Living allowance not salary under Income-tax Act; Retention remuneration not earned in India

The living allowance was determined not to be a perquisite under section 17(2) of the Income-tax Act, and thus not constituting the assessee's salary. The retention remuneration was held to be earned by the assessee but not in India under section 9(1)(ii). The High Court upheld the Tribunal's findings, ruling in favor of the assessee on both counts, concluding that the living allowance was not chargeable under "Salaries" and the retention remuneration was not earned in India.

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Issues Involved:
1. Whether the living allowance constituted a perquisite under section 17(2) of the Income-tax Act.
2. Whether the income computable under the head 'Salaries' had been earned in India as contemplated under section 9(1)(ii) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Living Allowance as Perquisite under Section 17(2):

The Tribunal examined the provisions of section 17(2) and concluded that the living allowance did not form part of perquisite under section 17(2) and hence did not constitute the assessee's salary. The Tribunal further noted that if the living allowance constituted a perquisite, the exemption under section 10(14) would not be attracted. The Tribunal observed that the allowance was not covered by any of the clauses (i) to (v) of the inclusive definition in section 17(2). The Tribunal relied on the principle established in Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147, which distinguished between a perquisite as a personal advantage and a reimbursement of necessary disbursement. The sliding scale of the allowance, dependent on the location and provision of accommodation, indicated it was a reimbursement rather than a personal advantage. Therefore, the living allowance was not considered a perquisite or salary and was not chargeable under the head "Salaries."

2. Income Earned in India under Section 9(1)(ii):

The Tribunal held that the retention remuneration was earned by the assessee as his salary but was not salary earned in India. The Tribunal relied on the decision of the House of Lords in McMillan v. Guest [1943] 11 ITR (Suppl) 35. The Tribunal interpreted the term "earned" in section 9(1)(ii) to mean "arising or accruing in India" rather than "service rendered in India." The Supreme Court's decision in E. D. Sassoon & Company Ltd. v. CIT [1954] 26 ITR 27 (SC) was cited, where it was held that the word "earned" implies a right to receive income, creating a debt in favor of the assessee. The Tribunal concluded that the liability to pay the salary arose outside India, and hence, section 9(1)(ii) could not be invoked. The Tribunal's reasoning diverged from the general commentary by Indian tax experts, emphasizing the need for a debt or right to receive payment for income to be considered "earned."

Conclusion:

The Tribunal's conclusions were upheld by the High Court. The living allowance did not constitute a perquisite under section 17(2) and was not chargeable under the head "Salaries." The retention remuneration was not considered earned in India under section 9(1)(ii) as the liability to pay arose outside India. Both questions were answered in favor of the assessee and against the revenue.

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