ORDER
I.S. Nigam, Accountant Member
1. This is an appeal filed by the revenue against the order of the AAC.
2. The assessee is an individual who was in the service of B.P. (Indian Agencies) Ltd. He retired after about 29 years of service with effect from 10-4-1977, which falls during the previous year relevant to the assessment year 1978-79 under consideration in the present appeal. On retirement, he was entitled to a total pension of Rs. 12,672 per annum. He, however, opted for the service benefit, which, we are given to understand, was three years’ salary, which amounted to Rs. 77,760 in lieu of surrender of 5.4 per cent thereof from the pension. The pension was, thus, reduced by 5.4 per cent of Rs. 77,760, i.e., Rs. 4,199 and the reduced pension was only Rs. 8,473 as against Rs. 12,672 earlier. In the salary certificate, which was given by the employer the amount of service benefit of Rs. 77,760 was shown as gratuity and exemption of an amount of Rs. 28,594 was claimed under Section 10(10)(iii) of the Income-tax Act, 1961 (‘the Act’)- The ITO, however, held that what was received by the assessee was in lieu of surrender of part of the pension and, therefore, this cannot be treated as gratuity. He, therefore, did not allow the claim of exemption to the extent of Rs. 28,594 under Section 10(10)(iii) out of the service benefit of Rs. 77,760. When the matter went up in appeal, the AAC held that this amount received in lieu of surrender of part of the pension was payment on account of commuted value of the pension. Proceeding further he submitted that since the pension commuted was only Rs. 4,199, which was less than one-third of the original pension of Rs. 12,672, the amount received in commutation thereof was exempt under Section 10(10A). The revenue is aggrieved and has, therefore, come up in the present appeal before us.
3. The learned departmental representative, Shri Subramanian, took us through the provisions of Section 10(10A) in order to point out that for the exemption of the commuted value of one-half or one-third of the pension in the case of any other employer the primary condition is that the commuted value had been determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality and since this was not done according to the pension scheme of the company the assessee was not entitled to exemption as laid down under Section 10(10A)(ii) and this exemption was wrongly allowed by the AAC on the service benefit of Rs. 77,760.
4. On the other hand, the assessee’s learned counsel, Shri Dastur, submitted to us that Section 10(10A)(ii) in the case of payment in commutation of pension from any other employer does not talk of the determination of the commuted value having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality as a condition for exemption but talks of them only for determining the limit up to which the exemption has to be allowed. Proceeding further he submitted that the employer, i.e., the British Petroleum Co. Ltd. has certified that under the rules of the B.P. Pension Scheme for Indian staff the commuted value of the pension has been determined on the advice of the Scheme’s Actuary after due consideration of the average age on retirement, the net rate of interest after allowing for the possibility of the discretionary pension increases and the expected mortality of the pensioner. In any case, according to Shri Dastur, if the limit up to which the exemption was admissible was not properly worked out, it was open to the ITO to work out the limit up to which the exemption was admissible after getting the necessary particulars from the assessee-company.
5. An alternative argument of Shri Dastur was that the payments received in commutation of pension in whole or in part were in lieu of surrender of a source of income and were, therefore, capital receipts, which were not liable to tax. Referring to the judgment of the Hon’ble Supreme Court in the case of CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45, Shri Dastur submitted that sometimes legislation is made to allay fears and as a measure of abundant caution even though without the legislation the amount may not be taxable. On this basis, Shri Dastur submitted that the provisions of Section 10(10A) were inserted by the draughtsmen as a measure of abundant caution when the receipts on account of commutation of pension were capital receipts and were, therefore, not liable to tax.
6. Summing up, Shri Dastur vehemently argued before us that from whatever way the matter was looked into the assessee’s claim of exemption on the amount of service benefit of Rs. 77,760 received in lieu of commutation of pension to the extent of Rs. 4,199, i.e., less than one-third was admissible and was rightly allowed by the AAC.
