| SooperKanoon Citation | sooperkanoon.com/63530 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Feb-09-1988 |
| Judge | A Balasubramanyam, M Ajinkya |
| Reported in | (1988)27ITD351(Mum.) |
| Appellant | First Income-tax Officer |
| Respondent | V.J. Paymaster |
He was at the relevant time Solicitor and Jt. Secretary to the Govt. of Maharashtra (Law and Judiciary Department). The main issue in all these appeals and cross-objections is that dearness allowance, compensatory city allowance, house rent allowance and compensation for surrender of earned leave are not taxable and that professional tax is deductible.
We shall deal with each of these issues separately.
2. As regards the taxability of dearness allowance, the main burden of the assessee's argument was that dearness allowance was not specifically included in the definition under Section 17 or the definition in Rule 2(h) of Part A, Part B and Part C of the Fourth Schedule to the Act. It was also argued that dearness allowance was not included under the Payment of Wages Act, 1936, Payment of Bonus Act, 1985 and Payment of Gratuity Act, 1972, Further, the assessee argued that the definition of 'salary' for the purpose of Section 36(1)(ii)(a) and Section 40A(5) does not include dearness allowance. The assessee also argued that since dearness allowance is not fixed but fluctuating from time to time and varies with the cost of living index, the amount thereof is not a part of the salary. This was, according to him, the case of the department in the case of Addl. CIT v. P. Krishna Kamat [1975] 99 ITR 74 (Kar.). He also argued that dearness allowance is not taken into account for payment of house rent allowance, compensatory city allowance, contribution to provident fund, payment of rent by Govt. servants occupying Govt. quarters. It is not an emolument, commission, fee, perquisite or profit within the meaning thereof under Sections 17(1)(iv) and 17(2). Dearness allowance, according to the assessee, is paid as and by way of reimbursement of additional expenses incurred on account of increase in cost of living and for this proposition, the assessee relied on the decision of the Bombay High Court in the case of CIT v. D.R. Phatak [1975] 99 ITR 14. By the same logic, he argued that city compensatory allowance is not salary or perquisite within the meaning of Section 17.
3. Since the arguments advanced by the assessee concerning the taxability of dearness allowance and compensatory city allowance were analogous and similarly we will deal with both these issues together.
Certain general principles relating to the taxability of income in general and income under the head 'Salary' in particular may be first laid down. The term 'income' connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. This definition of 'income' first laid down by the Privy Council in CIT v. Shaw Wallace and Co. 6 ITC 178 has been followed not only by the Privy Council in CIT v. Chunilal B. Mehta [1938] 6 ITR 521 at p. 529 but has been quoted by the Supreme Court in E.D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 at paga 49. Section 4 of the Income-tax Act, which is the charging section, provides that income-tax shall be charged for any assessment year at any rate or rates in respect of the total income of the previous year and Section 5 of the IT Act gives an inclusive definition of what constitutes "total income". Further, Sections 15, 16 and 17 of the IT Act deal with the computation of total income under the head 'Salaries'. Section 15 provides that any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not, shall be chargeable to income-tax and Section 17 gives an inclusive definition of what constitutes 'salary'. Section 10 of the IT Act details items of income or receipt which shall not be included in computing the income of the previous year. The definition of 'income' in Shaw Wallace and Co.'s case (supra) was followed in Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 (PC) by Lord Russell who, however, added (at page 242 of the report) that ' 'Anything which can properly be described as income, is taxable under the Act unless expressly exempted". A statutory recognition to this principle is to be found in the provisions of Sections 4, 5 and 10 of the IT Act. It is in the light of the above principles that the issue raised before us in the present appeals has to be considered.
4. When we apply the above test to the receipts like dearness allowance or city compensatory allowance, we find that these amounts are received by the assessee by virtue of his being an employee of the State Govt.
These amounts are received from a definite source, namely, the Govt. of Maharashtra. These are received by virtue of his employment under that Govt. There is nothing in the Act which provides for the exclusion of receipts of this type from the scope of taxation. In other words, no exemption from inclusion in total income is provided in respect of dearness allowance or city compensatory allowance. For these reasons, among others, the assessee's claim for exemption from taxation of these receipts is liable to be rejected.
