ISSUE FOR CONSIDERATION
A reward by the Central Government or a State Government for purposes approved by the Central Government in the public interest, is exempted from taxation under clause (ii) of section 10(17A) of the Income-tax Act, 1961. Likewise, a receipt of an award instituted in the public interest by the Central Government or any State Government or by any other body and approved by the Central Government, is exempt from taxation as per clause (i) of section 10(17A) of the Act.
Section 10(17A) reads as under;
‘Any payment made, whether in cash or in kind –
(i) in pursuance of any award instituted in the public interest by the Central Government or any State Government or instituted by any other body and approved by the Central Government in this behalf; or
(ii) as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in the public interest’.
A controversy has arisen in the context of the eligibility of a reward by the Central Government or a State Government for the purposes of exemption from tax under clause (ii) of section 10(17A) where the reward so conferred is not expressly approved by the Central Government. The issue is whether such approval can be construed to be implied in a reward so conferred.
The Patna and Delhi High Courts in the past had held that the awards instituted by the Government required approval by the Central Government, while recently the Madras High Court, following an earlier decision, has held that express approval is not required for the awards so instituted by such Government and the approval can be implied also and can be gathered from the facts in the public domain or can be read into a reward.
S.N. SINGH’S CASE
The issue before the Patna High Court first arose in the case of S.N. Singh, 192 ITR 306 followed by a case before the Delhi High Court in the case of J.C. Malhotra, 230 ITR 361.
In this case, the assessee, an individual, was working as an ITO at the material time.. In appreciation of the meritorious work done by the Income-tax personnel for the success of the Voluntary Disclosure Scheme, 1975 the Government of India decided to grant a reward of an amount equal to one month’s basic pay (vide Notification dated 16th January, 1976). In pursuance of the Notification, the assessee received a sum by way of a reward during the assessment year 1976-77. The assessee claimed exemption from income-tax of this amount under the then section 10(17B). The ITO rejected that claim.
On appeal, the AAC upheld the contention advanced on behalf of the assessee that the amount of reward could not be included in computing his total income in view of the provisions of then section 10(17B). On further appeal, the Tribunal agreed with the finding of the AAC and dismissed the appeal. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it was at the instance of the Revenue that the following question of law had been referred to the Patna High Court for its opinion:
‘Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the award of Rs. 1,150 received by the assessee is exempt from income-tax u/s 10(17B) of the Income-tax Act, 1961?’
At the time of hearing, no one appeared on behalf of the assessee. From a perusal of the provision it was clear to the Court that a payment made as reward by the State or Central Government was not includible in computing the total income only when the reward was for such purposes as might be approved by the Central Government in that behalf in the public interest. The Court found that there was no material on record for holding that the purpose for which the reward in question had been given had been approved by the Central Government in public interest for the applicability of clause (17B) of section 10. The Court noted that it was no doubt true that the payment had been made by the Central Government to the assessee as a reward and that the said payment was also in the public interest. However, unless and until it was shown by the assessee that such reward had been approved by the Central Government for purposes of exemption u/s 10(17B), the Court held that such reward would not qualify for exemption under that section and that the Tribunal, therefore, was not right in holding that the reward received by the assessee was exempt from income-tax u/s 10(17B).
In the case of CIT vs. J.C. Malhotra, 230 ITR 361 (Delhi) the assessee, who was an ITO at the relevant time, had been given a reward by the Central Government directly in connection with the Voluntary Disclosure Scheme. The Tribunal had upheld the claim of exemption holding that the cash award was exempt from taxation u/s 10(17B). On further appeal by the Revenue, the Delhi High Court observed that a separate approval of the Central Government for the purpose of exemption u/s 10(17B) was not given and that that being the position, the reward was not eligible for exemption from Income-tax by relying upon the decision in the case of CIT vs. S.N. Singh, ITO (Supra).
THE K. VIJAYA KUMAR CASE
Recently, the issue again arose in the case of K. Vijaya Kumar, 422 ITR 304.
In this case, the petitioner in the Indian Police Service had been appointed as Chief of the Special Task Force (STF) leading ‘Operation Cocoon’ against forest brigand Veerapan, leading to the latter’s fatal encounter on 18th October, 2004. In recognition of the special and commendable services of the STF, the Government of Tamil Nadu had issued G.O.Ms. No. 364, Housing and Urban Development Department dated 28th October, 2004 instituting an award in national interest to personnel of the STF for the valuable services rendered by them as part of the team. In consequence thereof, G.O.Ms. No. 16, Housing and Urban Development Department dated 12th January, 2006 was issued sanctioning a sum of Rs. 54,29,88,200 towards the cost of 773 plots to be allotted to STF personnel, including the petitioner. A specific G.O.Ms. 368, Housing and Urban Development dated 29th October, 2004 read with G.O.Ms. No. 763 was issued for first allotting an HIG Plot bearing No. 1A-642 at Thiruvanmiyur Scheme to the petitioner, subsequently modified to Plot No. 1 adjacent to Andaman Guest House at Anna Nagar West Extension. A registered deed of sale had been executed on 27th November, 2009 in consideration of Rs. 1,08,43,000 paid by the Government of Tamil Nadu on his behalf to the Tamil Nadu Housing Board.
