Amendment to the gratuity act is NOT retrospective: Supreme Court of India

IN THE CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4744 OF 2021 ARISING OUT OF SLPNO. 10622 OF 2017 KRISHNA GOPAL TIWARY & ANR UNION OF INDIA & ORS JUDGMENT HEMANT GUPTA J The challenge in the present appeal is to an order passed by the High Court of Jharkhand on 27.7.2016 whereby the claim of the appellants to declare the applicability of Payment of Gratuity Amendment) Act 20101 from 1.1.2007 was declined. The appellants are employees of Coal India Limited. The Government of India approved enhancement of gratuity to the executives and Non Unionized Supervisors of Central Sector Enterprises such as the Coal India Limited where the appellants were employed. The ceiling of the gratuity was raised to Rs.10 lakhs w.e.f. 1.1.2007 in terms of office memorandum of Government of India dated 26.11.2008 For short the ‘Amending Act’ The appellants were paid such gratuity in terms of such office memorandum. However later on the Payment of Gratuity Act 2 was amended by Central Act No. 110 which received the assent of the Hon’ble President on 17.5.2010. The relevant provisions of the Amending Act read as under “1(1). This Act may be called the payment of Gratuity Amendment) Act 2010 2) It shall come into force on such date as the Central Government may by notification in the Official Gazette 2.In Section 4 of the Payment of Gratuity Act 1972 in sub section for the words “three lakhs and fifty thousand Rupees” the words “ten lakh rupees” shall be substituted.” In terms of sub section of Section 1 of the Amending Act a notification was issued by the Government of India on 24.5.2010 appointing the said date as the date on which the Amending Act came into force. The grievance of the appellants is that the tax has been deducted at source when the gratuity was paid to the appellants before the commencement of the Amending Act. The appellants have thus challenged the date of commencement as 24.5.2010 but asserted that it should be made effective from 1.1.2007 and consequently the appellants would not be liable for deduction of tax on the gratuity amount. Certain provisions of the Gratuity Act as it existed prior to For short the ‘Gratuity Act’ amendment by Central Act No. 118 and that of Income Tax Act 19613 would be necessary to be extracted “The Payment of Gratuity Act 1972 4. Payment of Gratuity Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or 3) The amount of gratuity payable to an employee shall not exceed ten lakh rupees 5) Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.” The Income Tax Act 1961 10. Incomes not included in total income. In computing the total income of a previous year of any person any income falling within any of the following clauses shall not be included 1. xx 10to the extent it does not exceed an amount calculated in accordance with the provisions of sub sectionsandof section 4 of that Act ” Learned counsel for the appellants argued that the amendment of the Gratuity Act is to grant liberalised benefits. Therefore it would For short the ‘Income Tax Act’ be retrospective. Reliance is placed upon judgment of this Court in Commissioner of Income TaxI New Delhi v. Vatika Township Private Limited4. The aforesaid case is of insertion of proviso to Section 113 of the Income Tax Act providing that tax chargeable under the said Section shall be increased by a surcharge and shall be applicable in the assessment year relevant to the previous year in which the search is initiated under Section 132 of the said Act. It was the said provision which came up for consideration before this Court. This Court held as under “31. In such cases retrospectivity is attached to benefit the persons in contradistinction to the provision imposing some burden or liability where the presumption attaches towards prospectivity. In the instant case the proviso added to Section 113 of the Act is not beneficial to the assessee. On the contrary it is a provision which is onerous to the assessee. Therefore in a case like this we have to proceed with the normal rule of presumption against retrospective operation. Thus the rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary and distinct implication. Dogmatically framed the rule is no more than a presumption and thus could be displaced by outweighing factors.” Learned counsel for the appellants also referred to a judgment of this Court in D.S. Nakara & Ors. v. Union of India5 to contend that the cut off date as 24.5.2010 has created two categories of employees first who have attained the age of superannuation before the said date and second who have superannuated on or after 24.5.2010. Such classification is illegal and arbitrary in 1 SCC 1 1 SCC 305 On the other hand Mr. Vikramjit Banerjee learned counsel for the Union has argued that D.S. Nakara’s case deals with pensioners who get recurring benefit every month whereas the gratuity is one time payment. This Court has held that the cut off date so as