House rent allowance and delayed sales tax payments treated differently under income-tax disallowance rules

Cash allowance paid by an employer to employees towards house rent was treated as part of salary for section 40A(5) computation, so it fell within the disallowance mechanism; the issue was stated to favour the assessee and against the Revenue. A payment made for delayed sales tax was characterised as a penalty arising from breach of statutory obligation, not as a deductible discharge of civil liability, so it was held non-allowable as business expenditure; this issue went against the assessee and in favour of the Revenue.

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Issues: (i) Whether cash allowance paid by the employer to employees towards house rent expenses falls within the computation for disallowance under section 40A(5) of the Income-tax Act, 1961. (ii) Whether the sum paid for delayed payment of sales tax was an inadmissible payment arising from infraction of law or a deductible discharge of civil liability.

Issue (i): Whether cash allowance paid by the employer to employees towards house rent expenses falls within the computation for disallowance under section 40A(5) of the Income-tax Act, 1961.

Analysis: Cash allowance paid to employees by way of house rent support was treated as part of salary and not as a mere perquisite for the purpose of section 40A(5). The computation of disallowance under that provision therefore included such payment, in line with the settled view earlier taken on similar allowances.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the sum paid for delayed payment of sales tax was an inadmissible payment arising from infraction of law or a deductible discharge of civil liability.

Analysis: A payment made by way of penalty for breach or delay in complying with statutory obligations is not an allowable business deduction. The character of the payment was determined by its connection with default under the tax law, rather than as a civil liability incurred in the ordinary course of business.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered on two distinct questions, with the allowance issue going in favour of the assessee and the penalty-deduction issue going against the assessee, resulting in a partly favourable outcome overall.

Ratio Decidendi: Cash allowance paid to employees as house rent assistance is to be treated as salary for the purpose of section 40A(5), whereas a payment made as penalty for breach of tax law is not deductible as business expenditure.

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