1988 (2) TMI 101 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of Dearness Allowance
2. Taxability of Compensatory City Allowance
3. Taxability of House Rent Allowance
4. Taxability of Encashment of Leave
5. Taxability of Professional Income
6. Deductibility of Professional Tax

Detailed Analysis:

1. Taxability of Dearness Allowance:
The main argument by the assessee was that dearness allowance is not specifically included in the definition of salary under Section 17 of the IT Act and various other Acts. The assessee contended that dearness allowance fluctuates with the cost of living and should be considered as reimbursement rather than salary. However, the Tribunal found that dearness allowance is paid by virtue of employment and is received from a definite source, namely the Government of Maharashtra. The Tribunal held that there is no provision in the Act that excludes dearness allowance from the scope of taxation. Therefore, dearness allowance is taxable.

2. Taxability of Compensatory City Allowance:
The Tribunal considered compensatory city allowance analogous to dearness allowance. It referred to Section 10(14) of the IT Act and relevant case laws, concluding that compensatory city allowance is granted to meet personal expenses due to high living costs in big cities and is not related to the nature of duties performed. Therefore, it falls within the Explanation to Section 10(14) and is not exempt from tax.

3. Taxability of House Rent Allowance:
The assessee argued that payments made to a Co-operative Housing Society are in the nature of rent and thus should be exempt under Section 10(13A). The Tribunal rejected this argument, stating that the payments made to the society are not rent but are charges for municipal taxes, service charges, etc. The Tribunal also noted that the assessee is deemed to be the owner of the flat under Section 27(iii) of the IT Act. Consequently, house rent allowance received by the assessee is not exempt under Section 10(13A).

4. Taxability of Encashment of Leave:
The Tribunal referred to case laws and amendments to Section 17 of the IT Act, concluding that amounts received on account of encashment of earned leave are taxable as profits in lieu of salary under Section 17(3)(ii). The insertion of clause (v)(a) by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1978, was considered classificatory, and the Tribunal held that leave encashment is taxable for the years under appeal.

5. Taxability of Professional Income:
The Tribunal did not specifically address professional income from the Maharashtra State Industrial & Investment Corporation in detail, but it was implicitly understood to be taxable as it was not mentioned as exempt in the judgment.

6. Deductibility of Professional Tax:
The Tribunal held that professional tax is not deductible under Section 40A(2) of the IT Act. The specific deductions allowable from salary income are provided under Section 16(1), and professional tax does not fall within these provisions. The Tribunal rejected the assessee's reliance on a previous Tribunal decision, stating that it had limited application and did not apply to the present case.

Conclusion:
The Tribunal allowed all the appeals filed by the Department and dismissed the cross objections raised by the assessee. The Tribunal concluded that dearness allowance, compensatory city allowance, house rent allowance, and encashment of earned leave are all taxable receipts in the hands of the assessee. Additionally, professional tax is not deductible from salary income.