No Income tax on Gratuity to the extent of limit specified
Q Whether the Corporation can deduct income tax from the gratuity amount on the ground that the gratuity is paid under the Regulations and not under the Act ?
Incomes not included in total income:-
Section 10.(10)(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month’s salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government.
By a reading of this provision, it is clear that, in all the cases of payment of gratuity, an exclusion of gratuity amount is given from the total income, i.e., excluding the gratuity from the payment of tax to the extent of limit prescribed by notification issued in this behalf by the Central Government.
There is no distinction between the gratuity paid under the Act or otherwise. Accordingly, the contention that the gratuity amount is also liable for income-tax is rejected.
HIGH COURT OF KARNATAKA
North West Karnataka Road Transport Corporation
v.
Deputy Labour Commissioner
Smt. H.R. Renuka for the Petitioner. Bharmagowda B. Goudar and Aravinda Kumar for the Respondent.
JUDGMENT
1. This writ petition is directed against the order dated 30-11-2005, passed by the first respondent, confirming the order of the second respondent dated 8-2-2005.
2. The deceased workman filed a claim petition before the Controlling Authority under the Payment of Gratuity Act, 1972 (hereinafter referred to as “the Act”), inter alia, claiming the difference of gratuity amount on the ground that he joined the services of the Corporation on 24-4-1972, and he retired on 14-10-1997, and had completed 27 years 3 months’ complete service and he was not paid the full gratuity.
3. Against the claim petition, the petitioner-Corporation filed the statement of objection, inter alia, stating that the amount deducted is towards income-tax and also for causing damage to the property of the Corporation. The controlling authority considering the rival contentions held that, the deceased workman is entitled for the difference of gratuity amount to the tune of Rs. 1,16,870 and directed the Corporation to pay the same. The order of the controlling authority was called in question before the appellate authority. The appellate authority also confirmed the order of the controlling authority.
4. Learned counsel appearing for the petitioner submitted that income-tax is deducted in terms of section 10(10)(iii) of the Income-tax Act, 1961, since the exemption is given only in respect of gratuity amount under the provisions of the Act, and not in respect of payment of amount under the regulation. She also submitted that, insofar as the deduction towards damage is concerned, notice was issued to the third respondent as per exhibit P3, inter alia, calling upon her to show cause as to why Rs. 25,000 should not be deducted towards damage caused to the property of the corporation. Thereafter, an order was passed on 14-7-2000, inter alia, holding that, Rs. 25,000 is liable to be deducted from the gratuity amount in terms of section 4 sub-section (6) of the Act.
5. Since the deduction of income-tax was made by the Corporation from the gratuity amount, despite the provisions of section 13 of the Act, the Central Board of Direct Taxes, the Chief Commissioner of Income-tax and the Assistant Commissioner of Income-tax were made parties to this writ petition.
6. Sri Aravind Kumar, learned Assistant Solicitor General appearing for respondent Nos. 4 to 6 submitted that, under section 192 of the Income- tax Act, the employer is required to deduct income-tax on the amount payable towards the salary. He referred to section 17 of the Income-tax Act and submitted that “salary” is defined under the said provision, which includes gratuity amount also. By referring to sections 192 and 17 of the Income-tax Act, learned Assistant Solicitor General submitted that income-tax is deductible from the gratuity amount. However, exemption is given under section 10 of the Income-tax Act. He submitted that section 10 relates to incomes, which do not form part of the total income. He also referred to section 10 sub-section (10) clauses (i) to (iii) and submitted that, under these clauses, the exemption is given towards the payment of income-tax as against the gratuity amount. Insofar as section 10 sub-section (10) clause (i) is concerned, he submitted that the employees covered under this provision are exempted from paying the tax whereas, under clause (iii), in any other case where the gratuity becomes payable, a limit is fixed by a notification and in this regard, he submitted that on 24-9-1997, a notification has been issued fixing the limit up to which the income-tax is not deductible. He submitted that Rs. 3,50,000 is the ceiling limit fixed under section 10(10)(iii) of the Income-tax Act. He further submitted that, in this case, the gratuity amount payable is less than Rs. 3.5 lakhs, the exemption is applicable to the gratuity payable in this case.
