No TDS on salary of University employees : ITAT, Cochin

The ruling was passed saying that the university is covered under the definition of ‘State’ .


The salaries of Mahatma Gandhi University employees will not be subject to tax deduction at source ( TDS ) because the University may be deemed as a ‘State’, according to a ruling by the Income Tax Appellate Tribunal (ITAT), Cochin.

The assessee university had discharged the TDS liability on the payments made to employee on the Death cum Retirement Gratuity (DCRG), Commutation of Pension and leave salary after allowing exemption provided u/s. 10(10)(iii), 10(10A)(ii) and 10(10AA)(ii) of the Act. The University had claimed that it was covered under the definition of ‘State’.

But the appeal was rejected saying that the University was neither a state government entity nor a central government entity and nor were its employees under the central government.

However, on the second appeal, it was claimed that section 192(2A) of the Income Tax Act, for TDS purposes, clearly mentions that an employee of the University is separate from a government servant. The Tribunal observed that while the salary, pension and retirement benefits are paid from the consolidated fund of the state government, the grant for payment of salary and retirement benefits are provided by the Legislature through the budget of the State.

The amount towards salary is clearly specified under the head ‘salaries’ in the state budget. Therefore, there exists an employer-employee relationship between the ‘payer’ and ‘payee’, which in this case is the government and the employee. It is the state government that directly controls the expenditure of the University. The salary, pension and retirement benefits are directly credited to employees’ accounts by the Treasury Officer.

Therefore, the University is definitely covered under the definition of ‘State’. Therefore, its employees will be considered as holding civil posts under the State Government, which means they should be covered under the provisions of section 10(10)(i), 10(10A) and 10(10AA) of the Act. And if that happens, the employees of the University cannot be asked to pay to TDS.

Therefore, it was ruled that payments made by the University to its employees towards death cum retirement gratuity, commutation of pension or leave salary shall not be liable for TDS to the extent permitted under the provisions of section 10(10)(i), 10(10A) and 10(10AA) of the Act.

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