No TDS on Gratuity , pension Computation and leave salary of University Employee : ITAT

By | May 24, 2019
(Last Updated On: May 24, 2019)

Held

The word “Other Authorities” has been interpreted in Umesh vs. Singh A 1967 Pat. 3(9) F.B. to include a Board, University, The Chief Justice of a High Court, having powers to issue rules, bye laws or regulations having the force of law. The above decision provides that the assessee is covered under the expression ‘State’. In our opinion, the employees of the assessee are found to be holding civil posts under the State Government, therefore, the provisions of section 10(10)(i), 10(10A) and 10(10AA) of the Act are fully attracted. Once the assessee falls under the above provisions of the Act, the same cannot be subject to TDS. We, therefore hold that payments made by the assessee to its employees towards death cum retirement gratuity, commutation of pension or leave salary shall not be liable for TDS to the extent permitted under the provisions of section 10(10)(i), 10(10A) and

10(10AA) of the Act. Accordingly, we confirm the order of the CIT(A) on this issue.

The Income-tax Officer(TDS), Kottayam.

VS

Mahatma Gandhi University, Priyadarsini Hills P.O.,

I.T.A. Nos. 555 & 556/Coch/2018

Assessment Years : 2016-17 & 2017-18

O R D E R

Per CHANDRA POOJARI, AM:

These appeals filed by the Revenue are directed against the different orders of the CIT(A), Kottayam dated 03/09/2018 and pertain to the assessment years 2016- 17 and 2017-18. The assessee has also filed Cross Objections in C.O. Nos. 01 & 02/Coch/2019.

  1. The Revenue has raised the following common grounds of appeal:
    1. The order of the Learned Commissioner of Income Tax (Appeals), Kottayam in
    ITA No.KT-15/CIT(A)/KTM/2017-18 dated 03-09-2018 is opposed to law, facts
    and evidences of the case.
    2. The learned Commissioner of Income Tax (Appeals) has erred in deleting the demand raised u/s 201(1) & u/s 201 (1A) of the IT Act, 1961 amounting to
    Rs.59,65,182/-.
    3. The learned Commissioner of Income Tax (Appeals) erred in holding that
    university employees were to be considered as government employees and were therefore eligible for exemptions under sections 10(10)(i), 10(10A)(i) and 10(AA)(i).
    4. The learned Commissioner of Income Tax (Appeals) overlooked that
    employees of a university are not holders of civil posts and are therefore not government employees.
    5. The learned CIT(Appeals) erred in treating University as part of “State” even though the Income Tax Act in several sections such as section 192(2A) and section 10(10C) clearly distinguishes a university from government.
    6. The Learned CIT(Appeals) overlooked that employees of Universities are
    neither recruited by the State PSC nor paid from the consolidated fund of the State Government. They are employees of the University and not of the
    Government.
  2. The Learned CIT(Appeals) overlooked that a University does not perform any
    sovereign function of the State; rather a university is a product of a statue of the
    State.
    8. The Learned CIT(Appeals) overlooked that definitions of ‘government1
    such as those available in General Clauses Act does not include a university as part of
    the government.
    9. The Ld. CIT(A) overlooked that in State of Maharashtra & Ors. vs. Nowrosjee

Wadia College & Ors., the Hon’ble Supreme Court has held that teachers of

universities and affiliated colleges are not government employees.

  1. The facts of the case are that the assessee is a University established under the

Mahatma Gandhi University Act, 1985 passed by the Kerala Legislature. The

Assessing Officer during the course of enquiry noticed that the assessee was

discharging the TDS liability on the payments made to employee on the Death cum

Retirement Gratuity (DCRG), Commutation of Pension and leave salary after

allowing exemption provided u/s. 10(10)(iii), 10(10A)(ii) and 10(10AA)(ii) of the Act.

The Assessing Officer rejected the arguments of the assessee that the assessee is

covered under the definition of “State”. According to the Ld. AR, section 192(2A)

of the Income Tax Act, for TDS purposes, has clearly mentioned an employee of the

University separately from a Government servant. The section starts as, “where the

assessee, being a Government Servant or an employee in a company, cooperative

society, local authority, university, institution,….”. This clearly emphasises the legislative intention to treat the University as a separate entity than State or local

authorities. Further, as per the explanation to Section 192(2A),

“University” means a University established or incorporated by or under a Central,

State or Provincial Act…… Nowhere in the Income Tax Act, the University

has been classified under Government. The Assessing Officer observed that

the Income Tax Act clearly distinguishes a University from State Government or

Central Government as is evident from section 10(10C) of the Income tax Act, which

is reproduced here under:-

“10. In computation of the total income of a previous year of any person, any

income falling within any of the following clauses shall not be included.

[(10C) any amount received (or receivable] by an employee of—

(i) a public sector company ; or

(ii any other company ; or

(iii) an authority established under a Central, State or Provincial Act; or

(iv) a local authority ; or

(v) a co-operative society ; or

(vi) a University established or incorporated by or under a Central,

State or Provincial Act and an institution declared to be a University under

section 3 of the University Grants Commission Act, (3 of 1956) ; or .

