F.I. Rebello, J.
1. Revenue has preferred this appeal on the following questions:
(a) Whether on the facts and in the circumstance of the case and in law, the Hon'ble Tribunal was justified in law in holding that the amount received by the assessee under 'Optional Early Retirement Scheme of RBI' is eligible for exemption under Section 10(10C) of the IT Act?
(b) Whether on the facts and in the circumstance of the case and in law, the Hon'ble Tribunal, Mumbai, was justified in interpreting Rule 2BA in favour of assessee against the established norms of interpretation of the rules?
(c) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing relief to the assessee under Section 89(1) of the Act in respect of sum received under the VRS over and above a sum of Rs. 5,00,000 which is not prescribed under Section 89(1) of the IT Act nor under any of the prescribed categories as per Rule 21A of IT Rules, 1962?
(d) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing relief to the assessee under Section 89(1) of the Act when employer has not determined the amount of ex gratia and financial years to which it pertained?
2. Appeal admitted on the questions of law as formulated above.
3. On behalf of Revenue it is sought to be submitted that the employees who had taken benefit of the scheme framed by RBI are not entitled to the benefits under Section 10(10C) of the IT Act, considering Rule 2BA of the IT Rules. It. is further submitted that the AO took note of the CBDT Instructions dt. 26th Sept./Oct., 2005 wherein CBDT has stated that the 'Optional Early Retirement Scheme' (OERS) introduced by the RBI vide its administrative circular, dt. 11th Sept., 2003 for its employees did not conform to the provisions of Rule 2BA of the IT Rules and, therefore, does not qualify for exemption under Section 10(10C) of the IT Act, 1961. Along with the instructions copy of the letter written by the RBI, dt. March, 2005 was also enclosed. It is also submitted that insofar as the provisions of Section 89 are concerned, the employees who had retired under the scheme would not be entitled to the same. The Tribunal ought not to have taken note of the said provisions while passing the impugned order.
4. On the other hand on behalf of the assessee their learned counsel submits that a scheme framed by RBI satisfies all the requirements of both Section 10(10C) as also Rule 2BA. It is submitted that findings of fact have been recorded both by CIT(A) as also by the Tribunal. The CBDT circular, it is pointed out at the highest is binding on the AO, but would not be binding on the Tribunal or on this Court or for that matter on the assessee. Insofar as Section 89 is concerned, it is submitted that the issue stands concluded in favour of the assessee by judgment of a co-ordinate Bench of this Court in the case of CIT v. Nagesh Devidas Kulkarni : [2007]291ITR407(Bom) . The CBDT by its communication dt. 16th Jan., 2008 has informed the Chief CIT that the Board has accepted the said decision. For all the aforesaid reasons it is submitted that there is no merit in this appeal which consequently ought to be dismissed.
5. For the purpose of answering the issues in controversy, we may refer to Section 10(10C) which reads as under:
(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....
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.
Rules have been framed and we are concerned with Rule 2BA. The relevant portion of the rule reads as under:.at the time of his voluntary retirement or voluntary separation shall be exempt under Clause (10C) of Section 10 only if the scheme of voluntary retirement framed by the aforesaid company or authority or co-operative society or university or institute, as the case may be:
(i) it applies to an employee who has completed 10 years of service or completed 40 years of age;
(ii) it applies to all employees (by whatever name called) including workers and executives of a company or of an authority or of a cooperative society, as the case may be, excepting directors of a company or of a co-operative society;
(iii) the scheme of voluntary retirement or voluntary separation has been drawn to result in overall reduction in the existing strength of the employees;
(iv) the vacancy caused by the voluntary retirement or voluntary separation is not to be filled up;
(v) the retiring employee of a company shall not be employed in another company or concern belonging to the same management;
(vi) the amount receivable on account of voluntary retirement or voluntary separation of the employee does not exceed the amount equivalent to three months salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.
6. Before addressing ourselves to the issue let us refer to the orders of the AO, CIT(A) and Tribunal. Insofar as the AO is concerned, the AO proceeded on the footing that the employer framing the scheme has confirmed in writing that as per scheme framed by them the employees are not eligible for deduction under Section 10(10C) and also under Section 89(1) of the IT Act, 1961. Also CBDT vide its circular dt. 26th Sept./Oct, 2005 has clarified this issue and has confirmed that employees opting for OERS did not qualify for exemption under Section 10(10C) of the IT Act, 1961.
7. In the appeal preferred before the CIT(A) the first appellate authority again referred to the letter dt. 9th March, 2005 by RBI to its employees as also the Board's letter and for the reasons held that the assessee under the scheme OERS is not entitled to the benefits under Section 10(10C) of the Act and relief under Section 89(1) of the IT Act.
