All these appeals filed by the assessees, pertain to assessment year 1997-98. Since in all these appeals identical issues are involved, we dispose of the same by this common order for the sake of convenience.
The first common ground of objection raised by the assesses is directed against the order of the CIT (A) in adding the entire interest for the period from 1-4-1990 to 31-12-1996 received on retiral benefits, as income for the assessment year under consideration. The facts leading to the dispute briefly is as under.
In this case, the assessment was processed under section 143(1)(a) making adjustment to the income returned on account of interest received by the assessees from their employer ie. Overseas Communication Services (hereinafter referred to as the OCS) a Government of India concern. On conversion of OCS into Videsh Sanchar Nigam Limited (hereinafter referred to as the VSNL), the assessees were entitled to retirement benefits from OCS, which was retained by the employer for seven years from 1-1-1990 to 31-12-1996. On this retained amount being the retirement benefit, the ass'essees received interest, which according to the assessing officer was did not disclose in their return. As per section 143(1)(a) and in the light of the CBDT Circular No. 689, dated 24-8-1994, an amount of interest received on retirement gratuity of the impugned amount to be added to the total income of the assessee raising addition demand under section 143(1)(a) and interest thereon payable under section 234B. The CIT (A) held the adjustment made by the assessing officer was beyond the scope of prima facie adjustment since the amount was less than the monetary limit prescribed by the Board for filing of appeal. The revenue could not further appeal also.
According to the assessing officer, he reopened the assessment by issuing notices under section 148 read with section 147 since interest amount was not disclosed in the original return by the assessees, which according to the assessing officer was not covered by the provisions of section 10(10) of the Income Tax Act. Notices were issued on 8-3-2002.
The assessees filed returns in response to notice dated 10-6-2002 offering therein additional income being portion of total amount of interest received attributable to assessment year 1997-98. Notices were also issued under section 142(1) vide letter dated 7-10-2002 seeking assessees' explanation as to why interest received on Death- cum-Retirement Gratuity has not been shown in the return of income. In response to the above, it was submitted that prior to absorption of VSNL, the assessees were employees of Government of India and as per the scheme framed by the government, the assessees were received the amount of Death-cum-Retirement Gratuity along with interest for the period of seven years of the impugned amount. It was submitted that the entire amount pertaining to the year under consideration that is why it was agreed to offer the interest amount pertaining to the assessment year 1997-98 only. The assessee explained that the assessee offered the interest amount as per the pronounced judgment of the court and the Accounting Standard recognized by the Institute of Chartered Accountants of India. It was contended that interest accrued from year to year and not in the year of receipt and for the above proposition the assessee relied upon the decision of the Hon'ble Supreme Court in case of CIT v. T.N.K. Govindarajulu Chetty (1987) 165 ITR 231 (SC), which was a case of land acquisition.
The assessing officer rejected the assessees'claim and charged interest pertaining to assessment year 1997-98 alone and not chargeable to tax all the years or exigible to tax. The assessing officer held that the assessee has not offered interest on terminal benefits lying in deposit with employer neither for this year nor from year to year on accrual basis. Hence he held from assessee's conduct it is clear that the assessee was not following accrual basis for accounting interest, though the assessees had an option to do so and accordingly the decisions of accounting standards relied upon by the assessees do not hold good. The entire income has been received by the assessees during the year under consideration have to be taxed on receipt basis. The employer's certificate also does not give bifurcation of interest year to year. The assessees offered portion of interest only after issuance of notices under section 148, for the assessment year 1997-98. This offer is an afterthought, ie. after the reopening of the assessments of earlier six years. Hence, he brought the entire amount as taxable income the year in which the assessees received. Aggrieved by the above, the assesses are in apeal before the first appellate authority.
