2000 (2) TMI 11 - SC - Income Tax

Hold that dearness allowance, city compensatory allowance and house rent allowance would be taxable income. Since counsel for the employees did not make any submission with regard to other allowances like night allowance, tuition fee, leave enacashment linked with leave travel concession, running allowance, etc., we do not pass any order with regard to those allowances

Issues Involved:
1. Taxability of City Compensatory Allowance (CCA), Dearness Allowance (DA), and House Rent Allowance (HRA).
2. Reimbursement of tuition fees.
3. Taxability of leave encashment linked with leave travel concession.
4. Taxability of running allowance and night allowance.
5. Interpretation of "income" under the Income-tax Act, 1961.
6. Interpretation of "profits in lieu of salary" under Section 17 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of City Compensatory Allowance (CCA), Dearness Allowance (DA), and House Rent Allowance (HRA):
The appellants challenged the inclusion of CCA, DA, and HRA in their taxable income. The High Court held that these allowances are not reimbursements of necessary disbursements and are in addition to pay, thus taxable. The Supreme Court affirmed this, stating that the Income-tax Act, 1961, is a self-contained code, and the allowances are taxable as they are considered an advantage and part of salary.

2. Reimbursement of Tuition Fees:
The High Court held that the reimbursement of tuition fees is fully covered by Section 17(3)(ii) of the Income-tax Act, 1961, and is not exempt under any clauses of Section 10. The Supreme Court upheld this view, confirming that such reimbursements are taxable income.

3. Taxability of Leave Encashment Linked with Leave Travel Concession:
The High Court found that leave encashment linked with leave travel concession is taxable as "profits in lieu of salary" under Section 17(3)(ii). The Supreme Court agreed, reiterating that such payments are taxable as they fall within the definition of salary.

4. Taxability of Running Allowance and Night Allowance:
The High Court ruled that running allowance and night allowance are advantages by virtue of employment and are taxable as "perquisites" under Section 17(1)(iv) read with Section 17(2). The Supreme Court upheld this decision, confirming that these allowances are taxable under the head "Salaries."

5. Interpretation of "Income" under the Income-tax Act, 1961:
The Supreme Court clarified that the definition of "income" under Section 2(24) of the Act is inclusive and broad. It includes any special allowance or benefit granted to meet expenses wholly, necessarily, and exclusively for the performance of duties, as well as allowances to meet personal expenses or to compensate for the increased cost of living.

6. Interpretation of "Profits in Lieu of Salary" under Section 17 of the Income-tax Act, 1961:
The Supreme Court examined Section 17, which provides an exhaustive definition of "salary" and includes "profits in lieu of salary." The Court held that "profits in lieu of salary" include any payment received by an employee from an employer, even if not directly related to the employer's profits. The term "profits" is interpreted to mean any gain or advantage received by the employee, thus making allowances like CCA, HRA, and DA taxable.

Conclusion:
The Supreme Court held that CCA, DA, and HRA are taxable income. The Court also affirmed the taxability of tuition fee reimbursement, leave encashment linked with leave travel concession, running allowance, and night allowance. The interpretation of "income" and "profits in lieu of salary" under the Income-tax Act, 1961, was clarified to include various allowances and reimbursements as taxable income. Consequently, the appeals by the Revenue and General Insurance Corporation were allowed, and the appeals by the employees were dismissed. No order as to costs was made.

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