K.S. Radhakrishnan, J.

Whether the voluntary retirement from service would fall under he term “termination of employment” within the meaning of Section 17(3) of the Income-tax Act and the relief under Section 89(1) is admissible after the grant of exemption under Section 10 (10C) (viii) of the Income-tax Act is the question that arises for consideration in these cases.

2. Petitioners were officers and employees of State Bank of Travancore who had availed of the benefit of voluntary retirement scheme (in short VRS) framed by the Bank in accordance with the guidelines prescribed under Rule 21-A of the Income-tax Rules. Altogether 915 employees had opted for the benefit of the Scheme and retired from service with effect from 31.3.2001. Bank had deduced at source the income-tax on the taxable income for the year 2000-2001 after excluding five lakhs under Section 10 (10-C) (viii) of the Incometax Act. After excluding that amount the Bank arrived at the tax payable by each of the employees taking into account the allowances and reliefs and such other deductions under Chapter VI A to Chapter X. Employees who took voluntary retirement therefore were found entitled to relief under section 89(1) of the Income-tax Act in respect of payment under the provisions of clause (3) of Section 17.

3. Employees later filed their return for the assessment year 2001-2002 to the concerned office. Assessing Officer however based on a latter F.No.174/5/2001-ITA.I dated 23.4.2001 issued by the Central Board to Direct Taxes to the Chief Commissioner of Incometax, Bangalore issued notices to all the employees and initiated proceedings against the retired employees of the several branches of the Bank under Section 201 (1A) of the Act stating that the employees are not entitled to relief in excess of Rs.5 lakhs granted under Section 10 (10C) (viii) and hence no relief could be granted under Section 89(1) read with Rule 21A/Appendix Two in respect of the ex gratia of golden hand shake payment effected under VRS in excess of Rs.5 lakhs. Assessing officer also imposed penalty and levied tax on the said amounts due.

4. The assessing officer also issued notice to the employer under Section 201 (1A) of the Income-tax Act stating that the Bank had not complied with the above mentioned statutory provisions and hence threatened to impose penalty and levy of interest on the amounts paid to the employee. State Bank of Travancore has therefore filed O.P.No.8150 of 2002 challenging the action of the Department in taking action against the employer and also for a declaration that the Bank has rightly deducted the amount while granting benefits to its employees on their voluntary retirement. Employees who had availed of the benefit of the voluntary retirement scheme have also questioned the circular and prayed for a direction to the Department not to levy, impose or demand tax from the petitioners by denying the reliefs under Section 89(1) of the Act and also for other consequential reliefs.

5. We heard Senior Counsel Sri. Pathrose Mathai, who appeared for the Bank and Sri. Mathews V. Jacob appearing for the employees and also heard Senior Standing Counsel for Income-tax Department Sri. P.K. Ravindranatha Menon.

6. Counsel appearing for the petitioners submitted that the deduction by way of relief under Section 89(1) is distinct and different from the exclusion or exemption from the total income under Section 10 (10C). Counsel submitted that the respondent had failed to appreciate the provisions of Section 10 (10C) which excludes substantial amount of the total income for the purpose of Incometax Act and that the petitioners are legally entitled to get the benefit of Section 89(1) read with Rule 21 A/Appendix II and under the provisions of Clause (3) of Section 17 of the Act.

7. Senior Counsel appearing for the Income-tax Department on the other hand contended that relief under Section 89(1) read with Section 17 (3) of the Act applies only in the case of termination