8. In appeal before the Tribunal the learned Tribunal by a common order disposed of about 222 appeals. The learned Tribunal considered the provisions of Section 10(10C) and Rule 2BA. It also recorded a finding that the records produced before them showed, that the vacancies as a result of OERS had not been filled in by the bank and that the bank itself in its annual report stated that there has been considerable reduction in staff strength as a result of the option exercised under OERS. The Tribunal, therefore, rejected the contention of the Department that there is no material to show that the vacancies will not be filled up. Insofar as the objection that retired employees of the company shall not be employed by the said company or any of its group concerns it held that there was no evidence or material to show that there is any obligation on the part of the RBI to employ the retired employees in any other company or concerns under the same management. For the reasons aforesaid the Tribunal was pleased to hold that they do not agree with the stand of AO and CIT(A) that the conditions of the guidelines prescribed under Rule 2BA are not complied in the OERS of the RBI. For the aforesaid reasons they allowed the appeals.
9. Before answering the issue we may refer to some of the material which has been brought to our attention by the parties under the scheme as announced by administrative Circular No. 1, dt. 11th Aug., 2003 was applicable only those employees were eligible who have completed 25 years of full time regular service in the bank and have also completed 50 years of age as on 1st Aug., 2003. The ex gratia payment was equal to pay plus D.A. 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 D.A. for remaining months of service reckoned upto the date on which the employee would retire on superannuation, whichever is less. In the annual report for the year ending 30th June, 2004 reference is made to the OERS, the relevant portion of which reads as under:.Technological upgradation undertaken by the Reserve Bank towards streamlining the work in general and its core function i.e. currency management led to re-engineering of processes in some areas. Therefore, a scheme analogous to but not exactly identical to a VRS model was deemed necessary....
The respondents have placed before us a communication of 24th Oct., 2007 by the RBI, under the Right to Information Act, to Request No. RIA 421 2007-08. We have considered this as an additional material with the consent of the parties under Section 260A(7) of the IT Act to obviate a remand, if necessary. The information given reads as under:
The bank has not made any recruitments against the OERS vacancies. However, the total recruitments made during the calendar years 2004, 2005, 2006 and upto June, 2007 are furnished below:
Year 2004:
---------------------------------------------------------------Sr. Cadre Total Vacancies filled byNo. vacancies General SC ST OBCfiled1. Officers 88 43 19 4 222. Class III 98$ 8 - 1 -3. Subordinate staff 44* 29 13 2 -----------------------------------------------------------------141 80 32 7 22----------------------------------------------------------------* All the 44 appointments were compassionate appointments.$ Out of 9, 8 appointments were made on compassionate grounds.Year 2005:
----------------------------------------------------------------Sr. Cadre Total Vacancies filled byNo. vacancies General SC ST OBCFiled1. Officers 106 56 13 10 272. Class III 7* 7 Nil Nil Nil3. Subordinate staff 34@ 23 7 3 1----------------------------------------------------------------147 86 20 13 28----------------------------------------------------------------*All the 7 appointments were compassionate appointments.@ Out of 34 appointments, 32 were made on compassionate grounds.Year 2006:
-----------------------------------------------------------------Sr. Cadre Total Vacancies filed byNo. vacancies General SC ST OBCFiled1. Officers 140# 68 33 15 242. Class III 8* 8 Nil Nil Nil3. Subordinate staff 213@ 103 34 23 52-----------------------------------------------------------------360 179 67 38 76-----------------------------------------------------------------*Out of 8 appointments, 7 were made on compassionate grounds.@ Out of 212 appointments, 24 were made on compassionate grounds.*All the 44 appointments were compassionate appointments.# Includes 7 part time BMOs. (6 Gen. and 1 ST).Upto 30-6-2007:-----------------------------------------------------------------Sr. Cadre Total Vacancies filled byNo. vacancies General SC ST OBCFiled1. Officers 28# 10 2 9 72. Class III 7* 3 3 1 03. Subordinate staff 71@ 49 10 0 12-----------------------------------------------------------------106 62 15 10 19-----------------------------------------------------------------#Includes 2 part time BMOs (1 Gen. and 1 SC).*Out of 7 appointments, 5 were made on compassionate grounds.@Out of 71 appointments, 19 were made on compassionate grounds.
To a further query under RTI in respect of communication dt. 16th May, 2008 it was again reiterated that the bank has not made any recruitment against the vacancies caused by OERS.
Before introducing the scheme a note had been prepared by the Department of Administration and Personnel Management which shows that as a result of closure of Note Examination Section and also on account of downsizing/reduction of staff in other areas due to computerization, mechanisation, simplification of processes and decentralisation, a sizeable number of employees in all classes are being/will be rendered surplus. This problem was faced by all the offices.
