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Judgment
Leila Seth, C.J.—The first thirteen writ petitions pertain to the taxability of various allowances, e.g., dearness allowance, house rent allowance, city compensatory allowance, special compensatory allowance, compensatory allowance, hill compensatory allowance, capital allowance, hill and fuel allowance and special compensatory allowance for remote areas.
It is pertinent to mention that the question of not taxing dearness allowance was not pressed by the petitioners. On the question of house rent allowance, the respondents have conceded that it is not to be included in the total income to the extent prescribed as per the provisions of Section 10(13A) of the Income Tax Act, 1961, read with Rule 2A of the income tax Rules, 1962. Consequently, we are not dealing with the question of taxability of dearness allowance and house rent allowance.
The main contention of the petitioners which are associations of employees and employees working in Simla and its suburbs, as asserted in the writ petitions, is that these allowances are neither "salary" nor "perquisites" as defined in Section 17(1) and (2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), and, consequently, cannot be included in the total income under the head "Salary" for the purpose of Income Tax assessment. Further, they do not have "the character of income within the meaning and scheme of the Income Tax Act" and are, "therefore, not includible in total income". Consequently, it is prayed that their employers be restrained from deducting tax at source by including these allowances.
At the time when these writ petitions were filed, the petitioners were relying mainly on the decision of the Calcutta High Court in Commissioner of Income Tax Vs. R.R. Bajoria, , of the Gujarat High Court in Commissioner of Income Tax, Gujarat-III Vs. Nathalal Dahyabhai, , of the Madhya Pradesh High Court in Bishambar Dayal Vs. Commissioner of Income Tax, and of the Bombay High Court in Commissioner of Income Tax, Bombay City I Vs. D.R. Phatak, . The crux of the latest decision appears to be that compensatory allowance granted to a Government servant is required to be regulated under the Fundamental Rules in such a manner that it should not be a source of profit to the recipient. That is why the rates of city compensatory allowance varied from city to city. Consequently, it was held that it was neither an emolument nor a fee nor a profit nor a perquisite but only a payment for part reimbursement of the extra expenses incurred by the assessee as of necessity by reason of his posting. Such an allowance did not have the character of income within the meaning and scheme of the Act.
The question whether such allowances have the character of income is no longer res integra in view of the amendment to the Income Tax Act, 1961. Section 2(24) which defines "income" was amended by Act No. 3 of 1989, with retrospective effect from April 1, 1962. As a result of the said amendment, Clauses (iiia) and (iiib) were inserted by the Direct Tax Laws (Amendment) Act, 1989, with retrospective effect from April 1, 1962, by which "income" was to include :
"(iiia) any special allowance or benefit, other than perquisite included under Sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit ;
(iiib) any allowance granted to the assessee either 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 a place where he ordinarily resides or to compensate him for the increased cost of living."
The Karnataka High Court and the Patna High Court had occasion to deal with this amendment in KARNATAKA ELECTRICITY BOARD EMPLOYEES UNION Vs. UNION OF INDIA AND OTHERS, and Brooke Bond Employees Union Vs. Union of India (UOI) and Others, , respectively. Since the Patna High Court dealt with it in connection with dearness allowance and this is not being pressed, we need not refer to that decision.
The Karnataka High Court held that the said amendment was clarificatory in nature and salary which is one of the heads of income under which the total income of an assessee under the Act is subjected to tax, is always understood to include the special allowances paid to the salaried persons in addition to the basic salary. Any type of remuneration of an employee by an employer is taxable under the said category. These payments in the form of allowances and special allowances accrue and are received by salaried persons by virtue of their office and employment. The term "income" is very wide in its import and all allowances received by salaried persons are taxable under the Act unless expressly exempted.
In C.W.P. No. 104 of 1988 (M.L. Jain v. Central Bank of India), this court had also dealt with a similiar matter, Chief Justice P. C. Balakrishna Menon disposed of the said writ petition on August 13, 1990, with the following order :
"The only point raised in this writ petition is about the legality of including the city compensatory allowance in the total income of the assessee for the purpose of assessment to Income Tax. The question raised does not now survive in view of the amendment to Section 2(24) of the Income Tax Act, 1961, by the Direct Tax Laws (Amendment) Act, 1989, with retrospective effect from April 1, 1962. As per this amendment, the expression ''salary'' includes also special allowances paid to a salaried person in addition to the basic salary. In the light of this amendment, I see no merit in this writ petition and it is accordingly dismissed."
On a perusal of the provisions of the Act after the said amendment of 1989, it appears to us that the effect of the amendment is to specifically include as income any allowance or benefit specially granted to a salaried person to meet the expenses, wholly, necessarily and exclusively for the performance of his duties of an office or employment of profit. Consequently, it sets at rest the controversy as to whether special allowance or benefit paid to a salaried person is includible in his income as defined u/s 2(24) of the Act. Since these allowances are treated as income of a salaried person, it would prima facie appear that these would be includible in the total income of an assessee for the purpose of computation of income and would be automatically taxed.