It appears that the assessee had sold the plot of land and had offered the capital gains for taxation, computed after deducting the cost of the land that was paid by the Government. The assessment was completed u/s 143(3) r.w.s. 147 and the capital gain as computed by the assessee was accepted by the A.O.
The order of the A.O. was sought to be revised by the Commissioner u/s 263. In the said order u/s 263, the exemption granted u/s 10(17A) in respect of the reward of land was questioned by the Commissioner.
At paragraph 8 of the order, the Assessing Authority was directed to allow the claim of exemption u/s 10(17A) only if the assessee was able to produce an order granting approval of exemption by the Government of India u/s 10(17A)(ii).
Admitting the writ petition challenging the order, the single judge of the Madras High Court noted that the question that arose related to whether the reference to ‘approval’ in section 10(17A) included an implied approval or whether such approval had to be express.
The Court, referring to the legislative history of the provision, observed that the erstwhile clause (17A) contained a proviso that required that the ‘effective date’ from which the approval was granted was to be specified in the order of the Central Government granting such approval. Noting that the proviso had been omitted in the substituted provision, effective 1st April, 1989 onwards, it appeared to the Court that while enlarging the clauses generally, by obviating specific reference to the purposes for which the awards could be given, the Legislature had also done away with the specification of a written approval from the Central Government with effect from 1st April, 1989.
The Madras High Court, approving the decision of the Division Bench of the Court in the case of CIT vs. J.G. Gopinath, 231 ITR 229 held that the amount of reward received by the assessee was not taxable and was exempt from tax. The single judge of the Court noted with approval the following part of the decision in the case of CIT vs. J.G. Gopinath (Supra):
‘To quote the Ministry of Finance letter F. No. 1-11015/1/76 Ad. IX, dated January 16, 1976, the first paragraph itself explains the circumstances under which it is granted, “I am directed to state that in appreciation of the meritorious work done by the Income-tax personnel for the success of the voluntary disclosure schemes, the Government have decided to grant them reward of an amount equal to one month’s basic pay.”
The above extract makes it clear that such reward was granted in public interest. It would be surprising if the Government were to grant rewards for reasons other than public interest. It is, therefore, evident that the terms of section 10(17B) are completely satisfied in the present case as the circular gives the circumstances under which the rewards are granted. The voluntary disclosure scheme could only have been conceived in public interest as we do not see any other reason for this scheme coming into existence. If any person rendered sincere work to make this scheme a success, and if he is rewarded for it, such grant of reward cannot but be in public interest. There is no specific mode of approval indicated in the statute. No further approval is necessary or called for. The section is clear in its language and does not raise any problem of construction. Therefore, we do not find that any question of law arises out of the Tribunal’s order. Even assuming that a question of law arises, the answer is self-evident and, therefore, the reference shall be wholly academic and unnecessary. The petition is accordingly dismissed.’
The Court also took note of the contrary view expressed by the Patna High Court in CIT vs. S.N. Singh (Supra) and the Delhi High Court in CIT vs. J.C. Malhotra (Supra). The Court observed that the Division Bench of the Patna High Court took a view directly opposed to the view expressed by the Madras High Court in the J.G. Gopinath case and the said order delivered prior to the decision of this Court in the J.G. Gopinath case had not been taken into consideration by the Madras High Court. It was noted that the Patna High Court had proceeded on a strict interpretation of the provision rejecting the claim of exemption on the ground that though the reward by the Central Government to the assessee was indisputably in public interest, approval by the Central Government was mandatory for the purpose of exemption u/s 10(17B).
The single judge of the Court observed that sitting in Madras, he was bound by the view taken by the jurisdictional High Court to the effect that ‘approval’ of the Centre might either be express or implied, and in the latter case, gleaned from surrounding circumstances and events. Thus, that was the perspective from which the eligibility of the petitioner u/s 10(17A) to exemption or otherwise should be tested and decided.