While some other measures were being considered to tackle the problem of surpluses by redeployment, no easy and quick solution could be worked out to ensure gainful redeployment of such surplus staff. On the other hand, it was also not desirable to maintain a sizeable number of employees who are without work or underutilised. The problem was considered at a high level in the discussion with the Governor and it had been suggested that an open ended early retirement scheme be introduced for employees who are 55 years of age and above. It is clear from this report prepared by the bank that employees had become surplus on account of restructuring and they could not be redeployed. In other words the posts were no longer required.
10. With the above background we may now look at the scope of Section 10(10C) of the IT Act. The issue came up for consideration before the Supreme Court in the challenge to the said provisions in the base of Shashikant Laxman Kale and Anr. v. Union of India and Anr. : [1990]185ITR104(SC) . The Supreme Court was considering the constitutional validity of the said provisions at the instance of a person who was employed in the private sector company. It was his submission that the benefit being reserved only to employees of the public sector results in an indivious distinction between public sector employees and private sector employees in the matter of taxation and is arbitrary and unreasonable amounting to hostile discrimination. While repelling the contention, the Hon'ble Supreme Court took note of the need to streamline the public sector of one of its ailments which was over staffing. While answering the issue the Court observed as under:
There is a definite purpose for its enactment. One of the purposes is streamlining the public sector to cure it of one of its ailments of over staffing which is realised from experience of almost four decades of its functioning. In view of the role attributed to the public sector in the sphere of national economy, improvement in the functioning thereof must be achieved in all possible ways. A measure adopted to cure it of one of its ailments is undoubtedly a forward step towards promoting the national economy. The provision is an incentive to the unwanted personnel to seek voluntary retirement thereby enabling the public sector to achieve the true object indicated. The personnel seeking voluntary retirement no doubt gets a tax benefit but then that is an incentive for seeking voluntary retirement and at any rate that is an effect of the provision or its fallout and not its true object. It is similar to the incentive given to the taxpayers to invest in the public sector bonds by non-inclusion of the interest earned thereon in the taxpayer's total income which promotes the true object of raising the resources of the public sector for its growth and modernisation. The real distinction between the true object of an enactment and the effect thereof, even though appearing to be blurred at times, has to be borne in mind, particularly in a situation like this. With this perspective, keeping in view the true object of the impugned enactment, there is no doubt that employees of the private sector who are left out of the ambit of the impugned provision do not fall in the same class as employees of the public sector and the benefit of the fallout of the provision being available only to the public sector employees cannot be rendered the classification invalid or arbitrary. This classification cannot, therefore, be faulted.
It will, therefore, be clear that judicial notice was taken by the Supreme Court that the very object in enacting the provisions was to downsize the employees strength so that unwanted personnel could seek voluntary retirement thereby enabling the public sector to achieve the true object for (which) it was established. This would indicate that the provisions of section itself contemplate a scheme whereby there has to be downsizing on account of surplus or the like.
The scheme of the section, therefore, becomes apparent considering the object for which the amendment was introduced by Parliament. The object being to make the public sector undertakings to play their role in national economy by improvement in their functioning in all possible ways. The provision as explained by the apex Court is an incentive for unwanted personnel to seek voluntary retirement. The applicant is an employee of an authority established under the Central Act. The scheme for voluntary (retirement) was framed by RBI considering the provisions of the Act itself, such a benefit is available to the extent of Rs. 5 lakhs. The section, therefore, speaks of a scheme for voluntary retirement or termination of service. The section does not provide for any predicates. Normally, therefore, the scheme ought to be read as a scheme framed by the company or authority set out under Section 10(10C) of the Act. Rules, however, have been made which are known as guidelines for the purpose of Section 10(10C). The guidelines are not under challenge before us. We, therefore, proceed on the basis that these guidelines also will have to be fulfilled. The rule, however, will have to be read bearing in mind the object of Section 10(10C) itself. Under the rules a scheme framed must be in accordance with the requirements as set out therein. The scheme, therefore, must either expressly or impliedly comply with the requirements. Merely because the scheme may not expressly set out that the posts will not be filled in cannot result in the scheme not being a scheme falling under Section 10(10C) r/w Rule 2BA of the Rules, bearing in mind the procedural nature of the rules. It will have to be read in harmonious construction with the substantive provisions of the Act so as not to render it ultra vires the provisions of the substantive provisions of the Act.
