1. The appeal and the cross-objection arises from the order of the AAC in his Appeal No. THn. 7/79-80 dated 5-3-1980, disposing of an appeal filed by the assessee, for the assessment year 1979-80. The assessee is an individual. He was employed in National Machinery Manufacturers Ltd. He left that company on 1-1-1979. He received from the superannuation fund Rs. 25,823. The ITO brought this amount to tax. On appeal, the AAC deleted the addition. He, however, held that the amount received should be taxed under the Fourth Schedule, Part B, at the rates specified in Rule 6 therein, of the Income-tax Act, 1961 ('the Act').
2. Against this finding, both the assessee and the department are on appeal before us. In order to understand the issues involved in this appeal, we would give a few facts.
3. The assessee joined the company sometimes in 1969. As per the service agreement, the assessee would be entitled to participate in the company's provident fund and gratuity schemes. The standard employment terms applicable to all senior staff would be applicable in the assessee's case also and his services could be terminated by three months' notice.
4. The company had constituted a superannuation scheme with effect from 1-1-1973. Under this scheme, the employer-company would contribute in respect of each member, an annual contribution equal to two months' salary of the member. These contributions will be held by the trustees of the superannuation scheme. There is no requirement that the employee should make any contribution. As a matter of fact, no employee has been called upon to make any contribution. The contribution made by the company would be available to the members of the staff under certain contingencies and circumstances. Normally, they are available on the retirement of the employee. But it could be available under such circumstances when the employee withdraws from the scheme on an earlier date. The benefits would be claimed under an annuity purchased by the trustees with the Life Insurance Corporation of India. However, the employees have other options. They can elect a pension for a specific period plus certain guaranteed payment. Section III of the scheme gives seven alternatives to the employees.
10. Benefits on retirement or leaving service before normal retirement date : (i) With the consent of the employer, a member may retire from services within a period of 10 years preceding his normal retirement date. Upon such retirement or in the event of the member leaving the service of the employer of his own free will after continuous service for more than ten years or otherwise at the discretion of the employer or the member exercising his option to withdraw from the scheme at any time during service, the employer will discontinue making contributions in respect of him from the date of such retirement, leaving the service or earlier withdrawal, as the case may be and the benefit secured under the total of contributions and interest in respect of the member shall be vested in the member and the amount of annuity to be purchased from Life Insurance Corporation of India shall be determined by reference to :- (b) the total of contributions and interest in respect of him upto the date of retirement or the date of leaving the services or the date of earlier withdrawal as the case may be ; and Provided that if a member so desires and the Commissioner of Income-tax agrees thereto, the total of contributions and interest, as aforesaid, may be paid to the member in cash subject to such conditions as may be imposed by the Commissioner of Income-tax : Provided further if a member leaves the service of the employer before putting in the continuous service of more than 10 years and the employer has not agreed to use the discretion as aforesaid, he will not be entitled to any benefits under the Scheme. The Trustees shall in such circumstances credit the contributions and interest thereon in respect of him to the 'Surplus Account'.
(ii) Alternatively, the member may, in lieu of the pension described in (i) above, elect a deferred pension which shall commence from the normal retirement date and which shall be for an amount secured by the contributions paid and interest thereon in respect of him upto the date of his retirement or the date of leaving the service or the date of earlier withdrawal, as the case may be.
(iii) If the member's services are terminated on account of fraud or misconduct or the member leaves the service of the employer in anticipation of such termination, he will not be entitled to any benefits under the Scheme. The Trustees shall in such circumstances credit the contributions and interest thereon in respect of him to the 'Surplus Account'.
It will be seen from the above clause that in case an employee leaves the service within a period of 10 years, the amount which will be payable would be at the discretion of the employer-company. Clause 10 also states that the benefits shall be vested in the member on leaving the company and that is also subject to the discretion of the company.
6. Owing to certain exigencies, the assessee had to leave the services on 1-1-1979. He did not complete 10 years of service with the company.
The Board of Directors of the company passed a resolution on 21-3-1979.
According to this resolution, the condition regarding minimum service of 10 years for making of superannuation payment may be waived and the Trustees of the Scheme would be informed accordingly. As per this resolution, the assessee was to be paid Rs. 25,823 which included the superannuation fund plus interest thereon. On receipt of the resolution, the Trustees paid off the amount to the assessee. According to the requirements of the Scheme, the Trustees deducted tax under Section 6 (sic) from this amount. The tax deducted was Rs. 3,589.
7. The first issue which was seriously argued by Shri B.K. Khare is that the receipt from the superannuation scheme is not income at all.
In fact, this is the Ground No. 2 in his cross-objection. According to Shri Khare, this is a capital payment made by the Trust under the instructions from the company and it does not have the characteristic of income. He submitted that this is not treated as income under the definition clause in Section 2(24) of the Act. He agreed, however, that the payment is not covered by Section 10(13) of the Act which gives exemption in respect of certain payments made out of superannuation fund. He further distinguished the case law under the 1922 Act.
According to him, under that Act Section 58S had itself created a charge on such payments. Under the 1961 Act, there is no charge created by the statute. It is true that as per Rule 6, tax ought to be deducted. But, according to Shri Khare the rule cannot create a charge and that has to be created by the statute itself.
8. The point whether any receipt from the superannuation fund is income per se is not free from doubt. We may, in this connection, refer to the commentary by Sampat Iyengar in the 6th edition, volume 1, page 664.
The commentator had pointed out that in the 1922 Act such amounts were charged to income by specific provision. But he says, since the 1961 Act, this payment is removed from the concept of the assessee's income and the assessee is not made chargeable thereon. This commentary does support Shri Khare.
