1998 (10) TMI 58 - HC - Income Tax

Summary

Issues:
1. Exemption of living allowance under section 10(14) of the Income-tax Act, 1961.
2. Interpretation of whether living allowance is a special allowance specifically granted to meet expenses incurred wholly, necessarily, and exclusively in the performance of duties of an office or employment.

Analysis:
1. The case involved five foreign technicians employed by an Indian company under a collaboration agreement with a foreign company for a project in India. The technicians received a living allowance as per the agreement. The Income-tax Officer denied exemption under section 10(14) of the Act, considering it for personal expenses. The Commissioner of Income-tax (Appeals) allowed partial exemption, and the Tribunal, following a Gujarat High Court judgment, held the allowance as a special allowance and exempt. However, the High Court found no evidence linking the allowance to duties performed, thus denying the exemption.

2. The High Court analyzed section 10(14) of the Act, emphasizing the necessity of a nexus between the special allowance and duties of the office or employment. The agreement provided daily fees, living allowance, and additional amenities. The court noted the lack of clarity on the purpose of the living allowance - personal expenses or work-related costs. Citing precedents, including Zdzizlaw Skakuz v. CIT and CIT (Addl.) v. A. K Misra, ITO, the court held that allowances tied to personal expenses, not duty-related, do not qualify for exemption under section 10(14). Referring to CIT v. Arthur Fuchs, the court stressed that for exemption, the allowance must be specifically granted for expenses wholly incurred in office duties.

3. The court distinguished the Gujarat High Court judgment cited by the Tribunal, as it pertained to perquisites under section 17(2) of the Act, not the nature of the living allowance. Quoting Zdzizlaw Skakuz v. CIT and other cases, the court reiterated that allowances linked to personal expenses, not duty performance, do not meet the exemption criteria. As evidence was lacking to show the living allowance as related to duty expenses, the court ruled against granting the exemption under section 10(14). Consequently, both questions were answered negatively in favor of the Revenue, denying the exemption claim for the living allowance.