7. Though respondent No. 3 served, but has remained unrepresented.
8. In the light of the above contentions, the questions that arise for consideration are :
“1. Whether the Corporation can deduct income-tax from the gratuity amount on the ground that the gratuity is paid under the Regulations and not under the Act ?
2. Whether the Corporation can deduct the damage in terms of section 4(6) of the Act ?”
9. No doubt, section 192 of the Income-tax Act requires the employer to deduct the income-tax from the salary and the salary is defined under section 17 of the Income-tax Act, which includes wages, any annuity or pension, any gratuity, any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages, any advance of salary and other payments. However, section 10 of the Income-tax Act excludes certain amounts to be included in the total income. Section 10 sub-section (10) deals with the exclusion of the gratuity amount from the total income. The relevant provision for the purpose of this case is, section 10 sub-section (10) clause (iii) of the Income-tax Act, which reads as under :
“10.(10)(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month’s salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government.”
10. By a reading of this provision, it is clear that, in all the cases of payment of gratuity, an exclusion of gratuity amount is given from the total income, i.e., excluding the gratuity from the payment of tax to the extent of limit prescribed by notification issued in this behalf by the Central Government. It also makes it clear that the notification will be on par with the employees of the Government. It is brought to my notice that, by notification dated 24-9-1997, the Central Government has fixed the limit of exclusion of gratuity to the extent of Rs. 3.5 lakhs from the purview of the total income. If the gratuity is payable under the provisions of the Act, the protection is given to the gratuity under section 13 of the said Act, inter alia, no gratuity payable under this Act and no gratuity payable to an employee in any establishment, factory, mine, oil field, plantation, port, railway company or shop exempted under section 5 shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court. This also makes it clear that the protection is given against the attachment, even for recovery of the revenue also. The Income-tax Act also excludes the gratuity amount from the total income up to the limit fixed. The contention of the learned counsel for the Corporation that, it is only in respect of payment of gratuity under the Act and not under the Regulations, I find that such a contention is not tenable and is not in consonance with the provisions of the Income-tax Act. The Income-tax Act excludes the gratuity amount to the extent of limit prescribed under the Income-tax Act. Hence, the deduction of income-tax by the Corporation is per se contrary to the provisions of section 10 sub-section (10) clause (iii) of the Income-tax Act. There is no distinction between the gratuity paid under the Act or otherwise. Accordingly, the contention that the gratuity amount is also liable for income-tax is rejected.
11. Insofar as the damages is concerned, the record shows that the Corporation issued notice to the workman and in pursuance of the notice, the order has been passed on 14-7-2000, holding that the respondent has caused damage to the property of the Corporation to the tune of Rs. 25,000, section 4(6) of the Act provides for deduction of the amount towards the damage caused by the employee, which reads as under :
“4. Payment of gratuity.—. . . (6) Notwithstanding anything contained in sub-section (1),—
(a )the gratuity of an employee, whose services have been terminated for any act, wilful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused;
(b )the gratuity payable to an employee may be wholly or partially forfeited—
(i )if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
(ii )if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.”
12. The services of the respondent were terminated on account of the accident caused by the deceased workman-driver and in the said accident, it is alleged that the bus got damaged and damage was quantified to the tune of Rs. 25,000 and the notice was issued and an order has been passed. To this extent, the provisions of section 4(6) of the Act confer power on the Corporation to deduct the said amount from the gratuity amount. Hence, to this extent, the writ petition requires to be allowed.
13. Accordingly, the writ petition is partly allowed. The Corporation is entitled to deduct the damage to the tune of Rs. 25,000. However, the deduction of the income-tax from the gratuity amount is not justified. In all other respects, the writ petition stands dismissed.