Commissioner of Income-tax Vs. M. Arokiam and anr. - Court Judgment

K. Raviraja Pandian, J.

1. These appeals are at the instance of the Revenue against the order of the Income-tax Appellate Tribunal, Madras 'B' Bench, Chennai, dated September 21,2007, passed in I.T.A. Nos.1320 and 1323/Mds/2007 respectively.

2. The relevant assessment year is 2004-05. The facts, as culled out from the statement of facts, are as follows:

The assessees were employees of the Reserve Bank of India, Chennai, retired voluntarily under the Optional Early Retirement Scheme. They claimed exemption under Section 10(10C) of the Income-tax Act for Rs. 5 lakhs each out of the compensation received under the above scheme. The Assessing Officer found that the Reserve Bank of India has not granted exemption under Section 10(10C) on the compensation received under the above scheme, but has deducted tax duly treating the compensation as fully taxable and remitted to the Government account. The assessees made a claim under Section 10(10C) independently in the computation statement attached to the return and claimed refund. The Assessing Officer after considering the scheme concluded that the scheme was not in accordance with Rule 2BA of the Income-tax Rules and disallowed the claims. As against the orders, the assessees preferred appeals before the Commissioner of Income-tax (Appeals), who sustained the orders of the Assessing Officer. The assessee has further taken the matter on appeal to the Income-tax Appellate Tribunal and the Tribunal allowed the appeals. The correctness of the same is put in issue before this Court in these appeals by formulating the following common questions of law:

1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is eligible for the benefit of Section 10(10C) without even going into the details of the Optional Early Retirement Scheme to see if it fulfils the criteria laid down for voluntary retirement scheme?

2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the assessee is entitled to deduction under Section 10(10C) when the scheme under which the amount was paid does not fulfil the criteria prescribed under Rule 2BA of the Income-tax Rules?

3. It is contended by learned Counsel for the Revenue that this Court on earlier occasion considered the scheme and held that the scheme is not in conformity with Rule 2BA of the Income-tax Rules so as to grant exemption and this case is also identical to the case already decided by this Court in T.C. No. 101 of 2007, etc., batch dated February 25, 2008 CIT v. M. Chella-durai : [2009] 317 ITR 370.

4. In the above referred judgment, the Revenue assailed the order of the Tribunal granting the relief of deduction under Section 10(10C) of the Income-tax Act, 1961, to the respective assessees, who have severed their service connection from their employers--the ICICI Bank and the Reserve Bank of India, under a scheme framed in the year 2003 called the ICICI Bank Early Retirement Option 2003 and the Optional Early Retirement Scheme (OERS) 2003, respectively., wherein after extracting the need for introduction of the scheme and the object for introduction of the Optional Early Retirement Scheme in the Reserve Bank of India, as set out in its Administration Circular No. 1, dated August 11, 2003, held thus:

15. From the above, it is obvious that the scheme has been introduced for the purpose of enhancement of the competitive environment of the employer banks. The competitive environment was sought to be achieved by getting rid of the employer's unproductive and unwanted employees making them to leave voluntarily by granting some incentive for doing so. Such pruning of unproductive and unwanted employees benefits the speedy competitive growth and prosperity of the employer bank which also have a bearing on the national economy. In addition to that, the schemes are the outcome to fulfil the desire of the employees, who found the competitive environment too pressurizing to them and expressed their desire to have an early exit with some benefits. It is also relevant to mention here that during the relevant period a private scheduled bank merged with ICICI Bank Ltd.

16. From the reading of various clauses contained in the scheme, it is manifest that the scheme was not intended as staff reduction measure, but a soft exit option made available to those interested employees who were seeking alternative option to the level of adaptability and change, that the current environmental demands or those who are desirous of early retirement after a long and exhaustive period of service with the organisation. Thus, the schemes framed are not in accordance with the requirement of Rule 2BA of the Income-tax Rules. The requirement of the statutory provisions is that the exemption from tax under Section 10(10C) is available on the amount received under a scheme of voluntary retirement or a voluntary separation framed in accordance with the guidelines prescribed and specified in Rule 2BA. As the schemes had not been introduced for the purpose of making over the reduction in the existing strength of the employees and do not provide that the vacancy caused by the voluntary retirement or voluntary separation shall not be filled up, the requirements of clauses (iii) and (iv) of Rule 2BA have not been fulfilled.

17. The employers who are the authors of the schemes, the better persons to explain as to how they conceived the schemes, informed the Department in the following manner:

ICICI.

RBFs communication dated April 19, 2005:

(c) Clause (iii) of Rule 2BA provides that the scheme should have been framed in order to result in overall reduction in the existing strength of employees. The Bank's Optional Early Retirement Scheme has not been framed for that purpose but for providing some alternative optional facilities and work opportunities to the bank staff.

(d) Clause (iv) of Rule 2BA provides that the vacancy caused by voluntary retirement is not to be filled up. Bank has not bound itself not to fill up the vacancies arising out of ORES. It is open to the bank to make need based recruitment against such vacancies, if and when considered appropriate by the bank.

(e) Under the bank's scheme, the employee was eligible for ex gratia amount equal to pay plus dearness allowance for the number of years of actual completed year of service or part thereof in excess of six months or pay plus dearness allowance for remaining months of service reckoned up to the date on which the employee would retire on superannuation, whichever is less.

Accordingly, in view of the differences between the Bank OERS and the guidelines laid down in Rule 2BA of the Income-tax Rules, the ex gratia paid under the batik's scheme does not qualify for exemption under Section 10(10C) of the Income-tax Act. As such, the bank has not allowed the exemption under Section 10(10C) of the Income-tax Act, 1961, to the employees who had opted for OERS.

18. In order to entitle the person the benefit under Section 10(10C) of the Act the provisions of Section 10(10C) and Rule 2BA should be complied with cumulatively and compliance with some of them would not entitle the employee the benefit as claimed for.

19. The CBDT Circular No. 640 has also clariaed that if all the conditions specified in Section 10(10) and Rule 2BA of the Rules are satisfied, then only the assessee would be entitled to the benefit and in those cases, the employer need not deduct at source. Thus, it is clear that the scheme is not strictly in accordance with Section 10(10C) and Rule 2BA.

20. For the foregoing reasons, we are not in acceptance with the order of the Tribunal. Accordingly the order of the Tribunal is set aside and the appeals are allowed answering the question of law in favour of the Revenue.

5. However, on a perusal of the assessment order in the present case, the tax effect in T.C. No. 1099 of 2008 is Rs. 1,49,913 and in T.C. No. 1102 of 2008 is Rs. 1,83,480, which is below the tax effect fixed in Instruction 1979 Circular F. No. 279/126/98 ITJ dated March 27, 2000, wherein it has been stated that an appeal to the High Court could be filed by the Revenue only if the tax effect is more than Rs. 2 lakhs. Similar issue has been considered by this Court with reference to Circular F. No. 279/126/98 ITJ dated March 27, 2000, in T.C. No. 222 of 2004 dated August 16, 2007 CIT v. Associated Electrical Agencies : [2007] 295 ITR 496 and rejected the appeal filed by the Revenue on the premise that not only the tax effect involved was below the sum fixed in the circular but also the other qualifications prescribed therein were also not available to carve out and bring the case outside the purview of the circular. In the present appeals also, not only the tax effect is less than the amount stated in the circular and the other exceptions prescribed were also not available. Hence, following the decision of this Court dated August 16, 2007, made in CIT v. Associated Electrical Agencies : [2007] 295 ITR 496, T. C. No. 222 of 2004, these appeals are dismissed.