High Court Of Calcutta
CIT vs. R.R. Bajoria
Sections 2(45), 10(14), 16(v)
Asst. Year 1970-71, 1971-72, 1972-73
Dipak Kumar Sen & Shyamal Kumar Sen, JJ.
IT Ref. No. 97 of 1977
24th July, 1987
Counsel Appeared
A.N. Bhattacharjee, for the Revenue : Dr. Debi Pal with R.N. Dutta, as amicus curiae.
SHYAMAL KUMAR SEN, J.:
The facts found and proceedings culminating in the instant reference are, inter alia, that R.R. Bajoria, the assessee, is a member of the Indian Revenue Service. According to the terms and conditions of his service, he is liable to be transferred and posted in any city or town within the Union of India. In respect of the assessment years ending 1970-71, 1971-72 and 1972-73, the corresponding accounting years ending on the 31st March, 1970, 1971 and 1972, the assessee claimed that the amounts received by him as city compensatory allowance were not to be included in the total income of the assessee. The ITO, Central Salary Circle, rejected the claim of the assessee.
2. The assessee preferred an appeal before the AAC and reiterated that the amount received by him by way of city compensatory allowance was not taxable. AAC following an earlier decision of the Tribunal in Income-tax Appeal No. 3074 (Bom) of 1970-71, held that the said city compensatory allowance was not taxable and should not be included in the total income of the assessee and that having regard to the provisions of ss. 10(14) and 16(v) of the IT Act, 1961, the amount paid to the assessee as city compensatory allowance could not be brought to tax and the appeals of the assessee were allowed by the AAC by a consolidated order.
Being aggrieved by the said decision of the AAC, the Revenue preferred an appeal before the Tribunal. It was urged on behalf of the Revenue before the Tribunal that the finding of the AAC was not sustainable in law having regard to the amendments made in the provisions of s. 10(4) of the Act by the Finance Act, 1975. By the said amendment, an Explanation had been inserted to the said s. 10(14) of the said Act which read as follows: ” For the removal of doubts, it is hereby declared that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded, for the purposes of this clause, as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties. “
It was contended that the said Explanation be deemed to have been there always and accordingly the assessee was not entitled to the relief claimed.
3. It was also held that in view of the aforesaid amendment, the claims of the assessee were not tenable as under the said Explanation, no allowance granted to the assessee to meet his personal expenses where the duties of his office or employment were ordinarily performed or at the place where the assessee ordinarily resided would not be regarded as a special allowance to meet the expenses wholly, necessarily and exclusively incurred in the performance of the duties of the assessee.
The assessee, on the other hand, contended that the matter should be examined in the light of the scheme of the IT Act r/w the Fundamental Rules. On the basis of the Fundamental Rules governing the service conditions, the assessee claimed to be entitled to the relief. It was contended that the said amendment would not be operative in the case of the assessee. The Tribunal accepted the contentions of the assessee and held in his favour and against the Revenue.
The Tribunal accepted the contentions of the assessee. The Tribunal considered the scheme of the IT Act as also the fundamental rules governing the services of the assessee under which the said allowance was paid and held that the said city compensatory allowance did not confer any advantage on the assessee and could not be charged to tax under ss. 4 and 5 of the IT Act, 1961. The Tribunal also considered the sections relating to the computation of income and in particular ss. 10, 14, 15, 16 and 17 of the Act and held that the said allowance did not come within the charging section and could not be treated as income under ss. 2(24) and 2(45) of the IT Act, 1961. It was further held that the said allowance also did not come within the ambit of ss. 15 and 17 of the Act and, therefore, it was not necessary to consider the provisions of s. 16(v) of the Act in connection therewith. It was further held that up to the asst. yr. 1974-75, the city compensatory allowance would be allowed to be deducted as s. 16(v) of the IT Act was deleted w.e.f. April 1, 1975.
On an application of the Revenue under s. 256(1) of the IT Act, 1961, the following questions were referred to this Court by the Tribunal:
” (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 a Government servant in accordance with s. 2(24) of the IT Act, 1961, read with the Fundamental Rules and cannot come within the ambit of the meaning of total income as contained in s. 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 ss. 15 and 17 of the Act, the Tribunal was right in not considering the applicability of the provisions of s. 16(v) of the Act ?