One of the grounds urged by the assessees was that the assessing officer was erred in adding the entire interest of the seven years, which was received as retirement benefit in one year i.e. assessment year 1997-98 without appreciating that only the interest amount accrued during the relevant assessment year under consideration. The assessee also objected the charging of interest under section 234B.The CIT (A) records vide para 3 of his order that the entire retirement benefit was retained by the earlier employer, a Government of India concern viz. OCS on its conversion by the Government of India into VSNL, an Autonomous Body. It was submitted before the CIT (A) that office memorandum on 5-7-1989, dated 5-7-1989 issued by the government of India, Ministry of Pensioners' Welfare, the terms and conditions were applicable to the assessees as in the case of an en masse transfer of employees from one government department to a Public Sector Undertaking/ Autonomous Body. In this government memorandum, d(iv) gives the assessees an option that the retirement gratuity shall be paid on the expiry of a period of seven years from the date of permanent absorption. The amount however is payable earlier in the event of death /retirement/ resignation/discharge from service, and option (v) stipulates the amount of retirement gratuity and lump sum value in lieu of pension mentioned in clause (iv) shall remain with the government and the interest earned at the rate prescribed (for General Provident Fund deposits) from time to time for the period they remain with the government.
It was the case of the assessees that they were under bona fide belief that since the capitalized retirement benefits frozen for seven years it will be exempt from income-tax and the interest accrued thereupon will also be exempted. Although clause 12 copy of Government of India, Department of Personnel and Training No. 3/82/86-JCM, dated 6-2-1989 states the capitalized retirement benefit, frozen for years will be exempted from income-tax and the demand for income-tax exemption on the interest of deposit may be examined separately by the Government.
Nothing of that sort has been taken place.
Relying upon the decision of the Hon'ble Supreme Court in the case of Bikram Singh v. Land Acquisition Collector (1997) 224 ITR 551 (SC), the CIT (A) held that the interest received on delayed payment is revenue receipt, and therefore exigible to tax. The assessee, however, can spread over the income for the period for which the payment was delayed. The CIT (A) held that there is no merit in assessees'case that the assessees were following mercantile system and therefore interest received should be taxed over a span of seven years on accrual basis.
This is not coming out of assessees' conduct. The assessees also relied upon the decision of the Hon'ble Delhi High Court in a Writ Petition bearing No. 295/1997. The CIT (A) held, this reliance by the assessees is misplaced as according to him, there appears that VSNL deducted tax at source on the whole amount of interest as it felt that entire amount of interest receivable is taxable during the year only. Therefore, he held that the assessee cannot be allowed to choose and implement the Supreme Court's decision in part to the extent that the interest accrued pertaining to this assessment year 1997-98 only be taxable in this year. Hence, he held that the assessing officer was correct in judging the conduct of the assessees in practice the assessees follow the receipt system of accounting. Alternatively, he held that even in the system of mercantile accounting in the circumstances of the case where the entire interest was blocked by the Government of India for seven years, it can never be claimed that it accrued for a span of seven years, since the blocking was in pursuance of Government of India Notification. He further held, the ass essees' conduct cannot be treated as far as the assessees had not shown any taxable income.
Merely filing a.writ petition in the court does not grant any immunity to the assessees from not showing any taxable receipts as non taxable until the final verdict of the competent authority/court is rendered.
Hence, he held that the entire income was exigible to tax. Aggrieved by the above order, the assessees are in appeal before the Tribunal.
The assessees' Representative challenged the very basis of the assessment itself. He contended that the amount is not taxable at all.
He submitted that the assessees had not received the money. The Government of India's concern OCS was converted by the government itself into VSNL, an Autonomous Body. The employer retained the retirement benefits due to the assessees for seven years. The assessees had no option. The entire amount was paid in a subsequent year after the lapse of seven years.
The office memorandum dated 5-7-1989 settles the beneficiary terms etc.
The memorandum clause (a) supports that a permanent Central Government servant, who completes 10 years or more will receive the pro-rata retirement benefits for the services rendered under the government and it details in d(v) that the amounts of retirement gratuity and lump sum value in lieu of pension mentioned in clause (iv) shall remain with the government, earned the interest at the rate prescribed for General Provident Fund deposits from time to time for the period they remained with the government. As far as the assessees are concerned, there is no option. The assessees never received it. It remained with the government. This was on the basis of a scheme drawn by the government and as such it was contended though the assessees offered a portion of the interest received during the year 1997-98. In fact the interest received was not exigible to tax. The case relied upon by the CIT(A) in Bikaram Singh's case (supra) does not supports the case of the revenue.
It was a land acquisition matter. It was not a case of pensionary benefits, which is entirely different from the other one.
Replying to the above first, the learned Departmental Representative objected that the ground of appeal does not cover the very taxability of the impugned amount of interest computed on retirement benefits.
