Excerpt: payments received by an employee in respect of any period of leave not availed of by him will be exempt from income-tax only in cases where such payments are received on retirement and subject to the fulfilment of the other conditions laid down in section 10(10AA) of the Income-tax Act
ORDER P. Krishna, J.
The income-tax Appellate Tribunal, Delhi at the instance of the Income-tax department has referred the following two questions of law under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) for opinion to this Court:
“1. Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in law in fully concurring with the reasonings of the Appellate Assistant Commissioner granting exemption to the payments received in lieu of leave encashment to the assessee while in service?
2. Whether, on the facts and in the circumstances of the case, learned Tribunal was justified in law in not giving effect in the cases under consideration to the amendment to section 10(10AA) by Taxation Laws (Amendment) Act, 1984 (Part 1) which has been amended retrospectively with effect from the assessment year 1978-79.”
The assessment year 1983-84 is involved in the present reference. The brief facts of the case are as follows:
2. The assessee respondent, an employee of District Co-operative bank Limited, Bijnore for the accounting period ended on 31-3-1983 relevant to the assessment year 1983-84 received certain sum of money by way of leave encashment from the District Co-operative Bank, Bijnore. The Income Tax Officer treated the said receipt by way of leave encashment as assessee’s salary income in terms of section 15, read with section 17 of the Act. He negated the assessee’s claim for exemption in respect of aforesaid leave encashment in terms of section 10(10AA) of the Act. The Appellate Assistant Commissioner of Income-tax as well as Income Tax Appellate Tribunal have accepted the aforesaid plea of the assessee and held that the sum received by the assessee by way of leave encashment from the District Co-operative bank is exempted under section 10(10AA) of the Act.
3. Heard Shri Shambhu Chopra, the learned counsel for the department. None appeared on behalf of the assessee.
4. It was submitted by the learned Standing counsel that on true and correct interpretation of section 10(10AA) of the Act, only such sum of money received by an assessee by way of leave encashment is exempted which are paid to the employee at the time of his retirement on account of superannuation of age. Leave encashment paid by an employer to the employee during the currency of contract of employment is not exempted under the aforesaid provision of the Act. We have given careful consideration to the aforesaid contention of the learned counsel of the department.
5. Shri Shambhu Chopra learned Standing counsel for the department during the course of the argument has referred to a Circular No. 309, dated 3-7-1981 issued by the Central Board of Direct Taxes on the subject of cash equivalent of leave salary payable on the death of a Government servant to his legal heirs. Para 2 of the said circular provides that the family of a Government servant, who dies in harness and received the cash equivalent of the leave salary of the deceased employee is not income in hands of the family as it is not in the nature of income from an employer to employee. The deceased had no right or interest in this receipt. This payment is only by way of financial benefit to the family of the deceased Government servant, which would not have been due or paid had the Government servant been alive. In view thereof the amount will not be liable to income-tax.
6. The Andhra Pradesh High Court in M. Krishna Murthy v. CIT (1985) 152 ITR 163 (AP), has held that the “profits in lieu of salary” includes the leave encashment amount and is, thus, a receipt which falls within the provisions of definition of “profit in lieu of salary” as enacted in section 17(3)(ii) of the Act.
Section 17 of the Act defines “Salary”, “Perquisites” and “Profits in lieu of Salary”.
“17. ‘Salary’, ‘perquisite’ and ‘profits in lieu of salary’ defined.
For the purposes of sections 15 and 16 and of this section, (I) ‘salary’ includes (I) ‘salary’ includes
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
(v) any advance of salary;
(va) any payment received by an employee in respect of any period of leave not availed of by him;.”
