2000 (2) TMI 11 - SC - Income Tax

City Compensatory Allowance, Dearness Allowance, and House Rent Allowance ruled taxable income under Section 17

The SC held that City Compensatory Allowance (CCA), Dearness Allowance (DA), and House Rent Allowance (HRA) are taxable income under Section 17 of the ... Taxability of City Compensatory Allowance (CCA), Dearness Allowance (DA), and House Rent Allowance (HRA) - Nature of income - receipts on account of city compensatory allowance, house rent allowance and dearness allowance - tuition fee's reimbursement - Interpretation of 'profits in lieu of salary' under Section 17 of the Income-tax Act, 1961 - meaning of the word 'profits'. HELD THAT:- In our view, even though there is much substance in the contentions raised by learned counsel for the assessee yet it is to be stated that the Act is a self-contained code and the taxability of the receipt of any amount or allowance is to be determined on the basis of meaning given to the words or phrases in the Act. Section 2(24) of the Act gives wide inclusive definition to the word 'income'. Similarly, for levying tax on salary income, exhaustive definition is given under section 17, which includes perquisites and profits in lieu of salary. The only exclusion provided under clause 3 is any payment referable to clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section 10. In view of this specific inclusion and exclusion in the meaning of the word 'income' and 'salary', it is rightly submitted that payment received by the assessee has no connection with the profits of the employer. The word 'profits' is used only to convey any 'advantage' or 'gain' by receipt of any payment by the employee. Applying the aforesaid general meaning of the word 'profits' and considering the dictionary meaning given to it under section 17(1)(iv) and (3)(ii), it can be said that 'advantage' in terms of payment of money received by the employee from the employer in relation or in addition to any salary or wages would be covered by the inclusive definition of the word 'salary'. Because of the inclusive meaning given to the phrase 'profits in lieu of salary' would include 'any payment' due to or received by an assessee from an employer, even though it has no connection with the profits of the employer. It is true that the Legislature might have avoided giving an inclusive meaning to the word 'salary' by stating that any payment received by the employee from an employer would be considered to be salary except the payments which are excluded by section 17(3)(ii), i.e., clauses (10), (10A), (10B), (11), (12), (13) or (13A) of section 10. However, it is for the Legislature to decide the same. This would not mean that by giving an exhaustive and inclusive meaning, the word 'profits' can be given a meaning only when it pertains to sharing of profits by the employer. For the assessee, the receipt of such amount would be a profit, gain or advantage in addition to salary, even though it is not named as salary. Therefore, the word 'profits' in the context is required to be understood as a gain or advantage to the assessee. Hence, it is not possible to accept the contention of learned counsel for the employees that as the city compensatory allowance amount is paid to meet the additional expenditure as contemplated by the statutory service rules, it cannot be said to be profit, gain or additional salary. Under the Act, such receipt of the amount as conceded is covered by the definition of the word 'income' and as provided it would be in addition to salary. Hence, it would be part and parcel of income by way of salary, which would be a taxable one. Taxation of income is not dependent upon its destination or the manner of its utilisation. [Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997 (7) TMI 4 - SUPREME COURT]. Therefore, there is no question of referring to the Fundamental Rules framed by the Central Government or by the statutory authorities for payment of city compensatory allowance, house rent allowance or other such allowance for reimbursing the expenditure incurred by employees. Further, equity or hardship would hardly be a relevant ground for interpretation of tax law. It is for the Government or the statutory bodies to do the needful. However equitable it may be that the city compensatory allowance cannot be held to be 'profit' in the hands of the assessee or it is not a share out of profit, yet it cannot be helped in view of the inclusive and exclusive meaning given under the Act. In the result, we hold that dearness allowance, city compensatory allowance and house rent allowance would be taxable income. Since counsel for the employees did not make any submission with regard to other allowances like night allowance, tuition fee, leave enacashment linked with leave travel concession, running allowance, etc., we do not pass any order with regard to those allowances. Accordingly, Civil Appeals, filed by the Revenue and General Insurance Corporation and others, respectively are allowed and Civil Appeal rising out of S. L. P. (C) Nos. 15477-80 of 1988, filed by Karamchari Union, Agra, and All India Defence Accounts Association, Poona and others, respectively, are dismissed. There shall be no order as to costs. Issues Presented and ConsideredThe core legal questions considered by the Court were:1. Whether city compensatory allowance (CCA), house rent allowance (HRA), dearness allowance (DA), and other similar allowances paid to government and statutory employees constitute 'income' under the Income-tax Act, 1961 (the Act).2. If such allowances constitute income, whether they are taxable under the head 'Salaries' as defined in section 17 of the Act.3. The proper interpretation of the phrase 'profits in lieu of salary' under section 17(3)(ii) of the Act, particularly whether it includes any payment received from the employer regardless of connection to employer's profits, or only payments referable to employer's profits.4. Whether allowances like city compensatory allowance, which are paid to reimburse additional expenses incurred by employees due to their posting, should be excluded from taxable income on the basis that they are reimbursements and not profits or gains.5. The applicability of exemptions under section 10 of the Act to such allowances.6. The relevance of Fundamental Rules governing government service conditions in determining the taxability of such allowances.Issue-wise Detailed Analysis1. Whether CCA, HRA, and DA constitute 'income' under the Income-tax ActLegal Framework and Precedents: Section 2(24) of the Act defines 'income' inclusively, and was amended to include:(iiia) any special allowance or benefit, other than perquisite, granted to meet expenses wholly, necessarily and exclusively for performance of duties;(iiib) any allowance granted to meet personal expenses at the place of employment or residence or to compensate for increased cost of living.Earlier High Court decisions (e.g., CIT v. D. R. Phatak, CIT v. R. R. Bajoria) had held that CCA