On a reading of section 321 of the Criminal Procedure Code and the judgment of a three-Judge Bench in the case of Abdul Karim vs. State of Karnataka [2000] 8 SCC 710, the issue faced by the country because of the operations carried on by Veerapan and his associates was found to be grave and enormous by the single judge of the Madras High Court. The categorical assertion of the Apex Court that Veerapan was acting in consultation with secessionist organisations with the object of splitting India, in the Court’s view, was a vital consideration to decide the present lis.
The object of section 10(17A), the Court noted, was to reward an individual who had been recognised by the Centre or the State for rendition of services in public interest. The Court noted that no specification or prescription had been set out in terms of how the approval was to be styled or even as to whether a formal written approval was required and nowhere in the Rules / Forms was there reference to a format of approval to be issued in this regard.
One should, in the Court’s view, interpret the provision and its application in a purposive manner bearing in mind the spirit and object for which it had been enacted. It was clear that the object of such a reward was by way of recognition by the State of an individual’s efforts in protecting public interest and serving society in a significant manner. Thus, in the Court’s considered view, the reference to ‘approval’ in section 10(17A) did not only connote a paper conveying approval and bearing the stamp and seal of the Central Government, but any material available in public domain indicating recognition for such services, rendered in public interest.
Allowing the petition of the assessee, the Court in the concluding paragraph held as under: ‘The petitioner has been recognised by the Central Government on several occasions for meritorious and distinguished services and from the information available in public domain, it is seen that he was awarded the Jammu & Kashmir Medal, Counter Insurgency Medal, Police Medal for Meritorious Service (1993) and the President’s Police Medal for Distinguished Service (1999). Specifically for his role in nabbing Veerapan, he was awarded the President’s Police Medal for Gallantry on the eve of Independence Day, 2005. What more! If this does not constitute recognition by the Centre of service in public interest, for the same purposes for which the State Government has rewarded him, I fail to understand what is. The reward under section 10(17A)(ii) is specific to certain “purposes” as may be approved by the Central Government in public interest and the “purpose” of the reward by the State Government has been echoed and reiterated by the Centre with the presentation of the Gallantry Award to the petitioner in 2005. This aspect of the matter is also validated by the Supreme Court in Abdul Karim (Supra) as can be seen from the judgment extracted earlier, where the Bench makes observations on the notoriety of Veerapan and the threat that he posed to the country as a whole.
Seen in the context of the recognition by the Centre of the petitioners’ gallantry as well as the observations of the Supreme Court in Abdul Karim (Supra) and the ratio of the decision in J.G. Gopinath (Supra), the approval of the Centre in this case, is rendered a fait accompli.’
OBSERVATIONS
At the outset, for the record it is noted that in the original scheme of the Act of 1961, section 10(17A) [inserted by the Direct Taxes (Amendment) Act, 1974] provided for tax exemption for an award w.r.e.f. 1st April, 1973 and a separate provision in the form of section 10(17B) [inserted by the Direct Taxes (Amendment) Act, 1974] provided for tax exemption for a reward w.r.e.f. 1st April, 1973. The two reliefs are now conferred under a new provision of section 10(17A) made effective from 1st April, 1989. Clause (i) of the said new section provides for exemption for an award, while clause (ii) provides for exemption for a reward. While both the clauses provide for some approval by the Central Government, the issue for the present discussion is limited to whether such approval should be specifically obtained or such approval should be presumed to have been granted when a reward is conferred, especially by the Central Government.
The issue under consideration moves in a very narrow compass. There is no dispute that a reward, to qualify for exemption from tax, should be one that is approved by the Central Government. The debate is about whether such an approval should necessarily be in writing and express under a written order or whether such an order of approval can be gathered by implication, and whether implied approval can be gathered by referring to the facts of the services of the recipient available in public domain. In other words, by the very fact that a person has been rewarded for his services to the public, it should be construed that it was in public interest to do so and the availability of information of his services in public domain should be a fact good enough to imply a tacit approval by the Central Government of such a reward, and no insistence should be pressed for a written approval.
It is possible to hold that the requirement of a written order has been done away with by the deletion of the proviso w.e.f. 1st April, 1989 in the then prevailing 10(17A), which removed the requirement of referring to the purpose and the assessment year in the order, implying that the Legislature has done away with the specification of written approval from that date.
The legislative intent behind the exemption, no doubt, is not to tax a person in receipt of a reward from the Central or State Government. The approval for the purpose is incidental to the main intention of exempting such receipts. The need for such approval in writing is at the most a procedural or technical requirement, the non-compliance of which should not result in total denial of the exemption, defeating the legislative intent.
The very fact that the reward is conferred by the Government along with the fact that the facts of the rewards are in the public domain, should be sufficient to determine the grant of exemption from tax in public interest.
A purposive and liberal interpretation here advances the cause of justice and public good.
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