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TMI Blog2000 (2) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to as "DA") and house rent allowance (hereinafter referred to as "HRA"). The appellants filed Civil Miscellaneous Petition No. 470 of 1988 in the Allahabad High Court challenging the inclusion of dearness allowance, city compensatory allowance, house rent allowance, paid to them in their income for the purpose of income-tax. Various other petitions raising similar contentions were filed by the Central Government employees,employees of Central Government undertakings, bank employees, State Government employees and general insurance employees. One such petition is before us being Civil Appeals Nos. 1853-1856 of 2000 arising out of S. L. P. (C) Nos. 15477-80 of 1988 disputing the taxability of various allowances, namely, dearness allowance, city compensatory allowance, house rent allowance, leave encashment, linked with leave, travel concession, running allowance, night allowance, etc. All the writ petitions were disposed of by a common judgment and order dated September 12, 1988, by the High Court of Allahabad (see [1989] 175 ITR 494). The question for consideration before the High Court was---whether the receipts on account of city compensatory allowance, house rent allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alcutta passed in Income-tax Reference No. 97 of 1977 holding that the city compensatory allowance paid to the assessee did not have the character of income within the meaning and scheme of the Income-tax Act, 1961. The following three questions were referred to the High Court by the Tribunal for decision: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the city compensatory allowance cannot come within the charging sections and/or within the meaning of income of a Government servant in accordance with section 2(24) of the Income-tax Act, 1961, read with the Fundamental Rules and cannot come within the ambit of the meaning of total income as contained in section 2(45) of the Act ? 2. Whether, on the facts and in the circumstances of the case, when the assessee's case cannot come within the provisions of sections 15 and 17 of the Act, the Tribunal was right in not considering the applicability of the provisions of section 16(v) of the Act ? 3. Whether, on the facts and in the circumstances of the case, up to the assessment year 1974-75, because of the deletion of section 16(v) of the Act with effect from April 1, 1975, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents, employees of the L. I. C. and G. I. C., filed petitions under article 226 of the Constitution before the High Court of Calcutta in Matter No. nil of 1988 praying, inter alia, for issue of a writ or order directing the appellants herein not to treat city compensatory allowance paid and payable to the employees of the appellants-companies as their taxable income and not to deduct income-tax at source on city compensatory allowance paid to them. The High Court by order dated March 21, 1988, following an earlier decision given by it on March 17, 1988 in Syndicate Bank Officers' Association v. Union of India [1989] 176 ITR 223, allowed the writ petitions and passed an order restraining the appellant-companies and other insurance companies from deducting any tax on city compensatory allowance or any allowance in the nature of city compensatory allowance in computing taxable income of the employees for the year 1987-88 onwards. Hence, these appeals by special leave are filed by the corporations. Whether city compensatory allowance, house rent allowance or other such payment to the employee is covered by the word "income" defined under the Act ? In all these appeals it is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to compensate him for the increased cost of living is also to be included in income. Therefore, it is conceded that the payment of house rent allowance or city compensatory allowance, would be covered by the word "income". Hence, the basis of the decision rendered by the Calcutta High Court would not survive. Whether such amount is taxable ? Once it is conceded that receipt of such amount is income of the assessee, the only question would be whether it is taxable under the head "Salary". For that purpose, we have to refer to section 17 of the Act to find out what meaning can be given to the phrase "profits in lieu of salary". For appreciating the contentions raised by learned counsel for the parties, we would straightaway refer to the relevant part of section 17 of the Act, which is as under : "17. For the purposes of sections 15 and 16 and of this section,--- (1) 'salary' includes--- (i) wages ; (ii) any annuity or pension ; (iii) any gratuity ; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages ; (v) any advance of salary ; (va) any payment received by an employee in respect of any period of leave not availe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f payments in the word "salary"---(i) fees, (ii) commissions, (iii) perquisites, and (iv) profits in lieu of or in addition to salary. In common parlance, fees, commissions, perquisites or payments of profits in lieu of salary may not be considered to be salary. But by this inclusive definition, it has been provided so. After giving this exhaustive definition of the word "salary", a further inclusive definition is given to the word "perquisite", with which we are not concerned in these appeals. There after, clause (3) provides for an inclusive definition of the phrase "profits in lieu of salary". Sub-clause (i) of clause (3), inter alia, includes the amount of any compensation received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto. The inclusion of this amount of compensation has a direct connection with the employment or the terms and conditions relating thereto. In the context of the aforesaid clauses (1), (2) and (3), appropriate meaning to the words and phraseology used in sub-clause (ii) is to be given. It