2018 (6) TMI 1845 - AT - Income Tax

Tax free allowances - entitlement of judicial official of salary and allowances - scope of Shetty Commission recommendations - Disallowance of house rent allowance, medical allowance, sumptuary allowance and residence office allowance claimed by the assessee as exempt - assesse e is a judicial Officer of Rajasthan judicial services and at present working as Additional District Judge - AO disallowed the claim of the assessee by holding that as per the provisions of Income Tax Act these allowances are not exempt from tax but are part of the salary income of the assessee - AO contended that as per the recommendation of the Shetty Commission these allowances are tax free and not to be included in the salary income of the assessee for the purpose of income tax. HELD THAT - HRA - Hon'ble Supreme Court in case of All India judges Association Ors. v. Union of India Ors 2001 (2) TMI 1023 - SUPREME COURT has declined to accept the recommendation of the Shetty Commission for payment of house rent allowance over and above the official accommodation provided to the Judicial Officer. Therefore, the Hon'ble Supreme Court has held that the Judicial Officers are entitled for house rent allowance only when the Government, for any reason, is not able to make allotment or make available official accommodation. Thus as per the judgment of Hon'ble Supreme Court the Judicial officers are entitled for the house rent allowance at par with the other government officials and even equal to the judges of Hon'ble High Courts subject to the quantum of allowance varies from case to case depending upon the percentage of salary. Though the house rent allowance is exempt from tax as per provisions of High Courts judges (salaries and conditions of service) Act, 1954 as well as Supreme Court judges (Salaries and conditions of service) Act, 1958 however, the payment of HRA to the Judicial Officer is not governed by the provisions of these Acts. Section 22D of High Court judges (Salaries and conditions of service) Act 1954 and Section 23D of Supreme Court judges (Salaries and conditions of service) Act 1958 are pari material. Thus it is clear that the value of rent free official residence provided to a judge or the allowance paid to him under sub-section (1A) of Section 23 is excluded is exempt from liability to pay income tax. The provisions of High Court judges (Salaries and conditions of service) Act 1954 and as well as the Hon'ble Supreme Court judges (Salaries and conditions of service) Act 1958 are applicable only in respect of the judges of Hon'ble High Courts and Hon'ble Supreme court. The Judicial Officers government by the service conditions of the state higher judiciary cannot claim the benefit of High Courts judges (Salaries and conditions of service) Act 1954 as well as the Supreme Court Judges (Salaries and conditions of service) Act 1958. Therefore, the HRA drawn by the judicial officer of state higher judiciary is exempt only to the extent of the provisions of section 10(13A) r.w.r. 2A of the Income Tax Rules.Thus, in view of the above discussion, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Medical allowance - In case of Smt. Shilpa Sameer the Judicial Officer the Assessing officer while passing the assessment U/s. 143(3) of the Act dated 30.09.2013 has allowed the medical allowance as exempt to the extent of Rs. 15,000/-. Thus, we direct the AO to reconsider this issue of allowing the claim of exemption of medical allowance to the extent of Rs. 15,000/-. If the Assessment order in case of Smt. Shilpa Sameer is not disturbed till date then the claim of the assessee shall also be allowed to the extent of Rs. 15,000/-. Sumptuary allowance - CIT(A) has rejected the claim of the assessee on the ground that the assessee has not brought on record any section, notification, circular etc. as issued by the CBDT - We find that the CBDT vide letter No. 35/32/66-IT(B), dated 24-9-1966 has made it clear that sumptuary allowance has to be treated as an entertainment allowance and accordingly, the said allowance received by a person who is in receipt of salary from the Government, to the extent of such allowance are required to be deducted in computing the income chargeable under head salaries U/s. 16(ii)(a) - Thus, the CBDT circular has clarified that this allowance may be regarded as entertainment allowance and exempt from payment of income tax. We hold that the Sumptuary allowance is exempt from payment of income tax and accordingly to be excluded as a deduction while computing income under the head salary. Residence Office Allowance - We note that residence office allowance of Rs. 3,000/- received by the assessee is on account of minimum day to day expenses incurred by the assessee for keeping the residence office functional. Therefore, the expenses incurred on account of official work which is reimbursed by the Government in the shape of allowance cannot be treated as income of the assessee. In our view the allowance is paid to the Judicial Officer to avoid the furnishing accounts of petty expenses by the Judicial Officer for reimbursement. Thus, to avoid the production or furnishing of account of petty expenses in respect of residence office, the allowance is paid in lieu of reimbursement of such petty expenses. Accordingly, the residence office allowance cannot be treated as income of the assessee and the same has to be excluded from the salary income. Leave Encashment - Though there is no provisions under the Income Tax Act to exempt the leave encashment from tax during the service of Government employee except the provisions of Section 10(10AA)(i) of the Act applicable at the time of superannuation. Notification of Government of Odisha Gazette dated 25.06.2013 after consulting the Ministry of Law and Justice Government of India has decided that encashment of leave admissible to Judicial Officer in state shall continue to subject to applicable taxes. The language of the said gazette notification shows that the earlier resolution dated 17.08.2010 was modified vide this gazette notification dated 25.06.2013. Therefore, the said notification cannot be applied to the assessee before us with retrospective effect. Vide judgment in case of All India Judges Association Ors. v. Union of India and Ors 2001 (2) TMI 1023 - SUPREME COURT subject to the modification all the recommendations of the Shetty Commission were accepted. The recommendation for leave encashment and leave salary was not modified by the Hon'ble Supreme Court but was accepted as recommended by the Shetty Commission. Therefore, in view of the fact that the leave encashment was recommended as tax free and accepted by the Hon'ble Supreme Court prior to the notification dated 25.06.2013 the leave encashment would be tax free. In the result, the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of House Rent Allowance (HRA), Medical Allowance, Sumptuary Allowance, and Residence Office Allowance claimed as exempt.
2. Disallowance of Leave Encashment as exempt income.