(3) Whether, on the facts and in the circumstances of the case, upto the asst. yr. 1974-75, because of the deletion of s. 16(v) of the Act w.e.f. April 1, 1975, city compensatory allowance could be allowed as an admissible deduction under s. 16(v) of the Act ?”
It has been submitted on behalf of the Revenue before us that in view of the Explanation inserted by way of amendment to s. 10(14) of the IT Act, 1961, the assessee is not entitled to the relief claimed. The said amendment was inserted by the Finance Act, 1975, with retrospective effect. It is the contention of the Revenue that the view taken by the Tribunal is not correct in view of the amendment made as aforesaid. The said Explanation inserted by the Amendment Act, according to the Revenue, shall be deemed always to have been there and as such the assessee is not entitled to the relief claimed.
No one appeared on behalf of the assessee. The questions referred being of some substance, we invited Dr. D. Pal, a learned advocate of this Court, to act as amicus curiae in the matter. Dr. Pal drew our attention to the Fundamental Rule 9(5) which reads as follows : ” Compensatory city allowance ” means an allowance granted to meet personal expenditure necessitated by the special circumstances in which duty is performed. It includes a travelling allowance but does not include a sumptuary allowance nor the grant of free passage by sea to or from any place outside India. “
9. Dr. Pal also drew our attention to the following sections of the IT Act, 1961 : “Sec.10 : In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included …… (14) any special allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of cl. (2) of s. 17, specifically 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. Explanation.—For the removal of doubts, it is hereby declared that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded, for the purposes of this clause, as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties.” “Sec.14.— Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income.” ” Sec. 17.— For the purposes of ss. 15 and 16 and of this section,: (i)’Salary’ includes-… (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. “
10. Dr. Pal submitted before us that the amount received by way of city compensatory allowance in respect of the relevant assessment years cannot be included in the total income of the assessee inasmuch as the same was receivable by him by virtue of the Fundamental Rules which govern the terms and conditions of service of a Government employee. It is the contention of the assessee that the Fundamental Rules indicate that city compensatory allowance is given not as a source of profit or gain. It is the further contention of the assessee that in congested big cities like Bombay and Calcutta, an assessee had to spend more and to incur higher cost of living and city compensatory allowance is provided to compensate the loss which the employees suffer an account of their posting in a particular city or town. In this connection, learned counsel cited the decision in the case of CIT vs. D. R. Phatak (1975) 99 ITR 14 (Bom). In that case, the assessee was an ITO posted at Bombay. During the previous year relevant to the asst. yr. 1965-66, he received compensatory city allowance of Rs. 741 for the year. He claimed exemption of this amount under s. 10(14) of the IT Act, 1961, or, alternatively, as a deduction under s. 16(v) of the Act. The ITO rejected the claim of the assessee. On appeal by the assessee, the AAC dismissed the same relying upon the orders passed in the earlier years. On further appeal before the Tribunal, the Tribunal allowed the appeal. It took the view that all the conditions required by s. 10(14) of the Act were satisfied and the amount of compensatory city allowance received by the assessee, therefore, was exempt under that provision. It also accepted the alternative contention of the assessee that it was a permissible deduction under s. 16(v) of the Act. At the instance of the Revenue, the following two questions were referred to the High Court fordetermination :
” 1. Whether, on the facts and in the circumstances of the case, the compensatory city allowance received by the assessee was exempt from tax under s. 10(14) of the IT Act, 1961?
2. Whether, on the facts and in the circumstances of the case, the compensatory city allowance received by the assessee was deductible under s. 16(v) of the IT Act, 1961, in computing his total income ?”
