2012 (10) TMI 839 - HC - Income Tax

Court rules dearness relief taxable as 'profit in lieu of salary' under Income Tax Act

The High Court upheld the Tribunal's decision, ruling that dearness relief is taxable as 'profit in lieu of salary' under Section 17(3)(ii) of the Income ... Dearness relief - profits in lieu of salary - salary - pension - definition of income - omnibus clause - taxable as incomeDearness relief - profits in lieu of salary - salary - omnibus clause - taxable as income - Dearness relief received by the retired High Court judge is taxable as 'profits in lieu of salary' under Section 17(3)(ii) of the Income Tax Act. - HELD THAT: - The Tribunal and this Court held that the definition of 'profits in lieu of salary' (Section 17(3)(ii)) is wide and omnibus, covering 'any payment due to or received by an assessee from an employer or a former employer.' Dearness relief paid to retiring High Court judges is a payment relatable to employment, is not gratuitous or based on extra-employment considerations, and therefore satisfies the ingredients of Section 17(3)(ii). An amount may be taxed as profits in lieu of salary even if received after cessation of employment; the parenthetical exclusions in Section 17(3)(ii) do not encompass the dearness relief. The Tribunal's reasoning that the payment is in the nature of recompense or reward for services rendered and thus falls within 'salary' for tax purposes was affirmed. [Paras 8, 10, 19, 20, 24]Dearness relief is 'profits in lieu of salary' within Section 17(3)(ii) and is taxable as income.Dearness relief - pension - definition of income - taxable as income - Dearness relief is encompassed within the definition of 'pension' under the High Court Judges (Salaries and Conditions of Service) Act and is not exempt from income tax under Section 22D of that Act. - HELD THAT: - The Court noted the amended definition of 'pension' under Section 2(gg) of the High Court Judges (Salaries and Conditions of Service) Act, 1954, which includes sums payable by way of retirement benefits. The dearness relief payable to judges, being provided for by rule and notification and forming part of amounts received as pensionary or retirement benefits, falls within that definition. Exemptions under Section 22D are limited to specified perquisites or allowances; dearness relief is not covered and therefore is includible in taxable income. [Paras 21, 22, 23, 24]Dearness relief is part of pension as defined for judges and is not exempt under Section 22D; it is includible in taxable income.Final Conclusion: The appeal is dismissed; dearness relief paid to the retired High Court judge for AY 1998-99 is taxable-it is 'profits in lieu of salary' under Section 17(3)(ii) and also falls within the pension/retirement benefits definition and is not exempt. Issues Involved:1. Taxability of dearness relief as 'profit in lieu of salary' under Section 17(3)(ii) of the Income Tax Act.2. Whether dearness relief and dearness allowance have the same meaning for tax purposes.3. Applicability of legal precedents and statutory provisions to the taxability of dearness relief.Detailed Analysis:Issue 1: Taxability of Dearness Relief as 'Profit in Lieu of Salary'The appellant-assessee, a retired High Court Judge, contested the inclusion of dearness relief amounting to Rs. 53,640/- as taxable income under the category of 'profit in lieu of salary' for the assessment year 1998-99. The Income Tax Appellate Tribunal (ITAT) upheld the Assessing Officer's (AO) decision, asserting that dearness relief falls within the ambit of 'any payment received from a former employer' as per Section 17(3)(ii) of the Income Tax Act, 1961. The Tribunal reasoned that the definition of 'profits in lieu of salary' is broad and inclusive, encompassing any payment due to or received by an assessee from a former employer, thus making dearness relief taxable.Issue 2: Dearness Relief vs. Dearness AllowanceThe appellant argued that dearness relief should not be equated with dearness allowance, which is explicitly taxable under Section 2(24)(iii)(b) of the Act. The Tribunal, however, found that dearness relief, although not explicitly mentioned in the definition of income under Section 2(24), fits within the comprehensive definition of 'profits in lieu of salary' under Section 17(3)(ii). The Tribunal emphasized that the payment is related to employment and serves as recompense for services rendered, thus qualifying as taxable income.Issue 3: Legal Precedents and Statutory ProvisionsThe appellant cited several legal precedents, including CIT v. L.W. Russel, M.C. Desai v. Union of India, and others, to argue that dearness relief should not be taxable. The Tribunal, however, distinguished these cases, noting that dearness relief is not a gratuitous payment but a legal entitlement linked to employment. The Tribunal also referred to Rule 2 of the High Court Judges (Conditions of Service) Rules, 1956, and Rule 17 of the All India Services (Death-cum-Retirement Benefits) Rules, 1958, which govern the payment of dearness relief to retiring judges. The Tribunal concluded that these rules establish dearness relief as an addition to salary, making it taxable under Section 17(3)(ii).Conclusion:The High Court upheld the Tribunal's judgment, affirming that dearness relief is taxable as 'profit in lieu of salary' under Section 17(3)(ii) of the Income Tax Act. The Court found no error in the Tribunal's interpretation of the statutory provisions and legal precedents. The appeal was dismissed, and the questions raised were decided against the assessee and in favor of the revenue.