within the expression salary. That amount, therefore, would be taxable in the hands of the employer under the provisions of the profession tax. To that extent the contention as urged by the respondents that the ex gratia received is salary will have to be accepted.
8. The question then is whether the ex gratia payment received has to be considered as salary corresponding to number of years which the employee would normally have put in before actual retirement. The answer to that will decide the issue in the present petition. The ex gratia which is deemed to be salary by virtue of Section 17(3) of the Income-tax Act is what is received in connection with the termination of employment. In other words after the relationship of employer and employee has come to an end. There is, therefore, no longer a contract of employment as the contract stands severed on the payment of compensation. We have earlier noted the basis for computation of ex gratia. The minimum requirement for an employee exercising the option is that he must have put in atleast 25 years of service and should be 50 years of age as on 1st August, 2003, in which event he will be paid exgratia payment equivalent to pay plus dearness allowance for the number of years of actual service rendered at 60 days for each completed years of service or part thereof in excess of six months or pay plus dearness allowance for remaining months of service reckoned upto the date on which the employee would retire on superannuation, whichever is less. The age of superannuation is 58 years. As we have noted, therefore, what is payable is the lesser of the two amounts. The matter can be demonstrated by two illustrations. Let us take the first illustration. The amounts will have to be worked out as under: 60 days for each completed years of service or salary for balance of the period of eight years. In other words in terms of the scheme if an employee had opted for retirement after completing 50 years and if it is accepted on that date, the age of superannuation is 58 then two months salary for every completed year would be 25 x 2 = 50 months salary. If the reminder of the service is counted for 8 years it would be 12 x 8 = 96 months of salary. The employee would get the ex gratia of 50 months salary as it is the lesser amount. Take another illustration, the employee at the time of option was aged 54 years and upto the age of 50 had put in 25 years of service he would be getting 58 months salary as ex gratia payment, if two months are counted for each year of service. For the reminder of the period than he would be receiving 48 months of salary, 48 months being the lesser amount will be the exgratia that he will receive. The ex gratia is payable on the number of years already put in or to be put in whichever is less. On this basis itself the contention raised and urged on behalf of the petitioners that it is for the remainder of the period is fallacious and will have to be rejected. It will have to be based as to whether he has received ex gratia for the years of service already put in or the years of service he would have to put in upto the age of superannuation. Considering the stand of the respondents no profession tax will be payable in the case of the first illustration, but those employees covered by the second illustration will have to pay profession tax. Therefore, in terms of the scheme itself the interpretation sought to be canvassed by the respondents will have to be rejected as it would be discriminatory and violative of Article 14 of the Constitution. The compensation payable will differ depending upon how the employees ex gratia would be calculated at the time of retirement. In the first illustration the employee is not receiving ex gratia for the years to be completed, but receiving for the years already put in and in the second case for the years to be put in. It will not be possible to hold that in such a situation those getting ex gratia in the first illustration will have to pay no tax, but those falling under the second illustration would be liable for tax. This would be totally arbitrary and violative of Article 14 of the Constitution of India as they belong to the same class of voluntary retirees receiving ex gratia and the object of the scheme being to retire persons early to reduce man power. The classification would be unreasonable. We have, no hesitation based on this reasoning itself to reject the contention raised on behalf of the petitioners.
9. We may now look at the issue in another context. We have earlier noted the definition clauses of the Act. Employee means a person employed on salary or wages. In other words he has to be in employment and, therefore, entitled to salary or wages. The relationship of employer must subsist and the employer must be earning salary or wages on a regular basis under him. In other words the employee must be employed by the employer and earning salary or wages and engaged in any profession, trade calling or employment whether occupied fully or otherwise. In other words the person must be occupied in the profession, trade calling or employment. Persons include any person who is engaged actively or otherwise in any profession, trade calling or employment. Section 3(2) is the charging section which sets out that every person engaged actively or otherwise in any profession, trade callings or employment and falling under one or the other of the classes mentioned in the second column of Schedule 1 shall be liable to pay to the State Government the tax at the rate mentioned in the third column of the Schedule. A careful reading, therefore, of the charging sections and the definition clauses would clearly indicate that the person to be charged profession tax must be engaged actively or otherwise. It contemplates existence of employer and employee relationship under which a person employed receives salary or wages. The subsistence of the relationship of employer and employee, therefore, is the basis to charge the profession tax which is leviable under Section 3(2) of the Act. Contra, no profession tax would be liable if there is no relationship of employer and employee. We have earlier noted the relevant provisions of the scheme. The scheme provides that ex gratia would be payable on the application for early retirement being accepted. In other words the employee ceasing to be in employment of the employer. The note to the circular makes it further clear, that pay plus dearness allowance has to be calculated on the date of retirement. The scheme also provides for retirement benefits. It is, therefore, clear that under the scheme the employee has to first apply for voluntary retirement. The employer must accept and the date of acceptance would be the date of retirement from the employment of the employer on which the employee will receive the ex gratia payment. Read this way and considering section 3(2) and the definitions of employee such person would be no longer in employment with the employer as the employee would not be earning any salary or wages. What can be deducted is the amount for the year when he was in service by the employer. We are, therefore, clearly of the opinion that the deduction for profession tax of more than a sum of Rs. 2,500/- when the petitioners applications for voluntary retirement were accepted is clearly without the authority of law. The reminder of the amount has been deducted by respondent No. 4 and received by respondent No. 1 without the authority of law.
10. On behalf of the respondent No. 4 their learned Counsel points out that the entire amount deducted has been paid to the respondents. There is no dispute that the respondents have received the professional tax. The amount of tax received is set out in An-nexure P-l to the petition. The respondent Nos. 1 to 3, therefore, would be bound to refund to the petitioners, the said amounts, less the sum of Rs. 2.500/- if otherwise the sum of Rs. 2.500/- was not separately paid. The balance amount be refunded to the petitioners within 90 days from today, failing which it will carry interest at the rate of 12% from today till final payment.
11. Rule made absolute accordingly. In the circumstances of the case there shall be no order as to costs.