The Gujarat High Court has delivered a significant judgment upholding the right of ex-servicemen to claim income-tax exemption on disability pension, even when retiring voluntarily. The Court has directed the Income Tax Department to refund taxes paid on such exempt income, along with interest.
The matter pertains to an ex-serviceman, commissioned as a Second Lieutenant in the Army on 17 December 1977, who sustained serious spinal injuries in Jammu & Kashmir during military operations in 1985. He was medically downgraded to A3 (Permanent) in 1987 and thereafter opted for voluntary retirement on 31st May 2000 after serving the Indian Army for 22.5 years.
Although disability pension was not granted at the time of retirement, the Army Headquarters intervened in 2017, leading to reassessment by the Medical Board of Army Specialists. Based on medical findings that showed no improvement in his spinal condition, the Principal Controller of Defence Accounts (Pension), Allahabad, sanctioned 30% disability pension on 30th October 2018, with retrospective effect from 1st January 2006.
Tax Department Denies Refund
For the period 2006–2018, the petitioner filed regular Income Tax Returns and paid tax on pension income, as disability pension had not yet been granted. Following the retrospective grant of disability pension, the petitioner applied for refund of taxes paid on exempt income. The Income Tax authorities rejected the request citing:
- Limitation under CBDT Circular No. 9/2015,
- Applicability of CBDT Circular No. 13/2019 in cases where voluntary retirement is opted,
- Availability of alternative remedies.
High Court Observations
After hearing both parties, the High Court held:
- Disability pension — both service element and disability element — continues to be fully exempt from income tax in terms of CBDT Circular dated 02nd July 2001.
- When income is exempt by law, no tax liability arises, and refund of excess tax paid becomes a statutory right under Section 237 of the Income-tax Act, 1961.
- Limitation under CBDT Circular No. 9/2015 cannot be mechanically applied in cases of belated sanction of disability pension with retrospective effect.
- CBDT Circular No. 13/2019, limiting exemption only to invalidated personnel, cannot be invoked at this stage because the Supreme Court has ordered status quo in ongoing litigation challenging the circular.
The Court further noted that High Courts of Delhi, Madhya Pradesh, and Punjab & Haryana have already granted similar reliefs, and the SLP against the Punjab & Haryana High Court decision has been dismissed by the Supreme Court.
Judgment
The Gujarat High Court ruled:
“When it is not in dispute that disability pension received by the petitioner is exempt income, there is no liability to pay tax on such disability pension. The petitioner is therefore entitled to refund of tax paid.”
The Court:
- Quashed the rejection order dated 22nd March 2024, passed under Section 119(2)(b),
- Directed the Income Tax Department to refund taxes paid for relevant assessment years with interest @ 9% per annum within 3 months,
- Held that in case of non-payment within the stipulated period, interest @ 18% per annum shall be payable until full disbursement.
Significance
This judgment reinforces the legal position that disability pension to Armed Forces personnel is exempt from income tax irrespective of the mode of retirement, especially when disability is attributable to or aggravated by military service.
The ruling reinforces the principle that procedural limitations cannot be used to deny substantive relief where statutory exemption exists, providing significant clarity and relief to serving and retired Armed Forces personnel.
Source #E