9. We would, however, start from the definition of 'income'. Section 2(24) defines this concept. But, it is an inclusive definition. The section starts : 'Income includes-' and then goes on to include nine receipts which are normally not treated as income. If a receipt is income per se, it is not necessary to go to the extension of this concept under this section. So, if receipts from superannuation funds are income per se it would be taxable.
10. We would first of all refer to Simon's Income-tax. On page 567 of vol. II, 2nd edition, it is said : From the cases discussed above it would appear that sums deducted from an employee's salary by way of contribution to a superannuation or similar fund form part of his 'emoluments'. On the other hand Edwards v. Roberts (1) and Richardson (Inspector of Taxes) v. Lyon(s) leave in some doubt the circumstances in which payments made for the benefit of an employee and not deducted or paid out of his salary would form part of his emoluments.
Now, the two cases cited really does not throw any light on this issue.
In Edwards v. Roberts 19 TC 618 (CA), the issue was the year in which the payments by a fund akin to superannuation fund would be taxed : whether in each year when the employer makes the contribution or the year in which the employee becomes entitled to receive. Both the parties had proceeded on the footing that such receipts are taxable. So this decision does not help. The decision in 25 TC (sic) is one of those odd reports where there is no speaking order at all.
11. Now the employee makes no contribution to the superannuation fund.
At any rate, the fund we are concerned with is so. The employees would be entitled to receive from the fund what is due to them, only on retirement. Till then, they have no claim in it. The right vests in them only on the event of leaving the services. Therefore, the payment effected has all the characteristics of a gratuity payment.
12. Gratuity and superannuation payments are payments made in connection with or at the termination of the employment. Now, under the general law, any payment made for compensation of loss of office is a capital receipt. That has been laid down by the Supreme Court in CIT v.E.D. Sheppard [1963] 48 ITR 237. In the first para at page 247, they have held that the question would be whether it is capital or revenue.
So, under general law such a payment is capital. So, there is no question of this receipt being income per se.
13. Now, this position in general law has been got over by a specific provision in Section 17(3)(z) of the Act. By this sub-clause any compensation paid in connection with termination of employment is made taxable. Not only that, such payment covered by Section 17(3) has been specifically defined as 'income'. We may in this connection point out that Shri Khare's reliance on Privy Council's decision in CIT v. B.J.Fletcher [1937] 5 ITR 428 is no longer applicable precisely because of Section 17(5) and the consequent amendment of Section 2(24).
14. It would appear that payments from gratuity fund or superannuation fund or a compensation paid on an agreement, whatever may be the source of such payments, they are all made in connection with the termination of employment. Section 17(3)(0 is the general provision, which covers such payments. But when we read Section 17(3)(ii) we find that a separate treatment is given to payments out of superannuation funds and other similar funds.
(ii) any payment (other than any payment referred to in Clause (10), Clause (10A), Clause (10B), Clause (II), Clause (72) or Clause (13A) of Section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund), to the extent to which it does not consist of ontributions by the assessee or interest on such contributions.
15. So, this Sub-clause (ii) is the special clause which applies to payments from funds on the termination of employments. So, it would appear that the maxim generalia speciahbus non derogant would apply.
Whereas Sub-clause (!) of Section 17(3) is general and applies to all cases of payment at the termination of service, Sub-clause (ii) is special and applies to funds from which payments are made. And the special provision carves out a portion only from the terminal compensations to be brought to taxation. That portion is the contribution made by the employers to the fund or the interest thereon.
The rest is taken as not taxable.
16. Even in the part that is made taxable, i.e., the contribution of employers to the funds, a further exception is carved out ; the contribution made by the employer to a superannuation fund is taken out of the ambit of taxation.
17. Thus, it would appear that either in general law or in the extended definition of 'income' under Section 2(24) receipts from the superannuation fund would not be taxable.
18. We must see how far the above analysis is inconsistent with certain statutory provisions which would show a contrary position. Under Section 10(73) receipts from superannuation fund under certain specified circumstances are exempt. The implication is that otherwise they are taxable. If the above analysis is correct and payment from superannuation fund is always exempt, it may be asked what was the need for such a provision. After studying the provisions, we have come to the conclusion that they had been placed in the statute by way of abundant caution only to make clear that there is no intention to tax these payments. Now Sub-clause (i) of Section 10(73) says about payment on the death of the beneficiary, that is, the employee. Now in that case, the accrual would be only at the point of death or thereafter.
Either way the employee does not become entitle to it, only his legal heirs receive it and it is well settled that in their hands it is a capital receipt. Sub-clause (ii) deals with a commuted payment of annuity which would be a capital receipt. Sub-clause (iii) also is akin to Sub-clause (i) where the legal heirs only receive the payment. In all these cases the law is clear that there is no element of income therein. Still, if the statute declares them to be exempt, it could be only by way of abundant caution.
19. The second statutory provision is Rule 6 of the provisions for approval of superannuation funds in the Fourth Schedule of the Act (sic). This rule is part of the statute and, therefore, has statutory force. But the rule merely directs that tax should be deducted at source. It nowhere declares that it represents income. In this, the provisions of the 1961 Act are different from the 1922 Act where Section 58S provided for such a deeming charge, as Shri Khare pointed out.
20. So, we come to a finding that these payments do not represent income.
21. Assuming the above analysis is wrong and it is income, then, in so far as such income can be taxed as salary income only and the definition of 'salary' excludes these payments, it cannot be taxed under any other head. This is the view expressed by the Tribunal, Bombay Bench 'A', in J.S. Vasan v. Fourth ITO [IT Appeal No. 678 of 1980 dated 13-2-1981].
22. In view of this finding we hold that the receipt is not income and the assessee is entitled to the refund of the tax deducted at source, if it is not adjusted against the tax dues already. So, the departmental appeal is dismissed and cross-objection allowed.