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T. Banusekar

My father has retired under a voluntary scheme. He has claimed a sum of Rs 5 lakh as exempt under Section 10(10C). In respect of the excess compensation received over the sum of Rs 5 lakh claimed as exempt, under Section 10(10C), he has claimed relief under Section 89(1). The Assessing Officer has rejected this claim for relief under Section 89(1). Is this correct? -- C. Prakash

Reply:

Section 10(10C) entitles an individual employee to an exemption in respect of sums received on voluntary retirement or termination provided the conditions stipulated by the section are satisfied. Section 89(1) entitles an assessee to relief if he has received a salary in arrear or in advance or a salary in one financial year for a period exceeding 12 months or a family pension in arrears. This relief is meant to mitigate the hardship that may be caused due to such amounts received being taxed at a higher rate than at which he would have otherwise been assessed. The issue for consideration is whether both the relief under Section 89(1) and the exemption under Section 10(10C) can be claimed in respect of sums received under a VRS. It is understood that Assessing Officers are taking the view that sums in excess of what is exempt under Section 10(10C) will not qualify for the rebate under Section 89(1) based on the CBDT's letter dated April 23, 2001 in F. No.174/5/2001/ITA, which is reproduced below:

"Amount up to Rs 5 lakh s received under VRS is exempt as per the provisions of Section 10(10C)(viii) and after allowing this exemption, the balance amount exceeding Rs 5 lakh is not eligible for relief under Section 89(1) as per the proviso provided under Section 10(10C)(viii) which says `.... no exemption thereunder shall be allowed to him in relation to any other assessment year'. Thus, distributing the amount of compensation in more than one assessment year is not permissible as per the existing provisions".

Before proceeding to comment it may be stated that the columnist has not verified the authenticity of the above letter. At any rate it is felt that such a clarification (if one exists) is not the correct position in law. The relief under Section 89(1) read with Rule 21A(1)(c) is available in respect of compensation received in connection with termination of employment after a continuous service of more than three years and where the unexpired portion of the term of employment is three years or more.

The point in question is whether the second proviso to Section 10(10C) which reads as follows will disentitle an assessee to the relief under Section 89(1) "provided further that where an exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year".

What is denied under the second proviso to section 10(10C) is only an "exemption" in any other year. What is to be noted is that neither is Section 89(1) an "exemption" but a relief from tax nor is it claimed in any "other assessment year". The objective of the second proviso to Section 10(10C) is to disentitle an assessee from claiming an exemption more than once under the said section. Reference in this connection may also be made to the following decisions of the High Court where the Court has held that relief under Section 89(1) will be available in respect of sums received under a VRS:

CIT v M.Raman [2000] 245 ITR 856 (Mad)

CIT v J.Visalakshi [1994] 206 ITR 531 (Mad)

A similar view has also been taken by the Tribunal in:

ITO v. Dilip Shirodkar [2004] 82 TTJ (Panaji) 869

ACIT v. R.Sthalasayanam & Others ITA No.459/Mds/2004 (Chennai) (unreported)

If it is true that the Board has issued any instruction or circular contrary to this view that a relief under Section 89(1) would be available in respect of the amount in excess of the amount exempt under Section 10(10C), it is submitted that the same needs to be withdrawn as it does not appear that such a view is tenable in law. It may also be noted that only circulars and instructions of the Board are binding on subordinate authorities and not letters of the Board.

It may also be mentioned here that the CBDT has through its letter dated March 4, 2004 communicated to all Directors-General and Chief Commissioners of Income Tax that they have filed a special leave petition (SLP) against the decision of the Madras High Court in CIT v M. Raman [2000] 245 ITR 856 (Mad). The Board has through this letter required the Chief Commissioners and Directors General to bring this to the notice of all officers working in their region.

It may be noted that notwithstanding the filing of such SLP, income tax authorities particularly those operating under the jurisdiction of the Madras High Court are to allow the relief under Section 89(1) in respect of the VRS compensation which is not exempt under Section 10(10C).

Query:

I have the following questions:

For determining the quantum of standard deduction from salary income should the salary be taken as the gross salary or after the exemptions such as exemption for the HRA, transport allowance and so on as also deductions such as profession tax and interest on housing loan?

Should the gross total income for computing the percentage of rebate under Section 88 be taken before or after standard deduction from salary income?

Should profession tax paid and claimed as a deduction and exemptions such as under Section 10(13A) for HRA, under Section 10(14) for conveyance allowance and so on be reduced in computing the percentage of rebate under Section 88?

In the recent Budget, it has been announced that those with income up to Rs 1 lakh are exempt from tax. For this purpose should we take the gross salary or after exemptions and deductions. -- Shyamala Das

Reply:

The salary for the purpose of determining the ceiling under which an individual would fall for the purpose of computing the quantum of standard deduction would be the salary income after reducing all exemptions and deductions from salary but before allowing standard deduction.

However, if the salary is Rs 5 lakh as computed in the manner stated above, the standard deduction would be Rs 30,000 or 40 per cent of the salary computed excluding sums that are exempt under Section 10. For the sake of easier understanding, the manner in which the standard deduction is to be computed is given below: If the salary income before allowing standard deduction but after all other deductions and exemptions is Rs 5 lakh or less then the deduction is Rs 30,000 or 40 per cent of the gross salary, whichever is less. If it is more than Rs 5 lakh then the deduction is Rs 20,000.

Salary for this purpose means gross salary excluding items exempt under Section 10 and including all taxable allowances, benefits and perquisites.

There is no question of reducing the interest on housing loan in determining the standard deduction. The interest on housing loan will be allowed as a deduction only in computing income from house property and not in computing salary income and the same will, therefore, not affect the standard deduction.

The percentage of rebate will depend on the income computed after allowing standard deduction in respect of the salary income. For determining the percentage of rebate that a person is entitled to, what needs to be looked at is the gross total income.

The term gross total income would mean the aggregate of income under the five heads namely salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources after giving effect to the set off and carry forward and set off of losses but before allowing any deduction under Chapter VI-A (Sections 80CCC to 80U).

All exemptions and deductions under the various heads including deduction in respect of profession tax and exemptions from salary income will have to be reduced in computing the gross total income for the purpose of determining the percentage of rebate under Section 88.

The Finance Bill 2004 proposes to allow rebate for resident individuals having a total income, which does not exceed Rs 1,00,000. It is proposed that in such a case the entire tax can be claimed as a rebate. This will mean that such persons will have no tax liability.

The proposal as already mentioned is to allow a rebate to a resident individual whose total income is Rs 1 lakh or less. This will mean that all deductions including standard deduction will have to be given effect to, and the eligibility or otherwise of the rebate will depend on the income so arrived at after allowing all such deductions.

Interestingly, this will mean that if an individual has a total income of Rs 1,00,000, he will have no tax liability while an individual with a total income of Rs 1,00,100 will end up with a tax liability of Rs 9,200 (including additional surcharge).

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.)

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