1987 (7) TMI 77 - HC - Income Tax

Summary

Issues Involved:

1. Taxability of City Compensatory Allowance (CCA) under the Income-tax Act, 1961.
2. Applicability of sections 15, 16(v), and 17 of the Income-tax Act, 1961.
3. Impact of the deletion of section 16(v) of the Income-tax Act, 1961, with effect from April 1, 1975.

Issue-wise Detailed Analysis:

1. Taxability of City Compensatory Allowance (CCA) under the Income-tax Act, 1961:

The assessee, a member of the Indian Revenue Service, claimed that the amounts received as city compensatory allowance should not be included in his total income for the assessment years 1970-71, 1971-72, and 1972-73. The Income-tax Officer rejected this claim, but the Appellate Assistant Commissioner allowed it, following an earlier decision of the Tribunal. The Revenue appealed to the Income-tax Appellate Tribunal, arguing that the amendment to section 10(14) by the Finance Act, 1975, with retrospective effect, negated the assessee's claim. The Tribunal, however, sided with the assessee, stating that the CCA did not confer any advantage and could not be charged to tax under sections 4 and 5 of the Income-tax Act, 1961. The Tribunal held that the CCA did not fall within the definition of income under sections 2(24) and 2(45) of the Act and was not taxable under sections 15 and 17.

2. Applicability of sections 15, 16(v), and 17 of the Income-tax Act, 1961:

The Revenue contended that the Tribunal's decision was incorrect in light of the amendment to section 10(14). However, the Tribunal maintained that the CCA did not qualify as income under sections 2(24) and 2(45) and was not subject to tax under sections 15 and 17. The Tribunal also noted that section 16(v) was not applicable because it was deleted with effect from April 1, 1975.

3. Impact of the deletion of section 16(v) of the Income-tax Act, 1961, with effect from April 1, 1975:

The Tribunal held that up to the assessment year 1974-75, the CCA would be allowed as a deduction due to the deletion of section 16(v) from April 1, 1975. The Tribunal concluded that the CCA was a reimbursement for extra expenses incurred due to the assessee's posting in a particular city and did not constitute income.

Court's Analysis and Judgment:

The court considered the submissions made by Dr. Pal, acting as amicus curiae, and reviewed the relevant Fundamental Rules and sections of the Income-tax Act, 1961. It agreed with the Tribunal's view that the CCA was not an emolument, fee, profit, or perquisite but a reimbursement for extra expenses incurred due to the assessee's posting. The court noted that the CCA did not have the character of income within the meaning and scheme of the Income-tax Act, 1961. The court also referenced previous judgments, including CIT v. D. R. Phatak, Bishambar Dayal v. CIT, and CIT v. S. G. Pgnatale, which supported the view that CCA is not taxable.

Conclusion:

The court answered questions Nos. 1 and 2 in the affirmative and in favor of the assessee, concluding that the CCA does not come within the definition of income or total income and is not subject to tax under the computation or charging sections of the Income-tax Act, 1961. Consequently, it was unnecessary to answer question No. 3. Each party was ordered to bear its own costs. The court also expressed appreciation for Dr. Pal's assistance as amicus curiae.