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B.V.S. Rao Vs. Commissioner of Income-tax, Karnataka-ii and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberWrit Petition No. 10596 of 1978
Judge
Reported in[1981]127ITR130(KAR); [1981]127ITR130(Karn)
ActsIncome Tax Act, 1961 - Sections 10(10A) and 143(1)
AppellantB.V.S. Rao
RespondentCommissioner of Income-tax, Karnataka-ii and anr.
Appellant AdvocateG. Sarangan, Adv.
Respondent AdvocateS.R. Rajasekhara Murthy, Adv.
Excerpt:
.....it becomes a tax in the nature of tax on income being at 10% of the tax liability. it is to be noticed that the 10% tax liability may not even be the entire profit of the dealer and such levy of penalty while therefore becomes an oppressive levy being confiscatory of a percentage of the tax liability, partakes the character of a levy of tax on income, as the penalty has to be inevitably borne by the dealer and cannot be passed on to the consumer/buyer and therefore travels beyond the legislative competency of the state legislature, as enabled under entry 54 of list-ii of the 7th schedule to the constitution of india. the levy of penalty being a disproportionately high penalty, failing the test of reasonable restrictions saved under article 19(6) of the constitution of india vis-a-vis..........pension & gratuity : on this permanent absorption in beml the officer will be eligible for pro rata pension and death-cum-retirement gratuity based on the length of his qualifying service under the government up to the date of his permanent absorption in the company as admissible under the pension/death-cum-retirement gratuity rules for officers of the army on the above-mentioned date. he may commute his service pension as per army rules in force at the time. (iii) the pro rata pension and death-cum-retirement gratuity will be calculated as per rules for service officers. (iv) the amount of pro-rata pension and death-cum-retirement gratuity, which would be worked out and intimated to lt., col. b. v. s. rao as well as beml will be disbursable to the officer in absorption, provided.....
Judgment:

Srinivasa Iyengar, J.

1. The petitioner was a commissioned officer of the Indian Army and pursuant to a sanction of the President to his permanent absorption in the Bharath Earth Movers Ltd., was to be absorbed with effect from July 24, 1974. As a consequence his services with the Indian Army ceased and he was retired from that service. He was entitled to retirement benefits in accordance with communication bearing No. 23(7)/70/BEM/D(BEL) of the Government of India, Ministry of Defence, dated September 12, 1974. The letter is addressed to the chairman-cum-managing director, Bharath Earth Movers Ltd., Bangalore, and is to the following effect :

'I am directed to refer to your letter No. CAO/054/BVSR/73 dated March 19, 1974, on the above subject and to convey sanction of the President to the permanent absorption of Lt., Col. B. V. S. Rao (IC-6364) Engineers in the Bharath Earth Movers Limited, Bangalore, in public interest, with effect from the date mentioned below on the following terms and conditions :

(i) Date of absorption : Lt., Col. B. V. S. Rao will be absorbed in BEML with effect from July 24, 1974.

(ii) Pension & gratuity : On this permanent absorption in BEML the officer will be eligible for pro rata pension and death-cum-retirement gratuity based on the length of his qualifying service under the Government up to the date of his permanent absorption in the company as admissible under the pension/death-cum-retirement gratuity rules for officers of the Army on the above-mentioned date. He may commute his service pension as per Army rules in force at the time.

(iii) The pro rata pension and death-cum-retirement gratuity will be calculated as per rules for service officers.

(iv) The amount of pro-rata pension and death-cum-retirement gratuity, which would be worked out and intimated to Lt., Col. B. V. S. Rao as well as BEML will be disbursable to the officer in absorption, provided the officer gives an undertaking that in the event of his services with BEML being terminated at the instance of either BEML or of the officer himself within a period of 2 years of permanent absorption in the aforesaid undertaking, the approval of the Government would be obtained by the officer before he takes up any private employment.

(v) The officer shall exercise an option within a period of six months of the date of issue of this letter for either of the alternative indicated below :

(a) receiving the pro rata monthly pension and DCR gratuity as admissible under clauses (ii) to (iv) under the usual Government rules; or

(b) receiving the pro rata DCR gratuity and a lump sum amount in lieu of the pro rata service pension worked out with reference to commutation tables obtained on the date from which the service pension will be admissible and payable under these option rules.

2. There is no dispute that the petitioner exercised the option as given to him under clause V(b) and he became entitled to a lump sum amount in lieu of the pro rata service pension, that is, a lump sum in lieu of the entire pension to which he was entitled. Subsequently, the Controller of Defence Accounts, Allahabad, sent a communication dated 8/9-10-1975 addressed to the Pension Pay Master, Bangalore, in which Rs. 93,333 was stated to be the amount payable towards the full commuted pension in lieu of pro rata pension. However, that communication went on to add that a sum of Rs. 31,871 was to be deducted towards income-tax and surcharge. A copy of the communication is filed as Ex. A. The petitioner received the payment during the financial year 1975-76 relevant to the assessment year 1976-77. When he filed his income-tax return he claimed a refund of the income-tax deducted and credited, viz., Rs. 31,871, which had been deducted from the lump sum of the commuted pension. This was based upon the provisions of s. 10(10A) of the I.T. Act, 1961. The ITO accepted the contention of the petitioner and after making certain adjustments made an order for the refund of a sum of Rs. 28,765. The adjustments were in respect of tax liability in regard to certain other receipts of the petitioner and property income, etc. The assessment was made under s. 143(1)(a) of the I.T. Act, 1961, dated October 20, 1976 (Ex. B).

