[Opinion] Select Issues Requiring Clarity in Income-tax

CA V K Subramani – [2023] 152 taxmann.com 75 (Article)

Income-tax law in India is one of the most complex pieces of legislation and the lawmakers a few decades ago decided to replace the Income-tax Act by Direct Taxes Code. However, for the reasons best known to them the Direct Taxes Code went in to the cold storage and it was adopted in bits and pieces while enacting the Finance Acts subsequently. The insertion of GAAR is one of the pieces of legal legislations borrowed from the Direct Taxes Code. One of the proposals in recodifying the direct tax laws into Direct Taxes Code was to define the term ‘income’ which was quite challenging and would have been a fiasco, had it been given effect.

Independent of the aborted attempt to replace the Income-tax Act, 1961 with Direct Taxes Code, there are many legal provisions in income-tax law which require clarity. Providing clarity and plugging the loopholes have been the hallmark of the present dispensation notwithstanding the discomfort associated with it affecting the subjects.

1. Definition of Government employee: The Income-tax Act, 1961 does not define employee of the Government and there is a subtle distinction between a government employee and a person employed in government aided institution who receives the benefits similar as that of the government employee. For example, section 10(10) dealing with retirement gratuity categorizes in the same class Central, State Government employees and employees of local authority. Similarly, section 10(10A) meant for providing relief from lump sum amount received on commutation of pension covers employees of local authority and also corporation established by Central, State or Provincial Act. However, as regards amount received in respect of leave salary on superannuation or otherwise reference is limited to “employee of the Central Government or a State Government” and does not cover employees of local authority or corporation established under Central, State or Provincial Act.

Similar issue crop up for employees of government aided institutions receiving salary from such institution (whose salary of 90% or so, is funded by the Central or State Government). These employees also need to be treated on par with government employees. Yet another glaring issue relates to employees of State electricity companies who were previously covered by the State Electricity Board. The employees were treated as State government employees and eligible for dearness allowance and other compensation including retirement compensation and pension. Now the State electricity companies have become companies incorporated under the Companies Act, 1956 or 2013 as the case may be, the status of employees for the purpose of treating their retirement benefits on superannuation or otherwise, requires a relook.

Reference could be made to the decision of Dr. P. Balasubramanian v. Chief CIT (TDS) [2022] 142 taxmann.com 25/448 ITR 318 (Mad) where the assessee in a writ challenged the taxation of surrender of leave salary based on audit objection issued by local fund audit. The assessee claimed that the Tamil Nadu Agricultural University (TNAU) was constituted under a State Act and the employees were bound by the conditions and terms of employment that are applicable to government servants and the payment of gratuity as well as provident fund are as applicable to government servants and hence the surrender salary is eligible for exemption as applicable for State government employees. The court observed that the TNAU was managed, administered and substantially funded by government funds and grants and it was constituted under a State Act. As regards the payment of gratuity, pension and provident fund the provisions of Tamil Nadu Pension Code including the Tamil Nadu Liberalized Pension Rules, 1960 and Family Pension Rules, 1964 of the Tamil Nadu Government apply to the employees of TNAU. Similarly provident fund is governed by General Provident Fund Rules of the Tamil Nadu Government and interest paid to subscribers are the same as adopted by Tamil Nadu Government from time-to-time. The Court made reference to various decisions such as Ram Kanwar Rana v. ITO [2016] 71 taxmann.com 54/159 ITD 431 (Delhi – Trib.); ITO (TDS) v. Mahatma Gandhi University [2019] 107 taxmann.com 186/177 ITD 508 (Cochin – Trib.); Dev Raj Sood v. ITO [IT Appeal No. 905 (Delhi) of 2017, dated 30-5-2017] and Indra Kumar Bajaj v. ITO [IT Appeal No. 2735 (Delhi) of 2017 dated 4-12-2019]. The Court finally held that the employees of TNAU are government servants entitled to exemption under section 10(AA)(i) (eligible for full exemption without monetary limit).

It would be fair and proper that the coverage of the exemption in respect of gratuity, commutation of pension, leave salary is uniform among Central Government, State Government employees, employees of local authority or corporation or government aided institutions or PSU banks or other PSU undertakings. Whatever be the policy decision of the government, it has to be clearly brought out within the statute to minimize or avoid litigation in this regard.

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