Gratuity : Deduction u/s.10(10)(iii) of Income-tax Act, 1961 : No distinction between gratuity paid under Payment of Gratuity Act or otherwise : Where gratuity amount paid to employee was within the limit prescribed by Notification, deduction of income-ta

[North West Karnataka Road Transport Corporation v. Dy.
Labour Commissioner, 180 Taxman 489 (Kar.)]

The deceased employee of the petitioner-corporation had
filed a claim petition under the Payment of Gratuity Act, 1972 before the
controlling authority claiming the difference of gratuity amount on the ground
that he was not paid the full gratuity. The gratuity amount paid to the said
employee was less than the limit prescribed by the Notification. However,
while making payment of the difference, the petitioner-corporation deducted
income-tax at source. The petitioner-corporation contended before the
Karnataka High Court that income-tax was deducted from the amount of gratuity
since in terms of S. 10(10)(iii), the exemption was given only in respect of
gratuity amount under the provisions of the Payment of Gratuity Act, and not
in respect of payment of amount under the regulation.

The Karnataka High Court held as under :

“(i) S. 192 requires the employer to deduct income-tax
from the salary. S. 10(10) deals with the exclusion of the gratuity amount
from the total income. By a reading of the provisions of S. 10(10)(iii), it
is clear that in all the cases of payment of gratuity, an exclusion of
gratuity amount is given from the total income, i.e., excluding the
gratuity from the payment of tax to the extent of limit prescribed by
Notification issued in this behalf by the Central Government. It also makes
it clear that the Notification will be at par with the employees of the
Government. The Income-tax Act excludes the gratuity amount from the total
income up to the limit fixed. The contention of the Corporation that it was
only in respect of payment of gratuity under the Act and not under the
regulations, was not tenable and was not in consonance with the provisions
of the Act.

(ii) The Act excludes the gratuity amount to the extent
of limit prescribed under the Income-tax Act. In the instant case, the
gratuity amount payable to the employee was less than the pre-scribed
amount. Hence the deduction of income-tax by the corporation was per se
contrary to the provisions of S. 10(10)(iii). There is no distinction
between gratuity paid under Payment of Gratuity Act or otherwise.
Accordingly, the contention that gratuity amount was also liable for
income-tax was to be rejected.

(iii) The deduction of the income-tax from the gratuity
amount was not justified.”