(vii) an Indian Institute of Technology within the meaning of clause (g) of

section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or

(viia) any State Government; or

(viib) the Central Government; or

(viic) an institution, having importance throughout India or in any State or

States, as the Central Government may, by notification in the Official Gazette

sppecify in this behalf; or

(viii) such institute of management as the Central Government may, by

notification in the Official Gazette, specify in this behalf; or

[on his] [voluntary retirement or termination of his service, in accordance with

any scheme or schemes of voluntary retirement or in the case of a public

sector company referred to in sub-clause (i), a scheme of voluntary separation,

to the extent such amount does not exceed five lakh rupees:

Provided that the schemes of the said companies or authorities or societies or

Universities or the Institutes referred to in sub-clauses (vii) and (viii)], as the

case may be, governing the payment of such amount are framed in

accordance with such guidelines (including inter alia criteria of economic

viability) as may be prescribed:

Provided further that where 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:

Provided also that where any relief has been allowed to an assessee under

section 89 for any assessment year in respect of any amount received or

receivable on his voluntary retirement or termination of service or voluntary

separation, no exemption under this clause shall be allowed to him in relation

to such, or any other, assessment year;

3.1 According to the Assessing Officer, in section 10(10C), the University find

separate place other than the State/Central Government etc. Even though the

above section i.e. Section 10(10C) of the Income tax Act, 1961 has no direct nexus

with the present issue, it provides a meaningful insight that an employee of a

central or a state Government is totally different from the employee of a University

established or incorporated by or under a Central, State or Provincial Act or other

bodies for income tax purposes. If that would not have been, the case, there was

no need to incorporate the university as separate entity than the central or state

Government. Therefore, according to the Assessing Officer, it was crystal clear that

the status of the University is neither that of a State/Central government nor its

employees are the employees of Central government.

3.2 The Assessing Officer relied on the judgment of the Supreme Court in the case

of Shashikant Laxman Kale & Anr Vs Union Of India 185 ITR 104 wherein the Court

upheld the constitutional validity of Section 10(10C) which gives distinct treatment

to public sector and private sector employees on the plea of violation of article 14

and held that the provision to be neither discretionary nor arbitrary. The Assessing Officer relied on the judgment of the Supreme Court in the case of Mafatlal

Industries Vs Union of India (1997) 5 SCC 536 that the legislature can make

reasonable discrimination and make a choice in respect of districts, objects,

persons, methods and even rates of taxation.

3.3 The Assessing Officer was of the view that when there is specific provision &

separate treatment provided for in the Income Tax Act to tax the retirement

benefits of the University employees than the Government servants, Article 12,

which deals with the fundamental rights is not attracted. Therefore, the Assessing

Officer reiterated that the assessee cannot be treated as part of Government and

the employees of Mahatma Gandhi University do not fall under the category of

Government Employees and as such the exemptions available to the Government

employees will not be applicable to the University employees. Hence, TDS is to be

made on taxable portion of the payment of DCRG, Commutation of pension & leave

salary. The Assessing Officer passed the order u/s. 201(1) and 201(1A) of the Act

raising the demand of Rs.59,65,182/-.

  1. On appeal, the CIT(A) held that the assessee is to be treated as “State” for the

purpose of application of TDS provisions by relying on the decision of the ITAT,

Delhi in the case of Ram Kanwar Rana in ITA No.1307/Del/2016 dated 16/06/2016

wherein it was held as under:

  1. I have heard the rival submissions and perused the relevant material on

record. The controversy in this appeal can be viewed separately in respect of

receipt of gratuity amount and leave encashment. In so far as the addition on

account of gratuity received by the assessee amounting to Rs.6,50,000/- is

concerned, it is found that the case of the assessee is that this amount falls

u/s 10(10)(i) of the Act. On the contrary, the Revenue has treated it as a

case falling u/s 10(10)(iii). In order to appreciate the rival contentions in right

perspective, it will be apposite to set out the relevant parts of section 10, as

under :-

`(10) (i) any death-cum-retirement gratuity received under the revised

Pension Rules of the Central Government or, as the case may be, the Central

Civil Services (Pension) Rules, 1972, or under any similar scheme applicable

to the members of the civil services of the Union or holders of posts

connected with defence or of civil posts under the Union (such members or

holders being persons not governed by the said Rules) or to the members of

the all-India services or to the members of the civil services of a State or

holders of civil posts under a State or to the employees of a local authority or

any payment of gratuity received under the Pension Code or Regulations

applicable to the members of the defence services ;

(ii)…..

(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 :

…..

Provided further that where any such gratuity or gratuities was or were

received in any one or more earlier previous years also and the whole or any

part of the amount of such gratuity or gratuities was not included in the total

income of the assessee of such previous year or years, the amount exempt

from income-tax under this clause shall not exceed the limit so specified as

reduced by the amount or, as the case may be, the aggregate amount not

included in the total income of any such previous year or years.’

  1. A careful perusal of the above provision indicates that if a case falls under

clause (i) of section 10(10), the entire amount of death-cum-retirement gratuity

becomes exempt. Au contraire, if a case falls under sub-clause (iii) of section

10(10), then, the exemption is limited to the amount as the Central Government

may notify in official gazette. It is an accepted position that the Notification u/s

10(10)(iii) issued on 24.5.2010 raised the ceiling of exemption from Rs.3,50,000/-

to Rs.10 lac. Since the original amount was received by the assessee during the

currency of an earlier year on his retirement, the exemption limit prevalent at

that time at Rs.3,50,000/- was used by the assessee. It is nobody’s case that the

extended limit of exemption can be applied to the assessee, because of his

retirement which took place much before the cut-off date. To be more specific,

the question is as to whether the extant case falls under clause (i) or clause (iii)

of section 10(10). If a case does not fall under clause (i), it will automatically go

to clause (iii). On a specific query from the Bench, the ld. AR submitted that the

case of the assessee should be considered under sub-clause (i) of section 10(10)

as a ‘holder of civil post under a State.’ In order to construe any person as a

holder of civil post under a State, two requirements must be fulfilled viz., first

that the employee should be holding a civil post and, second, such civil post must

be under a State.

