1. This is an appeal filed by Smt. L.K. Thangammal as legal representative of late Shri T.H. Kalahasthy, Madras, against the order of the AAC, E-Range, Madras, for the assessment year 1978-79.
2. Shri T.H. Kalahasthy died on 5-12-1977. He had also salary income as an individual employed with Tata Oil Mills Ltd. His salary income till date of death was Rs. 27,070. He had leave salary of Rs. 960. The dispute is regarding the receipt of non-exempt portion, worked out at Rs. 22,000 by the ITO of gratuity to the extent of Rs. 46,640. The ITO allowed exemption under Section 10(70) of the Income-lax Act, 1961 ("the Act"), to the extent of Rs. 24,640 and brought the balance to tax. The stand of the assesses before the ITO was that he was entitled to the maximum exemption of Rs. 30,000. However, the assessee enlarged the dispute before the AAC by claiming that no part of Rs. 46,640 was taxable in the assessee's hands on the ground that it was not payable to him. It was payable only to his widow. The learned AAC held that the right to receive gratuity had accrued to the deceased and that it was, therefore, rightly included in the assessment made on him through his legal representative. Provisos to Section 10(70) clearly implied, according to him, that the gratuity was taxable in the hands of the employee. He also agreed with the ITO that the assessee was not entitled to have a larger deduction as basic pay alone could be reckoned with in ascertaining the eligible deduction.
3. The learned counsel for, the assessee reiterated the claim made before the first appellate authority. Since gratuity accrued on his death, it cannot be said to have accrued to him. He pointed out to the rules under which it was payable only to his widow/children. It could not be otherwise. At any rate, he claimed that the deceased could be assessed through the legal representative only on income which he had received or was entitled to receive during his life time. The learned departmental representative referred us to the definition of "salary" in Section 17(7) of the Act which specifically included gratuity. He pointed out that the gratuity could have been received by him on retirement, if he had been alive. According to him, it could make no difference if such gratuity is physically receivable after death. He also referred to the language of Section 10(70) which, according to him, clearly provided that gratuity was exempt to the extent provided in the hands of the employee. It could be so only if it were taxable in his hands. Any other view, he claimed, could defeat the scheme of the Act. He also justified the calculation made by the ITO.4. We have carefully considered the records as well as the arguments.
Gratuity is salary, since it is specifically included in the definition of "salary". Gratuity Rules for Employees (Supervisory Cadre) of Tata Oil Mills Co. Ltd. were framed with effect from 1-4-1950 in substitution of its earlier Rules framed in 1941. These rules fixed the rate of gratuity payable but also called it "discretionary". Merely because it is so described, we are not prepared to hold that it is discretionary. The payment is under pursuance of the scheme in force and the employee had rendered the requisite minimum period of satisfactory service to be eligible for the same. If the employee had attained superannuation at sixty or had retired before attaining sixty (otherwise than by removal or dismissal due to misconduct), he would have been entitled to it as a matter of legal right under the rules. So is his widow entitled to the same on the death of the employee. It is, therefore, a contractual payment. The provisions of the scheme as are relevant for the purpose of the dispute are reproduced below : 9. Payment of gratuity subject to company's discretion - All retiring gratuities granted under these Rules shall be at the absolute discretion of the Company, irrespective of whether the member of the Supervisory Staff has or has not performed all or any of the conditions hereinafter stated, and no member of the Supervisory Staff howsoever eligible shall be deemed to be entitled as of right to any payment under these Rules. The Company may, in its absolute discretion, grant such gratuity or a portion thereof, to the wife and for children of the Supervisory Staff to the exclusion of the Supervisory Staff concerned.
14. Gratuity payable only on final termination of service - A retiring gratuity will be payable, subject to the conditions of these Rules, only on final termination of the service of a member of Supervisory Staff and not from the date on which the member of a Supervisory Staff may proceed on leave preparatory to retirement, but in special cases approved by the Management, the company may advance the whole or a portion of such gratuity to the member of a Supervisory Staff taking leave preparatory to retirement.