to grant benefit of pension to the retirees after the cut off date and to deny the retirees pension before the cut off date is arbitrary. It was thus argued that benefit of gratuity stands on different footing then recurring right of payment of pension. This Court held as “38. What then is the purpose in prescribing the specified date vertically dividing the pensioners between those who retired prior to the specified date and those who retire subsequent to that date That poses the further question why was the pension scheme liberalised What necessitated liberalisation of the pension scheme 42. If it appears to be undisputable as it does to us that the pensioners for the purpose of pension benefits form a class would its upward revision permit a homogeneous class to be divided by arbitrarily fixing an eligibility criteria unrelated to purpose of revision and would such classification be founded on some rational principle The classification has to be based as is well settled on some rational principle and the rational principle must have nexus to the objects sought to be achieved. We have set out the objects underlying the payment of pension. If the State considered it necessary to liberalise the pension scheme we find no rational principle behind it for granting these benefits only to those who retired subsequent to that date simultaneously denying the same to those who retired prior to that date…” The aforesaid judgment has come up for consideration before this Court in a judgment reported as State Government Pensioners’ Association & Ors. v. State of Andhra Pradesh6 wherein the payment of gratuity from a specified date of retirement was held to be not unconstitutional. This Court held as under “2. … Similar is the case with regard to gratuity which has already been paid to the petitioners on the then prevailing basis as it obtained at the time of their respective dates of retirement. The amount got crystallized on the date of retirement on the basis of the salary drawn by him on the date of retirement. And it was already paid to them on that footing. The transaction is completed and closed. There is no scope for upward or downward revision in the context of upward or downward revision of the formula evolved later on in future unless the provision in this behalf expressly so provides retrospectively 3 SCC 501 : 1986 SCC L&S) 676] and to the decision in N.L. Abhyankar case3 SCC 125 : 1984 SCC 486] has been brought to out notice. The observations made in these two cases are binding on us insofar as the applicability of the rule in D.S. Nakara case1 SCC 305 : 1983 SCC2 SCR 165 : 1983 UPSC 263] to the liability of the Government to pay gratuity on retirement. We 3 SCC 501 2 SCC 580 respectfully agree with the views expressed in those decisions. It is also not shown that the Government notification in question either expressly or by necessary implication directs that those who had retired prior to 1 1 1973 would be entitled to any additional amount by way of gratuity. The Tribunal was therefore in error in upholding that gratuity was payable in accordance with the Government Notification No. 33 12 73 AISC(ii) dated 24 1 1975 to all those members of the All India Services who had retired prior to 1 1 1973.” Sub sectionof Section 4 of the Gratuity Act protects the right of an employee to receive better terms of gratuity under any award or contract with the employer. The gratuity paid to the appellants on the strength of office memorandum dated 26.11.2008 would fall in the said sub section. However what is exempt from the Income Tax Act is the amount of gratuity received under the Gratuity Act to the extent it does not exceed an amount calculated in accordance with the provisions of sub sections and of Section 4 of the Gratuity Act. The Gratuity Act contemplated rupees ten lakhs as the amount of gratuity only from 24.5.2010. Such gratuity is the amount payable only once. Thus the cut off date cannot be said to be illegal it being one time payment. Therefore such amendment in the Gratuity Act cannot be treated to be retrospective. Therefore the provisions of the statute cannot be said to be retrospective. In a judgment of this Court reported as Sri Vijayalakshmi Rice Mills New Contractors Co. & Ors. v. State of Andhra Pradesh8 the new rate of supply of rice was made effective on 23.3.1964. The question arose was as to whether the rice supplied earlier would have the benefit of beneficial provision as contained in the later notification dated 23.3.1964. This Court held that price as was prevalent on the date of sale alone would be payable and not the higher price introduced by amendment. It was held as “6. The aforesaid sales in the instant cases having been made by the appellants before the coming into force of the Rice Price Control Co. Ltd. v. CST4 SCC 98 : 1974 SCC226 2 SCR 879] Harishankar Bagla v. State of M.P.1 SCR 380 388 : AIR 1954 SC 465] ]” 3 SCC 37 1991 Supp.SCC 81 In a recent judgment reported as Himachal Road Transport