The High Court answered question No.1 in favour of the assessee and as such held it unnecessary to express any opinion on question No. 2 referred to above. While answering the said question No. 1, it was held by the Division Bench of the Bombay High Court, after referring to the relevant provisions of the Fundamental Rules, that the assessee is entitled to claim exemption in respect of the compensatory city allowance under s. 10(14). It was further held that the very definition of the expression ” compensatory allowance ” shows that it is an allowance granted to meet personal expenses necessitated by special circumstances in which the duty is performed. Thus it cannot be said that there is no nexus with the performance of duty when such allowance is received by the assessee. It was further held by the Court that the actual amount received by the Government servant is much less than what he ordinarily spends by reason of his posting at a particular place. Therefore, such expenses were wholly, exclusively and necessarily incurred in the performance of the duties. The Court also observed that the sole object of the compensatory city allowance is to compensate the Government servant for the extra expenditure which he will be called upon to bear by reason of his posting at a particular place. Relying upon the said judgment, Dr. Pal urged that the assessee is entitled to claim exemption in respect of the city compensatory allowance under s. 10(14) of the IT Act. Subsequent to the said judgment, however, an explanation has been inserted by the Finance Act, 1975, with retrospective effect which has already been set out hereinbefore. The said explanation has made it clear that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded for the purpose of this clause as a special allowance granted to him for expenses wholly, necessarily and exclusively incurred in the performance of such duties. Learned counsel for the assessee urged that the said Explanation would not be applicable in the case of a government servant. His terms and conditions of appointment are governed by the Fundamental Rules. The expression “compensatory allowance” is defined in Fundamental Rule 9(5) which has already been set out hereinbefore. According to the said definition, it is really an allowance granted to meet personal expenditure necessitated by the special circumstances in which, duty is performed which includes travelling allowance but, however, does not include a sumptuary allowance nor the grant of free passage by sea to or from any place outside India.
It was also urged that the amount received by the Government servant on the basis of the grant of a compensatory city allowance is much less than what is ordinarily spent by reason of his posting at a particular place. Therefore, this allowance can never be treated as a source of profit to the recipient. The sole object of the compensatory city allowance is to compensate the Government employee which he will be called upon to bear by reason of his posting at a particular place. Dr. Pal next cited the decision in the case of Bishambar Dayal vs. CIT (1976) 103 ITR 813 (MP). In that case, the assessee, a retired Chief justice of the Madhya Pradesh High Court, claimed deduction from his total income of a sum of Rs. 4,567.75 received by him as compensatory city allowance granted by Presidential order under Art. 222(2) of the Constitution of India. A note was put up in the return that the amount of compensatory city allowance received by virtue of the Presidential order was not taxable either as salary or as income. In the alternative, it was contended on behalf of the assessee that the compensatory city allowance was not taxable by virtue of s. 10(14) as also s. 16(v) of the IT Act, 1961. The ITO upheld the assessee’s contention. However, the Addl. CIT on a perusal of the assessment order was of the view that the city compensatory allowance was in the nature of salary as defined under s. 17(1) of the IT Act, 1961, or at any rate amounted to a perquisite as defined under s. 17(2) of the said Act. On an appeal to the Tribunal, the Tribunal affirmed the view of the Addl. CIT. The questions that were referred to the High Court by the Tribunal are as follows :
” 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the compensatory city allowance received by the assessee under the provisions of Art. 222(2) of the Constitution of India was liable to be included in his total income under the head ‘ Salaries ‘ for the purpose of income-tax assessment ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the Addl. CIT had rightly held that the order passed by the ITO under s. 142(1) of the IT Act without including such compensatory city allowance in the total income of the assessee was erroneous in so far as it is prejudicial to the interests of the Revenue ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction of the house rent of Rs. 3,720 paid by him at Jabalpur, from such compensatory allowance, either under s. 10(14) or under s. 16(v) of the IT Act, while computing his total income ? “
The High Court held in favour of the assessee that city compensatory allowance is not included within the definition of salary nor can it be treated as a perquisite after considering the provisions of Art. 222(2) of the Constitution of India. The High Court was of the opinion that such sum received by the assessee was only to compensate the loss which he may suffer as a result of the transfer and as such cannot form part of his income from salary, neither can it be treated as perquisite. The Explanation inserted in s. 10(14) was not considered in the said judgment. Relying upon the said decision of the Madhya Pradesh High Court, learned counsel urged that the city compensatory allowance paid to the assessee during the relevant year was granted to him to compensate the loss for the extra expenses incurred by him in a particular city by virtue of his transfer and/or posting in a particular city and cannot be included in his total income. Learned counsel also urged that even taking into consideration the Explanation to s. 10(14) inserted by the subsequent Amendment Act, the same would not come within the scope of the said Explanation and as such cannot be included within the scope of his total income. Dr. Pal next cited the decision in the case of CIT vs. S. G. Pgnatale (1980) 124 ITR 391 (Guj). In this case, the assessee was an employee of a French company which had entered into an agreement with an Indian company for rendering certain services in Europe and also providing back-up service and other assistance in installing a plant in India. The Indian company agreed to pay a lump sum for all the services. The assessee worked in India and rendered advisory and supervisory assistance to the Indian company. In lieu of his services, the assessee was to be paid “retention remuneration” by the French company outside India. The Indian company had also agreed to pay living allowance to the foreign specialists. The allowance was likely to be reduced or increased depending upon various factors like the place where the services were to be rendered, whether free accommodation or free road transport was allowed, etc. From the question whether retention remuneration was assessable in India under s. 9(1)(ii) as salary earned in India and the living allowance was assessable as a perquisite under s. 17(2), it was held by the Gujarat High Court that the amount received as ” retention remuneration ” was not ” salary earned in India ” within the meaning of s. 9(1)(ii) and was not assessable. It was also held that the living allowance was given to the assessee as a reimbursement rather than as a personal advantage and hence was not a “perquisite “. It was not salary because it was neither a fee, commission or perquisite nor profit in lieu of or in addition to salary or wages. It was held that the amount received as living allowance was not assessable. Relying upon the said decision, Dr. Pal urged that the city compensatory allowance paid to the assessee cannot come either within the scope of salary or within the definition of special allowance or perquisite and as such cannot be included within his total income and cannot be assessed to tax.