5. We may now turn to the specific arguments taken by the assessee. The assessee has first referred to the definition in Rule 2(h) of Part A, Part B and Part C of the Fourth Schedule. It is the case of the assessee that whereas in Rule 2(h) of Part A of the Fourth Schedule, dearness allowance is included in salary, it is not so included in Section 17. We cannot understand how this negative logic can in any way advance the case of the assessee. The Fourth Schedule deals with recognised provident fund which is defined in Section 2(38) of the IT Act. The rules concerning the recognized provident funds are in Part XII of the rules and Rules 67 to 81 deal with investment of fund moneys, nominations, circumstances in which withdrawals are allowed and so on. The definition of 'salary' has been made more specific in Clause (h) of Rule 2 possibly because there is a specific reference to dearness allowance in rule 69 which deals with conditions of withdrawals for various purposes. For example, Sub-Rule (2A)(i) provides that the amount of withdrawal shall not exceed the employee's basic wages and dearness allowance for 36 or 24 months. It was perhaps for this reason that there is a specific reference to dearness allowance. Similar reference to dearness allowance is to be found in other rules concerning withdrawals. If anything, reference to dearness allowance in the definition of 'salary' in Rule 2 of Part A to Fourth Schedule and its corresponding reference in the rules relating to operation and functioning of recognized provident funds, only establishes that dearness allowance is a part of the salary and is intended to be treated as such.
(i) It will not be out of place to refer to Section 10(72) of the IT Act which provides that the accumulated balance due and becoming payable to an employee participating in a recognised provident fund to the extent provided in Rule 8 of Part A of the Fourth Schedule would not be included in the total income. Correspondingly Rule 8 of Part A to Fourth Schedule lays clown that the accumulated balance due and becoming payable to an employee participating in a recognised provident fund shall be excluded from the computation of total income if certain conditions are fulfilled. These conditions are spelt out in Clauses (i), (ii) and (in) of Rule 8. Similarly, reference may be made to Section 10(25) which provides for total exemption in respect of interest on securities which are held by or are the property of any provident fund, any income received by the trustees on behalf of a recognised provident fund, etc. The reference made by the assessee to the definition of 'salary' in Rule 2(h) of Part A to distinguish it from the definition in Section 17 does not, therefore, help the assessee much. As pointed out earlier, 'salary' was defined to include dearness allowance for a specific purpose because that Schedule dealt with provident fund and the rules framed in that context refer to dearness allowance for a specific purpose. This fact by itself does not throw any light whatsoever on the controversy before us, namely, whether dearness allowance is taxable. The assessee's reference to the definition of 'salary' under the Payment of Wages Act, 1936. Payment of Bonus Act, 1965 and Payment of Gratuity Act, 1972 is for the same reason equally irrelevant as such definition of 'salary' appears in the respective Acts for the purposes mentioned in that Act and does not help the assessee in his claim that dearness allowance is not a taxable receipt. Reference may be made to a decision of the Karnataka High Court in P. Krishna Kamat's case (supra). In this case, the following observations of the Karnataka High Court only support out finding given above that the definition of the word 'salary' in Rule 2 of Part A of the Fourth Schedule is for the purpose of that para only: The word 'salary' is not defined in Section 2 of the Act, which contains definitions. Though that word has been defined in Section 17 of the Act, that definition is only for purposes of Sections 15 and 16 of the Act. Again, the definition of the word 'salary' in Rule 2 of Part 'A' of the IV Schedule to the Act is also for the purpose of that part only.
As for the taxability of dearness allowance, the Court made the following observations at para 77: Salary Fixed payment made periodically to a person as compensation for regular work.
Dearness allowance paid to an employee, in our opinion, also a part of recompense or consideration paid to him at regular intervals for his services. The view we take receives support from the observations of Panchapakesa Ayyar, J. in V. Srinivasan v. Padmasini Animal AIR 1957 Mad. 622 while construing Clause (i) of Sub-section (1) of Section 60 of the Code of Civil Procedure: The character of the dearness allowance differs in no respect from the character of pay, except in its temporary nature, as an addition to pay which may be decreased or increased, according to circumstances, or abolished altogether. ... I am, therefore, clearly of opinion that 'dearness allowance' will be part of a man's salary like acting allowance, when a man is discharging the duties of a higher office for the prescribed period under the rules and is entitled to it. Names may differ, but the character of the payment is the same. Dearness allowance fulfils the very same function as basic pay, and must, therefore, be deemed to be part of the 'salary', unlike travelling allowance, housing allowance, etc., which are meant for particular purposes and are confined to particular occasions and sometimes to particular areas.
It also considered the meaning of the word, 'salary' in Webster's New International Dictionary which reads as under: The recompense or consideration paid or stipulated to be paid to a person at regular intervals for services, especially to holders of official, executive or clerical position; fixed compensation regularly paid, as by the year, quarter, month or week, stipend.