15. Gratuity in case of death - In the event of the death of a member of Supervisory Staff whilst in service, the company will pay the gratuity to which he is eligible under these Rules to his widow or widows and/or children in such shares as the company may in its discretion determine. If there be no widow or widows or children as aforesaid, at the direction of the Management a gratuity may be sanctioned and paid to such other dependents of the deceased as the Management may think fit.
16. An application for retiring gratuity under these Rules should be drawn up in the form hereto attached, by the Head of the Department in which the member of the Supervisory Staff was serving at the time of his retirement on behalf of the retiring member of the Supervisory Staff or in the event of his death, on behalf of his widow or widows or children or other dependents as the case may be.
Such application shall be made within a period of one year from the date of retirement or death of the employee.
17. Authorities competent to sanction gratuity - The authorities competent to sanction retiring gratuities under these Rules either in one lumpsum or in instalments shall be the Management in all cases.
It is clear from the above provisions of the scheme that gratuity is payable to the employees on superannuation or retirement. There is an unusual provision in the scheme inasmuch as it may be paid to wife or children to the exclusion of the employees in "absolute discretion" of the employer. We are, however, not concerned with this provision for the purpose of the present dispute. We are immediately concerned with Clause 15 of the scheme under which the widow became entitled to the gratuity. Clause 15 makes it clear that the widow will be paid the gratuity to which the employee "is eligible under these rules".
Gratuity is, therefore, the amount which he has earned because of his service. It would have been payable to him, if he had lived up to the date of his retirement. However, in the assessee's case it had become payable on death and certainly not before it, as he was in service till he died. It is, at least, theoretically possible that he might have lost his right, if removal or dismissal due to misconduct had intervened before his death. The fact that the widow alone is entitled to the gratuity is clear not only from Clause 15 reproduced above but also from Clause 16 which stipulates an application to be made on behalf of the widow. It has also to be formally sanctioned by the management as provided in Clause 17. Another relevant and rather distinct fact is that the scheme does not provide for nomination of beneficiary for the purpose of gratuity by an employee. In other words, the deceased had no right of disposition over these moneys which devolved on the widow and/or children under the scheme itself. It is under these circumstances, we have to consider whether the gratuity amount is includible in the assessment on the deceased, through his legal representative.
5. The assessment is made on Smt. L.K. Thayammal as legal representative of her late husband under Section 159. Under Section 159(3) of the Act, she is deemed to be the assessee. Section 159(2) enables assessment on the legal representative "for making an assessment...of the income of the deceased...". The view that prevailed in relation to the corresponding Section 24B of the Indian Income-tax Act, 1922, was that the income received after death but before the end of the accounting year was includible in a single assessment. It is apparently in that view that the ITO assumed that the gratuity paid to the widow became payable to the deceased and the occurrence of the event of death being within the accounting year, both the salary and gratuity could be included in the same assessment. However, the view that prevailed under the old law can no longer hold good in view of Section 168(3) of the Act which reads as under : (3) Separate assessments shall be made under this section on the total income of each completed previous year or part thereof as is included in the period from the date of the death to the date of complete distribution to the beneficiaries of the estate according to their several interests.
Section 168 which enables assessment on executors had no corresponding provision under the 1922 Act. Section 159 read with Section 168 can leave us in no doubt about the-proposition that the 1961 Act requires an assessment till the date of death in the hands of the legal representative and another from date of death till the end of the previous year in the hands of the executor. No doubt, as in this case, both legal representative and executor may be one and the same person.
