1. This is an appeal by the assessee against the order of the Commissioner of Income-tax (Appeals) for the assessment year 1981-82.
2. The short dispute in this appeal is about the taxability of gratuity amount received by the legal heirs of late Sri D.S. Mistry who was in employment of three companies including M/s. M. Dinshaw and Co. P. Ltd. He died on 1-9-1980 and on his death the gratuity funds of the three companies paid the gratuity of Rs. 2,21,250 to the legal heirs of the deceased. The executors filed two returns of incomeone for the period from 1-4-1980 to 1-9-1980 in the capacity of legal representative and the other from 2-9-1980 to 31-3-1981 as executor. In the second return the receipt of gratuity was claimed non-taxable. The Income-tax Officer however made only one draft order for the entire period from 1-4-1980 to 31-3-1981 and brought the sum of Rs. 2,21,250 to tax. In the proceedings under Section. 144B the Inspecting Assistant Commissioner however accepted the contention of the assessee that two assessments were to be made. He however directed the Income-tax Officer to tax the receipt of gratuity for the period ending 1-9-1980. Assessment was thus finalised by the Income-tax Officer in pursuance of his direction under Section. 144B. The matter was carried in appeal before the Commissioner of Income-tax (Appeals). On perusal of the trust deed, under which the gratuity was paid, the Commissioner of Income-tax (Appeals) observed that the very purpose of creating the fund was to pay the gratuity to all the employees covered by the said Rules as per the scales laid down therein, on retirement, death or discharge of the employee. The scale of the payment is equal to 15 days of basic salary for every one year of uninterrupted service of the employees subject to a maximum thirty half-monthly basic salaries. Gratuity was thus not payable according to him, only after the death of a person because the right of an employee for the gratuity accrued during his lifetime on account of the services rendered to the company. It became payable on the happening of certain events like retirement, retrenchment or death of the employee. The gratuity was earned by the employee during his lifetime. He has also taken into consideration the fact that the said gratuity was included by the legal heir for the purposes of estate duty, of late Sri D.S.Mistry. This according to him would show that it had accrued to the deceased which passed on to the legal heirs on his death. Gratuity, according to him, is taxable under the head 'Salaries' because its payments involved relationship of an employer and the employee. The interest in the gratuity existed during the lifetime of the deceased and became payable only after his death to the legal heirs as his nominee for this purpose. Thereafter he cited three decisions of accident insurance receipts. They are, Bharat-kumar Manilal Dalal v.CED [1975] 99 ITE 179 (Guj), CED v. Smt. Motia Rani Malhotra [1975] 98 ITR 42 (Punj. and Har.) and CED v. Kasturi Lal Jain [1974] 93 ITR 435 (J and K). These decisions, it may be stated, have been disapproved by the Supreme Court in the case of M.Ct. Muthiah v. CED [1986] 161 ITR 768. He also took aid of Section. 10(10) and held that the very fact that the gratuity payable after death is exempted only up to a specified limit under this section shows that the remaining part of it is taxable. The right of the legal heirs to receive the gratuity, according to him, is only as his nominee as the gratuity was earned by the deceased during his lifetime by completing a number of years' service, 3. We have heard the parties and considered the rival submissions very carefully. The first point raised by the learned counsel for the assessee, Sri Sarkari is that Section. 10(10) is an exemption section and that does not mean that a receipt which is not exempt would necessarily be chargeable to tax. To bring an item to tax one must find an answer in the charging section. We agree with the contention of the learned counsel for the assessee. As held by their Lordships of Privy Council in the case of CIT v. Shaw Wallace & Co. 6 ITC 178 that to deduce from an exemption that the contrary must be taxable income may not be correct. In our opinion, simply because the gratuity received by the widow, children or dependant is exempt only up to a sum of Rs. 30,000 or Rs. 36,000 under Section. 10(10) it does not necessarily mean that the excess receipts in all circumstances would be taxable. To assess an item we should see the provision which bring the gratuity to charge.
4. The next contention of Sri Sarkari is that chargeability of the gratuity is provided in Section. 15 under which it could be assessed to tax only if it had become due or received by the employee during his lifetime. In this connection, he submitted that the gratuity became payable after the death of the deceased and, therefore, it could not be assessed to tax in the hands of the legal representative as having become due on 1-9-1980 when Sri D.S. Mistry died. Reference to Clause 18 of Rules & Regulations of M. Dinshaw & Co. Pvt. Ltd. Staff Gratuity Fund was invited in this behalf pointing out the fact that gratuity was payable to legal heirs of the employee on his death. Clause 4 of the Rules states the object of the Fund is to provide gratuities on death, retirement or discharge of the Company's employees. Clause 16 provides for the events and scales laid. Sub-Clause (1) thereof which is relevant for the purpose reads as under: (1) On the death or retrenchment or certified unfitness on medical grounds of an employee while in the service of the Company-fifteen days' basic salary or wages for each year of service subject to a maximum of thirty half-monthly basic salaries of wages to be paid to him or his heirs or executors or nominees; the qualifying period, of five years' service may be waived.
5. The event of payment is death. Clause 18 upon which the learned counsel for the assessee has placed heavy reliance reads as under: 18(a). In the event of gratuity becoming payable on the death the Company shall hold the amount of such gratuity on trust for such persons as shall have been duly appointed to receive the same by the deceased and in default as hereinafter provided.
18(b). Every worker, clerk or member of the technical and supervisory staff upon whose death in the service of the Company a gratuity becomes payable shall appoint a nominee who is of full ago to receive such gratuity but subject to defeasance of such appointment if the nominee shall die or become unable to act during the life of the appointor. If the nominee or any of the nominees is a minor the employee shall at the time of nomination also appoint in writing a person of full age to whom such amount shall be paid on behalf of the minor nominee and shall be at liberty from time to time to change such appointment.
