2012 (10) TMI 839 - HC - Income Tax

Profit in Lieu of Salary - Whether the receipt of dearness relief to pensioner is taxable as profit in lieu of salary Assessee is a retired judge of High Court Held that - The exemption from liability to pay income tax on certain perquisites or allowances received by a judge and which may not be included in the computation of his income chargeable under the head salaries u/s 15 IT. Act,1961 is included u/s 22D, in Chapter IV as substituted by Act No. 20 of 1998. All other amounts received by a judge are taxable. The dearness relief will be included in the pension and is not exempt from income tax u/s 22D of the Act of 1954. Therefore, the dearness relief is profit in lieu of salary and is included as an amount received by a retired judge u/s 17(3)(ii) and would be taxable as income. Appeal decides favour of revenue

Issues Involved:
1. Taxability of dearness relief as 'profit in lieu of salary' under Section 17(3)(ii) of the Income Tax Act.
2. Whether dearness relief and dearness allowance have the same meaning for tax purposes.
3. Applicability of legal precedents and statutory provisions to the taxability of dearness relief.

Detailed Analysis:

Issue 1: Taxability of Dearness Relief as 'Profit in Lieu of Salary'
The appellant-assessee, a retired High Court Judge, contested the inclusion of dearness relief amounting to Rs. 53,640/- as taxable income under the category of 'profit in lieu of salary' for the assessment year 1998-99. The Income Tax Appellate Tribunal (ITAT) upheld the Assessing Officer's (AO) decision, asserting that dearness relief falls within the ambit of 'any payment received from a former employer' as per Section 17(3)(ii) of the Income Tax Act, 1961. The Tribunal reasoned that the definition of 'profits in lieu of salary' is broad and inclusive, encompassing any payment due to or received by an assessee from a former employer, thus making dearness relief taxable.

Issue 2: Dearness Relief vs. Dearness Allowance
The appellant argued that dearness relief should not be equated with dearness allowance, which is explicitly taxable under Section 2(24)(iii)(b) of the Act. The Tribunal, however, found that dearness relief, although not explicitly mentioned in the definition of income under Section 2(24), fits within the comprehensive definition of 'profits in lieu of salary' under Section 17(3)(ii). The Tribunal emphasized that the payment is related to employment and serves as recompense for services rendered, thus qualifying as taxable income.

Issue 3: Legal Precedents and Statutory Provisions
The appellant cited several legal precedents, including CIT v. L.W. Russel, M.C. Desai v. Union of India, and others, to argue that dearness relief should not be taxable. The Tribunal, however, distinguished these cases, noting that dearness relief is not a gratuitous payment but a legal entitlement linked to employment. The Tribunal also referred to Rule 2 of the High Court Judges (Conditions of Service) Rules, 1956, and Rule 17 of the All India Services (Death-cum-Retirement Benefits) Rules, 1958, which govern the payment of dearness relief to retiring judges. The Tribunal concluded that these rules establish dearness relief as an addition to salary, making it taxable under Section 17(3)(ii).

Conclusion:
The High Court upheld the Tribunal's judgment, affirming that dearness relief is taxable as 'profit in lieu of salary' under Section 17(3)(ii) of the Income Tax Act. The Court found no error in the Tribunal's interpretation of the statutory provisions and legal precedents. The appeal was dismissed, and the questions raised were decided against the assessee and in favor of the revenue.

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