The Hindu : Business : Should the retired employees be denied relief u/s 10(10c) and 89

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Monday, Apr 05, 2004

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Should the retired employees be denied relief u/s 10(10c) and 89

QUESTION No.1: I opted for VRS during 2000-01 claiming exemption under Section 10(10C). Since it was given in instalments, the assessing officer declines to grant me the relief for next succeeding year/s, though I have not exhausted the overall limit applicable to me. I have filed an appeal. Would I be successful?

2. Relief under Sec. 89(1) is not allowed by the assessing officer for the taxable part of VRS payment. Barring right of appeal, do I have any other remedy?

3. I have received enhanced VRS amount on account of wage revision during the year, though I retired two years ago. Since I have exhausted exemption under Sec. 10(10C), I asked for relief under Sec. 89 in Form 10B with Annexure I requiring spread over in three financial years. This has been denied by the assessing officer, since he is of the opinion that for subsequent payment of VRS arrears, no relief could be claimed under Sec. 89. Is he right?

ANSWER: The above three queries are typical of many complaints on the subject from the readers.

Merely because VRS payments are distributed in instalments, right to exemption up to the limit specified under Sec. 10(10C) should not be lost. It is not that only the first instalment is exempt and that the assessee having availed Sec. 10(10C) in one year cannot further avail the same in a second year even though the amount is within limits under Sec. 10(10C). This confusion arises out of the misunderstanding of the provision in Sec. 10(10C) barring relief for more than one retirement and not for the amount which was earned in one such retirement but becoming liable to tax in more than one assessment year on account of staggering of the payment in instalments instead of one lump sum.

The Calcutta High Court in SAIL DSP VR Employees Association 1998 v Union of India (2003) 262 ITR 638 (Cal), has pointed out that the character of the payment does not change merely because it is stretched.

Board Circular No. 640 dated November 26, 1992 (1993) 199 ITR (St.) 2 clarifying that exemption under Sec. 10(10C) is in addition to exemption for other terminal benefits, it is pointed out, does not envisage any restriction on account of payment in instalments.

The amount though received in instalments, has already arisen on the date of retirement, so that no restriction on the amount of relief is possible. This answers the query 1 above.

As for relief under Sec. 89(1), it has always to be given, whenever arrears are received. Taxable part of the payments received under voluntary retirement scheme is pay eligible for relief. Sub-rule 4(b) of Rule 21A specifically provides for spread over in three years of compensation payable on termination of service after minimum service of three years.

This issue has been squarely considered by the Tribunal in the context of the claim of relief under Sec. 89 on the taxable part of VRS compensation in excess of exempted amount under Sec. 10(10C) in ITO v Dilip Shirodkar (2004) 82 TTJ (Panaji) 869.

Here again, second proviso to Sec. 10(10C) was sought to be relied upon even for purposes of Sec. 89 relief on the ground that, bar against second exemption in the second proviso would cover even a relief under Sec. 89. There is no second exemption for amounts received in instalment as seen in the previous paragraph. Further Sec. 89 relief is only recognition of the fact that the rate of tax should be commensurate with the period of earning as far as possible and that a taxpayer should be spared the bunching effect of the amount received in arrears or in one lump sum. Relief in rate of tax under Sec. 89 is different from exemption under Sec. 10(10C), so that the proviso in Sec. 10(10C) cannot come in the way of relief under Sec. 89. This should answer both second and third queries from the readers.

Both these reliefs under Sec. 10(10C) and 89 are patent as had been pointed out in earlier occasions in these columns.

From the spate of complaints received from the readers, it is seen that a very large number of persons are affected giving rise to appeals and litigation all round. One would least expect such controversies being left unattended in the context of assessments on retired persons in salary sector.

It is necessary that the Board should come out with reasonable clarification expeditiously. As otherwise, it is yet another instance of Parkinson's Law with the administration, tax judiciary and the profession feeding work for each other at the cost of the taxpayer, who in this case is a retired employee.

When is surcharge required to be deducted at source?

Q: The Finance Act, 2003 has provided for the rate and method of levy of surcharge on TDS. As per the new provision no surcharge on TDS is payable in the case of payment to an individual, HUF or AOP, if the amount paid does not exceed Rs. 8.50 lakhs. Kindly clarify if this provision is also applicable to payment of commission to post office small savings agents (TDS under Sec. 194H). Is there any need to deduct surcharge on TDS at the time of payment of commission so long as the total commission so paid does not exceed Rs. 8.50 lakhs in the current financial year?

A: Sec. 194H covers all commission or brokerage payments. It is defined in Explanation (i) to Sec. 194H as under:

"(i) `commission or brokerage' includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities".

From the above, it is clear that only transactions in securities are excluded. Contributions to small saving schemes cannot be classified as an excepted transaction.

As for the surcharge, such surcharge has to be levied only for persons with income of Rs. 8.50 lakhs. But the provision for surcharge in matters of tax deduction under Sec. 2(6) of the Finance Act, 2003 requires 10 per cent surcharge to be added to the amount of tax to be deducted, where income or aggregate of such income paid or likely to be paid and subject to deduction exceeds Rs. 8.50 lakhs.

While the law would levy surcharge only for persons with income of Rs. 8.50 lakhs, tax deduction provision would require tax deduction, where the payment itself is Rs. 8.50 lakhs. Hence, the inference of the reader is correct.

S. Rajaratnam

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Should the retired employees be denied relief u/s 10(10c) and 89