1. This appeal by the revenue is against the order of the AAC in his Appeal No. 39YB of 1982-83, dated 31-3-1983, directing the ITO to allow relief under Section 89(1) of the Income-tax Act, 1961 ('the Act'), in accordance with the provisions of Sub-rule 4 of Rule 21A of the Income-tax Rules, 1962, on the sum of Rs. 31,088. The facts in this regard, the rival submissions and our conclusion thereon are discussed hereunder.
2. The assessee, an employee of Brooke Bond India Ltd., Yavatmal, voluntarily retired from the service of the company on 2-4-1980 after twenty-eight years of continuous service. In the normal course, his retirement would have taken place only on 1-4-1985 subject to his having been found fit on 1-4-1983, fit to continue for two more years.
In consideration of his voluntary retirement and in pursuance of a scheme evolved by the company in this behalf and the practice followed in similar cases, the assessee was paid a sum of Rs. 31,088. The assessee claimed that only one-third of this amount was assessable in each of the financial years 1980-81 to 1982-83. The ITO, after referring to the certificate issued by the company in this behalf, which is in the following terms, held that relief under Section 89(1), read with Rule 21A, was not admissible in respect of this payment, as such relief was applicable only to the case of an employee, who has been paid compensation on termination of his services by the employer and not in the case of a person who has voluntarily retired from employment and, thus, became eligible for receiving compensation : This is to certify that Mr. M.R. Upasni was paid an amount of Rs. 31,088 as consideration for voluntarily retiring on 2-4-1980 from the company's services at the age of 55 years, after 28 years of service. His retirement in the normal course would have been due only on 1-4-1985 subject to his having been found on 1-4-1983 to continue for two more years. The above amount was paid according to a system evolved by the company and the practice followed in similar cases.
According to the ITO, the termination of services should have been brought about as an unilateral act on the part of the employer and then only, any compensation paid to the employee at the time of such termination would be eligible for the relief under Section 89(1), read with Rule 21 A. In the present case, the employee having voluntarily retired from service and received compensation according to a scheme drawn up in this behalf, the ITO was of the opinion that the provisions of Section 89(1), read with Rule 21A, were not applicable. He, accordingly, treated the entire payment as an ex gratia payment and included in the assessment for the year 1981-82.
3. An appeal was filed against this order to the AAC. The submissions made in this behalf before the AAC may be summarised hereunder.
The compensation paid to the employee at the time of his retirement was nothing but profits in lieu of salary covered by Section 17(7)(iv) of the Act. Profits in lieu of salary have been defined in Clause (3) to include "the amount of 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 in modification of the terms and conditions relating thereto;". Section 89(1) provides for relief in respect of a payment which under the provisions of Clause (3) of Section 17 is a profit in lieu of salary, by virtue of the inclusion of which the income is assessed at a higher rate than that at which it would otherwise have been assessed. The relief to be allowed in this behalf is governed by Rule 21A, which is applicable to a payment which under the provisions of Clause (3) of Section 17 is a profit in lieu of salary. Clause (c) of Sub-rule (1) of Rule 21A provides for the relief to be ascertained under Sub-rule (4) in respect of a payment in the nature of compensation received by an assessee from his employer at or in connection with the termination of his employment after a continuous service of not less than three years and where the unexpired portion of his term of employment is also not less than three years. Sub-rule (4) prescribes the method of ascertaining the relief in this behalf. All the requirements indicated in the rules were satisfied in this case and, therefore, the ITO had no basis for rejecting the claim for relief merely on the ground that the termination of employment should be at the instance of the employer and not as a result of voluntary retirement as happened in this case.
4. The AAC, after considering the above submissions, held that the compensation received by the assessee at the time of his voluntary retirement was covered by the definition of 'profits in lieu of salary' in Section 17(3) and as Rule 21A(1)(c) refers to compensation received at or in connection with the termination of the employment, the relief claimed in this behalf under Section 89 was admissible to the assessee, there being absolutely no basis to hold that the termination referred to both in Clause (3) of Section 17 and Clause (c) of Sub-rule (1) of Rule 21A should have been at the instance of the employer and not as a result of voluntary retirement. He held that the word 'termination' would cover a case of voluntary retirement as well before the date of superannuation. Accordingly, he directed the ITO to allow relief under Section 89(1), read with Rule 21A(1)(c), as applied in Sub-rule (4)(a)/(b).