3. The Commissioner of Income-tax, Bangalore, however, sent a notice dated July 21, 1978, proposing to revise the assessment on the ground that the order of the (ITO III), Bangalore, passed on October 29, 1976, for the assessment year 1976-77 was erroneous and prejudicial to the interests of the revenue as he had allowed exemption from tax in regard to the entire lump sum amount of commuted pension and that the petitioner was entitled only to an exemption in regard to 1/3 of the commuted value of the pension. A copy of this notice has been filed as Ex. C.

4. In this writ petition, the notice issued by the Commissioner is challenged as without jurisdiction and contrary to law.

5. This petition was heard along with Writ Petition No. 8618/78 (C. P. Ohrie v. Accountant-General - see p. 122 supra) in which a similar question was under consideration. The judgment has been delivered in W.P. No. 8618/78 yesterday. A common-objection statement has been filed in regard to both these cases. I must mention that so far as the instant case is concerned the averments in the common objection are not quite accurate. However, it is clear that the petitioner also exercised an option consequent on which he was entitled to receive a lump sum amount in commutation of the full pension. The reference, however, was to r. 37A of the Central Civil Services (Pension) Rules, 1972. This would not be correct as the petitioner was a commissioned officer in the Indian Army and was not governed by the Central Civil Services (Pension) Rules or the Civil Pension (Commutation) Rules of the Central Govt. From the communication addressed by the Controller of Defence Accounts it transpires that under the rules relating to the army service officer, the commutation of pension was permissible to the extent of 43 per cent. and that is how he had worked out the income-tax to be deducted at source. Therefore, the notice issued by the Commissioner mentioning that what was to be exempted was only 1/3rd of the commuted pension is not correct.

6. The contention on behalf of the petitioner is that no part of the lump sum payment that had been made in lieu of pro rata service pension consequent on the option exercised under the scheme which provided for such option and for payment of a lump sum amount in lieu of the pro rata service pension to the full extent was to be included in the computation of total income under s. 10(10A) of the I.T. Act, 1961. It is also urged that the impugned notice itself is defective and the assumption made that the order of the ITO was erroneous or that it was prejudicial to the interests of the revenue is untenable. It is urged for the respondent that this writ petition is premature and the petitioner is entitled to put forth his contention by way of objection to the notice issued and, therefore, this court should not interfere at this stage. It is also contended that it is for the petitioner to establish that he comes within the ambit of s. 10(10A).

7. As pointed out above the notice issued by the Commissioner is defective and it transpires that the notice was issued on certain departmental instructions from the CBDT which was in general terms, as to the interpretation of the provisions under s. 10(10A). The contention urged on behalf of the petitioner that the notice should be quashed as defective, is a highly technical one. It may not be correct to quash the notice merely on that ground, as the basis is that the full exemption granted by the ITO is erroneous and the exemption could have been only in regard to a portion of the amount. However, the main submission made, that the petitioner was entitled to the exclusion of the entire amount from computation of the total income, appears to be sound and must be accepted.

8. The scope of the provision in s. 10(10A) has been discussed and pointed out in the judgment relating to W.P. No. 8618/78 (C. P. Ohrie v. Accountant-General - see p. 122 supra). In that case, the person concerned was a member of the civil services. The contention on his behalf was that he was governed by a scheme which was similar to the scheme under the Civil Pensions (Commutation) Rules of the Central Government and the entire amount received by him in the commutation of pension under that scheme which permitted a lump sum payment in lieu of the entire pro rata pension was entitled to be excluded from the computation of the total income under the second part of s. 10(10A) of the Act. The reliance was on the scheme as had been specified under r. 37A of the Central Civil Services (Pension) Rules, 1972. In that petition also, the petitioner was absorbed in the services of a public undertaking for which provision had been made under r. 37 of the Central Civil Services (Pension) Rules, 1972. By virtue of the scheme, under r. 37A, an official was entitled to a lump sum payment in lieu of the pension and he was entitled to commute the entire pension payable. In the instant case also, as is clear from the communication dated September 12, 1974, the petitioner was governed by a different scheme which gave him an option to receive a lump sum payment in lieu of the pro rata service pension and not merely to a commutation of service pension as per the Army Rules in force. From the contents of clause (v) of the letter extracted above this becomes clear. A reading of s. 10(10A) of the Act makes it clear that the petitioner was not governed by the Civil Pension (Commutation) Rules of the Central Govt., as he was a member of the defence services. The payment to him on retirement consequent on his absorption in a public sector undertaking was not under the usual provision regarding commutation of pension under the Army Services Rules, but by virtue of the option rules as specified in the letter dated September 12, 1974. The reasoning adopted in W.P. No. 8618/78 (C. P. Ohrie v. Accountant-General - see p. 122 supra) equally applies to the instant case. The payment in commutation of pension received by the petitioner was under the special scheme applicable to him which had been indicated in the letter dated September 12, 1974, and as such the entire amount received was not to be included in the computation of his total income. Actually in one respect the case of the petitioner stands on a better footing than the petitioner in Writ Petition No. 8618/78. Here, the payment is one lump sum and not bifurcated in two categories of payments as specified in r. 37A of the Central Civil Services (Pension) Rules. Of course, it has been pointed out in the judgment in W.P. No. 8618/78, that the mere bifurcation of the payment under two heads did not really affect the substance of the matter.

9. The contention urged by the respondent that this petitioner is premature, cannot be accepted. The matter is one of jurisdiction and relating to the interpretation of the provision under s. 10(10A) and having regard to the facts and circumstances in the instant case, it is a proper case to interfere even at this stage. For the reasons stated above, the petitioner is entitled to succeed. The rule is made absolute and the notice issued by the Commissioner of Income-tax, Bangalore, Ex. C, is quashed. Parties to bear their own costs.


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