Salary for section 40A(5) includes dearness allowance; Rule 3's salary definition applies only to rent-free accommodation valuation.

Dearness allowance is includible in "salary" for computing disallowance under section 40A(5) because Explanation 2 to that provision adopts the meaning of salary in section 17(1) read with section 17(3) of the Income-tax Act, 1961, and that definition is wide enough to cover dearness allowance. The definition of salary in Explanation 1 to rule 3 of the Income-tax Rules, 1962 applies only to valuation of the perquisite of rent-free residential accommodation and does not govern section 40A(5). The departmental objection to including dearness allowance therefore fails.

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Issues: Whether dearness allowance is includible as part of salary for the purpose of computing the disallowance under section 40A(5) of the Income-tax Act, 1961, and whether the definition of salary in rule 3 of the Income-tax Rules, 1962 governs that computation.

Analysis: The expression "salary" in section 40A(5) has to be understood with reference to Explanation 2 to that section, which adopts the meaning given in section 17(1) read with section 17(3) of the Income-tax Act, 1961. That definition is wide enough to include dearness allowance. The definition of salary in Explanation 1 to rule 3 of the Income-tax Rules, 1962 is confined to valuation of the perquisite of rent-free residential accommodation and has no application to section 40A(5).

Conclusion: Dearness allowance is includible in salary for the purpose of section 40A(5), and the departmental challenge to the inclusion fails.

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