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R.P. Garg, Accountant Member

1. This is an appeal by the assessee against the order of the Commissioner of Income-tax (Appeals) for the assessment year 1981-82.

2. The short dispute in this appeal is about the taxability of gratuity amount received by the legal heirs of late Sri D.S. Mistry who was in employment of three companies including M/s. M. Dinshaw and Co. P. Ltd. He died on 1-9-1980 and on his death the gratuity funds of the three companies paid the gratuity of Rs. 2,21,250 to the legal heirs of the deceased. The executors filed two returns of incomeone for the period from 1-4-1980 to 1-9-1980 in the capacity of legal representative and the other from 2-9-1980 to 31-3-1981 as executor. In the second return the receipt of gratuity was claimed non-taxable. The Income-tax Officer however made only one draft order for the entire period from 1-4-1980 to 31-3-1981 and brought the sum of Rs. 2,21,250 to tax. In the proceedings under Section. 144B the Inspecting Assistant Commissioner however accepted the contention of the assessee that two assessments were to be made. He however directed the Income-tax Officer to tax the receipt of gratuity for the period ending 1-9-1980. Assessment was thus finalised by the Income-tax Officer in pursuance of his direction under Section. 144B. The matter was carried in appeal before the Commissioner of Income-tax (Appeals). On perusal of the trust deed, under which the gratuity was paid, the Commissioner of Income-tax (Appeals) observed that the very purpose of creating the fund was to pay the gratuity to all the employees covered by the said Rules as per the scales laid down therein, on retirement, death or discharge of the employee. The scale of the payment is equal to 15 days of basic salary for every one year of uninterrupted service of the employees subject to a maximum thirty half-monthly basic salaries. Gratuity was thus not payable according to him, only after the death of a person because the right of an employee for the gratuity accrued during his lifetime on account of the services rendered to the company. It became payable on the happening of certain events like retirement, retrenchment or death of the employee. The gratuity was earned by the employee during his lifetime. He has also taken into consideration the fact that the said gratuity was included by the legal heir for the purposes of estate duty, of late Sri D.S. Mistry. This according to him would show that it had accrued to the deceased which passed on to the legal heirs on his death. Gratuity, according to him, is taxable under the head 'Salaries' because its payments involved relationship of an employer and the employee. The interest in the gratuity existed during the lifetime of the deceased and became payable only after his death to the legal heirs as his nominee for this purpose. Thereafter he cited three decisions of accident insurance receipts. They are, Bharat-kumar Manilal Dalal v. CED [1975] 99 ITE 179 (Guj), CED v. Smt. Motia Rani Malhotra [1975] 98 ITR 42 (Punj. and Har.) and CED v. Kasturi Lal Jain [1974] 93 ITR 435 (J and K). These decisions, it may be stated, have been disapproved by the Supreme Court in the case of M.Ct. Muthiah v. CED [1986] 161 ITR 768. He also took aid of Section. 10(10) and held that the very fact that the gratuity payable after death is exempted only up to a specified limit under this section shows that the remaining part of it is taxable. The right of the legal heirs to receive the gratuity, according to him, is only as his nominee as the gratuity was earned by the deceased during his lifetime by completing a number of years' service,

(1) On the death or retrenchment or certified unfitness on medical grounds of an employee while in the service of the Company-fifteen days' basic salary or wages for each year of service subject to a maximum of thirty half-monthly basic salaries of wages to be paid to him or his heirs or executors or nominees; the qualifying period, of five years' service may be waived.

5. The event of payment is death. Clause 18 upon which the learned counsel for the assessee has placed heavy reliance reads as under:

18(c). If the nominee shall die or become unable to act during the life of the appointor or if the appointor desires to revoke the appointment of the nominee then the appointor shall appoint a fresh nominee in place of the nominee so dying or becoming unable to act or whose appointment is so revoked.
18(d). The appointment shall be in the Form "A" annexed hereto.
18(e). In default of a due appointment of a nominee it shall be in the discretion of the trustees to grant the whole or any part of the gratuity to the executors or administrators of the deceased or to any relative or relatives or dependant or dependants as the Trustees in their absolute discretion think fit (on production of heirship certificate signed by a Magistrate, J.P. or Gazetted Officer) and/or an Indemnity bond drawn up in the proper form being executed by such persons as the Trustees may determine.