Learned counsel for the assessee next contended that the assessee’s case cannot come within the meaning of income and also the meaning of total income and that he further urged that the assessee’s case cannot come within the charging ss. 4 and 5 of the IT Act. According to him, s. 2 (45) defines ” total income ” to mean the total income referred to in s. 5, computed in the manner laid down in the Act. Sec. 4 of the Act is captioned as ” charge of income-tax ” and it implies that income-tax shall be charged in respect of the income of the previous year of every assessee. Sec. 5 defines ” scope of total income ” and it states that subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person, or accrues or arises or is deemed to accrue or arise to him in India during such year. The words “all income from whatever source derived ” are significant inasmuch as the IT Act seeks to tax only that kind of income which arises from sources mentioned in the IT Act, namely, income from salaries, income from interest on securities, income from property, income from profits or gains from business and income from other sources. Learned counsel urged that considering the provisions in the Fundamental Rules and considering the postings of government servants throughout India, postings in big cities as a result of which city compensatory allowance is granted, it cannot be said that the assessee’s case can come within the meaning of income and also the meaning of total income and that the assessee’s case cannot come within the charging ss. 4 and 5 of the Act. It cannot be said that the actual amounts received by the Government servant is much more than what such a person ordinarily spends by reason of his posting at a particular place. There is no suggestion that any Government servant can retain or save any amount from city compensatory allowance for which it is given. Thus the city compensatory allowance cannot come within the scope of a perquisite or profit in lieu of salary on the construction of the provisions of ss. 15, 16 and 17 of the Act. It cannot be said that city compensatory allowance can be treated as a perquisite or profit in lieu of salary. Hence, the assessee’s case can come within the computation section nor within the charging section. Therefore, it is not necessary to consider the case with reference to the amendment of s. 10(14) of the Act. In this connection, learned counsel relied on the decision in the case of Nalinikant Ambalal Mody vs. S. A. L. Narayan Row, CIT (1966) 61 ITR 428 (SC). In this case, the assessee, who was an advocate, had adopted the calendar year as the accounting year and kept his accounts on the cash basis. He ceased to carry on his profession on March 1, 1957, when he was elevated to the Bench of the High Court. In the year 1958-59, during no part of which he carried on any profession, he received certain moneys on account of fees outstanding for professional work done by him. The Supreme Court, by a majority judgment, held that the receipts were not chargeable to tax at all. The receipts were the outstanding dues for professional work done and were clearly the fruits of the assessee’s professional activity. They were the profits and gains of a profession and they fell under the fourth head, viz., ” profits and gains of business, profession or vocation “. They were not, however, chargeable to tax under that head because under the corresponding computing section, i.e., s. 10 of the, Indian IT Act, 1922, an income received by an assessee, who kept his accounts on the cash basis, in an accounting year in which the profession had not been carried on at all was not chargeable to tax. Nor could the receipts be brought to tax under s. 12 as ” Income from other sources “. As the heads of income were mutually exclusive and the receipts could be brought only under the fourth head, they could not be brought under the residual head ” Income from other sources “.
