COMMISSIONER OF INCOME TAX Vs. TENDOLKAR N B

JUDGEMENT

(1.) AT the instance of the Revenue for the asst. yr. 1974-75, the Tribunal referred the following question for the opinion of this Court, under s. 256(1) of the IT Act, 1961 (hereinafter referred to as "the Act") :

(2.) THE assessee is an individual, who was earning salary from his employment from the Madras Fertilizers Ltd. During the previous year ended 31st March, 1974, corresponding to the asst. yr. 1974-75, the assessee retired. On retirement, he received a sum of Rs. 22,730 by encashment of the unutilised leave standing to his credit. THE assessee filed a return showing an income of Rs. 62,572 including the sum of Rs. 22,730 and claiming the spread over of this amount under s. 89(1) of the Act. THE assessment was originally completed under s. 143(1)(a) disallowing the claim. THE assessee then applied under s. 143(2)(a) objecting to the assessment of the sum of Rs. 22,730. But the ITO repeated the assessment in the view that s. 89(1) had no application to encashment of leave salary. THE assessee appealed to the AAC contending that encashing the leave is purely a voluntary act and so he should not be taxed. But the AAC was of the view that leave was accumulated in the course of service for which salary was paid and any benefit derived was salary. He, therefore, confirmed the assessment of the amount received by encashment of leave as part of salary.

(3.) A similar view was taken by the Allahabad High Court in the decision in All India Defence Accounts Association vs. Union of India , while considering whether encashment of leave salary is taxable under s. 17(3) of the Act, prior to the amendment. Learned counsel appearing for the assessee submitted that in view of the provisions contained in s. 17(1)(va), the encashment of leave salary is taxable from 1st April, 1978, onwards and prior to that date, the encashment of leave salary is not taxable. It was further submitted that profit in lieu of salary is taxable under s. 17(3)(ii) of the Act. According to learned counsel when the encashment of leave salary is taxable under the provisions contained in s. 17(1)(va), the provisions contained in s. 17(3)(ii) would be only residuary in nature. The contention put forward by learned counsel cannot be accepted because the assessment year under consideration would fall prior to the amendment. The law as it stood prior to the amendment has to be followed in the present case. According to the unamended provisions of s. 17(3) of the Act, profit in lieu of salary is liable to be taxed. As we have seen in the abovesaid three decisions all the Courts uniformly came to the conclusion that encashment of leave salary is profit in lieu of salary and, therefore, taxable under s. 17(3) of the Act prior to the amendment. Learned standing counsel also took us through the objects for introducing the amendment and the Bill introduced by the Government in Parliament relating to the provisions contained in s. 10(10AA)(ii) and s. 17(3)(ii) of the Act. The intention of the legislature prior to the amendment is to tax the encashment of leave salary since it happened to be profit in lieu of salary. Therefore, we hold the Tribunal was not correct in coming to the conclusion that encashment of leave salary is not income chargeable under the Act.