The fact that the dearness allowance is not taken into account for payment of house rent allowance or city compensatory allowance or contribution to provident fund has no relevance at all for considering its taxability. What is relevant is that it is received by a salary earner from his employer for services rendered. If the amount of dearness allowance varies from time to time according to the cost of index and if it is intended as a reimbursement for meeting the increasing cost of living, the quantum of dearness allowance would be the same in all grades of employees. However, it is common knowledge that the grades of dearness allowance vary with the grades of pay. It is also common knowledge that so far as Govt. servants are concerned, the Pay Commission has taken this fact into account while considering the revised pa,y structure in various grades of the Govt. employees.
'Dearness allowance' is distinguishable from 'travelling allowance' or 'daily allowance' which is granted specifically to meet a specific type of expenditure already incurred by an employee and is in the nature of a reimbursement of expenditure so incurred. We are not satisfied that dearness allowance is paid as reimbursement of any specific expenditure. It is paid as conditions of service and can well be considered as coming within the inclusive definition of 'salary' or 'wages'.
6. Turning now to city compensatory allowance, a decision in this regard has already been taken by D-Bench of the Tribunal in the case of Addl. ITO v. M.A. Twigg [IT Appeal No. 339 (Bom.) of 1984, dated 29-9-1986], (to which one of us was a party). It is seen that Section 10(14) of the IT Act was amended by Finance Act, 1975 with retrospective effect from 1-4-1962 and an Explanation was introduced which reads as under: Explanation: For the removal of doubts, it is hereby declared that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him for the purposes of this clause, as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties; The issue has been decided by the Allahabad High Court in the case of Addl. CIT v. A.K. Misra, ITO [1979] 117 ITR 342 and by the Andhra Pradesh High Court in the case of M. Krishna Murthy v. CIT [1985] 152 ITE 163. The Allahabad High Court in the case of A.K. Misra (supra) clearly held that city compensatory allowance is granted to meet the personal expenditure necessitated by the high cost of living in big cities. The allowance is not granted with reference to the nature of duties but exclusively with reference to the place of posting. Such an allowance will, therefore, fall within the Explanation to Section 10(14) and is not exempt from tax. This is a direct decision on the subject against the assessee. Similar decision was delivered by the Andhra Pradesh High Court which held that city compensatory allowance was in the nature of perquisites within the meaning of Section 17(2) and therefore constitutes taxable receipts. The following observations of the Andhra Pradesh High Court are very appropriate in the following context: The essential ingredients that are to be satisfied for the purpose of application of the provisions enacted in Section 17(3)(ii) are: (1) that the payment must be relatable to employment; (2) that it must not be based on personal or extra employment consideration; and (3) that it must not be a payment falling under any clauses of Section 10 specified in parenthetical clause of Section 17(3)(ii).
(i) The Court went on to observe that leave encashment satisfies all the ingredients being in the nature of recompense or reward for the services rendered and cannot be regarded as a payment made on personal or extra employment considerations. An argument was advanced at the time of the hearing that the amendment to Section 17 by addition of Sub-clause (v)(a) indicated that compensation for surrender of earned leave was not normally taxable or, in any case, not taxable for the period prior to the amendment. In M. Krishna Murthy's case (supra), the Court was interpreting Section 17(3)(ii) which gives inclusive definition of what constitutes 'profits in lieu of salary'. The observations of the Court in respect of amounts received by way of leave encashment are in this context. The insertion of Sub-clause (v)(a) by Taxation Laws (Amendment) Act, 1984 with retrospective effect from 1-4-1978 has to be considered only clarificatory. Further, it would appear that the Court considered Clause (10AA) of Section 10 which was introduced by the Finance Act, 1982 with retrospective effect from 1-4-1978 in this context but did not have occasion to considet Clause (5A) possibly because the amendment brought about by the Taxation Laws (Amendment) Act, 1984 was not before the Hon'ble Court at the relevant time. What is relevant is that the contentions advanced with reference to Clause (10AA) of Section 10 were dismissed by the Court in the following words at page 171: We have, however, no hesitation to dismiss the contention, faintly advanced though, that Clause (10AA) of Section 10 takes in not only the terminal benefit, but also the receipt of leave encashment amount from time to time while in service, as the provision enacted in Clause (10AA), viz., 'any payment received by an employee ... as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement on superannuation or otherwise,' -- is quite explicit and unequivocal that it coveres only the payment received at the time of retirement of the employee as the word 'otherwise' employed therein has reference, which is irresistible, to 'retirement' only -- whether that retirement is on superannuation or by any mode or method, say compulsory retirement and so forth.
