Sri. J. Micheal V. Chief Commissioner of I.T.

WP/26817/2000

AI Insights

The case involves two writ petitions filed by employees of the 3rd respondent, challenging the deductions made from their Voluntary Retirement Scheme (VRS) benefits. The VRS was introduced on 22.09.1993, providing financial compensation based on years of service. The petitioners contended that the deductions made by the 3rd respondent were contrary to Section 10(10C) of the Income Tax Act, 1961, which exempts VRS benefits up to Rs. 5,00,000 from income tax. The 3rd respondent argued that the deductions were in compliance with Rule 2-BA of the Income Tax Rules, which sets specific conditions for the exemption. The court found that the 3rd respondent's interpretation and application of the rules were incorrect, leading to an improper deduction of tax.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 727409 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 01-07-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S R ASHOK; Y RATNAKAR
• Assessee Lawyers: SRIRAM MOORTHY
• Keywords: Deduction at Source; Exemption; Income Tax; Voluntary Retirement Scheme; VRS
• Section: 10(10C); 2(ba)

Judgement Text

"*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM +W.P.Nos.839 and 26817 of 2000 % Dated 01.07.2014 # Sri V.Venkat Reddy and others. ….Petitioners $ The Chief Commissioner of Income Tax and others. ….Respondents ! Counsel for the petitioners : Sri Sriram Krishna Moorthy ^ Counsel for respondents 1&2: Sri S.R.Ashok ^ Counsel for respondent No.3 : Sri Y.Ratnakar < GIST: > HEAD NOTE: ? Cases referred: THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM W.P.Nos.839 and 26817 of 2000 COMMON JUDGMENT: (Per LNR,J) These two writ petitions are filed almost for similar relief. The petitioners are the employees of the 3rd respondent herein. On 22.09.1993, a Scheme of Voluntary Retirement (VRS) was introduced by the 3rd respondent, on the basis of a settlement arrived at between the management and the union of workmen. The scheme inter alia provided for payment of Rs.2.5 lakhs for an employee, who has completed 10 to 15 years of service and Rs.2.65 lakhs for an employee, who has completed 16 to 20 years of service. With similar progression, the last category is the one, of employees, who completed the service of 31 years and above and the compensation provided for is Rs.3.25 lakhs. The grievance of the petitioners is that though under Section 10(10C) of the Income Tax Act, 1961 (for short ‘the Act’) VRS benefits to the extent of Rs.5,00,000/- is exempted, the 3rd respondent i.e., employer has effected deductions of substantial amounts, at source. They contend that the action taken by the 3rd respondent is contrary to the provisions of the Act, the Rules made thereunder, and the Circulars issued from time to time. The writ petitions are contested mainly by the 3rd respondent. According to them, Section 10(10C) of the Act, no doubt, provided for exemption to the extent of Rs.5,00,000/- of VRS amount, but subject to certain conditions. Reliance is placed upon the guidelines issued under Section 10(10C) of the Act in the form of Rule 2-BA of the Income Tax Rules (for short ‘the Rules’). They submit that Clause (vi) of Rule 2BA of the Rules mandates working out of the VRS benefits and if they exceed the limits stipulated therein, the balance of the amount is to be levied tax and accordingly, deduction, at source was made. Heard Sri Sriram Krishna Moorthy, learned counsel for the petitioners, Sri S.R.Ashok, learned senior Standing Counsel appearing for respondents 1 and 2 and Sri Y.Ratnakar, learned counsel for the 3rd respondent. The 3rd respondent felt that the manpower in its establishments has become economically unviable and accordingly evolved VRS, with the participation of the representatives of the workmen. The gist of the formula for extending the VRS benefits has already been indicated in the preceding paragraphs. Recognizing the need to prune excessive manpower in various organizations, the Government intended to provide incentives not only to the employers but also to the employees, in the context of enforcing the measures evolved for that purpose. Section 10(10C) of the Act is one such provision. It provided inter alia for exemption of levy of income tax on the amounts received by an employee of a company, under VRS, subject to the ceiling of Rs.5,00,000/- To discourage introduction of indiscriminate schemes, which ultimately may serve the cross purposes, the Government introduced Rule 2BA in the Rules, prescribing certain Guidelines. The provision reads: 2BA. The amount received by an employee of- (i) a public sector company; or (ii) any other company; or (iii) an authority established under a Central, State or Provincial Act; or (iv) a local authority. At the time of his voluntary retirement shall be exempt under clause (10C) of section 10 only if the scheme of voluntary retirement framed by the aforesaid company or authority, as the case may be, is in accordance with the following requirements namely:- (i) it applies to an employee of the company or the authority, as the case may be, who has completed 10 years of service or completed 40 years of age; (ii) it applies to all employees(by whatever name called) including workers and executives of the company or the authority, as the case may be, excepting Directors of the company; (iii) the scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees of the company or the authority, as the case may be; (iv) the vacancy caused by the voluntary retirement is not to be filed up; (v) the retiring employee of a company shall not be employed in another company or concern belonging to the same management; (vi) the amount receivable on account of voluntary retirement of the employee does not exceed the amount equivalent to one and one-half month’s salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. It is only when VRS satisfies these conditions, that the benefit under Section 10(10C) of the Act would be available, to the extent of Rs.5,00,000/-. The 3rd respondent effected deductions of income tax at source, though the amount that became payable to each of the petitioners was less than Rs.5,00,000/-. The 3rd respondent effected deduction of tax at source on the basis of working out a formula referred to Clause (vi) of Rule 2BA of the Rules. They proceeded on the assumption that the amounts stipulated under that Clause viz., one and half months salary for each completed year of service or the monthly salary multiplied by the balance of months of service left before the date of retirement on superannuation alone is exempted. The amount so arrived at was treated as qualified for the benefit under Section 10(10C) of the Act and the rest of the amount was subjected to TDS, though the aggregate was below Rs.5,00,000/-. The approach of the 3rd respondent is contrary to the relevant provisions of the Act and the Rules made thereunder. Rule 2BA of the Rules by itself does not provide for any formula for deductions. It only stipulates the conditions on satisfaction of which, the VRS would qualify for the benefit under Section 10(10C) of the Act. The 3rd respondent filed the order, dated 22.09.1993 passed by the 1st respondent approving the scheme. Once the scheme is approved, the occasion to effect deduction of tax at source would arise, if only the benefit of a particular employee exceeds Rs.5,00,000/-. It is not in dispute that for none of the petitioners herein, the benefit under VRS exceeded Rs.5,00,000/-. Therefore, the writ petitions are allowed and it is directed that the 3rd respondent shall refund the amount deducted at source, from the amounts payable to the petitioners, with interest at the rate of 9% per annum, within three months. Since we find that the very deduction was not proper, the 3rd respondent shall be entitled to claim refund of the amount, if any, passed on by it to the Revenue. If any of the petitioners herein have been refunded any amount deducted towards tax from the VRS benefit either by the 3rd respondent or by the Department, they shall not be entitled to be paid any further amount. The miscellaneous petitions filed in these writ petitions shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 01.07.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM W.P.Nos.839 and 26817 of 2000 Date: 01.07.2014 JSU "