1996 (6) TMI 347 - AT - Income Tax

Summary

Issues Involved:

1. Taxability of various allowances paid to employees.
2. Jurisdiction of the Assessing Officer u/s 201(1) for short deduction of tax.
3. Bona fide estimate of taxable salary by the employer.
4. Applicability of CBDT instructions/circulars post amendment of section 10(14).
5. Interest charged u/s 201(1A) for short deduction of tax.

Summary:

1. Taxability of Various Allowances:
The Assistant Commissioner of Income-tax, TDS (Salaries), Bombay, observed that the assessee paid several allowances to its employees, including Kit Maintenance Allowance, Telephone Allowance, Compensatory Allowance, Special Travelling Allowance, Additional Special Travelling Allowance, Stay Over Allowance, Meal Allowance, Light Refreshment Allowance, and Entertainment Allowance. The assessee claimed these allowances were non-taxable and merely reimbursements. However, the Assessing Officer held these allowances taxable post the amendment of section 10(14)(i) effective from 1-4-1989 and computed short deduction of tax at source, passing an order u/s 201.

2. Jurisdiction of the Assessing Officer u/s 201(1):
The assessee contended before the Commissioner of Income-tax (Appeals) that the employer is only required to estimate proper tax to be deducted from salaries and if the conduct of the employer is bona fide, the Assessing Officer does not have jurisdiction to pass any order u/s 201(1). The CIT (Appeals) rejected this contention, concluding that the assessee had made short deductions of tax and upheld the Assessing Officer's order.

3. Bona Fide Estimate of Taxable Salary:
The Tribunal considered whether the estimate made by the assessee was honest, fair, and reasonable. It was noted that the instructions/circulars issued by the CBDT prior to the amendment indicated that the allowances were treated as reimbursements and thus exempt. The Tribunal found the assessee's belief that these allowances were reimbursements and not part of the income to be bona fide. Therefore, the assessee could not be treated as in default for short deduction of tax.

4. Applicability of CBDT Instructions/Circulars Post Amendment:
The Tribunal agreed with the CIT (Appeals) that the amendment effective from 1-4-1989 changed the legal position, and allowances could only be exempt if notified by the Central Government. The Tribunal rejected the assessee's contention that earlier notifications held the field until withdrawn in 1995, clarifying that the CBDT's Circular No. 701 dated 23rd March 1995 was only a clarification of the legal situation post-amendment.

5. Interest Charged u/s 201(1A):
The CIT (Appeals) had directed the Assessing Officer to modify the quantum of interest charged u/s 201(1A) based on the relief allowed in the appeals against the order u/s 201(1). The Tribunal upheld this direction, instructing the Assessing Officer to adjust the interest calculation in light of the Tribunal's order.

Conclusion:
The Tribunal held that the revenue authorities had no jurisdiction u/s 201 to demand further tax from the assessee for short deductions concerning the specified allowances. Consequently, the appeals filed by the assessee were partly allowed. The appeals regarding interest charged u/s 201(1A) were dismissed, subject to the modification of quantum based on the Tribunal's order.