Addl. Commissioner of Income Tax vs A.K. Misra, Income Tax Officer

Satish Chandra, C.J.—The assessee was an ITO. During the previous year relevant for the assessment year 1972-73, he was posted at Kanpur. He received Rs. 531 by way of city compensatory allowance because he was posted at Kanpur. He claimed this amount to be exempt from Income Tax. The ITO concerned, however, did not accept it. The assessee appealed. The AAC upheld the contention that this allowance was given to compensate against extra cost of living in big cities. It was an allowable deduction u/s 10(14) of the I.T. Act as well as tinder Section 16(v) of the Act. The Tribunal affirmed this view. It held that the allowance was granted to meet personal expenditure necessitated by the special circumstances in which the duty was performed. This allowance was not a perquisite attached to the post but was a special allowance granted to officers posted at specified places. It was hence exempt u/s 10(14) of the Act.

At the instance of the Commissioner, the Tribunal has referred, for our opinion, the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the city compensatory allowance was exempt from tax u/s 10(14) of the Income Tax Act, 1961 ?"

By the Finance Act No. 25 of 1975, Parliament added an Explanation to Clause (14) of Section 10 of the Act. This Explanation was inserted retrospectively by using the words "shall be inserted, and shall be deemed always to have been inserted". The Explanation says :

"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 or at the place where he ordinarily resides shall not be regarded, 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."

On the finding that the compensatory allowance was granted to meet the personal expenditure necessitated by the high cost of living at big cities like Kanpur, the Explanation added by the Finance Act of 1975 becomes applicable. The emphasis in the Explanation is that the allowance should be granted to meet personal expenses at the place where the duty is to be performed. The allowance in the present case was not granted with reference to the nature of the duties but exclusively with reference to the place of posting. It was granted to meet the personal expenses necessitated by the extra high cost of living at, inter alia, Kanpur. In view of the Explanation such an allowance cannot be treated as deductible under Clause (14) on the ground that it was granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties.

We, therefore, answer the question referred to us in the negative, in favour of the department and against the assessee. As no one has appeared on behalf of the assessee, there will be no order as to costs.