Page 359 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes by way of leave encashment is only a compensation or reward for services rendered by
the employee and so is taxable under the head “salary”. Their Lordships at page-174 of the
judgment observed as follows:
“Further, there is internal evidence furnished by section 17(3)(ii) providing a clue to the
intention of the Legislature as to whether payments by way of leave encashment should
be regarded as “profits in lieu of salary” and consequently, as “income”. It may be seen
that as and when clauses (10A), (10B), (11), (12) and (13A) were inserted into section 10 by
successive amendments, section 17(3)(ii) was contemporaneously and, consequently,
amended so as to introduce them into the parenthetical clause therein. It is significant that
when clause (10AA) which provides for exemption of encashment of leave on retirement
from service from inclusion in the assessee’s total income, was inserted into section 10 to
be effective from April 1, 1978, by the Finance Act, 1982, no consequential amendment of
section 17(3)(ii) was made. That demonstrates the intention of Parliament to the effect that
all categories of payment by way of leave encashment should be treated as profit in lieu of
salary and, consequently, as income. But, one particular category, viz., leave encashment
paid on retirement from service, though of income character, should not be included in
one’s total income.”

It may be observed that their Lordships held that the amount received on leave encashment
during service is not exempt from tax as what is exempted under section 10AA was only
encashment of leave on retirement from service. In other words, when the provision
specifically exempted amount received on encashment of leave on retirement it has to be
inferred that the amount received on encashment of leave prior to retirement is not
exempt. On analogous reasoning we are of the view that as section 115E extends the
concessional tax rate specifically and only to long term capital gains, as a corollary it
follows that short-term capital gains are excluded. If such benefit is to be extended to
short-term capital gains also by what we may be permitted to call, back door method
through their inclusion in the scope of ‘investment income’ has sought to be made out to
the assessee by the appellant it would, to our mind, only frustrate the intention of the
Legislature.
As we have already mentioned, the scheme of the Act particularly in respect of TDS as
applicable to non-resident Indians was not brought to the notice of the Delhi Bench of the
Tribunal when they decided the case considered supra. Accordingly, we are of the view
that the Material provisions of the Act were not considered by the Bench and if they have
been considered the decision of the Tribunal would have been different. As this material
internal evidence of the Act was not considered by the Delhi Bench of the Tribunal, with
respect we are unable to follow the decision.

We have indicated hereinbefore that the decision of the Apex Court in the case of Sevantilal
Maneklal Sheth (supra) on which the Delhi Bench of the Tribunal mainly relied was given
in a different context and the Court came to the conclusion it did because there was
nothing in the concerned provision to hold that capital gains were excluded from the
scope of the word “income”. We have brought out that in the context of section 115E and
other provisions of Chapter XIIA such is not the case at all. The same is the position with
the decision of the jurisdictional High Court in the case of Manubhai A. Sheth (supra) on
which also same reliance was placed. This decision was given in the context of interpreting
a constitutional provision relating to legislative competence and so to our mind is
distinguishable. We have also invited attention to the comments of the Apex Court both
in the case of Sevantilal Maneklal Sheth (supra) and Padmaraje R. Kadambande (supra) to
the effect that a provision in a statute has to be interpreted in the light of its purpose and
the scheme of the statute. Bearing in mind the purpose of section 115E which seems to be
Contd...

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