2013 (2) TMI 72 - AT - Income Tax

Salary terminology - definition of salary - whether Salary includes DA - computation of gratuity and leave encashment - Held that - AO has rightly computed the amount of gratuity exempted under the Act by following definition of salary as per Fourth Schedule, Part A Rule 2(h) which defines salary including dearness allowance, if the terms of the employment so provides but exclude all other allowances and perquisites for the purpose of this Act. Disallowance of ₹ 29,060/- out of leave encashment under the provisions of section 10(10AA) - Held that - In view of the Explanation to section 10(10), the computation of benefit of gratuity and leave encashment, as contemplated u/s 10(10) and 10(AA) are to be governed by the definition of salary contained in the above Explanation and not by any agreement, as contended by the assessee viz 8th Bipartite Settlement on wage revision and other similar conditions between Indian Banks Association and their Workmen. The definition of salary is squarely and specifically applicable to section 10(10) and 10(AA) of the Act and, hence, any other definition of salary cannot be imported and applied to such sections. This view is supported by the direct decision of the Hon ble Madras High Court in the case of K. Gopal Krishan v. Central Board of Direct Taxes 1994 1993 (4) TMI 33 - MADRAS HIGH COURT - against assessee.

Summary

Issues involved:
Appeal against order u/s 250(6) of the Income-tax Act, 1961 regarding computation of gratuity and leave encashment.

Analysis:

Issue 1: Interpretation of salary terminology
The assessees contested the definition of salary, arguing that it includes various components beyond basic pay and dearness allowance. They relied on different Acts and circulars to support their claim. The AO computed gratuity and leave encashment based on basic pay + DA, leading to additions in the assessees' income. The CIT (Appeals) upheld the AO's decision, citing the definition of salary as per the Fourth Schedule, Part A Rule 2(h) of the Act. The tribunal concluded that the statutory definition of salary governs the computation of gratuity and leave encashment, dismissing the assessees' contentions.

Issue 2: Application of statutory provisions
The tribunal emphasized that the computation of gratuity and leave encashment benefits under sections 10(10) and 10(AA) must adhere to the statutory definition of salary provided in the Explanation to section 10(10). It rejected the argument that other definitions of salary, such as those from agreements, should apply. Citing a precedent from the Madras High Court, the tribunal affirmed that the definition of salary in clause (h) of Rule 2 of Part A of the Fourth Schedule is the sole reference point for sections 10(10) and 10(AA). Consequently, the tribunal upheld the AO's calculations and the CIT (Appeals) decisions, dismissing the appeals of the assessees.

Conclusion:
The tribunal dismissed the appeals of the assessees, affirming the decisions of the AO and the CIT (Appeals) regarding the computation of gratuity and leave encashment. It clarified that the statutory definition of salary as per the Fourth Schedule governs the assessment of benefits under sections 10(10) and 10(AA), rejecting alternative interpretations proposed by the assessees.