  1. The first condition is that the employee should be holding a civil post. The

assessee was appointed as a Research Assistant in December, 7 1971, who

eventually rose to the post of Head of Department, Plant Breeding Department at

the time of his retirement. Page 32 of the paper book is copy of the assessee’s

Pension Payment Order, which depicts the assessee’s designation as Sr. Scientist,

Department of Plant Breeding. On the ‘Pensioner’s Portion’ of this document,

there is a reference to Rule 10, 11 and note thereunder of Civil Services Rules

(CSR) V.II. As the assessee’s pension has been computed under Civil Services

Rule, it goes to show that the assessee was holding a ‘civil post’ at the time of his

retirement. No other contrary material has been placed on record by the ld. DR to

show that the assessee was holding a post other than civil post.

  1. The second requirement is that such civil post must be under a State. Page 20

of the paper book is a copy of Haryana and Punjab Agricultural University Act,

1970, which was passed by the Parliament and received the assent of the

President on 2nd April, 1970. Under this Act of Parliament, two independent

agricultural universities in place of the hitherto Punjab Agricultural University,

were established. Section 5 of this Act sets out the name of CCSU as the

agricultural university to function within the territories of State of Haryana. This

proves that the CCSU was established by an Act of Parliament. Page 29 of the

paper book is a document which shows that the assessee is a State University

covered under University Grants Commission (UGC). It is undisputed that the

entire funding of the CCSU is done by the State Government. Page 25 is a copy

of Notification issued by the Haryana Government increasing the maximum limit

of death-cum-retirement gratuity at Rs.10 lac, under which the assessee has

received the arrears of retirement gratuity under this scheme only. The above

facts amply demonstrate that CCSU is covered under the expression ‘State.’ This

is further corroborated from Article 12 of the Constitution of India which states

that: ‘In this part, unless the context otherwise requires, ‘the State’ includes the

Government and Parliament of India and the Government and the legislature of

each of the States either local or other authorities within the territory of India or

under the control of the Government of India.’ The expression ‘other authorities’

has been interpreted in Umesh v. Singh A 1967 Pat. 3(9) F.B. as including: ‘a

Board, a University, the Chief Justice of a High Court, having the power to issue

rules, bylaws or regulations having the force of law.’ The above discussion

manifests that CCSU is covered within the meaning of ‘State’.

  1. As the assessee is found to be an employee holding a civil post under a State,

in my considered opinion, the provisions of section 10(10)(i) are fully attracted in

this case entitling him to exemption for the amount under consideration. Once a

case falls under clause (i) of section 10(10), the same cannot be brought within

the purview of clause (iii) of section 10(10). I, therefore, hold that the assessee is

entitled to exemption u/s 10(10)(i) in respect of gratuity amount received in total

upto Rs.10 lac, which covers a sum of Rs.6,50,000/- received during the year.

Overturning the impugned order on this score, I allow exemption u/s 10(10)(i) to

the arrears of gratuity received by the assessee at Rs.6,50,000/- during the

instant year.

  1. As regards the second amount of Rs.1,88,720/- received by the assessee

during the year towards the arrears of leave encashment, it is noticed that the

assessee claimed exemption u/s 10(10AA)(i) which was refused by the AO by

holding the case to be covered under sub-clause (ii) of section 10(10AA). The ld.

CIT(A) affirmed the view taken by the AO on this point, thereby denying the

benefit of exemption in respect of the arrears of leave encashment received

during the year.

  1. I have heard the rival submissions and perused the relevant material on

record. The ld. AR submitted that there is not much difference in the language of

section 10(10)(i) and 10(10AA)(i) and the view taken in respect of arrears of

gratuity u/s 10(10) should be followed for arrears of leave encashment u/s

10(10AA). The ld. DR supported this proposition. As both the sides are consensus

ad idem on the position that the view taken in the context of section 10(10) as

applicable to leave gratuity be followed here in the context of section 10(10AA) in

the context of leave encashment, I am desisting from independently examining

the later provision. In view of the fact that I have held the assessee to be entitled

to exemption u/s 10(10)(i) in respect of arrears of gratuity, following the same, I

extend the benefit of 11 exemption u/s 10(10AA)(i) in respect of arrears of leave

encashment. This ground is allowed.”

4.1. The CIT(A) also relied on the decisions of the ITAT, Delhi in the case of Dr.

S.B. Kalidhar in ITA No.1087/Del/2016 dated 28/09/2016 and Raghubir Singh Panghal in ITA No. 1308/Del/2016 dated 16/06/2016 wherein it was held that leave

encashment paid to employees of University formed under a Central Act was

exempted u/s. 10(10AA)(i) of the Act. Thus, the CIT(A) held that the assessee is to

be treated as “State” for the purpose of application of TDS provisions.

  1. Against this, the Revenue is in appeal before us. The Ld. DR relied on the order

of the Assessing Officer.

  1. The Ld. AR submitted that the assessee, Mahatma Gandhi University was

established as per the Mahatma Gandhi University Act 1985 passed by the Kerala

Legislature and hence is a statutory body formed by an Act of the State legislature.

It was submitted that as per the Act and Statutes, the Government of Kerala

exercises direct control over the financial and administrative matters of the

university and the Governor of Kerala is the Chancellor of the University, who shall

appoint the Vice Chancellor of the University. It was submitted that the University

was created by the State Government to discharge one of its sovereign function of

imparting higher education in the State. The Ld. AR referred to the preamble to

the MG University Act, 1985, which states as follows:

“WHEREAS it is considered necessary to establish a new teaching and

affiliating University in the State to provide for the urgent development

of higher education in the areas comprised in the Kottayam, Ernakulam

and Idukki revenue districts, the Kuttanad taluk of the Alleppey revenue

district and the Kozhencherry, Mallappally, Thiruvalla and Ranni taluks of

the Pathanamthitta revenue district of the State;”.