It was further held that s. 3 of the Indian IT Act, 1922, does not provide that the entire total income shall be chargeable to tax. It says that the chargeability of an income to tax has to be in accordance with, and subject to, the provisions of the Act. The income has, therefore, to be brought under one of the heads in s. 6 and can be charged to tax only if it is so chargeable under the computing section corresponding to that head. Income which comes under the fourth head, i. e., professional income, can be brought to tax only if it can be so done under the rules of computation laid down in s. 10. If it cannot be so brought to tax, it cannot be brought under the residual income, i. e., “income from other sources “, and it will escape taxation even if it be included in the total income under s. 4. Relying upon the said decision, learned counsel urged that the city compensatory allowance received by the assessee neither comes under the provisions of income nor does it come within the computation sections so as to charge the same for tax and as such the same cannot be taken into account in computing the total income of the assessee.
We have carefully considered the submissions made by Dr. Pal and the cases cited by him as aforesaid and, in our opinion, the submissions made by Dr. Pal are not without substance.
It may be noted that any allowance to meet personal expenditure necessitated by exceptional circumstances in which duty is to be performed is included within the definition of the expression ” city compensatory allowance”. Fundamental Rule 44 provides that subject to any restrictions which the Secretary of State in Council may by order impose upon the powers of the Governor-Generalin-Council or the Governor-in-Council, as the case may be, the amount of city compensatory allowance should be so regulated that the allowance is not, on the whole a source of profit to the recipient. The local Government may grant such allowances to any Government servant under its control and may make rules prescribing the amounts and the considerations under which they may be drawn. Different types of city compensatory allowances are contemplated under the Supplementary Rules. For example, under Supplementary Rule 6A, grant is permitted in respect of grain compensation allowance. In the same manner, under Supplementary Rule 6B, grant is permitted owing to expensiveness of living. Similarly, under Supplementary Rule 6C, compensatory allowance by way of house rent allowance is permitted. Rates of city compensatory allowance may also vary with the class of cities. Fundamental Rule 11 provided that the whole time of a government servant is at the disposal of the government which pays him, and he may be employed in any manner required by the proper authority without the claim of additional remuneration, whether the services required of him are such as would ordinarily be remunerated from general revenues, from a local fund or from the funds of a body incorporated or not, which is wholly or substantially owned or controlled by the Government. Since payment of city compensatory allowance under the Government is neither an emolument nor fee nor profit but is a reimbursement of personal expenses required by a Government servant to be incurred on account of expenses of living at a particular place, it will not come within the definition of income or total income and will not fall with in the computation or charging sections of the IT Act.
On a careful consideration of the facts on record, the decisions to which our attention was drawn, the contention of the Revenue, the contention of the assessee raised in the proceedings below and the relevant Fundamental Rules and sections of the IT Act, 1961, it appears to us that a city compensatory allowance granted to a Government servant under the Fundamental Rules is required to be regulated in such a manner that the same would not be a source of profit to the recipient. We have noted the, provision of Fundamental Rule 44 earlier. We have already noted that the rates of city compensatory allowance vary from city to city. We also note that under the terms and conditions of his service, the assessee is liable to be posted in any city in India and if he is so posted, the assessee is bound to carry out his duties in such city. For the reasons already indicated earlier, it appears to us that the city compensatory allowance paid to the assessee was neither an emolument nor a fee nor a profit nor a perquisite but was only a payment for part reimbursement of the extra expenses incurred by the assessee as of necessity by reason of his posting. The said allowance, in our view, does not have the character of income within the meaning and the scheme of the IT Act, 1961. This is not an allowance granted to the assessee specifically to meet his personal expenses but it is an allowance meant for part reimbursement of the assessee for the extra expenditure necessarily to be incurred by him as a result of his being posted in a city. We agree with respect with the view taken by the Bombay High Court in CIT vs.D. R. Phatak’s case (supra), the Madhya Pradesh High Court and the Gujarat High Court in Bishambar Dayal’s vs. CIT case (supra) and CIT vs. S. C. Pgnatale’s case (supra) on the same question. Amount paid to the assessee on account of this allowance, in our view, does not come within the definition of income or total income nor within the purview of the computation or charging sections under the IT Act, 1961.
For the above reasons, we answer questions Nos. 1 and 2 in the affirmative and in favour of the assessee. In view of our answer to the said questions, it is not necessary for us to answer question No. 3. The reference is disposed of accordingly. Each party will pay and bear its own costs. We record our appreciation of the able assistance rendered by Dr. Pal as amicus curiae.
DIPAK KUMAR SEN, J.:
I agree.
[Citation : 169 ITR 162]