But, that does not mean that there can be a single assessment as had been sought to be done in this case. This is also the view expressed by the authors of Kanga and Palkhivala's Law and Practice of Income-tax (at page 944, vol. T, 7th edition). The position now under Indian Law is the same as under the law in United Kingdom, where it has been held that where the income is payable after death (as in the case of dividend or interest), it cannot be treated as income of the deceased-I.R.V. Henderson's Executors 16 TC 282 followed in Bryan v.Cassin 24 TC 468, though apportionment is necessary where the income accrues de die in diem between the periods before and after death-Palmer v. Cattermole 21 TC 191. The authorities below in this case have not properly appreciated the effect of Section 168(3). We will now proceed to consider whether the gratuity will be includible in the assessment to be made on income which had accrued before death. If it had so accrued, it will be includible and otherwise not.
6. Gratuity became payable in the assessee's case only on death. In another sense, it really arose on account of death of the assessee (Shri T.H. Kalahasthy) to his widow (Smt. L.K. Thangatnmal). The deceased had no right of nominating the beneficiary. It was not available to him at his call. Even during life time, it could have been lost, if removal or dismissal due to misconduct had intervened. The scheme under consideration makes the widow and/or children eligible for the gratuity and not any other legatee even if there be such other legatee by a will. The right to get gratuity is their own. They are not getting it as a collection agent or a trustee. There should be a formal application on behalf of the widow/children and sanction by the management. While there could be more than a legitimate doubt about the inclusion of death gratuity in the assessment on the legal representative as income arising before death even in any normal case, the scheme before us leave us in no doubt as to the correct inference in this particular case. The amount becomes payable on account of death. It could have been paid only after death. It was not payable to legal heirs or legatees by a will or a nominee nominated during life time. These facts may even give rise to a reasonable inference as to whether it will be includible even in the hands of executor. In fact, the Delhi High Court in the case of Uma Sehgal v. Dwarkadoss Sehgal AIR 1982 Del. 36 has held that even in the case of a nomination under Section 39 of the Insurance Act it is not correct to say that the nominee holds the insurance moneys either as trustee or agent on behalf of the legal heirs, but in her own right and that it is heris absolutely. At any rate, all that we have to consider is the question whether the gratuity is includible in the hands of the legal representative under Section 159. The very fact that the right arose on death and, therefore, becomes payable thereafter justified the exclusion of the entire gratuity in the assessment. Section 10(70) which provides for exemption of part of whole of gratuity is only complementary to Section 17(7) which makes it taxable. Section 10(70) cannot justify the assessment of taxable gratuity in a wrong assessment or wrong hands. There would have been no dispute about the inclusion of the gratuity if the same had arisen on superannuation or retirement and not on death as this case. Hence, there is no basis for the apprehension 'expressed by the learned departmental representative that our view will defeat the purpose of the Act. In fact, even in death gratuity the provision relating to exemption may well come into play in the case of an assessment on the executor under Section 168.
7. We may also refer to Board's Circular No. F. 35/1/65-IT(B) dated 5-11-1965 [pp 92-93 of Taxmann's Direct Taxes Circulars, vol. 1, 1980 edition] subsequently reiterated in Circular No. 309 dated 3-7-1981 ( 132 ITR St. 3), where the Board has taken the view that even in respect of salary pertaining to leave not availed of by the deceased, it cannot be included in the assessment of the deceased on the ground that the deceased had no right or interest in it. It has gone further and taken the view in the first of the two circulars that it will not be taxable even in the hands of the widow as an ex gratia payment in the nature of gift. The view we have taken does not go that far, since we have not expressed any opinion as to its liability to tax either in the hands of the widow as executor or in her own right as the occasion for such an opinion does not arise in the present appeal. We have also pointed out that there are some peculiar features of the scheme which makes the right to gratuity subject to qualifications which are not present even in a simple right of the legal heir to salary for leave earned by the deceased though unavailed by him.
8. In view we have taken, it is not necessary to go into the alternative question as to the exact amount of gratuity that will be exempt under Section 10(70), a question which depends for its answer on the amount of allowances which have to be reckoned as part of salary with reference to the contract of service.
9. In the result the appeal is allowed. Relief due Rs. 22,000. Since the appeal is decided, stay petition has become infructuous and it is dismissed as such.