2016 (1) TMI 758 - HC - Income Tax

Salary computation - whether any benefit or allowance other than dearness allowance is to be included in the basic salary of the assessee for computation of gratuity and leave encashment under Section 10(10) and 10(10AA)? - Held that - The authorities below on appreciation of material on record have concurrently recorded that the computation of benefit of gratuity and leave encashment under Sections 10(10) and 10(10AA) of the Act are to be governed by the definition of salary as per Rule 2(h) Part A, Fourth Schedule. Learned counsel for the assessee was not able to demonstrate that the approach of the authorities below was erroneous or perverse or that the findings of fact recorded were based on misreading or misappreciation of evidence on record so as to warrant interference by this Court. Madras High Court in K. Gopalakrishnan v. Central Board of Direct Taxes and others (1993 (4) TMI 33 - MADRAS High Court) Section 17 of the Income-tax Act contains a definition for the purpose of section 15, 16 and 17 of the Act. Explanation 1 to section 36(1)(iia) of the Income-tax Act is to the effect that the expression salary in that clause includes the pay, allowances, bonus or commission payable monthly or otherwise. Hence, the contention of the petitioner that the expression salary found in section 10(10) and section 10(10AA) of the Income-tax Act should be given a wider meaning than found in clause (h) of rule 2 of Part A of the Fourth Schedule is wholly untenable. Thus, the petitioner is not entitled to the grant of any part of the prayer made by him in the writ petition - Decided in favour of revenue

Summary

Issues:
1. Interpretation of the legal provisions related to gratuity and leave encashment under the Income Tax Act, 1961.
2. Determination of the definition of 'salary' for the purpose of calculating exempted amount of gratuity and leave encashment.
3. Application of the decision of the Madras High Court in a similar case.

Analysis:

Issue 1: Interpretation of Legal Provisions
The judgment concerns a bunch of three appeals involving similar questions of law and facts. The primary issue revolves around the interpretation of Sections 10(10) and 10(10AA) of the Income Tax Act, 1961, regarding the exemption of death-cum-retirement gratuity and leave encashment. The appellant contested the additions made by the Assessing Officer on these accounts, leading to a series of appeals.

Issue 2: Definition of 'Salary' for Calculation
The crux of the matter lies in the definition of 'salary' for computing the exempted amount of gratuity and leave encashment. The judgment highlights that as per Rule 2(h) of Part A of the Fourth Schedule of the Act, 'salary' includes dearness allowance if specified in the terms of employment but excludes all other allowances and perquisites. The court emphasized that only dearness allowance, if provided for in the terms of employment, should be considered while calculating the exempted amount under Sections 10(10) and 10(10AA) of the Act.

Issue 3: Application of Precedent
The judgment references a decision by the Madras High Court in a similar case, emphasizing that the definition of 'salary' as per Rule 2(h) of Part A of the Fourth Schedule should be applied while interpreting Sections 10(10) and 10(10AA) of the Act. The Madras High Court ruling clarified that there is no general definition of 'salary' applicable to all provisions of the Income Tax Act, and the specific definition provided in the Fourth Schedule should be adhered to for these sections.

In conclusion, the High Court dismissed the appeals, upholding the orders of the lower authorities. The judgment affirms that the computation of gratuity and leave encashment benefits under the Income Tax Act should strictly adhere to the definition of 'salary' as per Rule 2(h) of Part A of the Fourth Schedule, excluding all allowances and perquisites except dearness allowance as specified in the terms of employment.