2010 (2) TMI 668 - AT - Income Tax

Income under head salary or other sources - Regarding taxability of the salary and different allowances under various heads received by the MLAs - Hon ble High Court of Rajasthan in the case of CIT v. Shiv Charan Mathur (2008 -TMI - 31398 - RAJASTHAN HIGH COURT) has held that the MLA having been elected and not employed under section 15 is not attracted in respect of remuneration received by him and as a necessary corollary, applicability of section 17(2) clause 4 is also ruled out in respect of reimbursement of medical expenses - Therefore, the remunerations received by the MLAs and MPs cannot be taxed under the head income from salary but can only be taxed under the head income from other sources Whether the provisions of section 10(14) of the Act can be invoked for other allowances given to the MLAs - The language of section 10(14) would clearly show that any special allowance or benefit specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or an employment of profit would be exempt - The expression of profit qualifies only employment and does not qualify office - In the case of an MLA, he may not be holding an employment of profit but he is certainly holding an office of MLA and as such whatever allowances or benefit granted to it to meet the particular expenses, he is entitled for exemption upto the applicability of section 10(14) Act to the allowances granted to the assessee-MLAs whether the special allowances or the benefits other than the perquisites, forms part of the total income defined in section 2(24) of the Act - all allowances section 10(14) can be invoked subject to proof of the expenditure to be incurred in respect of that purpose to which the allowances are given, there would be no need to make a necessary amendment time to time in section 10(17) - only those allowances are to be exempted from the total income of the assessees which are specified in these sections or Rule 2BB of the IT Rules - In the result, appeals of the assessees are partly allowed for statistical purposes

Summary

Issues Involved:
1. Taxability of salary and different allowances received by MLAs.
2. Applicability of Section 10(14) and Rule 2BB of the Income-tax Act.
3. Proof of expenditure for exemption under Section 10(14).
4. Exemption limits under Section 10(17).

Detailed Analysis:

1. Taxability of Salary and Different Allowances Received by MLAs:
The primary issue in these appeals is the taxability of salary and various allowances received by MLAs, including Constituency allowance, Conveyance allowance, Telephone allowance, Clerical allowance, Medical allowance, and Contingency allowance. The Assessing Officer taxed these allowances under the head 'income from other sources,' excluding daily allowances up to Rs. 24,000 as per Section 10(17) of the Income-tax Act.

2. Applicability of Section 10(14) and Rule 2BB of the Income-tax Act:
The Tribunal examined whether the provisions of Section 10(14) could be invoked for the allowances given to MLAs. It was noted that Section 10(14) provides exemption for special allowances granted to meet expenses wholly, necessarily, and exclusively incurred in the performance of duties of an office or employment of profit, to the extent such expenses are actually incurred. Rule 2BB supplements Section 10(14) by identifying the specific allowances and their exemption limits. The Tribunal found that conveyance and clerical allowances could be exempted under Section 10(14), subject to proof of expenditure, but telephone and constituency allowances do not fall under Rule 2BB and thus cannot be exempted.

3. Proof of Expenditure for Exemption Under Section 10(14):
The Tribunal emphasized that the onus is on the assessee to provide evidence of expenditure incurred for the purpose for which the allowance was granted. The Tribunal referred to various judgments, including the Apex Court's decision in CIT v. Tejaji Farashran Kharwalla Ltd., which held that the purpose for which the allowance is granted is not solely determinative of the claim for exemption. The assessee must prove that the expenditure was incurred wholly, necessarily, and exclusively for the performance of duties.

4. Exemption Limits Under Section 10(17):
Section 10(17) initially exempted daily allowances received by MLAs and MPs. Over time, the scope was widened to include other allowances up to specified limits. The Finance Act, 2006, further amended Section 10(17) to exempt constituency allowances received by MLAs. The Tribunal noted that while Section 10(17) provides specific exemption limits without requiring proof of expenditure, Section 10(14) requires proof of expenditure for exemption. The Tribunal concluded that both sections must be read together, and only those allowances specified in Section 10(17) and Rule 2BB can be exempted.

Conclusion:
The Tribunal upheld the Assessing Officer's treatment of remuneration received by MLAs as 'income from other sources.' It directed the Assessing Officer to re-examine the issue and grant exemption for conveyance and clerical allowances after verifying the expenditure. Telephone, constituency, and contingency allowances were not exempted under Sections 10(14) or 10(17). Medical allowances could be exempted if they were reimbursements, as per the Rajasthan High Court's decision in CIT v. Shiv Charan Mathur. The appeals were partly allowed for statistical purposes.