6.1 Further, the Ld. AR submitted that the university was established by the

government as an autonomous institution, (like RBI, SEBI, ISRO, C&AG, IRDA. TRAI

etc.) to deliver the services that the government had approved as part of its policy

frame work. It was submitted that it is a government organization and the

government frames the policy and autonomous institutions implement it. It was

submitted that the income of the University is exempt u/s 10(23C)of the Income

Tax Act. According to the Ld. AR, the State Government exercises power in

appointing staff to posts in the University. The Statute and the State Government

ensured that the recruitments to all non teaching posts were filled through selection

conducted by the State Public Service and the senior administrative posts such as

Registrar, Controller of Examinations and Finance Officer were also selected by the

Government.

6.2 It was submitted that the first statute passed by the Legislature ensured that

the service conditions are managed in accordance with the provisions of the Kerala

Service Rules, 1959, Kerala State and Subordinate Service Rules 1958 and the

Government Servants Conduct Rules, 1960. Statute 40 of Chapter 4 of the MGU

Statute 1997 brings the employees under the ambit of Kerala Public Servants

(inquiries) Act 1963.

6.3 The Ld. AR referred to Para 78 of the MG University Act which states as

follows:

“Reservation of appointments.-In making appointments by direct recruitment

to posts in any class or category under the University or to posts of non-

teaching staff in the University, the University shall mutates mutandis observe

the provisions of clauses (a), (b) and (c) of rule 14 and rules 15, 16, 17 and

17A of the Kerala State and Subordinate Service Rules, 1958, as amended

from time to time.”

According to the Ld. AR, as stated in Part II if the Mahatma Gandhi University

statutes 1997, the employees belonging to Classes I and II shall have the status of

Gazetted Officers of the Kerala Government Service and accordingly, the pay of the

employees of the university is fixed and also revised in accordance with and at par

with pay revision of the state government employees. It was submitted that the

employees of this university are also governed by the Kerala Government Pension

Rules. These Rules are the same as the Central Civil Services (Pension) Rules 1972

(CCS Pension Rules 1972). The salary, pension and retirement benefits are paid

from the consolidated fund of the state government and the grant for payment of

salary and retirement benefits are provided by the Legislature through the budget of

the State. The amount is specifically provided under the head ‘salaries’ in the state

budget which was placed on record. Thus, there exists an employer employee

relationship between the ‘payer’ and ‘payee’ i.e. the government and the employee.

It was submitted that the state government retains complete and direct control over

the expenditure of the university. The salary, pension and retirement benefits were

directly credited to the account of the employees by the Treasury Officer.

6.4 The Ld. AR referred to Article 12 of the Constitution of India which reads as

follows:

“Definition In this part unless the context otherwise requires, the State includes

the Government and Parliament of India and the Government and the

Legislature of each of the States and all local or other authorities within the

territory of India or under the control of the Government of India”.

The definition paraphrased is as under:

  1. a) The Government and Parliament of India;
  2. b) The Government and the Legislature of each of the States;
  3. c) All local and other authorities within the territory of India; and
  4. d) All local and other authorities under the control of the Government of

India.

It was submitted that the assessee had been allowed exemption on these payments

while estimating the income of the employees for all the prior years which were

accepted by the department.

6.5 It was submitted that the CIT(A) had considered two requirements which

must be fulfilled as per Section 10(10) ie. first that the employee should be holding

a civil post and second such civil post must be under the State. As regards the first

point, the CIT(A) stated that in the pension payment order of one of the employees

of the appellant, in the ‘ Pensioner’s portion’ there was a reference to Rule 10,11

and note thereunder to the Civil Services Rules. The Ld. AR submitted that as the

employee’s pension is under the Civil Services Rules , it showed that the employee

was holding a ‘civil post’ and no contrary material has been placed on record by the Ld. DR to show that the employee holds a post other than a civil post. As regards

the second requirement, the CIT(A) stated that in the case of CCSU which is a University formed by an Act of Parliament was held to be covered under the

expression ‘State’. Article 12 of the Constitution of India includes ‘other authorities’

under the definition of the word “State”. It was submitted that the word” Other

authorities has been interpreted in Umesh vs. Singh A 1967 Pat. 3(9) F.B. to include

‘a Board, University, The Chief Justice of a High Court, having powers to issue rules,

bylaws or regulations having the force of law’. Hence it was concluded that the

employee of the assessee was an employee holding a civil post under the State.

The Ld. AR submitted that consequently, the view taken for Section 10(10)(i) was

extended to Section 10(AA)(i) stating that there was not much difference in the

language of the both the sections and hence, the view taken with regard to section

10(10) was to be followed for section 10(10AA). The CIT(A) relied on the decision

of ITAT, Delhi SMC Bench, in the case of Ram Kanwar Rana cited supra and allowed the appeal of the assessee.

6.6 It was submitted that the Supreme Court while interpreting the expression

“other authorities” in the case of Som Prakash Rekhi vs. Union of India AIR 1981 SC

212 had culled out certain tests to determine as to when a Corporation should be

said to be an instrumentality or agency of the Government. The Ld. AR

summarised the tests laid down by the Apex Court with regard to how the

conditions are satisfied in the case of the assessee as follows:

  1. a) If the entire share capital of the corporation is held by the Government, it

would go a long way towards indicating that the corporation is an

instrumentality or agency of the Government.

The University is formed under a State Act and the revenue nd capital

requirements of the University is allotted from the State Budget by the State

Government as planned and unplanned expenditure.

  1. b) Existence of deep and pervasive State control may afford an indication

that the corporation is a State agency or instrumentality.

The creation and operation of the University is entirely based on a statute/Act

that has been enacted by the State Government. The Financial and

Administrative control over the University is with the State Government.

