Subsistence allowance as salary and no exemption for duty-related expenses under the income-tax law

Subsistence allowance paid to foreign technicians was treated as salary because it arose under the contract of employment and formed part of remuneration received by reason of the service, even though it was not shown to be a mere reimbursement of actual expenses. It was also held not to qualify as a special allowance exempt under section 4(3)(vi) because it was linked to subsistence and accommodation, not to expenses wholly and necessarily incurred in the actual performance of duties. The allowance was therefore taxable as salary and no exemption applied.

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Issues: (i) Whether the subsistence allowance paid to foreign technicians fell under the head "Salaries" within section 7(1) of the Indian Income-tax Act, 1922. (ii) Whether the same allowance was a special allowance specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit, so as to qualify for exemption under section 4(3)(vi) of the Indian Income-tax Act, 1922.

Issue (i): Whether the subsistence allowance fell under the head "Salaries" within section 7(1) of the Indian Income-tax Act, 1922.

Analysis: The allowance was paid under the contract of service and formed part of the remuneration received by the technicians by virtue of their employment. The nomenclature of the payment was not determinative. A receipt need not be paid directly by the employer in every case to fall within the salary head if it accrues by reason of the employment. The allowance was not shown to be a mere reimbursement of actual expenditure incurred in the performance of duties, and the content of the receipt brought it within salary or wages.

Conclusion: Yes. The subsistence allowance fell under the head "Salaries" under section 7(1), against the assessee.

Issue (ii): Whether the subsistence allowance was a special allowance specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit, so as to qualify for exemption under section 4(3)(vi) of the Indian Income-tax Act, 1922.

Analysis: To attract section 4(3)(vi), the allowance must be specially granted to meet expenses that are wholly and necessarily incurred in the actual performance of duties. The allowance in question was linked to subsistence and accommodation, not to the performance of duties as such. The record did not show that it was granted to meet duty-related expenses, and the mere fact that the assessees had to stay in India for the work did not satisfy the statutory test.

Conclusion: No. The allowance did not qualify for exemption under section 4(3)(vi), against the assessee.

Final Conclusion: The allowance was taxable as salary and did not qualify for exemption as a special allowance incurred in the performance of duties; both questions were answered against the assessees.

Ratio Decidendi: A receipt paid under a contract of employment is assessable as salary if it accrues by reason of the employment, and exemption for a special allowance is available only when the allowance is specifically granted to meet expenses wholly and necessarily incurred in the actual performance of the duties of the office.

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