Issue-wise Detailed Analysis:

1. Disallowance of House Rent Allowance (HRA), Medical Allowance, Sumptuary Allowance, and Residence Office Allowance claimed as exempt:

House Rent Allowance (HRA):
The assessee, a judicial officer, claimed various allowances as exempt, including HRA. The Assessing Officer (AO) disallowed these claims, stating that such allowances are not exempt under the Income Tax Act and should be included in the salary income. The CIT(A) upheld the AO's decision. The assessee argued that based on the Shetty Commission's recommendations, these allowances should be tax-free. However, the Tribunal referenced the Supreme Court's decision in All India Judges Association & Ors. v. Union of India & Ors., which clarified that judicial officers are entitled to HRA only if government accommodation is not provided. The Tribunal concluded that HRA is only exempt to the extent specified under Section 10(13A) read with Rule 2A of the Income Tax Rules and upheld the CIT(A)'s order.

Medical Allowance:
The assessee claimed medical allowance as exempt up to Rs. 15,000 based on Section 17 and Section 80D. The Tribunal noted that in a similar case, the AO had allowed medical allowance exemption up to Rs. 15,000. Therefore, the Tribunal directed the AO to reconsider the exemption for medical allowance up to Rs. 15,000, subject to consistency with other assessments.

Sumptuary Allowance:
The assessee argued that sumptuary allowance, being an entertainment allowance, should not be included in taxable income. The Tribunal referred to the CBDT Circular No. 35/32/66-IT(B) dated 24-9-1966, which clarified that sumptuary allowance is to be treated as an entertainment allowance and is exempt from tax. Therefore, the Tribunal held that sumptuary allowance should be excluded from the taxable salary.

Residence Office Allowance:
The assessee claimed residence office allowance of Rs. 3,000 as exempt, arguing it was for maintaining a residence office. The Tribunal agreed, stating that such an allowance, meant to cover petty expenses for official work, should not be treated as income. Therefore, the Tribunal directed that residence office allowance should be excluded from the salary income.

2. Disallowance of Leave Encashment as exempt income:

The assessee claimed exemption for leave encashment of Rs. 51,983, citing a Supreme Court decision that declared such encashment tax-free for judicial officers. The AO and CIT(A) disallowed this claim. The Tribunal noted a Government of Odisha notification dated 25.06.2013, which made leave encashment taxable. However, this notification could not be applied retrospectively. The Tribunal referenced the Supreme Court's acceptance of the Shetty Commission's recommendation that leave encashment should be tax-free. Therefore, the Tribunal concluded that leave encashment received by the assessee for the relevant year should be tax-free.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on certain allowances and leave encashment while upholding the disallowance of HRA as per the specified limits under the Income Tax Rules. The detailed analysis ensured adherence to legal terminology and significant phrases from the original judgment.