Corporation & Anr. v. Himachal Road Transport Corporation Retired Employees Union10 in the case of payment of increased quantum of death cum retirement gratuity it was held that the cut off date cannot be said to be arbitrary which was fixed keeping in view financial constraints. This Court held as under “18. Though there are long line of cases where validity of fixation of cut off date is considered by this Court we confine and refer to the case law which is relevant to the facts of the case on hand. In State of Punjab v. Amar Nath Goyal6 SCC 754 : 2005 SCC910] while examining the validity of cut off date fixed for grant of benefit of increased quantum of death cum retirement gratuity this Court has held that the financial constraint pleaded by the Government was a valid ground for fixation of cut off date and such fixation was not arbitrary irrational or violative of Article 14 of the In view of the above we find that the date of commencement fixed by the Executive in exercise of power delegated by the Amending Act cannot be treated to be retrospective as the benefit of higher gratuity is one time available to the employees only after the commencement of the Amending Act. The benefit paid to the appellants under the office memorandum is not entitled to exemption in view of specific language of Section 10(10)(ii) of the Income Tax Act. 10 4 SCC 502 18. Consequently we do not find any error in the order passed by the High Court. The appeal is dismissed. NEW DELHI AUGUST 13 2021

Summary: Pension is payable periodically as long as the pensioner is alive whereas the gratuity is ordinarily paid only once on retirement. Therefore, any amendment with respect to the cutoff date cannot be treated retrospective. This was held by the two-judge bench comprising of Hon’ble Justice Hemant Gupta and Hon’ble Justice A. S. Bopanna in the case of Krishna Gopal Tiwari and Anr. Vs. Union of India and Ors. [CIVIL APPEAL NO. 4744 OF 2021] on the 13th of August before the Hon’ble Supreme Court of India at New Delhi. The brief facts of the case are, the appellants are employees of Coal India Limited. The Government of India approved enhancement of gratuity to the executives and Non-Unionized Supervisors of Central Sector Enterprises such as the Coal India Limited where the appellants were employed. The ceiling of the gratuity was raised to Rs.10 lakhs w.e.f. 1.1.2007 in terms of office memorandum of Government of India dated 26.11.2008. The appellants were paid such gratuity in terms of such office memorandum. However, later on, the Payment of Gratuity Act was amended. In terms of sub-section (2) of Section 1 of the Amending Act, a notification was issued by the Government of India on 24.5.2010 appointing the said date as the date on which the Amending Act came into force. The grievance of the appellants is that the tax has been deducted at source when the gratuity was paid to the appellants before the commencement of the Amending Act. The appellants have thus challenged the date of commencement as 24.5.2010 but asserted that it should be made effective from 1.1.2007 and consequently the appellants would not be liable for deduction of tax on the gratuity amount. The challenge in the present appeal is to an order passed by the High Court of Jharkhand on 27.7.2016 whereby the claim of the appellants to declare the applicability of Payment of Gratuity (Amendment) Act, 2010 from 1.1.2007 was declined. The counsel for the appellant submitted that, the amendment of the Gratuity Act is to grant liberalized benefits. Therefore, it would be retrospective. It was also submitted that, the cut-off date as 24.5.2010 has created two categories of employees, first who have attained the age of superannuation before the said date and second who have superannuated on or after 24.5.2010. Such classification is illegal and arbitrary in nature. The counsel for the respondent submitted that, the cut-off date so as to grant benefit of pension to the retirees after the cut-off date and to deny the retirees pension before the cut-off date is arbitrary. It was thus argued that benefit of gratuity stands on different footing, then recurring right of payment of pension. The learned judges heard the submissions of both the parties and relied on the judgement in State Government Pensioners’ Association &amp; Ors. v. State of Andhra Pradesh (1986) 3 SCC 501, wherein, “Similar is the case with regard to gratuity which has already been paid to the petitioners on the then prevailing basis as it obtained at the time of their respective dates of retirement. The amount got crystallized on the date of retirement on the basis of the salary drawn by him on the date of retirement. And it was already paid to them on that footing. The transaction is completed and closed. There is no scope for upward or downward revision in the context of upward or downward revision of the formula evolved later on in future unless the provision in this behalf expressly so provides retrospectively.”