2011 (9) TMI 397 - AT - Income Tax

Taxability of Living allowance granted to employees deputed abroad- Claim of tax credit in respect of tax paid in USA on living allowance under DTAA- Definition of Deputation -Held that - The living allowance was in the nature of special allowance or benefit specifically granted to meet expenses wholly, necessarily and exclusively in the performance of duties of an Office or employment of profit. Therefore, the living allowance was covered under the provisions of section 2(24)(iiia) and eligible for exemption u/s 10(14)(i). See Hindustan Powerplus Ltd. 2004 (10) TMI 591 - AUTHORITY FOR ADVANCE RULINGS . Further, it has been clarified that it is not open to the revenue to call for the details of expenses actually incurred unless the specific disallowances were disproportionately high compared to the salary received by them or unreasonable with reference to the nature of the duties performed by the assessee. See Madanlal Mohanlal Narang 2006 (4) TMI 185 - ITAT BOMBAY-J - Since living allowance is not taxable in India. Therefore, assessee cannot claim tax credit in respect of tax paid in USA on living allowance under DTAA. The term deputation does not mean transfer of employee from one place of duty to another place of duty, rather the persons should be considered to be on tour in connection with official assignment. The basic criteria for deciding, whether a person is on tour or transfer is to examine his place of employment in consequence to the order. Period of stay does not decide whether it is tour or transfer. Impact of the fact that whether FBT has been paid or not - held that - employer has not paid FBT. - the considerations for eligibility of exemption under section 10(14)(i) are entirely different and nothing turns around on the applicability or non-applicability of the provisions of FBT.

Summary

Issues Involved:
1. Taxability of Living Allowance.
2. Charging of Interest under Section 234B.

Issue-wise Detailed Analysis:

1. Taxability of Living Allowance:

The assessees, salaried employees of TCS Limited, were deputed to the USA and received a "Living Allowance" from their employer. The Assessing Officer (AO) considered this allowance as increased salary and not exempt under Section 10(14) of the Income Tax Act. The assessees claimed the allowance was exempt under Section 10(14)(i) and Rule 2BB(1), arguing it was granted to meet expenses incurred wholly, necessarily, and exclusively for the performance of duties outside their normal place of duty, Kolkata, India. The AO rejected this claim, treating the Living Allowance as a perquisite under Section 17(2) and allowed tax relief under Section 90 for taxes paid in the USA.

Before the CIT(Appeals), the assessees contended that the Living Allowance was paid to meet daily expenses incurred due to their deputation to the USA, and thus, should be exempt under Section 10(14)(i). They relied on various CBDT Circulars and judicial decisions supporting their claim. However, the CIT(Appeals) held that the assessees were not on tour but had shifted their residence to the USA, thus not fulfilling the conditions under Rule 2BB(1). The CIT(Appeals) concluded that the Living Allowance was not exempt under Section 10(14)(i) and treated it as income under Section 2(24)(iiib).

The Tribunal examined the deputation agreement and concluded that the place of posting did not change to the USA, and the employees were sent there for specific projects, retaining their salary structure in India. The Tribunal held that the Living Allowance was a special allowance granted to meet expenses incurred wholly, necessarily, and exclusively for the performance of duties, thus falling under Section 2(24)(iiia) and not Section 2(24)(iiib). Consequently, the Tribunal held that the Living Allowance was exempt under Section 10(14)(i) read with Rule 2BB(1)(b).

2. Charging of Interest under Section 234B:

The CIT(Appeals) allowed the appeals of the assessees regarding the charging of interest under Section 234B. The Tribunal upheld this decision, referencing the ITAT Special Bench decision in Sumit Bhattacharya v. Asstt. CIT, which supported the non-applicability of interest under Section 234B in this context.

Conclusion:

The Tribunal allowed the appeals and Cross Objections filed by the assessees, granting exemption for the Living Allowance under Section 10(14)(i) and dismissing the Department's appeals. The Tribunal noted the revenue-neutral nature of the issue due to the potential applicability of DTAA with the USA, which would have allowed tax credit if the allowance was taxable in both countries.