was a reimbursement and not income.Court's Interpretation and Reasoning: The Court noted that the amendments to section 2(24) broadened the definition of 'income' to expressly include allowances like CCA and HRA. It held that these allowances fall within the inclusive definition of income, regardless of their characterization under service rules.Application of Law to Facts: The Court observed that the allowances are paid to employees as an advantage or benefit in addition to salary, and thus constitute income under the Act.Treatment of Competing Arguments: The employees argued that these allowances were reimbursements of necessary expenses and thus not income. The Court rejected this, emphasizing the statutory inclusive definition of income and that the Act is a self-contained code.Conclusion: CCA, HRA, and DA constitute 'income' under the Income-tax Act.2. Whether such allowances are taxable under the head 'Salaries' as per section 17Legal Framework: Section 17(1) defines 'salary' exhaustively to include wages, annuity, gratuity, fees, commissions, perquisites, profits in lieu of salary, advances, leave encashment, and certain provident fund accretions. Section 17(3) defines 'profits in lieu of salary' to include compensation received on termination or modification of employment and any other payments from employer not exempt under section 10.Court's Interpretation and Reasoning: The Court analyzed the phrase 'profits in lieu of salary' and held that it includes any payment received by an employee from the employer, regardless of whether it is referable to employer's profits. The word 'profits' was interpreted broadly to mean any gain, advantage, or benefit accruing to the employee.The Court rejected the argument that 'profits in lieu of salary' only applies to payments linked to employer profits. It referred to dictionary definitions and prior judicial pronouncements to support a broad interpretation.Key Findings: The Court emphasized that the Act's inclusive definitions must be accepted as they stand, and the Legislature's choice to include such payments under 'salary' indicates clear intent to tax these allowances.Application of Law to Facts: Since CCA, HRA, and DA are payments from the employer and confer an advantage, they fall within the definition of salary and are taxable accordingly.Treatment of Competing Arguments: Employees contended that these allowances are merely reimbursements and not income or salary. The Court held that taxability depends on statutory definitions, not on the nature of the allowance under service rules or its intended use.Conclusion: Allowances like CCA, HRA, and DA are taxable under the head 'Salaries' as defined in section 17 of the Act.3. Interpretation of 'profits in lieu of salary' under section 17(3)(ii)Legal Framework: Section 17(3)(ii) includes 'any payment (other than exempted payments) due to or received by an assessee from an employer' as profits in lieu of salary.Court's Reasoning: The Court analyzed whether 'profits' should be understood in its commercial sense (i.e., linked to employer profits) or as any gain or advantage. It concluded that 'profits' here means any advantage or gain, not necessarily linked to employer's profits.The Court relied on dictionary meanings and prior case law to affirm that 'profits' in this context is a broad term encompassing any pecuniary gain or benefit.Application of Law to Facts: Since CCA and HRA confer a pecuniary advantage, they qualify as profits in lieu of salary.Treatment of Competing Arguments: The employees argued for a narrow interpretation requiring connection to employer profits. The Court rejected this, noting that the statute's language and intent support a wider meaning.Conclusion: 'Profits in lieu of salary' includes any payment or advantage received from the employer, irrespective of connection to employer profits.4. Whether allowances that reimburse additional expenses should be excluded from taxable incomeLegal Framework and Precedents: Earlier High Court rulings had held that CCA was a reimbursement of necessary expenses and thus not taxable income.Court's Interpretation and Reasoning: The Court acknowledged that the allowances are intended to reimburse extra costs incurred by employees due to their posting. However, it held that for tax purposes, the statutory definitions prevail over service rules or the intended use of the allowance.The Court emphasized that the Income-tax Act is a self-contained code, and taxability is determined by statutory definitions, not by the nature or destination of the allowance.Application of Law to Facts: Even if the allowance reimburses less than actual expenses, it is still an advantage or gain and thus taxable.Treatment of Competing Arguments: Employees argued that taxing these allowances causes hardship and is inequitable. The Court stated that equity or hardship is not a relevant ground for interpreting tax laws and that any relief must come from the legislature or government policy.Conclusion: Allowances reimbursing additional expenses are taxable income under the Act despite their reimbursement character under service rules.Significant Holdings'The Income-tax Act, 1961, is a self-contained code to judge the taxability of a particular receipt and the taxability of dearness allowance, house rent allowance and city compensatory allowance will have to be seen only within the scheme of the Act.''The word 'profits' in the context is required to be understood as a gain or advantage to the assessee. Hence, it is not possible to accept the contention... that as the city compensatory allowance amount is paid to meet the additional expenditure as contemplated by the statutory service rules, it cannot be said to be profit, gain or additional salary.''Income-tax is attracted at the point when the income is earned. Taxation of income is not dependent upon its destination or the manner of its utilisation.''The word 'salary' is given an exhaustive meaning as stated in sub-clauses (i) to (vii) of section 17(1). The inclusive definition... provides that apart from salary received by the employee, it includes wages, any annuity or pension, any gratuity, any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages...''The phrase 'profits in lieu of salary' includes 'any payment' received by an assessee from an employer or a former employer except those payments exempt under section 10.''Allowances such as dearness allowance, city compensatory allowance and house rent allowance would be taxable income.'The Court thus firmly established that allowances paid to employees by virtue of their employment, including CCA, HRA, and DA, are taxable as income under the head 'Salaries' within the meaning of the Income-tax Act, 1961, regardless of their characterization as reimbursements under service rules. The inclusive definitions in the Act govern taxability, and the phrase 'profits in lieu of salary' encompasses any payment or advantage received from the employer, not limited to payments linked to employer profits.