7. The learned departmental representative, Shri Subramanian, in reply referred to the definition of ‘profits in lieu of salary’ inserted by Sub-section (3) of Section 17 of the Act, where any payment from an employer or former employer received or due to be received not being assessee’s contribution to an approved provident fund or superannuation fund or interest thereon or amounts exempt under Section 10 are included in ‘profits in lieu of salary’ and consequently in ‘salary’ as defined under Sub-section (/) of Section 17. Proceeding further he submitted that the assessee’s claim before the ITO was that the service benefit of Rs. 77,760 was gratuity and before the AAC the assessee changed his stand to claim that the payment was for commutation of pension and before this changed stand was accepted by the AAC, no opportunity was given to the ITO to verify the correctness of the changed stand taken by the assessee and the ITO did not have an opportunity to make such submissions in this connection as the ITO considered necessary.
8. We have carefully considered the rival submissions. At the outset it will be necessary to point out that the definition of ‘salary’ as given in Sub-section (1) of Section 17 includes profits in lieu of salary and ‘profits in lieu of salary’ as defined in Sub-section (3) of Section 17 includes any payment received or due to be received by an assessee from an employer or a former employer other than from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest thereon and amounts exempt under Clause (10), (10A}, (10B), (11), (12) or (13A) of Section 10. In these circumstances, we cannot accept the contention of the assessee’s learned counsel, Shri Dastur, that the amounts received on commutation of part of the pension are not liable to tax even if they are not covered by the exemption under Clause (10A) of Section 10.
9. Coming, however, to the main submission of Shri Dastur it would be necessary to refer to Sub-clause (ii) of Clause (10A) of Section 10, which reads as follows :
(ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed-
(a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and
(b) in any other case, the commuted value of one-half of such pension, such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality :
Provided that the maximum limit of payment specified in Sub-clause (ii)(a) or Sub-clause (ii)(b) shall not apply in respect of any such payment made before the 19th day of August, 1965 ;
This makes it very clear that any payment in commutation of pension received under any scheme of any other employer is exempt up to the limits laid down therein and it is only while working out these limits that it has been provided that the commuted value should be determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality. This view also finds support from the proviso to Sub-clause (ii) of Clause (10A) of Section 10, which clearly lays down that the maximum limit of payment on which exemption is admissible under Sub-clause (ii)(a) or (ii)(b) shall not apply in respect of any such payment made before 19-8-1965. This means that the assessee is entitled to exemption as laid down under Sub-clause (ii) of Clause (10A) of Section 10 on the service benefit received, which, it is not under dispute, was in lieu of surrender of pension to the extent of Rs. 4,199, which comes to less than one-third of the pension to which the assessee was originally entitled at the time of retirement.
10. The next issue that remains is the limit up to which the exemption will be admissible. Since the payment under consideration here was made after 19-8-1965, the maximum limit up to which the exemption will be admissible has to be worked out on the basis of the commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and the officially recognised tables of mortality. A certificate was filed before us from the employer that in arriving at the amount of the service benefit the employer company acting on the advice of the Scheme’s Actuary had given due consideration to the average age on retirement, the net rate of interest after allowing for the possibility of discretionary pension increases and the expected mortality of the pensioner. This certificate, however, is undated and there is no material before us to show that this certificate was filed before the ITO. Besides, the claim of exemption of the service benefit .on the basis that it was payment in commutation of pension was not made before the ITO but was made for the first time before the A AC and, as pointed out by the learned departmental representative, Shri Subramanian, the ITO was not given a specific and reasonable opportunity to verify this claim and make his submissions in this connection before the claim was accepted. Considering all this and looking to the totality of the facts and circumstances, we while holding that the assessee was entitled to exemption on the service benefit, which was a payment in commutation of pension, as already described, direct that on the assessee furnishing the particulars of the maximum limit up to which the exemption was admissible having regard to the commuted value being determined keeping in view his age, his state of health, the rate of interest and the officially recognised tables of mortality on the date of his retirement, the ITO will verify these particulars and determine to what extent the exemption under section l0(10A)(ii) is admissible and to this extent the exemption will be admissible to the assessee out of the service benefit received at the time of retirement. The order of the AAC is, therefore, modified accordingly.
11. The appeal is partly allowed.