Gratuity Exemption

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Querist : Anonymous

Querist : Anonymous (Querist)

03 June 2010 What is the Gratuity exemption as per Income tax act for A.Y. 2011-12 ?
Is it Increased from 350000 to 10 Lacs?

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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03 June 2010 Gratuity limit, as per the Payment of Gratuity Act,1972, is enhanced to Rs.10,00,000/- with effect from May 24,2010 vide notification SO.1217(E). But the limit as per Income tax Act,1961 is not correspondingly increased till date.

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Ramakrishna

Ramakrishna (Expert)
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03 June 2010 Hi Chakrapani sir, do we need to wait for any communication from Income Tax Act??
Given the fact that so far we have not got any such communication, how do we go about processing Gratuity transactions post 24-May-10??

kantijain

kantijain (Expert)
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03 June 2010
Dear ??? & Mr. Ramakrishna,

I agree with Mr.Chakrapani, however since the gratuity amendment bill 2010 is already passed by the parliament and the ministry have promised the benefit under Income-tax also, we can go ahead and give the benefit to the assessee.
The relevant extract of proceeding in the parliament are as follow:
"While the Lok Sabha had passed the Payment of Gratuity (Amendment) Bill 2010 on Monday, the Rajya Sabha put its stamp of approval on it on Wednesday.

Labour minister Mallikarjun Kharge,replying to a brief debate on the bill said the legislative measure also provides that the income tax exemption limit has commensurately been increased to Rs 10lakh from Rs3.5 lakh earlier.

On demands for giving a retrospective effect to the measure, Kharge said, “We want to give a lot, but there should be a capacity (of the employer) to pay and it should reach the beneficiaries.”

He gave the same reason for not accepting demands from the members to improve the formula for calculation of gratuity.

The bill was brought following demands from trade unions and others to remove the ceiling or increase the maximum payable amount, which was fixed in 1997."

I will request Mr.Chakrapani to please confirm my understanding of law & parliament proceedings.

kantijain

kantijain (Expert)
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03 June 2010 Dear reader,

I just came across an intersting judgement by supreme court which supports my view;

Citation: 2010-TIOL-02-SC-CT:State Of Bihar Vs Kalyanpur Cements Ltd (Dated : January 8, 2010)

"Promise of exemption – promissory estoppel – state bound to give Exemption; The State Government had been consistently giving assurances not only to the Company but also to the financial institutions that the necessary Sales Tax exemption notification will be issued. The Company had laid a clear, sound and a positive foundation for invoking the doctrine of `promissory estoppel'. The Company as well as the financial institutions were entitled to rely upon the repeated assurances given by the State Government. However, since the promised notification was not forthcoming, the Company was constrained to file the writ petition. When the State Government gives an assurance and undertaking, in form of a policy then in fact it allures person/industries to enter into the individual ventures, invest money on the assurances contained in the policy, would it be justified on the part of the State Government to say later on that on a second thought they were withdrawing the policy and the benefits flowing from that policy? We are unable to agree to this argument."

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K V Subba Rao

K V Subba Rao (Expert)
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03 June 2010 Until and unless, suitable amendment to provisions of tax law is brought out, it would not be possible for any employer to "exempt" Gratuity upto Rs 10 lacs.

If an individual or company has time and patience to approach the Court, nobody would object

One important point to note that every Assessing Officer would allow us to use our discretion or interpret any tax provision, if and only if it benefits the Department

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CA Devanshi Gandhi (Ajani)

CA Devanshi Gandhi (Ajani) (Expert)
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03 June 2010 still its 3.5 lacs

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Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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04 June 2010 Sri. Kantijain

In the matter of Kerala General Sales Tax Act , the Kerala High Court as well as Supreme Court has also taken a similar view taken in the case of Kalyanpur Cements Ltd.In that case there was a notification as per KGST Act. Dealers relied on that. Subsequently Government modified certain terms of the notification which in the opinion of court was promissory estoppel. Here a benefit allowed and relied on by the dealers were withdrawn. This is just to supplement your observation.

Coming to gratuity, the cited cases and the question of promissory estoppel is distinguishable because, as I understood, government notification cannot be equated with the ministers speech.

That may the reason, I presume, behind the answer of Mr.K.V.Subba Rao.

kantijain

kantijain (Expert)
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04 June 2010 Dear reader & respected Warrier sir,

The spirit of promissory estoppel, is a different subject by itself.
However there are various case laws & resource material available based on which we can decide on when it can be applied

Promissory estoppel is not limited only to cases where there is some contractual relationship or other pre-existing legal relationship between the parties. The principle can be applied even when the promise is intended to create legal relations or affect a legal relationship which will arise in future, says H. P. Ranina, a Mumbai-based well known advocate specialising in tax laws.

THE doctrine of promissory estoppel has great significance in taxing statutes. It marches with the hypotheses that a promise given by the state is binding on the government in the following circumstances:

Where there is a clear and unequivocal promise knowing and intending that it would be acted upon by the promisee; and

by acting upon the promise by the promisee, it would be inequitable to allow the promisor to go back on the promise.
The doctrine is not limited to cases where there is some contractual relationship or other pre-existing legal relationship between the parties.

The principle would be applied even when the promise is intended to create legal relations or affect a legal relationship that would arise in future.

A leading authority on this subject is of the Supreme Court in Motilal Padampat Sugar Mills Co Ltd. v State of Uttar Pradesh (118 I.T.R. 326).

It was held that the government is susceptible to the operation of the doctrine in whatever area or field the promise is made: Contractual, administrative or statutory.