On the basis of these observations, we would hold that even for the years under appeal amounts received on account of encashment of earned leave are exigible to tax as profits in lieu of salary under Section 17(3)(ii).
7. Turning now to house rent allowance, it was claimed by the assessee that he was an allottee of a flat and that he is deemed to be owner only for the purpose of Sections 22 to 26 of the Act. Reliance was placed on a decision of the Supreme Court in the case of R.A. Shah v.N.J. Doshi [1975] 2 SCO 105, which held that only right of a member of a Co-op. Society is to occupy the flat allotted as a member and that the amount paid by every member to the Society every month is in the nature of rent since the title of the member occupying the flat allotted is of a tenant and not an owner or a licensee or a mortgagee in possession. Further, the amount paid every month by a member to the Co-op. Housing Society is expenditure actually incurred on payment of rent within the meaning of Section 10(13A) of the Act, and therefore, the house rent allowance paid to the employee is not taxable.
8. We have considered these arguments advanced by the assessee who argued his own case. Section 10(13A) excludes from the ambit of 'total income' allowances specifically granted to an assessee to meet expenditure on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee to such extent as may be described. However, this exemption is not available in case where residential accommodation occupied by the assessee is owned by him or the assessee has not actually incurred expenditure on payment of rent by whatever name called in respect of residential accommodation occupied by him. The assessee's argument in this connection is two-fold: He first argues that the flat which he occupies in a Co-op.
Housing Society is not owned by him and, secondly, he argues that the payments made by him to the Society are in the nature of rent and, therefore, Clauses (a) and (6) of the Explanation, which carved out an exception to the general exemption granted under Clause (13A), are applicable in his case. Section 27 of the IT Act defines 'owner of house property' and Clause (iii) of Section 27 provides a member of a Co-op, Society to whom a building or a part thereof is allotted or is leased under a house building scheme of the society shall be deemed to be the owner of that building or part thereof. Although this definition is for the purposes of Sections 22 to 26, it is ultimately relevant for deciding computation of income from house property and therefore relevant for all purposes under the IT Act. One cannot have one definition of 'owner' in the context of one section of the Act and another concept in context of the other particularly when ownership of the residential accommodation is not separately defined in the Explanation to Clause (13A) of Section 10. Further, what is paid by the assessee to the Society is not rent in the sense it is not money paid for occupation and use of the premises to a landlord. As an allottee and member of the Co-op. Society the assessee pays to the Society his share in the common charges borne by the Society towards the payment of municipal taxes, service charges and other common expenses, etc., which is the normal custom followed by the owners of flats in a Co-op.
Society. In fact, a copy of a Bill dated 1-10-1975 filed before us by the assessee shows that a payment of Rs. 371 is made for the month of October 1975 towards service charges, municipal charges, car parking.
These expenses cannot be treated as rent for occupation of premises in order that they fall within the parenthetical expression "by whatever name called". The assessee has not produced any rent receipt from the Co-op. Society to indicate that he was a tenant and the Co-op. Society was the landlord or the owner of the flat which he occupied. The literal interpretation which the assessee wants the Tribunal to put on his status as an allottee of a Co-op. Society would lead to absurd results. The assessee does not dispute that he is an owner of the flat occupied by him within the meaning of Section 27(iii). No other definition or concept of ownership can be imported into the Act for interpreting the provisions of Section 10(13A) in the absence of any separate definition of the term in that section. A similar issue came up for consideration before the Delhi Bench of the High Court in All India Lakshmi Commercial Bank Officers' Union v. Union of India [1984] 150 ITR 1. The Court dealt with Section 10(13A) and Rule 2(a). At page 6 of the report, the Court observed as under:- The special allowance covered by the clause is to meet expenditure and is not intended to compensate for any monetary loss suffered by the assessee or to offset any other loss of a self-occupied flat/ house. Then the words 'actually incurred on payment of rent' spell out the intention that the allowance must be to meet expenditure already incurred on payment of rent for the residential accommodation occupied by the employee. The employee concerned, in order to claim exclusion of the house rent allowance, has to show that he had paid house rent.
The Andhra Pradesh High Court also gave a similar finding in M. Krishna Murthy's case (supra). We, therefore, reject the claim of the assessee that house rent allowance received by him is exempt under Section 10(13A).