Mr. K.D. Sood, learned counsel for the petitioners, however, contends that though, as a result of this amendment, these allowances may be in the nature of income or have the character of income, they are not to be included in the total income, if they are exempt u/s 10(14). Section 10 of the Act provides for those incomes which are not to be included in the total income. It states that, in computing the total income of a previous year of any person, any income falling within any of its clauses shall not be included. Section 10(14) has been amended from time to time. Section 10(14) as it originally stood was :
"(14) any special allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of Clause (2) of Section 17, specially 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."
It appears that to get over the difficulty resulting from the interpretation placed by the Bombay High Court on the provisions of Section 10(14) of the Act in the case of Commissioner of Income Tax, Bombay City I Vs. D.R. Phatak, , which declared compensatory (city) allowance exempt from Income Tax u/s 10(14) of the 1961 Act, an Explanation was added by the Finance Act of 1975 with retrospective effect from April 1, 1962. The Explanation is as follows :
"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."
Again Section 10(14) was amended by the Direct Tax Laws (Amendment ) Act, 1987, with effect from April 1, 1989, and the amended sub-clause reads as follows :
"(14) (i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of Clause (2) of Section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit as the Central Government may, by notification in the Official Gazette, specify, to the extent to which such expenses are actually incurred for that purpose ;
(ii) any such allowance granted to the assessee either 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, or to compensate him for the increased cost of living, as the Central Government may, by notification in the Official Gazette, specify, to the extent specified in the notification."
This clause was further amended by the Direct Tax Laws (Second Amendment) Act, 1989, with effect from April 1, 1989, and a proviso was added. The said proviso reads :
"Provided that nothing in Sub-clause (ii) shall apply to any allowance in the nature of personal allowance granted to the assessee to remunerate or compensate him for performing duties of a special nature relating to his office or employment unless such allowance is related to the place of his posting or residence."
Certain notifications were issued u/s 10(14). The portion of the notification issued by the Central Government which is relevant for our purposes is as follows (see [19891 176 ITR 133) :
"Notification No. S.O. 144(E), dated February 21, 1989.
In exercise of the powers conferred by Sub-clause (ii) of Clause (14) of Section 10 of the Income Tax Act, 1961 (43 of 1961), the Central Government hereby specifies the allowances mentioned in column (2) of the Table below, granted to an assessee to meet his personal expenses and to compensate him for the increased cost of living at the places mentioned in the corresponding entry in column (3) of the said Table, and the maximum amount of such allowances mentioned in the corresponding entry in column (4) of the said Table, for the purposes of the said sub-clause.
TABLE
SI. No.
Name of allowance
Place
Maximum amount
1
2
3
4
1.
Composite Hill Compensatory Allowance
All places located at a height of 1,000 metres or more above the sea level
Rs. 150 per month
2.
Any special compensatory allowance in the nature of border area allowance or remote area allowance or diffcult area allowance or disturbed area allowance.
Following areas in Hima-chal Pradesh, �
(a) Pangi sub-division of Chamba District ;
(b) Baramour Tehsil of Chamba District ;
(c) Lahaul and Spiti District ;
(d) Kinnaur District ;
(e) Dodra-Kawar area of Rohru Tehsil, Parganas of Pandrabis and Atharabis, Gram Panchayats of Munish, Derkalai and Kashapat of Rampur Tehsil of Simla District ;
(f) Pargana of Pandrabis of Kulu District ;
(g) Chhota Banhgal and Bara Bhangal area of Palampur sub-division of Kangra District ;
(h) Gram Panchayat Deothi (Teklech area) and Parganas of Chhaibis, Naubis, Sarahan and Barabis of Rampur Tehsil of Simla District ;
(i) Chhuhar Valley of Jogindernagar Tehsil of Mandi District ;
(j) Mangal Panchayat area of Solan District ;
(k) Cuter-Seraj and Malana Panchayat area of Kulu District. "
Rs. 650 per month
It is pertinent to notice that Simla or its suburbs were not mentioned in the said "place". However, a subsequent notification was issued being Notification No. S.O. 259(E), dated March 27, 1990, which is as follows (see [1990] 183 ITR 3) :
"In exercise of the powers conferred by Sub-clause (ii) of Clause (14) of Section 10 of the Income Tax Act, 1961 (43 of 1961), the Central Government hereby makes the following amendments, with effect from April 1, 1990, in the notification of the Government of India, in the Ministry of Finance, Department of Revenue No. S.O. 144(E), dated February 21, 1989, namely :--
In the said notification, in the Table,--
(a) for Serial No. 1 and the entries relating thereto, the following shall be substituted, namely :--
1
2
3
4
1.
Any special compensatory allowance in the nature of composite hill compensatory allowance or high altitude allowance or uncongenial allowance, climate allowance or snow bound area allowance or avalanche allowance.
I (e) Himachal Pradesh.
(i) All areas at 9,000 ft. and above ahead of line joining Pub-Kaja-Junzomla towards the bower
(ii) Area ahead of line joining Karchham and Shigrila towards the bower
(iii) All areas, in Kalpa, Spiti Lahul and Tisa. . . . III. All places located at a height of 1,000 metres or more above the sea level, other than places specified at (I) and (11) above.
