Salary Taxation Clarified: Allowances for dearness, housing and cost of living form taxable income under the Income-tax Act.

The amendment to section 2(24) of the Income-tax Act, 1961, by inserting sub-clauses (iiia) and (iiib), brought special allowances and allowances paid to meet personal expenses or increased cost of living within the definition of "income". The clarification was treated as settling the controversy on whether dearness allowance, additional dearness allowance, city compensatory allowance and house rent allowance form part of taxable salary. Once treated as income, those allowances became part of total income chargeable under section 4 and taxable under the head "Salaries", leaving no basis for the writ challenge.

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Issues: Whether dearness allowance, additional dearness allowance, city compensatory allowance and house rent allowance formed part of the salary of salaried employees and were taxable under the head "Salaries" under the Income-tax Act, 1961.

Analysis: By the amendment to section 2(24) of the Income-tax Act, 1961, inserting sub-clauses (iiia) and (iiib), special allowances and allowances granted to meet personal expenses or increased cost of living were specifically brought within the definition of "income". The amendment was treated as clarificatory and was held to set at rest the controversy regarding inclusion of such allowances in taxable income. Once treated as income, they necessarily formed part of total income chargeable under section 4 of the Act and attracted taxation under the head "Salaries".

Conclusion: The allowances were held to be includible in taxable salary income, and the writ petition failed as infructuous.

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