Commissioner of Income Tax vs K.S. Krishnan

T.D. Sugla, J.—The Income Tax Appellate Tribunal has referred to this court only one question of law, at the instance of the Department. The question reads thus :

"Whether, on the facts and in the circumstance of the case, the city compensatory allowance received by the assessee during each of the accounting periods relevant to the assessment years 1971-72 and 1972-73 was deductible u/s 16(v) of the Income Tax Act, 1961, in computing the taxable income of the assessee for each of the said years ?"

It is pointed out by Dr. Balasubramaniam, learned counsel for the Department, that this issue had come up for consideration before this court in the case of Commissioner of Income Tax, Bombay City I Vs. D.R. Phatak, and that this court held that the payment of compensatory (city) allowance was exempt u/s 10(14) of the Income Tax Act, and was not a perquisite within the meaning of section 17(2) of the Income Tax Act, 1961. Dr. Balasubramaniam further pointed out that two questions were referred to this court in that case : (i) whether the compensatory (city) allowance was exempt from tax u/s 10(14) of the Income Tax Act, 1961 ? (ii) whether the said allowance was deductible u/s 16(v) of the Income Tax Act, 1961 ? On consideration of the arguments advanced, this court answered the first question in favour of the assessee but did not answer the second question as it was considered unnecessary. It is contended that the Legislature, in its wisdom, introduced an Explanation to section 10(14) of the Income Tax Act, 1961, with effect from the commencement of the Act with the object of nullifying the effect of the above judgment. In response to a query from the Bench, he, however, fairly stated that, in this regard, the language of section 10(14) and section 16(v) as it stood during the relevant period was not materially different. While section 10(14) provided for exemption, section 16(v) provided for deduction. In the former case, the exemption was in respect of "any special allowance... specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose". In the latter case, the deduction was in respect of "any amount actually expended by the assessee which, by the conditions of his service, he is required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties." It is seen that this court categorically held that the amounts given by the Government to its employees by way of compensatory (city) allowance are so regulated that the allowance is not at all a source of profit to the recipient. The amount received by a Government servant is much less than what he ordinarily spends by reason of his posting to a particular place and on account of which he becomes entitled to such a compensatory (city) allowance. Thus, the effect of section 10(14) might have been nullified because of the insertion of Explanation by the Legislature. Section 16(v), as it was applicable to the relevant year, was admittedly neither modified nor amended. In this view of the matter, we have to hold that though the question as such was not answered, the observation of this court holds good in regard to the provisions of section 16(v) also. In our view, we are fortified by the Calcutta High Court''s decision in the case of Commissioner of Income Tax Vs. R.R. Bajoria, , where, after discussing the entire case the law then available on the issue, including this court''s judgment in Commissioner of Income Tax, Bombay City I Vs. D.R. Phatak, , the court came to the same conclusion.

Accordingly, the question is answered in the affirmative and in favour of the assessee. No order as to costs.