2009 (7) TMI 914 - AT - Income Tax

Summary

Issues Involved:
1. Whether Dearness Allowance (DA) should be considered part of salary for computing perquisites under Rule 3 of the Income-tax Rules, 1962.
2. Whether the assessee is in default under section 201(1) of the Income-tax Act for short-deducting tax at source.
3. The impact of the Financial Adviser's order dated 20-5-2004 on the computation of salary and perquisites.

Detailed Analysis:

Issue 1: Dearness Allowance as Part of Salary for Perquisites
The primary issue in these appeals is whether DA should be considered part of salary for computing the perquisite value of accommodation provided to employees. The Assessing Officer (AO) argued that DA forms part of salary for retirement benefits like gratuity and leave encashment, and thus, should be included in salary for perquisite valuation under Rule 3 of the Income-tax Rules, 1962. The AO noted that other sister-concern companies were already including DA in salary for this purpose.

However, the CIT (Appeals) found that the term "retirement benefits" is not defined under the Income-tax Act and should include all benefits given at retirement. Since DA was not included in salary for all retirement benefits (specifically pension), it should not be considered part of salary for perquisite valuation. The CIT (Appeals) observed that only 50% of DA was merged with basic pay from 1-4-2004 as per the Financial Adviser's order and should be considered part of salary from that date onwards.

Issue 2: Assessee in Default under Section 201(1)
The AO held the assessee in default under section 201(1) for short-deducting tax at source by not including DA in salary. Interest was also charged under section 201(1A). The CIT (Appeals) disagreed, stating that the assessee had a bona fide estimate and followed guidelines from the head office, which did not include DA for computing pension, a key retirement benefit.

The Tribunal supported the CIT (Appeals), noting that the legal position at the relevant time did not consider the accommodation perk as taxable. Various judicial decisions supported this view, and any error in valuation was deemed bona fide, thus not warranting default status under section 201(1).

Issue 3: Impact of Financial Adviser's Order Dated 20-5-2004
The Financial Adviser's order stated that 50% of DA merged with basic pay from 1-4-2004 and should be counted for various purposes, including retirement benefits. The CIT (Appeals) concluded that this 50% of DA should be considered part of salary for computing perquisites from 1-4-2004 onwards, but not for the financial years 2001-02 to 2003-04.

Conclusion:
The Tribunal upheld the CIT (Appeals) decision, stating that for financial years 2001-02 to 2003-04, no part of DA should be treated as part of salary for computing perquisites under Rule 3. Consequently, the assessee was not in default for short-deducting tax at source during these years. The appeals were dismissed, affirming that the inclusion of DA in salary for perquisite valuation should only apply from 1-4-2004, following the Financial Adviser's order.