The Supreme Court recently comprising of a bench of Justices Hemant Gupta and AS Bopanna observed that 2010 amendment of Payment of Gratuity Act 1972 is not retrospective. (Krishna Gopal Tiwary vs Union of India)
As per the 2010 amendment, the upper-limit of amount of gratuity payable as per Section 4 of the Payment of Gratuity Act 1972 was increased as Rupees 10 lakhs from Rupees 3.5 lakhs.
Facts of the case
The appellants were former employees of Coal India Limited, who were paid gratuity amount of Rs 10 lakhs in January 2007 in terms of an Office Memorandum of the Union Government. At that point of time, i.e in 2007, the statutory upper limit of gratuity was Rs 3.5 lakhs. According to the Income Tax Act, the amount of gratuity received by an employee to the extent it does not exceed the upper limit under the Payment of Gratuity Act is exempt from tax liability. Since the upper limit for gratuity in 2007 was Rs 3.5 lakhs, the appellants had to incur TDS liability for the remaining amount.
Since the upper limit of gratuity was amended as Rs 10 lakhs in 2010, the appellants sought for a retrospective effect to it from 01.01.2007, so that they can claim complete tax exemption for the gratuity received.
Thus they challenged the date of commencement as 24.5.2010(the date when the amendment act received the assent of the President) and asserted that it should be made effective from 1.1.2007.
Contention of the Parties
They contended that since the amendment of the Gratuity Act is to grant liberalized benefits, it would be retrospective.
They also contended that the cut-off date created two categories of employees, first who have attained the age of superannuation before the said date and second who have superannuated on or after 24.5.2010.
The Counsel for the appellants relied on the Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited, and argued that the amendment is beneficial and therefore should be retrospective. Counsel for the appellants also referred to a judgment of this Court in D.S. Nakara & Ors. v. Union of India to contend that the cut-off date as 24.5.2010 has created two categories of employees, first who have attained the age of superannuation before the said date and second who have superannuated on or after 24.5.2010. And such classification as illegal and arbitrary.
Courts Observation and Judgment
The court firstly looked into Section 4 of the Payment of Gratuity Act and Section 10 of The Income Tax Act, 1961. The court observed that under subsection 5 of Section of Payment of Gratuity Act, the employee is entitled to receive better terms of gratuity under any award or contract with the employee and the same was awarded to the appellants.
The court referring to Income Tax Act, 1961 said that amount of gratuity that can be exempted under the act should not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of Section 4 of the Gratuity Act
The bench observed that the benefit of higher gratuity is one-time available to the employees only after the commencement of the Amending Act.
The bench referring to the decision in State Government Pensioners' Association & Ors. v. State of Andhra Pradesh, noted that the payment of gratuity from a specified date of retirement was held to be not unconstitutional.
The bench said, "The Gratuity Act contemplated rupees ten lakhs as the amount of gratuity only from 24.5.2010. Such gratuity is the amount payable only once. Thus, the cut-off date cannot be said to be illegal, it being one-time payment. Therefore, such amendment in the Gratuity Act cannot be treated to be retrospective. Therefore, the provisions of the statute cannot be said to be retrospective."
The court has also referred to judgments in Vijayalakshmi Rice Mills, New Contractors Co. & Ors. v. State of Andhra Pradesh, Orient Paper and Industries Ltd. & Anr. v. State of Orissa and Himachal Road Transport Corporation & Anr. v. Himachal Road Transport Corporation Retired Employees Union.
The bench while dismissing appeals remarked, "In view of the above, we find that the date of commencement fixed by the Executive in exercise of power delegated by the Amending Act cannot be treated to be retrospective as the benefit of higher gratuity is one-time available to the employees only after the commencement of the Amending Act. The benefit paid to the appellants under the office memorandum is not entitled to exemption in view of specific language of Section 10(10)(ii) of the Income Tax Act."
Accordingly, the benefit paid to the appellants under the office memorandum was not entitled to exemption in view of specific language of Section 10(10)(ii) of the Income-tax Act.
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