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Issues:
1. Interpretation of section 10(7) of the Income-tax Act, 1961 regarding the exemption of compensatory allowance paid by the Royal Bhutan Government to Government of India servants deputed to Bhutan. Analysis: The case involved a departmental appeal against the order of the AAC regarding the exemption of compensatory allowance paid by the Royal Bhutan Government to a Government of India servant deputed to Bhutan for the assessment year 1980-81. The key question was whether such compensatory allowance is entitled to exemption under section 10(7) of the Income-tax Act, 1961. The appellant argued that the exemption under section 10(7) is only applicable if allowances are paid by the Indian Government, not by any foreign government. The AAC, however, held in favor of the assessee, granting exemption for the compensatory allowance and directing the ITO to exclude it from the gross salary income. The Tribunal heard arguments from the departmental representative and considered the written arguments submitted by the assessee. The Tribunal analyzed the provisions of section 10(7) which exempt allowances or perquisites paid by the Government to a citizen of India for rendering services outside India. The Tribunal referred to the definition of 'Government' under the General Clauses Act, 1897, and concluded that the word 'Government' in section 10(7) should be interpreted as the Government of India. However, the Tribunal emphasized that if the allowances are allowed by the Government of India, even if paid by a foreign government, they are entitled to exemption under section 10(7). In this case, as the compensatory allowance was approved by the Government of India for deputationists to Bhutan, the exemption was deemed applicable. The Tribunal dismissed the revenue's appeal, upholding the exemption of the compensatory allowance. This judgment clarifies the interpretation of section 10(7) of the Income-tax Act, 1961 regarding the exemption of allowances paid by a foreign government to Government of India servants deputed abroad. The Tribunal emphasized that the word 'Government' in section 10(7) should be understood as the Government of India. However, the key factor for exemption is whether the allowances are allowed by the Government of India, regardless of the foreign government making the payment. The Tribunal highlighted that the disjunctive nature of 'paid or allowed' in section 10(7) indicates that the payment and allowance do not need to be from the same authority. As long as the Government of India approves the payment, the exemption applies. The Tribunal also referenced a clarificatory letter from the Commissioner to a deputationist in Bhutan, supporting the interpretation that if the payment is allowed by the Government of India, the exemption under section 10(7) is applicable. This judgment provides clarity on the eligibility of compensatory allowances paid by foreign governments to Government of India servants for exemption under section 10(7) based on the approval by the Government of India, ensuring a fair and consistent application of tax laws in such cases.
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