18(c). If the nominee shall die or become unable to act during the life of the appointor or if the appointor desires to revoke the appointment of the nominee then the appointor shall appoint a fresh nominee in place of the nominee so dying or becoming unable to act or whose appointment is so revoked.
18(e). In default of a due appointment of a nominee it shall be in the discretion of the trustees to grant the whole or any part of the gratuity to the executors or administrators of the deceased or to any relative or relatives or dependant or dependants as the Trustees in their absolute discretion think fit (on production of heirship certificate signed by a Magistrate, J.P. or Gazetted Officer) and/or an Indemnity bond drawn up in the proper form being executed by such persons as the Trustees may determine.
This clause also provides that the gratuity is payable on death and it is held on trust for such person as shall have been appointed by the deceased. The deceased had a right to the gratuity amount before his death but it became due and payable on his death to the appointee or nominee who was authorised to receive the same. Let us see the scheme of the Act. Section. 4 is a charging section. It brings for charge to tax the total income of the assessee. Total income is defined in Section. 2(45) of the Act, as the total amount of the income referred in Section. 5 and computed in the manner laid down in the Act. under Section. 5, total income of a person includes all income from whatever source derivad which are received or deemed to have been received by him or on his behalf and also which accrue or arise or are deemed to accrue or arise to him. Computation of income is provided in various Sections Under 6 heads as mentioned in Section. 14. We are here concerned with the computation of income under the head "Salary" which is provided in Sections. 15 to 17. Section. 15 provides for the charge of the following income under the head 'Salaries': (a) any salary due from an employer or former employer to an assessee in the previous year, whether paid or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him. in the previous year by or on behalf of an. employer or a former employer, if not charged to income-tax for any earlier previous year.
Section. 17 defines what is salary. As per Sub-Clause (iii) of Section.17(I) salary includes gratuity. Any payment other than a payment referred to in Clause (10) of Section. 10 due to or received from an employer or a former employer or from a Provident Fund or other fund is also treated as salary by virtue of Clause (ii) of Sub-Section.
3 of Section. 17 read with Clause (iv) of Sub-Section. 1 thereof.
6. On a careful reading of these sections we find that the main emphasis of taxability of gratuity is on the date when it became due to an employee. Due means due and payable as held by the Supreme Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 in the following extract; while dealing with the concept of "debt owed" within the meaning of Section. 2(m) of the Wealth-tax Act, wherein the following observation has been quoted with approval.
7. "Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds: solvendum in praesenti and solvendum in futuro. Whether a claim or demand is a debt or not, is in no respect determined by a reference to the time of payment. A sum of money which is certainty and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency has happened." In our opinion, the contingency had happened immediately on the death of Sri D.S. Mistry and it became due and payable to the appointee after his death.
8. Sri Sarkari, the learned counsel for the assessee had also raised a contention that only that part of the gratuity could be taxable which was relating to the service of the deceased from 1-4-1980 to 1-9-1980.
This is an alternative contention in the situation that it is held that the gratuity had accrued to the assessee from year to year on completing a particular year of service. As aforesaid, the gratuity is assessable as salary which is chargeable to tax when it became due. We have earlier pointed out that the gratuity became due and payable to the appointee immediately after his death on 1-9-1980. Therefore, we do not find any force in this alternative contention of Sri Sarkari.
9. We may also state here that the assessment of this amount to estate duty of the deceased, which is stated to be a fact by the assessee in his favour, is in fact not very relevant. The fact that the amount has been assessed to estate duty gives an impression that the amount accrued to the deceased. It does not necessarily mean that it was due to the assessee on the date of his death or prior to his death.
10. We may also point out here in this connection the provisions contained in Part 'C' of Schedule IV to the Income-tax Act dealing with the approval of the gratuity fund. By Clause 5 therein it is provided that where any gratuity is paid to an employee during his lifetime, the gratuity shall be treated as salary paid to the employee for the purposes of this Act. This gives an indication that it is this gratuity alone which is included in the definition of 'salary' under Section.
17(1)(iii). Any gratuity which is not paid to the employee during his lifetime may, therefore, be not treated as salary for the purposes of this Act.
11. Sri Sarkari had also invited our attention to the Board Circular letter No. F. 35/1/65 dated 5-1-1965 wherein leave salary of an assistant is stated to be non-taxable in the hands of the recipient both as legal heirs as well as in their personal capacity. It states as under: The leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary. For being taxable as salary, the payment must be due from an employer to the assessee. If the deceased officer is regarded as the assessee in respect of the proposed payment, then the amount was not due to the assessee. Firstly, this is not a payment which is due to be paid to him after his death as a matter of contractful right. Secondly, even before his death, the payment was not due to him unless and until the leave was actually taken by him. If the legal representative of the deceased is to be taken to be the assessee, then the amount proposed to be paid is certainly not due to him. It is an ex gratia payment on compassionate grounds in the nature of gift. Thus the payment is not in the nature of salary.
We are here in this case not concerned with the latter part of the Circular. In the first part, it is stated that the leave salary payment is not taxable because of two reasons namely that it is not a payment which was due to be paid to the deceased after his death as a matter of contractual right and secondly that it was not due to the deceased unless and until the leave was taken. In the present case, though the gratuity to be paid after his death was as a matter of contractual right of the deceased in terms of Rules and Regulations of the company but the event entitling him to gratuity happened only on his death.
Therefore, the Circular also help the assessee.
12. We accordingly hold that the gratuity in this case was not due to late Sri D.S. Mistry so long he was alive. It became due and payable on his death to the legal heir/appointee. It was, therefore, wrongly brought to tax by the Income-tax Officer.