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TMI Blog1988 (9) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... s arguments relating to these allowances were adopted by the other learned counsel for the petitioners. The submission of Sri Upadhyaya is that these allowances do not amount to "income" under the provisions of the Income-tax Act, 1961 (hereinafter referred to as "the Act, 1961"), and, therefore, they are not liable to tax. Sri Upadhyaya being very firm in his submission that these allowances are not in the nature of income, no argument as an alternative was made to claim exemption under section 10 of the Act, 1961, in respect of such receipts. So, the only question for consideration is whether the receipts on account of city compensatory allowance, house rent allowance and dearness allowance are in the nature of income entailing tax liability. What is income ? Section 2(24) of the Act, 1961, gives an inclusive definition of the word "income" and says, so far as relevant, that "income" includes "(i) Profits and gains; ... (iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17 ; . . ." Section 14 sets out heads of income. If any receipt is income within the meaning of section 2(24), then the same will be brought to tax u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny reason under that head, cannot be taxed as "income from other sources" under section 56 (See Nalinikant Ambalal Mody v. S. A. L. Narayan Row, CIT [1966] 61 ITR 428 (SC)). So, either of these receipts can be taxed under the head "Salary" as defined by section 17 or not at all. To revert to the main question whether city compensatory allowance, house rent allowance and dearness allowance are of income character, we may first take into consideration as to how these receipts have been treated by the Legislature so far. Section 10 embodies several exemptions. Exemption implies or postulates income. If a given receipt is not of income character, then the same is not at all included in the total income. If a receipt is of income character, but exempted under section 10, then the same, while computing the total income, will be deducted. Section 10(13A) clearly provides exemption with regard to house rent allowance to the extent expenditure has been actually incurred towards the payment of rent. The Explanation to clause (14) of section 10, which was inserted with retrospective effect from April 1, 1962, nullified the judgment of the Bombay High Court in CIT v. D. R. Phatak [1975] 99 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the Bombay High Court that city compensatory allowance was exempt under section 10(14). By section 10(14)(ii), the Legislature has clearly provided that an allowance in the nature of dearness allowance granted to compensate an employee for the increased cost of living could be exempted by the Central Government to the extent as notified in the Official Gazette. Though clause (14) as amended with effect from April 1, 1989, will be applicable to future assessment years, i.e., assessment year 1989-90 onwards, it furnishes enough clue that the Legislature all along has treated dearness allowance as income in the past and has made a provision for future exemption subject to the condition contained therein. In J. K. Steel Ltd. v. Union of India, [1970] AIR 1970 SC 1173, the Supreme Court emphasised the importance of "Exemption" thus (headnote) : "In the case of fiscal statutes, it may not be inappropriate to take into consideration the exemptions granted in interpreting the nature and scope of the impost. Hence for finding out the scope of a particular levy, notifications issued by the Executive Government providing for exemption from that levy can be looked into as they disclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproach that when city compensatory allowance, house rent allowance and dearness allowance are not written in so many words in section 17 and, therefore, they cannot be taken to be "perquisites" or "profits in lieu of or in addition to any salary" within the meaning of section 17, is an attempt at oversimplification. The contents of section 17 have to be seen in totality and section 10(13A) and section 10(14) read with sections 10 (14) (i) and 10 (14) (ii) furnish a very valuable clue in regard to the true scope or the overall scheme of section 17. Section 10(13A) and section 10(14), read with sections 10(14)(i) 10(14)(ii), bring to the surface what is dormant, inherent and implied in section 17. Section 17 gives an inclusive definition of the word "salary". Section 17(1)(iv) reads that salary includes any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. Clause (2) of section 17 again gives an inclusive definition of the word "perquisite" Clause (3) of section 17 defines the expression profits in lieu of salary" and this too is an inclusive definition. The word "includes" is generally used as a word of extension, but the meaning of a w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , house rent allowance and dearness allowance. In CIT v. L. W. Russel [1964] 53 ITR 91, the Supreme Court interpreted the word "perquisite", occurring in Explanation I to section 7(1) of the Indian Income-tax Act, 1922 corresponding to section 17(2) of the Act, 1961, and then their Lordships clearly observed at p. 96 "The Explanation 1 to subsection (1) of section 7 of the Act gives an inclusive definition." If the submission of Sri Upadhyaya that section 17(2) though it gives an inclusive definition is exhaustive and could not extend to the special allowances in the nature of city compensatory allowance, house rent allowance and dearness allowance were correct, then the Supreme Court would not have held the corresponding provision as having given an "inclusive" definition. When Explanation I to section 7(1) of the Act, 1922, gave an inclusive definition, in the opinion of the Supreme Court, on the same analogy, section 17(2) of the Act of 1961 could not be said to be exhaustive. What is a perquisite ? Since the definition of the word "perquisite" in section 17(2) is inclusive and not exhaustive, we will be fully justified in resorting to the ordinary dictionary meaning of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other payments specifically exempted under clauses (10) to (13A) of section 10, all other payments received by an employee from an employer or former employer are liable to tax under this head. This section cannot include those payments which are made not on account of master and servant relationship, but on account of personal consideration or for reasons not connected with the employment. The expression "profit in lieu of salary " occurring in section 17(3)(ii) came up for interpretation before the Supreme Court in