Statutory salary definition governs gratuity and leave encashment exemptions, excluding broader contractual pay concepts.

Section 10(10) and section 10(10AA) exemptions for gratuity and leave encashment must be computed strictly by reference to the definition of "salary" in Rule 2(h) of Part A of the Fourth Schedule. That statutory definition includes dearness allowance only where the terms of employment so provide and excludes other allowances and perquisites. A broader salary meaning drawn from employment terms or a bank settlement cannot enlarge the exemption. The assessee's claim for wider computation was rejected, and the tax additions were sustained.

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Issues: Whether, for exemption under section 10(10) and section 10(10AA) of the Income-tax Act, 1961, "salary" is to be computed only on the basis of basic pay and dearness allowance under Rule 2(h) of Part A of the Fourth Schedule, or whether a wider salary concept from the employment terms could be applied for gratuity and leave encashment.

Analysis: The exemption provisions expressly incorporate the definition of "salary" contained in clause (h) of Rule 2 of Part A of the Fourth Schedule. That definition includes dearness allowance only if the terms of employment so provide and excludes other allowances and perquisites. In view of this statutory mandate, the computation of exempt gratuity and leave encashment could not be expanded by relying on a separate bank settlement or broader employment-based salary description. The statutory definition alone governed the extent of exemption.

Conclusion: The additions made by the Assessing Officer and sustained in appeal were and the assessee's claim for a wider salary definition was rejected.

Final Conclusion: The appeals failed because the exemption for gratuity and leave encashment had to be worked out strictly on the statutory definition of salary under the Fourth Schedule, not on any broader contractual understanding.

Ratio Decidendi: Where section 10(10) and section 10(10AA) expressly adopt the salary definition in Rule 2(h) of Part A of the Fourth Schedule, that statutory definition alone governs the exemption and excludes wider contractual or administrative notions of salary.

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