7. The expression “salary” for the purposes of computing income for charging purposes will mean only as defined under section 17 of the Act. The chargeability of a receipt has to be adjudged with reference to section 17 and de hors section 10 which directs certain receipts to be excluded from the computation of the income. If a receipt is not chargeable under section 17 it is unnecessary to examine section 10 as it cannot be decided with reference to the said section. If any, receipt does not fall within the ambit of section 17 and is also included in the exemptible limit under section 10, it shows that the Legislature by way of abandoned precautions refers to them in section 10-See Rani Amrit Kunwar v. CIT (I946) 14 ITR 561 (All).
8. It may be noticed here that the clause (1)(va) was inserted by the Taxation Laws (Amendment) Act, 1984 with effect from 1-4-1978. Simultaneously section 10(10AA) was inserted by the Finance Act, 1982 with effect from 1-4-1978. In it, at all places, “whether on superannuation” was substituted for “on superannuation” by the Taxation Laws (Amendment) Act, 1984 with effect from 1-4-1978. Section 10(10AA) as it stood at the relevant point of time provided that the receipt by way of leave encashment paid to the employee at the time of the retirement on superannuation is specifically exempted from inclusion in the recipients total income. The said amendment, as is clear from the Finance Act, 1982 has been given retrospective effect with effect from 1-4-1978. The Legislature by inserting clause (va) in section 17 has provided that any payment received by an employee in respect of any period of leave not availed of by him shall be included in “salary”. However, simultaneously with a view to give limited relief to such employee an exemption under section 10(10AA) has been provided for on certain amount of sum so received in lieu of encashment of leave. Controversy in the present case centers round as to whether the sum received by an employee who continues to be in employment towards the leave encashment shall be includable in salary or not. The Tribunal disagreeing with the Income Tax Officer held that the words “or otherwise” in section 10(10AA) of the Act clearly indicates that the exemption is to be given to the assessee in the cases as and when there is a payment to the assessee in lieu of leave encashment and these words “or otherwise” do not restrict the purview of exemption to the retiring employee only.
9. The object or purpose of all constructions and interpretations is to ascertain the intention of the law makers and make it effective. The court has to determine the intention as expressed by the words used. If the words of statutes are themselves precise and unambiguous then no more can be necessary than to expound those words in their ordinary and natural sense.
10. Interpretation postulates the search for the true meaning of the words used in the statute as a medium of expression to communicate a particular thought. The task is not easy as the language is often misunderstood even in ordinary conversation or correspondence. The tragedy is that although in the matter of correspondence or conversation the person who has spoken the words or used the language can be approached for clarification, the Legislature cannot be approached as the legislature, after enacting a law or Act, becomes functus officio so far as that particular Act is concerned and it cannot itself interpret. No doubt, the Legislature retains the power to amend or repeal the law so made and can also declare its meaning, but it can be done only by making another law or statute after undertaking the whole process of law making.J.P. Bansal v. State of Rajasthan AIR 2003 SC 1405, para 12.
G.P. Singh on Statutory Interpretation (8th Edn.) 2001 has observed as follows:
“It may look somewhat paradoxical that plain meaning rule is not plain and require some explanation. The rule, that plain words, require no construction, starts with the premise that the words are plain, which itself is a conclusion reached after construing the words. It is not possible to decide whether certain words are plain or ambiguous unless they are studies in their context and construedD. Saibaba v. Bar Council of India, 2003 (4) LT. 435 (P. 16).’
