City compensatory allowance taxed where payment was linked to posting location and personal living costs, not duties performed.

City compensatory allowance paid by reason of the place of posting, and intended to offset higher personal living costs, does not qualify for exemption under section 10(14) of the Income-tax Act, 1961. The allowance must be linked to the nature of duties and satisfy the requirement that it be incurred wholly, necessarily and exclusively in performance of those duties; a payment meeting personal expenses at the place where duties are ordinarily performed falls outside the exemption because of the retrospective Explanation inserted by the Finance Act No. 25 of 1975. On that basis, the allowance was held taxable and the exemption claim failed.

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Issues: Whether city compensatory allowance paid to an assessee posted at a particular city was exempt from tax under section 10(14) of the Income-tax Act, 1961.

Analysis: The allowance was found to have been granted not with reference to the nature of the duties performed, but exclusively with reference to the place of posting and to meet the increased personal cost of living. The Explanation inserted retrospectively by the Finance Act No. 25 of 1975 clarified that an allowance paid to meet personal expenses at the place where duties are ordinarily performed is not to be treated as a special allowance incurred wholly, necessarily and exclusively in the performance of duties. On that footing, the allowance did not satisfy the statutory requirement for exemption under clause (14).

Conclusion: The city compensatory allowance was not exempt under section 10(14) of the Income-tax Act, 1961, and the question was answered in the negative, in favour of the Revenue and against the assessee.

Ratio Decidendi: An allowance granted by reason of the place of posting, to meet personal expenses arising from higher living costs, is not exempt under section 10(14) where the statutory explanation excludes allowances paid for personal expenses at the place where duties are ordinarily performed.

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