2006 (4) TMI 185 - AT - Income Tax

Special Allowance - Disallowance Of Exemption u/s 10(14) - authorities not satisfied evidence regarding actual use of the allowances - Uniform Making Expenses and Uniform Washing Expenses and Academic Research Allowance - Assessee-appellant is working as Electrical Officer on the Ships owned or operated by the employer i.e. Shipping Corporation of India Limited - HELD THAT - In the light of the Central Board of Direct Taxes issued a circular, it is not open to the revenue to call for the details of expenses actually incurred unless the specific allowance are disproportionately high compared to the salary received by him or unreasonable with reference to the nature of the duties performed by the assessee. None of the conditions is satisfied in the present case. It is also not the case of the revenue that there is any material to indicate or establish that the assessee has any unspent portion out of the allowances so paid to the assessee. The disallowance sustained by the CIT(A) therefore does not meet our approval, so far as objections taken by him are concerned. As far educational allowance is concerned, rule 2BB(1)(e) provides that any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions is eligible for exemption u/s 10(14)(i). But then, the assessee is working in a ship and it cannot be said that the allowance was granted to him for encouraging the academic, research and training pursuits in educational and research institutions . In our humble understanding, an academic or research allowance could be eligible for exemption u/s 10(14)(i) r/w rule 2BB only when academic, research and training pursuits are in educational and research institutions. There is no material to establish that this condition is fulfilled in the present case. Therefore, even as we hold that observations of the CIT(A) are not sustainable in law, we also hold that, on the facts of the present case, academic research allowance is not eligible for exemption u/s 10(14)(i) of the Act. In effect, the CIT(A)'s action of sustaining denial of exemption to uniform making and uniform washing allowances is reversed. In coming to this conclusion, we have taken particularly guided by the fact that (i) these allowances are exempt u/s 10(14)(i) r/w rule 2BB; (ii) quantum of allowances is not excessive or unreasonable vis-a-vis salaries of the employees or the purposes for which allowances are granted by the employer; and (iii) there is no material to establish, or even indicate, that the any portion or whole of allowances so granted has remained unspent by assessee employee. Thus, we are of the considered view that the CIT(A) committed error in declining exemption u/s 10(14)(i) of the Act in respect of Uniform Making Expenses and Uniform Washing Expenses . We, therefore, direct the Assessing Officer to grant the exemption u/s 10(14)(i) in respect of the above allowances. The appeal is partly allowed in the terms indicated above. Thus, appeal is partly allowed.

Summary

Issues:
- Disallowance of exemption under section 10(14) for "Uniform Making Expenses," "Uniform Washing Expenses," and "Academic Research Allowance."

Analysis:
The assessee, an Electrical Officer for a shipping company, received allowances for uniform making, uniform washing, and academic research. The Assessing Officer disallowed the exemption under section 10(14) as the assessee failed to provide evidence of actual expenses incurred. The CIT(A) upheld the disallowance, considering the expenses as personal and not for official duties. The ITAT noted that exemption under section 10(14)(i) requires actual expenditure for the intended purpose. Referring to historical amendments and a circular from 1955, the ITAT emphasized that details of actual expenses need not be provided unless the allowances are unreasonably high. The ITAT found the allowances reasonable and necessary, reversing the CIT(A)'s decision on uniform expenses but denying exemption for academic research allowance not meeting the prescribed criteria.

The ITAT highlighted that the CIT(A) erred in considering the allowances as personal expenses, emphasizing that the key factor is whether the allowances are granted to meet expenses wholly, necessarily, and exclusively incurred for official duties. Rule 2BB of the Income-tax Rules specifies eligible allowances for exemption under section 10(14), such as uniform expenses and educational allowances for academic pursuits. The ITAT concluded that the uniform expenses were eligible for exemption, given their necessity and reasonableness. However, the academic research allowance did not qualify under the prescribed criteria, as the nature of the allowance did not align with the requirements of section 10(14)(i). The ITAT partially allowed the appeal, directing the Assessing Officer to grant exemption for uniform expenses but not for academic research allowance.

The ITAT's decision was based on the interpretation of section 10(14)(i) and the relevant rules, emphasizing the necessity for actual expenditure for allowances to qualify for exemption. The judgment clarified the distinction between personal expenses and expenses incurred for official duties, ensuring compliance with the prescribed criteria for exemption under section 10(14).