  1. c) Whether the Corporation enjoys monopoly status which is State conferred

or State protected.

Yes. The University enjoys monopoly status conferred by the State with

respect to collegiate education and powers conferred on the university with

respect to functions to be performed by it is exclusive and not available with

any other agency or institution.

  1. d) If the functions of the corporation are of public importance and closely

related to governmental functions. It would be a relevant factor in classifying

the corporation as an instrumentality or agency of the Government.

The University is carrying out one of the State Government’s function of

imparting higher education and hence is of utmost public importance and

closely related to the functions of the Government.

  1. e) If a department of a Government is transferred to a corporation, it wou

ld be a strong factor supporting this inference of the corporation being an

instrumentality or agency of the Government.”

The University is under the direct control of the Department of Higher

Education of the Government of Kerala

6.7 It was submitted that the University falls under the category “Other

Authorities” in the definition of the State as per Article 12 of the Constitution of

India and it was to be treated as part of State for the purpose of exemption under

the Income Tax Act. The University is a constitutional / statutory authority on whom

powers are conferred by law. Reliance was placed on decision of the Supreme Court in the case of Rajasthan State Electricity Board, Jaipur V Mohanlal (1967 AIR 1857)

wherein it was held that the Board formed under a Central Act is other authority as

per Article 12 of the Constitution and hence, is to be treated a State. The Ld. AR

submitted that exemption u/s. 10(10)(i) and 10(10A)(i) of the Act is available to

holders of civil posts under a “State”. It was the submission of the Ld. AR that it is a

State as defined in Article 12 of the Constitution since it falls under the category

“other authority” being an authority created by a statute. Reliance was also placed

on the decision of the ITAT, Pune in the case of Smt. Sapna Sanjay Raisoni vs ITO

(2016) 70 taxmann.com 7 (Pune-Trib.) wherein it was held that Maharashtra State

Electricity Board (MSEB) which was established under the Road Transport Act 1950

was considered State as per Article 12 of the Constitution and hence, payment to

MSEB would be exempted u/s. 40A(3) of the IT Act. The Supreme Court in the case of Rajasthan State Electricity Board cited supra held that the words “other

authorities” occurring in Article 12 of the Constitution should be given their full

dictionary meaning. The expression ‘other authorities’ in Article 12 will include all

constitutional or statutory authorities on whom powers are conferred by law. Any

public authority created by the statute on whom powers are conferred by law must

be held to be a State irrespective of whether the functions of that authority are

sovereign functions or non-sovereign functions.

6.8 It was submitted that the department had taken a ground that since “state

government” and “university” are shown separately in section 10(10C) of the IT Act and section 192(2A) of the IT Act, the words University and state government are

different and not same which has no merits for the following reasons:

  1. In section 10(10C) what is contemplated is all employees of universities

established under a state act are eligible for exemption even if such

universities are not substantially funded by the Government of Kerala. Eg.

Kerala University of Health Sciences is a university established under a State

Act but not substantially funded by the Govt. of Kerala. Hence these are shown

separately.

  1. Under section 192(2A) of the Income Tax Act, a similar explanation is added

as under Section 10(10C)of the Income Tax Act.

6.9 Notwithstanding the above, it was submitted that these employees are the

employees of the State Government and not of the M. G. University for the reason

that the salary is paid by the Kerala Government. Reliance was placed on the

decision of the ITAT Chandigarh in the case of ITO(TDS) vs. Supdtt. Engineer

wherein the employees of Bhakra Beas Management Board(BBMB) which is a

statutory body formed under the Punjab Reorganization Act were to be treated as

employees of the State Government since BBMB was functioning under the direct

control of the Government. The Ld. AR submitted that the assessee is also formed

under a State Act and is working under the direct supervision of the State Govt.

The Chancellor of the University is the Governor of Kerala and the Pro Chancellor is

the Education Minister of the State. All the administrative matters of the University

are controlled by the State Government.

6.9.1 Regarding decision of the Supreme Court in the case of State of Maharashtra

  1. Nowrosjee Wadia College & Others relied on by the Department, the Ld. AR submitted that it is on a different context and facts. It was submitted that the facts

in the case of Nowrosjee Wadia College was that the decision was under the

Maharashtra Universities Act. In this case, the decision was on the validity of the

directives issued by the State Government and not on income tax. The question in

this case was whether the university teachers are employees of the government and

the question whether the university can claim reimbursement from government for

leave encashment paid to its employees. However, in the case of the assessee

herein, it is under the Mahatma Gandhi University Act. In the case of the assessee

herein, the question was on the provisions of the Income Tax Act. The question was

whether the university employees are employees of State. In the case of the

assessee herein, the State Government had already reimbursed all the benefits to

the employees of M.G. University by accepting that they are the employees of the state.

  1. We have heard the rival submissions and perused the record. The main

contention of the assessee is that the employees of the assessee are holding civil

posts under the State Government. As such, the provisions of section 10(10)(i),

10(10A) and 10(10AA) of the Act are applicable to the assessee’s case. Accordingly,

the assessee is not liable to deduct TDS on the payment of death cum retirement

gratuity, commutation of pension and leave salary to its employees. The issue to be

considered is whether the provisions of sections 10(10)(i), 10(10A) and 10(10AA) of

the Act are applicable or not. For this, two requirements must be fulfilled as per

section 10(10) i.e., first that the employee should be hold a civil post and second such civil post must be under the State Government. The assessee herein Mahatma

Gandhi University was formed as per the Mahatma Gandhi University Act, 1985

passed by the Kerala Legislature and hence, it is a statutory body formed by an Act

of the State Legislature. As per the Act and Statutes, the Government of Kerala

exercises direct control over the financial and administrative matters of the

university and the Governor of Kerala is the Chancellor of the University, who shall

appoint the Vice Chancellor of the University. The University was created by the

State Government to discharge one of its sovereign function of imparting higher

education in the State.