Hence, the plea of the assessees whether it is taxable or not, is beyond the scope of appeal. On the other hand, the learned Representative of the assessee submitted that the ground of the assessees is wide enough to cover the very taxability of the said amount.
With a view to remove any ambiguity and keeping in mind the proviso to rule 11 of the Income tax Appellate Tribunal, parties were allowed to address us on the following points:- "Whether or not the entire amount paid by the government, computed as interest on retirement benefits is taxable in nature." First, we will advert to the objection of the learned Departmental Representative as to whether the party before the Tribunal could address a Bench on a ground of appeal that has not taken in its grounds of appeal. The Appellate Tribunal Rules, 1963, rule 11 "Grounds which may be taken in appeal" reads as under: "The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule: Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground." The reading of section and proviso together make it clear that the appellant cannot urge or support any of the grounds not set forth in the memorandum of appeal except by the leave of the Tribunal. But the Tribunal in deciding the appeal shall not be confined the grounds set forth in the memorandum of appeal or taken by the leave of the Tribunal under the Rule. The only restriction provided in the rule is that "Tribunal shall not restrict its decision on any other ground unless the party who may be affected thereby had a sufficient opportunity of being heard on that ground." This means that the Tribunal had the power but the power can be invoked only if the other affected party had given sufficient opportunity to present its case.
Though a specific ground has not been taken by the assessees, but the assessees had taken a general ground which reads - "the appellate craves leave to amend, alter or delete, elaborate any of the above grounds of appeals and add further grounds at the time of hearing." Though the ground is not specific, the assessees have sought them indulges of the Bench to amend the ground, if necessary.
In view of the above, since both the parties were allowed to address onus on the point, we proceed to decide the issue on merit.
The learned assessee's representative reiterated the submissions recorded herein above made before the revenue authorities and also the submission made before the Tribunal objecting the very taxability of the amount received. On the other hand, the learned Senior Departmental Representative brought our attention to the decision of the Privy Council in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC). The learned Departmental Representative submitted that there is similarity of the facts in the instant case of the assessees and the case before their Lordships of the Privy Council.
The case before the Privy Council, interest was payable in respect of land used for agricultural purposes, agricultural income was exempted from taxation. So also in the instant case of the assessees, the pensionary benefits receivable is exempted from taxation and not so the interest accrued thereon. Interest accrued is independent from the pensionary benefits exempted under section 10(10)(a).
The learned Representative for the assessee relied upon the following judgments: We heard the rival submissions and gone through the decisions cited.
The facts leading to the dispute and from the records briefly noted as under.
The assessees were Central Government employees working in Overseas Communication Service (OCS), a department under the Ministry of Communication, Government of India. In the wake of liberalization and decentralization policy adopted by the Government of India by a Union Cabinet decision, it was decided to convert OCS into an independent autonomous entity namely Videsh Sanchr Nigam Ltd. (VSNL), a wholly Central Government owned company. VSNL, absorbed en masse the entire staff of OCS with effect from 1-4-1986 on the same scale of pay but without deputation allowance vide office memorandum dated 5-7-1989 issued by the Government of India (hereinafter referred to as the GOI), Ministry of Personnel, Public Grievance and Pension (Department of Pension and Pensioners' Welfare) terms and conditions applicable in the case of en masse transfer of employees from government departments to a public sector undertaking/autonomous body were laid down. 100 per cent lump sum amount/commuted value along with the retirement gratuity which the assessees were entitled to get upon their absorption into VSNL was compulsorily retained by the GOI and was to be paid on the expiry of a period of seven years from the date of permanent absorption into VSNL and it was to earn interest at the rate prescribed by the General Provident Fund deposits from time to time for the period the amount remained with the GOL With the return of income the assessees claimed interest received on retiral benefits as exempt and had attached tax deduction certificate on the interest on retiral benefits and also the information that taxability of the same was challenged before the High Court. The assessing officer made prima facie adjustment and levied additional tax under section 143(1)(a) in the case of the assessees.
However, the CIT (A) had cancelled the additional tax levied since he was of the opinion that the issue was not within the scope of prima facie adjustment. The view canvassed by the assessees that interest accrued from year to year and not in the year of receipt so only the interest accrued for assessment year 1997-98 should be taxed in the said year and not the whole interest on the reason that entire amount was paid in a subsequent year after the lapse of seven years. The assessing officer as well as the CIT (A) did not accept the above.