9. Since, in our opinion, the assessee is an owner of the premises occupied by Mm, his case is covered by Explanation to section 10(13 A).
10. As regards the claim for deduction of professional taxes, it is clearly not admissible in view of Section 40A(2), which provides that any sum paid on account of any rate of tax levied on the profits or gains of any business or profession or assessed at a proportion or otherwise on the basis of any such profits or gains not a deductible expenditure. What is deductible from salary income is specifically provided under Section 16(i). The assessee's reliance on a decision in Sixth ITO v. Narendra V. Patel [1985] 11 ITD 587 (Bom.) (TM) is misplaced because in that case the Tribunal by majority decision held that other expenses incurred for procuring business for the LIC were admissible deduction against incentive bonus. That decision has a limited application and has to be considered in the context of the facts of that case. It cannot be said to have a general application particularly when the law provides what amounts are deductible in the computation of income under the head 'Salary'. This ground is also rejected.
11. In the result, all the appeals by the department for all the years are allowed.
12. The cross-objections are raised for the assessment years 1973-74, 1976-77, 1977-78 and 1978-79. So far as assessment year 1973-74 is concerned, it appears that certain new grounds were agitated before the AAC in a letter dated 11-12-1981. It would appear that the assessment for the assessment year 1973-74 was completed under Section 143(1) on 30-1-1976. No demand was raised. The assessee made an application for rectification pointing out that credit for tax deducted at source was not correctly allowed and that allowance under Section 80K was not granted. These were mistakes apparent from record and should be rectified. The ITO passed an order of rectification against which an appeal was filed. The AAC held that refund, if any, arose as a result of order under Section 154 dated 24-2-1977 and not from the date of the original assessment. The AAC allowed the appeal in part and the assessee in the present cross-objections is agitating that the additional grounds should have been allowed.
13. We find on perusal of the additional grounds that they relate to the claim for exemption of dearness allowance on the ground that it is only a reimbursement for increase in the cost of living. We have already dealt with this issue at some length in the foregoing paragraphs dealing with the departmental appeals. The point taken by the assessee is that dearness allowance and city compensatory allowance, though shown in the return of income as salary and though not claimed as not taxable, the tax was paid on it incorrectly and tax under a mistake of law is liable to be refunded. We cannot accept this proposition which is based on several assumptions. Firstly, we have already held that dearness allowance and city compensatory allowance for encashment of earned leave are all taxable receipts in the hands of the assessee for all the years under appeal. The assessee's interpretation of a particular provision of law cannot be accepted as the settled law. In the case relied upon by the assessee in this context, the Supreme Court was concerned with sales tax on forward transactions which was voluntarily paid but which was subsequently held, as invalid. In the case cited by the assessee, the respondent paid sales tax in respect of its forward transactions in pursuance of assessment orders passed by the Sales Tax Officer for the years 1949 to 1951, but in 1952, the Allahabad High Court held that the levy of sales tax on forward transactions was ultra vires. The respondent applied for a refund and on these facts the Supreme Court held that the term 'mistake' in Section 72 of the Indian Contract Act comprises within its scope a mistake of law as well as a mistake of fact. The Supreme Court, however, specifically held that where there is a clear and unambiguous provision of law which entitles a party to the relief claimed by him, equitable considerations cannot be imported. In the present case, there is no clear and unambiguous pronouncement of law supporting the assessee's stand. Further, a mistake can be rectified under the Income-tax Act if it is a mistake apparent from record. We are, therefore, satisfied that no refund is due to the assessee both for assessment years 1973-74 and 1976-77 in which he had included dearness allowance and compensation for surrender of earned leave in his return as salary income.
14. The next cross-objection is that the compensation of Rs. 240 received for use of parking lot is not taxable because there is no separate assessable value assigned to it and, therefore, it cannot be taxed under Section 22. Income of a portion of property cannot be taxed and, since it is in the nature of income from house property, it cannot be taxed as income from other sources. In this cross-objection, the assessee appears to be begging the question. Having first stated that since there is no separate assessable value it cannot be assessed as income from property, he goes on to state that since it is in the nature of income from house property it cannot be taxed as income from other sources. Such compensation, again, is not specifically exempted under any of the provisions of Section 10. It is amount received by the assessee by allowing the use of parking lot at a fixed rate of compensation. Such income is, therefore, rightly taxable as income from other sources. The second cross-objection is also rejected.
15. In the result, all the appeals filed by the department are allowed, while the cross-objections by the assessee are dismissed.