7.1 The preamble to the MG University Act, 1985 states as follows:

“WHEREAS it is considered necessary to establish a new teaching and

affiliating University in the State to provide for the urgent development

of higher education in the areas comprised in the Kottayam, Ernakulam

and Idukki revenue districts, the Kuttanad taluk of the Alleppey revenue

district and the Kozhencherry, Mallappally, Thiruvalla and Ranni taluks of

the Pathanamthitta revenue district of the State;”.

7.2 The university was established by the government as an autonomous

institution, (like RBI, SEBI, ISRO, C&AG, IRDA. TRAI etc.) to deliver the services

that the government had approved as part of its policy frame work. It is a

government organization and the government frames the policy and autonomous

institutions implement it. The income of the University is exempt u/s 10(23C) of the

Income Tax Act. The State Government exercises power in appointing staff to posts

in the University. The Statute and the State Government ensured that the

recruitments to all non teaching posts were filled through selection conducted by the State Public Service and the senior administrative posts such as Registrar, Controller of Examinations and Finance Officer were also selected by the Government.

7.3 The first statute passed by the Legislature ensured that the service conditions

are managed in accordance with the provisions of the Kerala Service Rules, 1959,

Kerala State and Subordinate Service Rules 1958 and the Government Servants

Conduct Rules, 1960. Statute 40 of Chapter 4 of the MGU Statute 1997 brings the

employees under the ambit of Kerala Public Servants (inquiries) Act 1963.

7.4 Para 78 of the MG University Act states as follows:

“Reservation of appointments.-In making appointments by direct recruitment

to posts in any class or category under the University or to posts of non-

teaching staff in the University, the University shall mutates mutandis observe

the provisions of clauses (a), (b) and (c) of rule 14 and rules 15, 16, 17 and

17A of the Kerala State and Subordinate Service Rules, 1958, as amended

from time to time.”

7.5 As stated in Part II if the Mahatma Gandhi University statutes 1997, the

employees belonging to Classes I and II shall have the status of Gazetted Officers of

the Kerala Government Service and accordingly, the pay of the employees of the

university is fixed and also revised in accordance with and at par with pay revision

of the state government employees. The employees of this university are also

governed by the Kerala Government Pension Rules. These Rules are the same as

the Central Civil Services (Pension) Rules 1972 {CCS Pension Rules 1972). The salary, pension and retirement benefits are paid from the consolidated fund of the

state government and the grant for payment of salary and retirement benefits are

provided by the Legislature through the budget of the State. The amount is

specifically provided under the head ‘salaries’ in the state budget which was placed

on record. Thus, there exists an employer employee relationship between the

‘payer’ and ‘payee’ i.e. the government and the employee. The state government

retains complete and direct control over the expenditure of the university. The

salary, pension and retirement benefits were directly credited to the account of the

employees by the Treasury Officer.

7.6 Article 12 of the Constitution of India reads as follows:

“Definition In this part unless the context otherwise requires, the State includes

the Government and Parliament of India and the Government and the

Legislature of each of the States and all local or other authorities within the

territory of India or under the control of the Government of India”.

The definition paraphrased is as under:

  1. a) The Government and Parliament of India;
  2. b) The Government and the Legislature of each of the States;
  3. c) All local and other authorities within the territory of India; and
  4. d) All local and other authorities under the control of the Government of

India.

7.7 The word “Other Authorities” has been interpreted in Umesh vs. Singh A 1967 Pat. 3(9) F.B. to include a Board, University, The Chief Justice of a High Court, having powers to issue rules, bye laws or regulations having the force of law. The above decision provides that the assessee is covered under the expression ‘State’. In our opinion, the employees of the assessee are found to be holding civil posts under the State Government, therefore, the provisions of section 10(10)(i), 10(10A) and 10(10AA) of the Act are fully attracted. Once the assessee falls under the above provisions of the Act, the same cannot be subject to TDS. We, therefore hold that payments made by the assessee to its employees towards death cum retirement gratuity, commutation of pension or leave salary shall not be liable for TDS to the extent permitted under the provisions of section 10(10)(i), 10(10A) and

10(10AA) of the Act. Accordingly, we confirm the order of the CIT(A) on this issue.

Hence, the appeals of the Revenue are dismissed.

C.O. Nos. 01 & 09/Coch/2019:Assessee

  1. The assessee has raised the following common grounds in its Cross Objections:

1) If for any reason the appeal filed by the department is allowed in favour

of the appellant, since the Respondent had deducted tax from the employees

on the bonafide and honest belief that they are State Government

employees, whether tax can be levied u/s.201 of the Income tax Act by

treating the Respondent as an assessee is default.

2) Whether the responsibility to assess tax on the salary income of the

assesssee is on the assessing officer of the employee concerned and whether

the Respondent can be treated as an assessee in default for the reason that

there is a legal interpretation regarding an item of payment made by the

assessee to the employee.

  1. There was delay of 25 days in filing the Cross Objection by the assessee before

the Tribunal. The assessee has filed a petition, accompanied by affidavit explaining

the reasons for delay in filing the Cross Objections before this Tribunal as follows:

  1. The Petitioner is an University formed under the Mahatma Gandhi University

Act.

  1. Since the income of the University is fully exempt from tax u/s.10 of the

Income tax Act, the University had not filed its return of income (except in few

years when refund were due) and did not have any income tax consultant or a

division on a regular basis.