Chapter III in the Income Tax Act enumerates the income which do not form part of total income. Section 10 states that "in computing the total income of the previous year of any person, any income falling within any of the following clauses shall not be included". The relevant provision of the Act is section 10(10A), which reads as under: "(i) any payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable (to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the defence services orto the members of the civil services of a State or holders of civil posts under a state or to the employees of a local authority) or a corporation established by a Central, State of Provincial Act; (ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed- (a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognized tables of mortality.
(iii) any payment in commutation of pension received from a fund under clause (23AAB))".
It is the case of the revenue that under Chapter 3 which deals with the income that does not form part of the total income, what is exempted under section 10A is only the amount of commutation of pension received under the Civil Pensions (Commutation) Rules of the government or under any similar schemes applicable to government servants Central or the State. Therefore, it is the case of the revenue that interest arising from the amount received is not exempted and it is to be taxed as interest arising is taxable.
As is stated herein above, the assessees, Central Government employces working in OCS was converted into an independent autonomous entity by the government and the staff en masse was also absorbed by the new autonomous body. On this change, the Government also issued an office memorandum by virtue of which the assessees pensionary benefits were also kept with the government for a further seven years without actually paying it. While keeping it with the government, in the memorandum it is also mentioned that interest will be paid to the assessee for these years but the interest will be as it is applicable to the General Provident Fund deposits from time to time. There is no occasion to say that the assessees have ever received the amount and used their discretion. If ever they have received and used the discretion definitely the interest arising is taxable.
Section 10(15) deals with interest, premium on redemption or other payments on such securities owned and its savings certificates, other certificates issued by the Central Government and the deposits as the Central Government by notification in the Official Gazette, specify in this behalf. Section 10(15)(i) and (iv) are relevant for our purpose and the same reads as under:- (i) income by way of interest, premium or redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf, subject to such conditions and limits as may be specified in the said notification.
(i) by government on deposits made by an employee of the Central Government or a State Government (or a public sector company), in accordance with such scheme as the Central Government may, by notification in the Official Gazette, frame in this behalf, out of the moneys due to him on account of his retirement, whether on superannuation of otherwise." "Forthepurposes of thissub-clause, the expression"industrial undertaking' means any undertaking which is engaged in - This Explanation was introduced with effect from 1-4-1991 by Finance Act, 1991, Explanation (ba) came into statute book with effect from 1-4-1998 onwards. This means the interest arising to these Central Government employees, who had been absorbed into the wholly owned Central Government Undertaking i.e. VSNL, who were absorbed and whose pensionary benefits were not paid by it but kept by the government for seven years and the interest arose on them on this pensionary benefits is also is exempted, but with effect from 1-4-1998.
Explanation IA was substituted by Finance Act, 2001 w.e.f 1-4-2002.
Before the change Explanation IA states "for the purpose of this subclause, expression "interest" shall not include interest paid on delayed payment of loan or on default." The learned representative for the assessee submitted that the amount retained by the Government for seven years, which was due to the assessee, is infact nothing but a delayed payment. This is to be considered as a loan and since there is a default in paying the interest by the government. So Explanation IA below section 10(15) applies.
We are of the view that the view canvassed by the assessee's Representative is not acceptable. Explanation IA states that expression "interest" shall not include interest paid on delayed payment of loan or default.
The question is, could the amount retained by the government can be treated as a loan? If it is a loan, the view canvassed by the assessee's Representative is correct. However, it is difficult to accept this view. This is specially so, in view of the fact that section 10(15)(iv)(a), (b), (c) and some other sections deal with borrowing either by the government of local authority or it deals with debt incurred in a foreign country in respect of the purchase outside India or raw materials etc. In such cases, the government is liable to pay interest and if government could not pay interest then government has to pay interest on the delayed payment, Explanation IA contemplates such circumstances. Here the interest paid by the government comes under section 10(15)(iv)(i), and therefore, the view canvassed by the assessee's representative cannot be adverted to.
Now the question is whether it is taxable in the year of receipt or it is to be taxed on accrual basis from year to year? We are of the view that since the interest accrues to the assesee from year to year, it is to be taxed on accrual basis and not the entire amount which it was received. Since the decision relied on by the assesee in the case of TNK Govindarajulu Chetty (supra) is relevant. As rightly contended by the assessee the interest is to be taxed on accrual basis from year to year and not on the year of receipt entirely.
