City compensatory allowance was held not subject to tax deduction at source, with prior deductions ordered refunded or adjusted.

Tax could not be deducted at source from city compensatory allowance, or an allowance in the nature of city compensatory allowance, paid to officers and staff. Following the Court's earlier view on the same issue, the employer was restrained from making such deductions, and amounts already deducted during the relevant financial year were to be refunded to employees. Where any deducted tax had already been deposited with the Income-tax Department, adjustment or refund was directed against tax payable in the following financial year, with liberty to recover any refunded amount if the decision were later set aside.

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Issues: Whether tax could be deducted at source from city compensatory allowance or an allowance in the nature of city compensatory allowance paid to officers and staff, and whether tax already deducted for the financial year 1987-88 was liable to be refunded.

Analysis: In view of the earlier decision of the Court on the same issue, the application was allowed. The insurance company was restrained from deducting any tax from city compensatory allowance or similar allowance. Amounts already deducted during the relevant financial year were directed to be refunded to the employees, and if any deducted tax had already been deposited with the Income-tax Department, adjustment or refund was directed against the tax payable for the following financial year. Liberty was reserved to recover any refunded amount in accordance with law if the decision were later set aside.

Conclusion: Tax could not be deducted at source from city compensatory allowance or a similar allowance, and the tax already deducted was directed to be refunded or adjusted as ordered.

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