To put it in the words of the Court: "The law may, therefore, now be taken to be settled as a result of this decision, that where the government makes a promise knowing or intending that it would be acted on by the promisee and, in fact, the promisee, acting in reliance on it, alters his position, the Government would be held bound by the promise and the promise would be enforceable against the Government at the instance of the promisee, notwithstanding that there is no consideration for the promise and the promise is not recorded in the form of a formal contract as required by Article 299 of the Constitution."

However, there are some limitations to this doctrine. These are:

Since the doctrine of promissory estoppel is an equitable doctrine, it must yield when the equity so requires. But it is only if the court is satisfied, on proper and adequate material placed by the government, that overriding public interest requires that the government should not be held bound by the promise but should be free to act unfettered by it, that the court would refuse to enforce the promise against the government.

No representation can be enforced which is prohibited by law in the sense that the person or the authority making the representation or promise must have the power to carry out the promise.
If the power is there, then subject to the preconditions and limitations noted earlier, it must be exercised.

Thus, if the statute does not contain a provision enabling the Government to grant exemption, it would not be possible to enforce the representation against the Government, because the Government cannot be compelled to act contrary to the statute.

But if the statute confers power on the Government to grant the exemption, the Government can legitimately be held bound by its promise to exempt the promisee from payment of any tax.

An apparently aberrant note was struck in Jit Ram Shiv Kumar v State of Haryana (3 S.C.R. 689) where despite all the factors of promissory estoppel being established, the court held: "The plea of estoppel is not available against the state in the exercise of its legislative or statutory functions."

Of course, it was also found that the representative had no authority to make the representation it had.

To that extent the decision could not be said to have deviated from the earlier pronouncements of the law.

The discordant note struck in Jit Ram's case was disapproved by a Bench of three judges of the apex court in Union of India v Godfrey Philips India Ltd. (158 I.T.R. 574).

It was held that: "There can, therefore, be no doubt that the doctrine of promissory estoppel is applicable against the government in the exercise of its governmental, public or executive functions and the doctrine of executive necessity or freedom of future executive action cannot be invoked to defeat the applicability of the doctrine of promissory estoppel."

It was held that regardless of the nature of power wielded, the government is bound to exercise that power provided it possessed such power and has promised to do so knowing and intending that the promisee would act on such promise and the promisee has done so.

The limitations to the doctrine delineated in Motilal Padampat Sugar Mills' case were also reaffirmed by declaring that there can be no promissory estoppel against the Legislature in the exercise of its legislative functions nor can the government or a public authority be debarred by promissory estoppel from enforcing a statutory prohibition.

Promissory estoppel cannot be used to compel the government or a public authority to carry out a representation or promise which is contrary to law or which was outside the authority or power of the officer of the government or of the public authority to make.

The decision of the Supreme Court in Bakul Cashew Co. v Sales Tax Officer (159 I.T.R. 565) was a case dealing with the preconditions on the fulfilment of which a plea of promissory estoppel can be raised — that the representation must not only be definite but must be satisfactorily established.

The alteration of the petitioner's position acting upon such representation must also be pleaded expressly and must be sufficiently supported with material.

The doctrine of promissory estoppel has also been extended to service law. In Surya Narain Yadav v Bihar State Electricity Board (3 S.C.C. 38), it was found as a fact that the Bihar State Electricity Board had made representations that graduates who would be taken as trainee engineers would be regularised against appropriate posts and the submission that such appointments would be contrary to statutory rules of the Board was brushed aside.

The court directed the Board to act in terms of the representation made.

The case of Kasinka Trading v Union of India (1 S.C.C. 274) is an authority for the proposition that the mere issuance of an exemption notification under a provision in a fiscal statute such as Section 25 of the Customs Act, 1962, could not create any promissory estoppel because such an exemption by its very nature is susceptible to being revoked or modified or subjected to other conditions. In other words, there is no unequivocal representation.

The seeds of equivocation are inherent in the power to grant exemption. Therefore, an exemption notification can be revoked without falling foul of the principle of promissory estoppel.

Amrit Banaspati Co. Ltd. v State of Punjab ((85 S.T.C. 493 (S.C.)); (2 S.C.C. 411)) is an example where, despite the petitioner having established the ingredients of promissory estoppel, the representation could not be enforced against the Government because the Court found that the Government's assurance was incompetent and illegal and "a fraud on the Constitution and a breach of faith of the people".

In a recent decision, the Supreme Court in State of Punjab v Nestle India Ltd. (269 I.T.R. 97) held that promissory estoppel, long recognised as a legitimate defence in equity, can be the basis of a cause of action against the government, even when the representation sought to be enforced is legally invalid in the sense that it was made in a manner which was not in conformity with the procedure prescribed by statute.

The Government cannot rely on a representation made without complying with the procedure prescribed in the relevant statute, but a citizen may and can compel the government to act on such a representation if the factors necessary for founding the plea of promissory estoppel are established.

The aforesaid decisions throw considerable light on the circumstances in which the doctrine is applicable and the limitations to which it is subjected.

Conclusion:

With due respect to my other fellow expert's, my personal view is that in given case of gratuity we can follow this principle & give the benefit to the assessee.

Querist : Anonymous

Querist : Anonymous (Querist)

04 June 2010 Thanks all.

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2010 Hi,

Can you please provide me the latest notification for gratuity limit exemption.

kantijain

kantijain (Expert)
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12 June 2010 Dear All,

The Central Board of Direct Taxes has approved notification of ten lakh rupees as the maximum amount of gratuity entitled to exemption under sub-clause (iii) of clause (10) of section 10 of the Income Tax Act 1961. The notification will be applicable to employees who retire, or become incapacitated before retirement, or expire, or whose services are terminated, on or after the 24th May 2010.
Source: Press Release issued by Ministry of Finance on Friday, June 11, 2010

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