Standard deduction on pension and compensation in lieu of salary is available, subject to the statutory ceiling.

Pension was treated as salary for the purpose of standard deduction under section 16(i) because the salary-definition provisions in section 17 extended that character to pension, so the deduction was available. Compensation received in lieu of salary was also held to qualify for standard deduction under section 16(i) because it was substitutionary in nature and therefore partook of the character of salary, subject to the statutory ceiling. The departmental challenge to denial of the deduction on pension failed, and the same deduction was recognised on compensation received in lieu of salary.

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Issues: (i) whether standard deduction under section 16(i) was allowable on pension received by the assessee; and (ii) whether standard deduction under section 16(i) was allowable on compensation received in lieu of salary.

Issue (i): Whether standard deduction under section 16(i) was allowable on pension received by the assessee.

Analysis: Pension was treated as falling within the definition of salary by reference to the relevant provisions relating to salary under section 17 of the Income-tax Act, 1961. Since standard deduction was admissible on salary, the same treatment extended to pension for the purpose of section 16(i).

Conclusion: Yes. Standard deduction under section 16(i) was allowable on pension, and the departmental challenge failed.

Issue (ii): Whether standard deduction under section 16(i) was allowable on compensation received in lieu of salary.

Analysis: The compensation was paid in substitution for salary. Amounts received in lieu of salary were treated as partaking of the character of salary for the limited purpose of the standard deduction under section 16(i), subject to the statutory ceiling.

Conclusion: Yes. Standard deduction under section 16(i) was allowable on the compensation amount, subject to the maximum prescribed under the section.

Final Conclusion: The departmental challenge to allowance of standard deduction on pension failed, and the assessee succeeded in obtaining the same deduction on compensation received in lieu of salary, resulting in relief in favour of the assessee on the entire dispute.

Ratio Decidendi: For the purpose of standard deduction under section 16(i), pension can be treated as salary under the salary-definition provisions, and compensation received in lieu of salary also qualifies for the deduction subject to the statutory limit.

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