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Issues involved: Interpretation of the term 'salary' u/s 10(13A) of the Income-tax Act, 1961 to determine if 'bonus' is included.
Summary: The High Court of Kerala was presented with a question regarding the inclusion of 'bonus' in the term 'salary' u/s 10(13A) of the Income-tax Act, 1961. The case involved an individual employee receiving salary, dearness allowance, bonus, and house rent allowance from the employer. The dispute arose in determining the exemption for house rent allowance as per the prescribed limits in the Income Tax Rules. The definition of 'salary' in the Fourth Schedule of the Act includes dearness allowance but excludes other allowances and perquisites. The assessee argued that bonus should not be considered part of the salary for exemption calculation purposes. The Income Tax Officer (ITO) initially included the bonus in the salary calculation, limiting the exemption under section 10(13A) to a specific amount. However, the Appellate Authority Commissioner (AAC) ruled in favor of the assessee, stating that as per the terms of employment, only dearness allowance should be considered part of the salary, not the bonus. The Tribunal upheld the AAC's decision, emphasizing that the definition of 'salary' in the Fourth Schedule excludes bonus from its scope. The High Court analyzed the definition of 'salary' in the Fourth Schedule and referred to a Supreme Court case to support the interpretation that only remuneration or recompense specifically provided in the employment contract can be considered as 'salary'. The Court disagreed with a Madras High Court decision suggesting that bonus should be considered part of the salary post the Payment of Bonus Act, 1965. The Court concluded that bonus does not fall within the definition of 'salary' as per the Fourth Schedule, and therefore, upheld the Tribunal's decision that the bonus paid to the assessee should not be included in the salary calculation. In conclusion, the Court answered the question in the negative, favoring the assessee and directing the parties to bear their respective costs.
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