Rs. 600 per month
Rs. 600 per month
(b) against Serial No. 2,--
(i) in column 3, in category (A),--
(1) in item 5, after sub-item (k), the following sub-items shall be inserted, namely :--
(1)to (n) . . .
(o) Simla Town and its sub urbs (Mashobra, Dhalli, Taradevi, Kasumpti, Jatog and Tulu)."
It is, therefore, apparent from a perusal of these notifications that, with effect from February 21, 1989, the petitioners would be entitled to composite hill compensatory allowance at all places located at a height of 1,000 metres or more above the sea level to a maximum of Rs. 150 per month, with effect from April 1, 1990. This composite hill compensatory allowance now reads as any special compensatory allowance in the nature of composite hill compensatory allowance or high altitude allowance or uncongenial allowance, climate allowance or snow-bound area allowance or avalanche allowance. The maximum amount still remains Rs. 150 per month for all places located at a height of 1,000 metres or more above the sea level, other than places specified under items (I) and (II) where the allowance had been raised to Rs. 600 per month for places such as Kalpa, Spiti Lahul and Tisa, etc. Further, the petitioners who are in Simla town and its suburbs (Mashobra, Dhalli, Taradevi, Kasumpti, Jatog and Tulu) will be entitled to any special compensatory allowance in the nature of border area allowance or remote area allowance or difficult area allowance or disturbed area allowance to a maximum of Rs. 650 per month. But it is clear that these allowances will be available only from the dates of the said notifications or the dates from which they come into effect. This is because it has been clearly stated in Section 10(14)(i) that such allowances will not be includible in total income as may be notified by the Central Government in the Official Gazette to the extent specified and to the extent to which such expenses are actually incurred for the purpose ; and in the case of Section 10(14)(ii) to the extent specified in the notification ; Section 10(14)(ii) deals with the allowances for meeting the personal expenses of the assessee at the place where the duties of his office or employment of profit are ordinarily performed or at the place where he ordinarily resides or to compensate him for the increased cost of living related to the place of posting or residence. The emphasis in these notifications issued u/s 10(14)(ii) is on altitude, climatic conditions, remoteness and disturbed area rather than on the size of the city or its being a capital, as was the case of city compensatory allowance or capital allowance.
Consequently, on a perusal of Section 10(14)(ii), the proviso thereto and the abovementioned notifications issued u/s 10(14)(ii), it is clear that those allowances which fall within the ambit of these notifications will not be includible in the total income of the assessee to the extent specified and from the date of the notifications or the dates from which they come into effect.
Mr. K.D. Sood, however, urges that although a receipt may be of an income character, if it is exempt u/s 10, then it should not be taken into consideration in computing the total income of the assessee even if it pertains to a period prior to the notifications and the amendment of Section 10(14) with effect from April 1, 1989.
We have noticed earlier that an Explanation was added to Section 10(14) of the Act by the Finance Act of 1975, with retrospective effect from April 1, 1962. The said Explanation, as set out earlier, indicates 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 will not be regarded as a special allowance to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties for the purpose of Clause (14) to Section 10. Further, apart from this Explanation, the special allowance envisaged in Clause (14) requires certain conditions to be fulfilled ; first, it is not in the nature of an entertainment allowance or other perquisite within the meaning of Section 17(2) ; secondly, the allowance or benefit is specifically granted to meet expenses ; thirdly, the expenses are wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit ; and fourthly, the exemption is only to the extent to which such expenses are actually incurred.
Consequently, it would appear to us that, for the earlier years, that is, prior to the amendment with effect from April 1, 1989 (whereafter a notification by the Central Government has become necessary), any special allowance which comes within the ambit of Clause (14) of Section 10 read with its Explanation may be deductible from total income even if it has the character of income. Clearly, the city compensatory allowance and capital allowance do not come within this ambit, since it is not shown that the conditions precedent aforementioned are fulfilled. These writ petitions are disposed of accordingly. However, we make no order as to costs.
CWP No. 435 of 1990.--In Writ Petition No. 435 of 1990, which was ordered to be heard along with these writ petitions, a different prayer has been made. In the said writ petition, the petitioners have prayed that the notification dated March 27, 1990 (see [1990] 183 ITR 3), applying to Shimla and its suburbs should be given effect to from February 21, 1989, when the earlier notification was issued which did not include Shimla but extended the benefit to certain other places in Himachal Pradesh.
The contention of Mr. Barowalia, learned counsel for the petitioner in this writ petition, has to be rejected, because the provisions of the Act clearly provide that the exemption is to be granted in accordance with the notification of the Central Government in the Official Gazette and to the extent specified in the notification. Since the notification dated February 21, 1989 (see Income Tax Officer Vs. Savitri Devi Seva Trust, was amended by the notification of March 27, 1990 (see [1990] 183 ITR 3), only with effect from April 1, 1990, no benefit can be given to employees of Simla town and its suburbs (Mashobra, Dhalli, Taradevi, Kasumpti, Jatog and Tulu) from an earlier date. Consequently, this writ petition is dismissed. However, we make no order as to costs.