CIT v. G. Hyatt [1971] 80 ITR 177, but the Supreme Court cut short the matter saying at page 179 "In our opinion, the meaning of section 17(3)(ii) is plain and unambiguous. Hence, there is no need to call into aid any of the rules of construction as was sought to be done by the High Court." In our view, the essential ingredients that are to be satisfied for the purpose of application of the provisions, enacted in section 17(3)(ii), are (i) that the payment must be relatable to employment; (ii) that it must not be based on personal or extra-employment, considerations ; and (iii) that it must not be a payment falling under any of the clauses of section 10, spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the erosion in the money value. In short, the submission is that these allowances do not result in an advantage or benefit to the petitioner and, therefore, are not "perquisites" as per the ordinary dictionary meaning of the word "perquisite". It is undisputed that house rent allowance is awarded to the petitioners irrespective of the fact whether they actually incur expenditure on rent or not and whether they live in rented accommodation or in their own house. It shows that house rent allowance is not linked with the actual expenditure incurred. This type of allowance will surely be a "perquisite" within the meaning of section 17(1)(iv) read with clause (2). To do justice to those who actually incur expenditure on rent, a provision has been made in section 10(13A), as exemption from tax liability has been given in respect of the allowance actually incurred on payment of rent. Then come city compensatory allowance and dearness allowance, which the petitioners continue to get irrespective of the fact whether they actually incur the expenditure or not. Therefore, strictly speaking, house rent allowance, city compensatory allowance and dearness allowance cannot be said to be reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof exempts the special allowance or benefit specially granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose. Since we are not dealing with a case of reimbursement of necessary disbursement, the case of Owen v. Pook 1969] 74 ITR 147 (HL) cannot be pressed into service. In our opinion, to the cases in hand, the rule laid down in Fergusson v. Noble [1919] 7 TC 176 (C. Sess) and in Corry v. Robinson [1933] 18 TC 411 (CA) is fully applicable. In Fergusson's case [1919] 7 TC 176 (C. Sess), a detective officer received clothing allowance from the employer in lieu of obtaining his uniform as a policeman, free of charge. He was to buy a suit of clothes for official duties out of the allowance. Detective officers were not given police uniform, because, being in uniform, they would have been easily identified. The clothing allowance was held taxable, because that was granted to the detective officer by virtue of his office. Lord Skerrington briefly stated the legal position thus (at page 181 ) : "I must assume further that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld result from the compensatory allowance, because it is so regulated that the allowance does not become a source of profit to the recipients. This rule does not lead to the conclusion that house rent allowance, city compensatory allowance and dearness allowance are reimbursements of necessary disbursements. It is only for determination of compensatory allowance that the Central Government will take care that grant of compensatory allowance does not become a source of profit to the employees, but it does not mean that the allowances in the nature of house rent allowance, city compensatory allowance and dearness allowance do not amount to an advantage. The allowances are surely in addition to pay and this is clearly borne out from the heading of Chapter V, which runs thus: "Chapter V: Additions to pay" in Swamy's Compilation of Fundamental Rules Supplementary Rules, Part 1, General Rules. Since house rent allowance, city compensatory allowance and dearness allowance are paid to the employees by virtue of their employment over and above their salary, they are "perquisities" within the meaning of section 17(1)(iv) read with section 17(2). Since section 17(2) gives an inclusive defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include so many things which ordinarily do not fall within the concept of salary. Moreover, the aforesaid Rules, 1937, are not pari materia to the Act of 1961. The question for consideration is whether to examine the scheme of Act of 1961, aid can be taken from the Fundamental Rules governing the service conditions of the Central Government employees or from the provisions of a statute, which is not cognate or pari materia to the Act of 1961. The Income-tax Act is a self-contained code and the taxability of house rent allowance, city compensatory allowance and dearness allowance or of any other allowance will have to be seen only within the scheme of the Act of 1961. In S. Mohan Lal v. R. Kondiah, AIR 1979 SC 1132, the Supreme Court succinctly stated the legal position thus (p. 1134.) : "It is not a sound principle of construction to interpret expressions used in one Act with reference to their use in another Act, more so if the two Acts in which the same word is used are not cognate Acts. Neither the meaning nor the definition of the term in one statute affords a guide to the construction of the same term in another statute and the sense in which the term has been understood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome and, therefore, no advantage could be taken from these two authorities. Then, we turn to other allowances, the taxability of which has been disputed by some of the petitioners. In Writ Petition No. 1295 of 1988, Diesel Locomotive Workshop Mazdoor Sangh v. Union of India, the additional contention of the petitioners is that reimbursement of tuition fee is not taxable. The petitioners have filed Railway Services (Educational Assistance) Order, 1985, para 18 of which deals with reimbursement of tuition fee. Para 18 says that a railway servant shall be eligible to the reimbursement of tuition fee payable and actually paid in respect of each child, provided that no children's educational allowance under these orders is admissible to him. Sri Bharatji, learned counsel for the Revenue, says that reimbursement of tuition fee falls under sub-clause (iv) of section 17(2). The reimbursement is due to the employee and no payment is directly made by the employer in respect of the employee's obligation to the educational authorities and, therefore, the reimbursement will not be covered by sub-clause (iv) of section 17 (2). In Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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