Court includes dearness allowance in 'salary' for gratuity exemption under Income-tax Act

The court ruled in favor of the assessee, holding that 'salary' in section 10(10) of the Income-tax Act, 1961 includes dearness and special allowances for calculating the exempt portion of gratuity. The income-tax department was directed to pay costs to the respondent-assessee, including advocate's fee.

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Issues:
Interpretation of the term 'salary' in section 10(10) of the Income-tax Act, 1961 for calculating exempt portion of gratuity.

Analysis:
The case involved a question of law referred by the Income-tax Appellate Tribunal regarding the interpretation of the term 'salary' in section 10(10) of the Income-tax Act, 1961. The respondent-assessee, an employee of Canara Bank, received a gratuity and claimed exemption under section 10(10) for a portion of it based on his average basic pay, dearness allowance, and special allowance. The Income-tax Officer allowed exemption only for the basic pay portion, excluding dearness and special allowances, arguing they were not part of 'salary' under section 10(10).

The management of Canara Bank stated that special allowance was paid to employees based on skill or nature of duties, and under the bank's gratuity rules, 'salary' included special allowance. The absence of a specific definition of 'salary' in section 10(10) led to a reliance on the ordinary meaning of the term, which includes fixed compensation regularly paid for services. The court cited dictionaries to support the view that dearness allowance is part of salary, akin to basic pay, and fulfills a compensatory function.

The income-tax department argued that the bank's gratuity rules defined 'salary' differently, excluding dearness allowance. However, the court held that such internal definitions are not determinative for interpreting section 10(10) uniformly across all employees. Referring to Corpus Juris Secundum, the department contended that dearness allowance, being variable, does not qualify as fixed compensation. The court disagreed, stating that 'fixed' in this context means predetermined at the payment period, not immune to variations due to increments or pay revisions.

In conclusion, the court ruled in favor of the assessee, holding that 'salary' in section 10(10) includes dearness and special allowances for calculating the exempt portion of gratuity. The income-tax department was directed to pay costs to the respondent-assessee, including advocate's fee.

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