5. Aggrieved with this decision of the AAC the department is in appeal before us. The submissions made on behalf of the revenue are as under : No appeal has been provided under Section 246 of the Act against the refusal of the ITO to allow relief under Section 89. The assessee should have made an application for relief in this behalf before the ITO, which he has failed to do. The assessee was not justified in returning only one-third of the compensation received by him in the return. The termination referred to in both Section 17(3) and the rules covers only cases of termination brought about by the employer and not in pursuance of a scheme of voluntary retirement.
6. The assessee's representative reiterated the submissions made before the AAC, and also made the following further submissions.
The nature of the receipt has first to be determined before deciding whether the relief under Section 89 is admissible or not. The compensation received by the assessee can only partake of the character of profits in lieu of salary included in Sub-clause (iv) of Section 17(2), which defines salary to include the various items mentioned therein. Profits in lieu of salary under Section 17(3) include compensation received at or in connection with the termination of an employment. Section 89 specifically provides for relief in respect of payments which are to be treated as profits in lieu of salary under Section 17(3). Rule 21A(1)(c) also refers to such payments as eligible for the relief prescribed in Sub-rule (4) of that rule. The claim for relief was made before the ITO, though not in any particular format, as otherwise there was no need for the ITO to hold in para 4 of his order that the relief under Section 89(1) was not admissible.
7. After a careful consideration of the submissions, we are of the opinion, that the AAC was justified in entertaining the appeal and directing the ITO to allow the relief admissible under Section 89(1), read with Rule 21A. As regards the maintainability of the appeal, we have simply to refer to Section 246, which in Clause (c) of Sub-section (1) indicates that an assessee, objecting to the amount of income assessed or to the amount of tax determined, may file an appeal to the AAC. Section 89 clearly lays down that relief is admissible in a case where income is assessed at a rate higher than that at which it would otherwise have been assessed. Since the rate applied is a determining factor of the amount of tax determined, the assessee has, undoubtedly, a right of appeal under Section 246(1)(c) against the higher amount of tax determined. The relief provided for in Rule 21 A(4) is also quite explicit, in that the average of the average rates of tax for the three previous years has to be applied for determining the tax in respect of the compensation received on termination of services. As to the objection that the assessee had not specifically applied for the relief, no particular format appears to have been prescribed for applying for the relief under Section 89. It is quite evident, that the assessee had claimed this relief before the ITO, or else we do not see any reason for a reference made in this regard in para 4 of the ITO's order.
8. Adverting to the merits of the claim, we are of the opinion that the compensation received at the time of voluntary retirement of the assessee has to be treated as profits in lieu of salary under Section 17(1)(iv) read with the definition of 'profits in lieu of salary', under Clause (3), as no other sub-clause provides for it. Section 17(3) clearly lays down that profits in lieu of salary include compensation received by an assessee from an employer at or in connection with the termination of his employment. There is absolutely no basis or authority to hold that the termination referred to in Clause (3) should be a termination at the instance of the employer and not a termination as a result of voluntary retirement. The word 'termination' has been explained in the Judicial Dictionary by K.J. Aiyer, Eighth edn., 1980, as follows : The expression in ordinary parlance may include termination for misconduct. But in the light of rules and prevailing practice, the meaning of that word has come to be restricted to contractual termination unconnected with any idea of punishment for misconduct.
From the above, it is clear that the termination should be as a result of contract and it has absolutely no connection with the idea of punishment or misconduct, which would be the case in the event of a termination by the employer. In the present case, the termination was as a result of voluntary retirement brought about in pursuance of a scheme of voluntary retirement, which, in other words, is a contractual termination. Once the compensation received is to be treated as profits in lieu of salary as per the definition in Section 17(3), Section 89 would automatically be attracted, as the same is made applicable to a payment which is treated as profits in lieu of salary under Section 17(3). Once this premise is granted, the provisions of Rule 21A(1)(c) and Sub-rule (4) would automatically apply. Moreover, all the requirements specified in Rule 21A(1)(c) are satisfied in the present case. We have, therefore, absolutely, no doubts in our mind that the compensation received by the assessee at the time of his voluntary retirement is inciudible under the head 'Profits in lieu of salary' and, therefore, the same is eligible for relief under Section 89, read with Rule 21A. We, therefore, confirm the order of the AAC and dismiss the appeal filed by the department.