Applying the tests we find firstly that it satisfies the first test namely 10 years of service and 40 years of age. In the instant case it is 25 years of service and 50 years of age. Secondly it applies to all employees. This meets the second requirement. The third requirement is that the scheme has been drawn to result in overall reduction in the existing strength of the employees. This has not been expressly stated in the scheme. However, we have noted the object behind the Section 10(10C) and the note put up before the Governor at the time when the scheme was framed. The material on record would indicate that the employees had been rendered surplus on account of various steps taken by the employer. The scheme, therefore, was meant for an overall reduction in the existing strength of the employees. The third requirement is also, therefore, satisfied. The fourth requirement was the vacancy caused by the voluntary retirement or voluntary separation is not to be filled up. We may firstly note that a finding of fact has been recorded by the Tribunal on that count which is not challenged before us in terms of the questions of law as framed by the Revenue. Secondly there was material on record which shows that the scheme basically was to reduce the employee strength as posts had become surplus on account of reorganisation. One cannot fill in the posts which have become surplus as the posts have become redundant. Also additional evidence taken on record under Section 260A(7) would show that none of these posts from the day the scheme came into force till 2008 has been filled in. In other words the fourth requirement has also been satisfied. Insofar as the fifth requirement is concerned, the Tribunal has already answered the issue and that finding of fact is not in issue before us. Even otherwise considering that the RBI is a statutory body created under an Act there is no other company or concern belonging to the same management. The fifth requirement has also been satisfied. The sixth requirement has also been satisfied as in the instant case what is offered is two months salary for each completed year of service. Thus the scheme expressly or impliedly satisfied all the requirements of the section as well as the guidelines framed for the purpose of Section 10(10C) namely Rule 2BA.
11. The only other question which is left for our consideration is whether the circular issued by CBDT was binding on the authorities discharging quasi judicial functions or for that matter the assessee or is this Court precluded from answering the issue contrary to the CBDT circular. The CBDT circular took note of the letter written by the RBI. In our opinion that letter by itself would not be of much consequences as the OERS itself notes that income-tax if any would be payable by the employee. Even in the note put up by the Department for introduction of the scheme for consideration of the Governor it was made clear that if any income-tax is payable that will be paid by the employee and it was further made clear that the payment is subject to provisions of Section 10(10C) of the IT Act. The letter, therefore, by RBI by itself would not be determinative as to whether the income is liable to tax. One has to see the scheme framed in terms of Section 10(10C) and whether it satisfies the guidelines in terms of Rule 2BA of the Rules. In CIT v. Hero Cycles (P) Ltd. and Ors. : [1997]228ITR463(SC) the Supreme Court has observed as under:
Moreover, it is well-settled that circulars can bind the ITO but will not bind the appellate authority or the Tribunal or the Court or even the assessee.
This view has been reiterated by the apex Court in UCO Bank v. CIT : [1999]237ITR889(SC) as also in CST v. Indra Industries (2001) 168 CTR (SC) 50 : (2001) 248 ITR 338 . The Court, therefore, is not precluded to consider the issue irrespective of the CBDT circular. On examination of the issue it would be clear that the guidelines have to be read in conformity with the statutory provisions. On the facts in the instant case, the Tribunal has recorded a finding that the predicates of the rule have been satisfied. The Supreme Court in CIT v. Gwalior Rayon Silk Mill Mfg. Co. Ltd. : [1992]196ITR149(SC) has observed as follows:
Logic alone will not be determinative of a controversy arising from a taxing statute. Equally, common sense is a stranger and an incompatible partner to the IT Act. It does not concern itself with the principles of morality or ethics. It is concerned with the very limited question as to whether the amount brought to tax constitutes the income of the assessee. It is equally settled law that if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The 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. The object being that, in computation of the net income, the statute provides deductions, exemptions or depreciation on the value of the capital assets from the taxable income....
Applying these principles we are clearly of the opinion on a proper construction of the rules that the scheme itself may not expressly state all the terms as it is possible for the Court to read the implied terms of the scheme. In the instant case we have so read. The question Nos. 1 and 2, therefore, as framed will have to be answered against the appellant.
12. That brings us to the questions 3 and 4. As rightly pointed out by the learned counsel for the assessee the question has been answered in favour of the assessee by the judgment of a co-ordinate Bench of this Court in the case of CIT v. Nagesh Devidas Kulkarni (supra). This judgment was considered by the CBDT. The CBDT by their communication dt. 16th Jan., 2008 have informed the Chief CIT, Mumbai, that they have accepted the said judgment.
13. In other words the judgment of this Court would not be appealed against. In other words for the amount in excess of Rs. 5 lakhs received under the OERS the assessee would be entitled to the benefits under Section 89 in addition to the benefits available under Section 10(10C) of the IT Act.
14. For the aforesaid reasons questions 3 and 4 also would not arise and Consequently appeal dismissed.