1999 (4) TMI 112 - AT - Income Tax

Summary

Issues:
- Short deduction of tax at source from the salary and allowance payable to employees.
- Exemption of house rent allowance under section 10(13A) of the IT Act.
- Interpretation of the term "salary" including dearness allowance.
- Whether dearness allowance is part of salary for the purpose of tax deduction.

Analysis:
1. The appeal by the Industrial Finance Corporation against the order passed by the Dy. Commissioner (Appeals) pertained to the short deduction of tax at source from the salary and allowance paid to employees for the assessment year 1992-93.
2. The main contention was regarding the exemption of house rent allowance under section 10(13A) of the IT Act. The assessee argued that the house rent allowance was exempt, and dearness allowance should not be considered part of salary for tax deduction purposes.
3. The interpretation of the term "salary" was crucial, including whether dearness allowance formed part of it. The provisions of rule 2A of the IT Rules were analyzed to determine the exemption under section 10(13A) concerning house rent allowance.
4. The question revolved around whether dearness allowance was explicitly included in the terms of employment as part of the salary. The terms of employment specified the payment of dearness allowance, leading to the conclusion that it was indeed part of the salary.
5. The Tribunal upheld the order of the Dy. CIT (Appeals), stating that dearness allowance was to be included in the definition of salary for the purpose of calculating exemption under section 10(13A) on house rent allowance.
6. Despite the Corporation's treatment of dearness allowance for other benefits calculations, the Tribunal emphasized following the provisions of the IT Rules and the definition of salary under clause (h) of rule 2 of Part A of the IV Schedule.
7. The decision was based on the terms of employment specifying the payment of dearness allowance, which warranted its inclusion in the salary for tax deduction purposes. The Kerala High Court's judgment on the inclusion of dearness allowance in the salary further supported the Tribunal's decision.

In conclusion, the appeal by the Industrial Finance Corporation was dismissed, affirming the inclusion of dearness allowance in the calculation of salary for determining tax deductions, specifically in relation to the exemption of house rent allowance under section 10(13A) of the IT Act.