Coming to the decision relied upon by the learned Senior Departmental Representative, Dr. Aggarwal, the facts are distinguishable. This was a case wherein interest on arrears of rent payable in respect of land used for agricultural purposes was not treated as agricultural income within the definition of the phrase "contained" in section 2(1) of the Income Tax Act, 1922. Their Lordship of the Privy Council held the interest is not therefore exempted as it is neither rent nor revenue derived from the land. The facts in that case briefly as "The holders of patni rights under an estate was unable to pay the patni rent due to the estate for several years with the result that the rent and interest on arrears of rent amounted to a certain sum and the holder of the rights thereupon executed a usufructuary bond in favour of the assessee under which they were put in possession of certain agricultural property for the purpose of realizing the sum due to them." Their Lordship held that the bond was merely a security for the debt and no taxable income accrued to the assessee.
Coming to the decisions relied on by the assessees, these decisions are also not directly on the point. However, the decision in the case of Accountant General Karnataka (supra) states - "There might be a scheme for payment in commutation of pension different from the provisions in the Civil Pensions (Commutation) Rules and persons not governed thereby and accordingly relief should be granted to persons who would not be receiving payments under the Commutation Rules as such but also under other schemes. Whatever be the amount actually received under the Commutation Rules, the relief would be limited to the extent of the amount receivable thereunder. So far as the several schemes are concerned, relief would be available to the extent the payment in commutation of pension would be received under those respective schemes. The relief or exemption provided in section 10(10A) of the Income Tax Act, 1961, under such "similar scheme" could not be restricted to the extent of the amount received in commutation of pension under the Civil Pensions (Commutation) Rules. If there is a scheme apart from the Civil Pensions (Commutation) Rules by which a person is governed the operation of section 10(10A) must extend to the amount received under that scheme by that person and could not be limited under some other provisions. Whenever such a limitation was intended, the legislature has made specific provision in that behalf.
For example, in section 10(10A)(ii), provision is made in respect of payment in commutation of pension received under any scheme of any other employer and the extent to which the amount would not be included in the computation of total income is restricted." Coming to the instant case of the assessees, it is important to note that the amount receivable to the assessees was withheld by the government for seven years. The assessees had no option. There is no possibility of ever holding that the amounts were in the hands of the assessees and thereafter the assessees made a choice to deposit. The scheme was framed by the government. It was under this scheme that the assesses were transferred en masse from the Central Government service to an autonomous body, wholly owned by the Ministry of Communication.
The interest paid to them was at the rate of GPF. It means, it has all the trapping of keeping the amount in GPF though it is termed as pensionary benefits. Annexure-1 to the memorandum issued by VSNL, bearing No. HQ/01-01 /89-PE1, dated 11-12-1989 is the terms and conditions of permanent absorption of the OCS staff. item No. 2 deals with the pensionary benefits. Item No. 2(iv) and (v) read as under: "(iv) In the case of employees covered by clause (ii), the retirement gratuity and for those covered by clause (iii) above both retirement gratuity as well as lump sum commuted value shall be paid on the expiry of a period of 7 years from the date of permanent absorption.
The amounts, however, can be paid earlier in the event of death/ retirement/ resignation/ discharge from service.
(v) The amounts of retirement gratuity and lump sum value in lieu of pension mentioned in clause (iv) above shall remain with the government, and earn interest at the rate prescribed for General Provident Fund deposits from time to time for the period they remain with the government." In the light of the above discussion it is clear that income by way of interest arose to the assessees before 1-4-1998. Since the assessees were declared as industrial undertaking for the purpose of Income Tax Act with effect from 1-4-1.998, assessees are entitled for benefit from that date onwards. Assessees plea that they are entitled for benefit from 1-4-1996 prior to the notification date is devoid of merits.
Explanation (1)(ba) provides that it is applicable to the assessees with effect from 1-4-1998.
Now coming to the assessees plea that in the instant case the interest arises from year to year and there is no justification in treating the entire amount in the year of receipt, it is to be accepted. The wording "earn interest at the rate Prescribed for General Provident Fund deposits from time to time for the period they remain with the government" quoted above makes it clear that interest arises from year to year and not in the year of receipt i.e. after 7 years locking.