has been contended by learned counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment received from the employer relatable to or out of profits or it has nothing to do with the "profits" as understood in common parlance ? Or whether "profits" is to be understood as any gain or advantage in lieu of salary or in addition to salary for which any payment is received by the assessee. It is submitted that "salary" includes any payment out of "profit" in lieu of salary. Instead of salary any amount is paid in terms of profits, then the same is included in "salary" as it is "profits in lieu of salary". The basis for payment of such amount is "profits". So the expression "any amount" received by the employee is relatable to the profits of the employer and that payment out of profit is considered to be salary by the inclusive definition. Reference is made to Earl Jowitt's The Dictionary of English Law which mentions profit as---"an arrangement whereby an employer agrees that his employees shall receive a share, fixed before hand, in the profits of the undertaking". Hence, it is submitted that payment received by the employee should be relatable to profits and whatever amount is paid to an employee---is paid in lieu of salary out of profits. Instead of paying salary, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et income for the period. Gain realised from business or investment over and above expenditures. Profit means accession of good, valuable results, useful consequences, avail, gain, as an office of profit, excess of returns over expenditures or excess of income over expenditure." U. S. v. Mintzes, D. C. Md., 304 F. Supp. 1305, 1312. "The benefit, advantage, or pecuniary gain accruing to the owner or occupant of land from its actual use ; as in the familiar phrase 'rents, issues and profits,' or in the expression 'mesne profits.' Profit-sharing plan---A plan established and maintained by an employer to provide for the participation in the profits of the company by the employees or their beneficiaries. In order to qualify for tax benefits, the plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. Such plans are regulated by the Federal Employee Retirement Income Secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the phrase "profits in lieu of salary" what is included is "any payment" which must be out of the profits, i.e., sharing of the profits by the employer. For this purpose, he further referred to the words "any fee, commission, perquisites or profits" used in section 17(1)(iv) and pointed out that in the inclusive definition the Legislature wanted to include fee, commission or perquisites which normally cannot be included in the word "salary" by specifically mentioning the same. It is also submitted that similarly what is included in the word "salary" is only "profits in lieu of salary". Therefore, any payment received by the employee from the employer would have limited meaning and is referable only to payments received out of profits. As against this, learned counsel for the Revenue submitted that salary includes profits in lieu of salary which in turn includes any payment received by an assessee front an employer. The word "profits" is to be given its plain meaning to mean any benefit, advantage or pecuniary gain accruing to the assessee. Therefore, any payment received by an assessee from an employer would be profits in lieu of salary or in addition to salary. For the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny payment" due to or received by an assessee from an employer, even though it has no connection with the profits of the employer. It is true that the Legislature might have avoided giving an inclusive meaning to the word "salary" by stating that any payment received by the employee from an employer would be considered to be salary except the payments which are excluded by section 17(3)(ii), i.e., clauses (10), (10A), (10B), (11), (12), (13) or (13A) of section 10. However, it is for the Legislature to decide the same. This would not mean that by giving an exhaustive and inclusive meaning, the word "profits" can be given a meaning only when it pertains to sharing of profits by the employer. For the assessee, the receipt of such amount would be a profit, gain or advantage in addition to salary, even though it is not named as salary. Therefore, the word "profits" in the context is required to be understood as a gain or advantage to the assessee. Hence, it is not possible to accept the contention of learned counsel for the employees that as the city compensatory allowance amount is paid to meet the additional expenditure as contemplated by the statutory service rules, it cannot be sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferring to the Fundamental Rules framed by the Central Government or by the statutory authorities for payment of city compensatory allowance, house rent allowance or other such allowance for reimbursing the expenditure incurred by employees. Further, equity or hardship would hardly be a relevant ground for interpretation of tax law. It is for the Government or the statutory bodies to do the needful. However equitable it may be that the city compensatory allowance cannot be held to be "profit" in the hands of the assessee or it is not a share out of profit, yet it cannot be helped in view of the inclusive and exclusive meaning given under the Act. In the result, we hold that dearness allowance, city compensatory allowance and house rent allowance would be taxable income. Since counsel for the employees did not make any submission with regard to other allowances like night allowance, tuition fee, leave enacashment linked with leave travel concession, running allowance, etc., we do not pass any order with regard to those allowances. Accordingly, Civil Appeals Nos. 1784-86 of 1988, 6054 of 1994 and 6058 of 1994, filed by the Revenue and General Insurance Corporation and others, re ..... 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