11. The Supreme Court explained the principle of ejusdem generis in the case of Grasim Industries Ltd. v. Collector of Customs (2002) 4 SCC 297, as follows:
“. . . The rule is applicable when particular words pertaining to a class, category or genus are followed by general words. In such a case the general words are construed as limited to things of the same kind as those specified. The rule reflects an attempt to reconcile incompatibility between the specific and general words in view of the other rules of interpretation that all words in a statute are given effect if possible, that a statute is to be construed as a whole and that no words in a statute are presumed to be superfluous. The rule applies only when (1) the statute enumerates the specific words, (2) the subjects of enumeration constitute a class or category, (3) that class or category is not exhausted by the enumeration, (4) the general terms follow the enumeration, and (5) there is no indication of a different legislative intent.. ..” (P. 304)
12. In the case of Kamlesh Kumar Sharma v. Yogesh Kumar Gupta JT. 1998 (1) SC 642 the Supreme Court interpreted the word “otherwise” occurring in section 13(4) of U.P. Higher Education Services Commission Act, 1980. This section provides for the filling of vacancy “occurring due to death, resignation or otherwise.” An argument was raised before the Supreme Court that the word “otherwise” should not be read as a ejusdem generis, but in a wide connotation covering all vacancies. The Apex Court after careful consideration of the scheme of the Act observed that if the aforesaid argument is accepted by giving a wider interpretation to the word “otherwise” it would thwart the very object of the Act. In otherwords, it would permit the filling of the vacancy occurring, which was never advertised and a person in the select panel, even though not applying for any vacancy, would be absorbed.
13. The interpretation put by the Tribunal on the words “or otherwise” does not appear to be legally sound. The words “or otherwise” are of very wide amplitude. These words shall draw the restricted meaning qua the immediately preceding word “superannuation”. The superannuation is of an employee’s severance of relationship of contract of employment in between employer and employee. After attaining a specified age, an employee ceased to be an employee ipso facto in pursuance of terms and conditions governing the employment. The phrase “or otherwise” will cover only such an eventuality when there is severance of relationship of employer and employee and contract of employment. To put it differently the phrase “or otherwise” will not cover such cases where there is no severance of relationship of employer and employee and the assessee continues to be under the employment of the same employer, and receiving the leave encashment. This interpretation is in consonance of the legislative history of the section as well as it also manifests the intention of the legislature to give a limited benefit to an employee with respect to the income received by the employee at the time of his retirement or superannuation of severance of relationship. In the case of M. Krishna Murthy (supra) the High Court interpreting the phrase “profits in lieu of salary” held that the expression “salary” will include the sum received by the assessee towards the leave encashment amount. With a view to give a limited relief to a retiring employee clause 10(10AA) was inserted in section 10 of the Act. Reference was made by the learned Standing counsel towards the Circular No. 394, dated 14-9-1984. The relevant portion of the said circular reads as follows:
“6.2 It has come to notice that attempts have been made by taxpayers to claim exemption under the aforesaid provision in respect of payments received by them for not utilizing leave even while in service. With a view to avoiding litigation on this point, the Amending Act has made two amendments to put the underlying intention beyond doubt.
6.3 Under one of the amendments, a new sub-clause (va) has been inserted in clause (1) of section 17 of the Income Tax Act to provide that any payment received by an employee in respect of any period of leave not availed of by him shall be regarded as ‘salary’. The other amendment has been made in section 10(1OAA) of the Act to clarify that the exemption under the aforesaid provision shall be allowed only where the payment is received by the employee on his retirement, whether on superannuation or otherwise. The combined effect of the two aforesaid amendments will be that payments received by an employee in respect of any period of leave not availed of by him will be exempt from income-tax only in cases where such payments are received on retirement and subject to the fulfilment of the other conditions laid down in section 10(10AA) of the Income-tax Act
14. In the case of CIT v. R.J. Shahney (1986) 159 ITR 160 (Mad.), it has been held that the words “whether on superannuation or otherwise” also includes the case of resignation. It has been held that a retirement may be of various kinds. It may be on superannuation or it may be voluntary. If there is any voluntary retirement from service, the provisions of section 10(10AA) would cover only such cases where there is severance of relationship of employer and employee.
15. The next case relied upon by the learned Standing Counsel. K. Gopalakrishnan v. CBDT (1994) 206 ITR 183 (Mad.) has hardly any application to the controversy involved in the present case.
16. In view of the foregoing discussion, we answer the above questions referred to us in negative, i.e., in favour of the revenue and against the assessee. However, there shall be no order as to costs.