  1. For the Assessment years 2016-17 & 2017-18, the ITO (TDS) initiated

proceedings u/s.201 and 201(1A) of the Income tax Act for the alleged short

deduction of tax at source, vide orders dt.31/08/2017 and 31/01/2018

  1. On appeal before the CIT(A), the order of the ITO (TDS) was reversed and

the demand raised was cancelled, vide orders dt. 03-09-2018.

  1. Department filed appeals before the Bench against the orders of the CIT(A),

which are posted for hearing before the Bench on 27-02-2019.

  1. The Petitioner was under the bonafide belief that no action is required on

receipt of the notice and had engaged M/s. Varma & Varma, Chartered

Accountants, Kochi, to enter appearance before the Bench.

  1. The Petitioner is now advised that a Cross Objection u/s. 253(4) of the

Income tax Act ought to have been filed within 30 days of the receipt of the

notice.

  1. The Petitioner had received the notice of filing the appeal on 04/01/2019 and

hence the Cross Objection ought to have been filed on 03/02/2019.

Consequently there is a delay of 24 days.

  1. The delay was caused only due to ignorance of the requirement since the

Petitioner is a charitable entity and is not benefitted by the advice of any

consultant/expert on matters relating to income tax on a regular basis.

  1. lt is respectfully prayed that the delay of 24 days may kindly be condoned

and the Cross Objection may please be taken on record and disposed off on

merits.

9.1 We have gone through the petition. We find that there is sufficient and

reasonable cause for delay in filing the Cross Objections. Accordingly, we condone

the delay of 25 days in filing the Cross Objections before the Tribunal and admit the

Cross Objections for adjudication.

  1. Coming to the grounds in the Cross Objections, without prejudice to the above

appeals of the Revenue, the Ld. AR submitted that the provisions of section 201(1)

and 201(1A) of the Act are not attracted in the present case because non-deduction

of tax at source by the university is based on a bonafide estimate of the tax liability

of its employees. According to the Ld. AR, the obligation of the employer u/s 192 is

only to deduct tax on the estimated income of the Assessee under the head salaries

for that financial year. If the estimate is made bonafide and tax is deducted on such

bonafide estimate then there can be no proceedings u/s 201(1) and 201(1A),

treating the person responsible for deducting tax at the time of payment as

Assessee in default. As far as the assessee is concerned, his obligation is only to

make an “estimate” of the income under the head “Salaries” and such estimate has

to be bonafide estimate.

10.1 According to the Ld. AR, Section 192 of the Act uses the word” estimate” and

therefore the statutory intention is that it should be an approximation. The Ld. AR

placed reliance on the decision of the ITAT, Bangalore in the case of Karnataka

Power Transmission Corporation Limited (2019) 102 taxmann.com 245 (Bangalore

Trib.) wherein it was held that Section 192 used word ‘estimate’ and, therefore,

statutory intention is that it should be an approximation. It was further held that

where the assessee was under bonafide belief that its employees were to be

regarded as employees of State Government and were entitled to exemption of

entire sum of unutilized leave encashment u/s. 10(10AA)(ii), it had discharged its

obligation u/s. 192 and, hence, proceedings u/s. 201(1) and 201(1A) deserved to be

quashed. It was submitted that the assessee is also under the bona fide belief that

its employees are State Government employees and has been deducting tax

accordingly u/s. 192 and filing its TDS return for all the past years.

10.2 The Ld. AR submitted that the primary liability of the payee to pay tax remains

and Section 191 confirms this. It was submitted that in a situation of honest

difference of opinion, it is not the deductor that is to be proceeded against but the

payees of the sums. Hence, it was submitted that no tax can be recovered from the

employer on account of short deduction of tax at source under section 192 if a

bonafide estimate of salary taxable in the hands of the employee is made by the

employer and the tax assessment of the employee has become invalid.

10.3 The Ld. AR placed reliance on the following decisions of the Tribunal wherein

the appellate authorities had taken a view that if tax is deducted based on a

bonafide estimate or if there is no observation that the estimate is not honest or

fair, the deductor cannot be held to be assessee in default u/s. 201(1). It was also

held that deduction of tax at source by an employer is always a tentative deduction

of income-tax subject to regular assessment in the hands of the payee/recipient:

  1. Business India Television International Ltd. vs. ACIT ([2007] 11 SOT 486

(Delhi).

  1. Orient Paper & Industries Ltd. vs. CIT 12 Taxman 348 (MP)
  2. JCIT vs. Nestle India Ltd. 109 Taxman 403 (Delhi)
  3. Gwalior Rayon Silk Co. Ltd. vs. CIT 14 Taxman 99 (MP)
  4. DCIT vs. Excel Industries Ltd (2006) 5 SOT 235 (Mum.)
  5. Nishith M Desai vs. Income Tax Officer (TDS) (2006) 9 SOT 42 (Mum.)
  6. CIT (TDS) vs. Oracle India Pvt Ltd (2013) 37 taxmann.com 327

(Bangalore -Trib.).

  1. ACIT vs SAP Labs India Pvt Ltd ([2013] 36 taxmann.com 200

(Bangalore -Trib.)

  1. ACIT(TDS) vs. Infosys BPO (2013) 37 taxmann.com 53 (Bangalore -Trib.)
  2. CIT vs Kannan Devan Hill Produce Co. Ltd (1987) 30 Taxmann 460

(Ker.).

  1. Aligarh Muslim University vs. Income Tax officer(TDS), Aligarh (2017]

83 taxmann.com 364 (Agra-Trib.))

  1. P.V Rajagopal vs. Union of India ((1998) 99 taxman 475 (AP).
  2. ACIT (TDS) vs. CISCO Systems Asia Services (2013)

38 Taxmann.com 381 (Bangalore-Trib.)

  1. ACIT vs. Thomson Corporation (International) Pvt Ltd. (2013)

37 taxmann.com 383(Bangalore -Trib).

