2018 (10) TMI 374 - HC - Income Tax

Reversal of TDS having regard to reimbursement of allowance by LIC - Benefit of section 89(1) - distribution of income - TDS claim from the amounts paid by LIC to the extent it was applied to allowances meant to reimbursed - Held that - This Court is of the opinion that as to whether a particular kind of expenditure is necessary and is exclusively incurred or to be incurred in the function intimately connected with the employment requires to be inquired into especially in the context of commercial organisations like the LIC. The Development Officers are charged with the responsibility of increasing the business of the Corporation in the areas under their supervision. Apparently, this involves a range of duties that also calls for extensive travelling within the city or touring outside the city including in rural areas. The circulars referring to the terms of the employment clearly indicate that LIC expects such Development Officers to routinely travel within the city and also undertake journey outside city periodically. Given these impediments, the analogy which the DCIT appears to have drawn by comparing the chart, which referred to Section 10(14)(ii) of the Act, and granting relief limited to the extent the chart indicated, was not appropriate. In this regard this Court is of the opinion that the decision of the employer to grant the allowance either on actual reimbursement after verifying it or spare itself the added responsibility of verifying it but based upon observing a general pattern give a lump-sum allowance, which either covers it fully or in part leaving the rest to be reimbursed, if a higher amount was incurred, was a business or commercial decision. The stereotypical approach adopted by the DCIT was clearly not warranted. What the Central Government or the State Government might permit their employees or officers under the employment or having authority of law cannot blindly be applied to other organisations even to the Public Sector Units which are expected to be organised on commercial pattern and have entire different objectives. The petitioners are entitled to succeed. The respondents, DCIT and the concerned Assessing Officers are hereby directed to facilitate the working out of the reversal of the TDS having regard to the circulars of the LIC (especially circular of 18.03.1991) with respect to the reimbursement of three items i.e. fixed conveyance allowance, additional conveyance allowance and expenses under the head reimbursement of expenses scheme . The LIC shall also ensure that the amounts withheld from the employee and kept in a fixed deposit are reimbursed having regard to the orders of the Assessing Officer. Towards such reimbursement, the TDS amounts, if any, shall receive the benefit of spread out under Section 89 of the Act.

Summary

Issues Involved:
1. Whether the Tax Deduction at Source (TDS) on allowances paid by LIC to its Development Officers was justified.
2. Whether the allowances paid to the Development Officers fell under the exemptions provided by Section 10(14) of the Income Tax Act.
3. The applicability of Rule 2BB of the Income Tax Rules, 1962, regarding the allowances.
4. The finality of the matter due to the rejection of LIC’s appeal and the impact on individual employees.

Detailed Analysis:

1. TDS on Allowances Paid by LIC:
The petitioners challenged the TDS deductions on allowances paid by LIC, claiming these were reimbursements and not subject to tax. The DCIT had ordered TDS on these allowances, including fixed conveyance allowance and additional conveyance allowance, stating that LIC had not complied with Section 10(14)(i) of the Income Tax Act. The DCIT’s order pointed out that the allowances were taxable and LIC had defaulted by not deducting taxes, thus making the corporation liable for additional tax.

2. Exemptions under Section 10(14) of the Income Tax Act:
The petitioners argued that the allowances should be exempt under Section 10(14)(i) of the Act, which exempts allowances granted to meet expenses wholly, necessarily, and exclusively incurred in the performance of duties. They relied on the Rajasthan High Court ruling in Life Insurance Corporation of India vs. Union of India, which supported their claim that such allowances are exempt from income tax. The court noted that the Development Officers’ duties required extensive travel, justifying the conveyance allowances as necessary for their job.

3. Applicability of Rule 2BB of the Income Tax Rules, 1962:
Rule 2BB lists allowances exempt under Section 10(14)(i), including travel and conveyance allowances. The court found that the DCIT’s application of Section 10(14)(ii) was inappropriate, as it did not consider the specific duties and travel requirements of the Development Officers. The court emphasized that the allowances were part of a commercial decision by LIC to either reimburse actual expenses or provide a lump-sum allowance, which should not be treated as income.

4. Finality of the Matter and Impact on Individual Employees:
The Revenue argued that since LIC’s appeal was rejected, the matter had attained finality, and no relief should be granted. However, the court disagreed, stating that the relief should be granted to individual employees as the ultimate liability of claiming exemption and proving it lies with the employees. The court directed the DCIT and Assessing Officers to work out the reversal of TDS in line with LIC’s circulars and ensure that the withheld amounts are reimbursed to the employees.

Conclusion:
The court ruled in favor of the petitioners, directing the respondents to facilitate the reversal of TDS and ensure reimbursement of the withheld amounts. The court held that the allowances paid to the Development Officers were necessary for their duties and should be exempt under Section 10(14)(i) of the Income Tax Act, as per Rule 2BB. The writ petitions were allowed, providing relief to the petitioners.