  1. Karnataka Power Transmission Corporation Ltd. (2019) 102 taxmann.com

245 (Bangalore Trib.)

The Ld. AR submitted that there has been no observation by the ITO that the

estimate of salary made by the assessee was not honest or fair. Also, the assessee

had deducted tax on the basis of a bonafide estimate of the salary of its employees.

11 The ld. DR relied on the order of the Assessing Officer.

  1. We have heard the rival submissions and perused the record. We are of the

view that the facts and circumstances of the present case are identical to the case

of Indian Institute of Science vs. DCIT in ITA No.1589/Bang/2014 dated 27/02/2015

for the AY 2010-11 decided by the ITAT, Bangalore. In the said case, the issue was

with regard to deduction of tax at source u/s.192 of the Act on the rent free

accommodation provided to employees of a statutory corporation such as the

assesses. The assesses in that case took similar plea of bonafide belief as raised in

the case of Karnataka Power Transmission Corporation Ltd. (102 taxmann.com

245)(Bangalore Trib.) in the present proceedings. The Tribunal considered the

submissions and firstly found that the law on the issue of bonafide belief in the matter of estimating of income under the head “salaries” for the purpose of

Secc.192 of the Act, was explained in a decision of ITAT Bangalore in the case of

ACIT Vs. lnfosys BPO Ltd. 150 ITD 132/53 CCH 602 (Bang) in the following manner:

“26. It is no doubt true that TDS is to be made at the time of payment of salary

and not on the basis of salary accrued. Sec. 192(3) of the Act permits the

employer to increase or reduce the amount of TDS for any excess or deficiency.

We have already noticed that the fact that bills/evidence to substantiate incurring

of expenditure on medical treatment up to Rs.15,000/- and the availing of the

LTC by the employees and the fulfilment of the conditions contemplated by Sec.

10(5) of the Act for availing exemption by the employees so availing LTC, have not been disputed by the AO. Even assuming the case of the AO, that at the time

of payment the Assesses ought to have deducted tax at source, is sustainable;

the Assessee on a review of the taxes deducted during the earlier months of the

previous year is entitled to give effect to the deductions permissible under

proviso (iv) to Sec. 17(2) or exemption u/s.10(5) of the Act in the later months of

the previous year. What has to be seen is the taxes to be deducted on income

under the head ‘salaries ‘ as on the last date of the previous year. The case of

the AO is that LTC and Medical reimbursement should be paid at the time the

expenditure is incurred or after the expenditure is incurred by way of

reimbursement and not at an earlier point of time. If it is so paid, then, even

though the payment would not form part of taxable salary of an employee, the

employer has to deduct tax at source treating it as part of salary, is contrary to

the provisions of Sec. 192(3) of the Act and cannot be sustained. The reliance

placed by the AO on the expression “actually incurred” found in Sec. 10(5) of the

Act and proviso (iv) to Sec. 17(2) of the Act, in our view cannot be sustained. In

any event, the interpretation of the word “actually paid” is not relevant while

ascertaining the Quantum of tax that has to be deducted at source u/s.192 of the

Act. As far as the Assessee is concerned, his obligation is only to make an

“estimate” of the income under the head “salaries” and such estimate has to be a

bonafide estimate.

  1. The primary liability of the payee to pay tax remains. Section 191 confirms this. In a situation of honest difference of opinion, it is not the deductor that is to be proceeded against but the payees of the sums. To reiterate, the payment towards medical expenditure and leave travel is made keeping in view the employee welfare. The exclusion in respect of payment towards medical expenditure and leave travel is considered after verifying the details and evidence furnished by the employees. No exemption is granted in the absence of details and/or evidence. The exemption in respect of medical expenditure is restricted to expenditure actually incurred by the employees, or Rs. 15,000/- whichever is lower. The exemption is granted even if the payment precedes the incurrence of expenditure. The requirements/conditions of section 10(5) and proviso to section

17(2) are meticulously followed before extending the deduction/exemption to an employee. No tax can be recovered from the employer on account of short deduction of tax at source under section 192 if a bona fide estimate, of salary taxable in the hands of the employee is made by the employer, is the ratio of the following decisions…………………………”.

12.1 In the present case, as pointed out by the Ld. AR, there has been no

observation by the Assessing Officer with regard to estimate of salary made by the assessee. Further, the assessee has deducted tax on the basis of bona fide estimate of the salary to its employees. The various case laws cited by the assessee also supports the contentions of the assessee. In view of the above decisions of the Tribunal, if tax is deducted based on a bonafide estimate or if there is no observation that the estimate is not honest or fair, the deductor cannot be held to be assessee in default u/s. 201(1). Thus, in our opinion, deduction of tax at source by an employer is always a tentative deduction of income-tax subject to regular assessment in the hands of the payee/recipient. Accordingly, the Cross Objections filed by the assessee are allowed.

  1. In the result, the appeals of the Revenue are dismissed and the Cross

Objections of the assessee are allowed.

Order pronounced in the open Court on this 14th

May, 2019

sd/- sd/-

(GEORGE GEORGE K.) (CHANDRA POOJARI)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi

Dated: 14th May, 2019

GJ

Copy to:

  1. Mahatma Gandhi University, Priyadarsini Hills P.O., Kottayam-686 560.
  2. The Income Tax Officer(TDS), Kottayam.
  3. The Commissioner of Income-tax(Appeals), Kottayam.
  4. The Pr. Commissioner of Income-tax, Kottayam.
  5. D.R., I.T.A.T., Cochin Bench, Cochin.
  6. Guard File.

By Order

(ASSISTANT REGISTRAR)

I.T.A.T., Cochin

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