Dearness relief with pension is taxable as salary when linked to former employment and not excluded under the Income-tax Act.

Dearness relief received by a retired Judge along with pension is treated as taxable salary income where it is payable under service rules and governmental notifications and is relatable to former employment. The expression "profits in lieu of salary" is interpreted broadly to cover such payments unless they fall within an exclusion under section 10. The nomenclature used, such as "allowance" or "relief", is not decisive; the character of the receipt determines taxability. Accordingly, dearness relief is chargeable to income-tax as salary income under section 17(3)(ii) of the Income-tax Act, 1961.

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Issues: Whether dearness relief received by a retired Judge along with pension forms part of salary as "profits in lieu of salary" and is chargeable to income-tax.

Analysis: The statutory scheme of the Income-tax Act, 1961 treats "income" as including profits in lieu of salary, and salary as including such profits. The expression "profits in lieu of salary" under section 17(3)(ii) was held to be wide enough to cover any payment due to or received by an assessee from a former employer, provided it is relatable to employment and does not fall within the excluded categories under section 10. Dearness relief was found to be payable under the governing service rules and governmental notifications, and therefore not a mere gratuitous ex-gratia payment. The distinction between "allowance" and "relief" was held to be immaterial because the character of the receipt, not its nomenclature, determines taxability. The contrary authorities cited on behalf of the assessee were held not to assist the case.

Conclusion: Dearness relief is taxable as salary income as profits in lieu of salary under section 17(3)(ii) of the Income-tax Act, 1961.

Ratio Decidendi: Any payment received by a retired employee from a former employer, if relatable to employment and not excluded by section 10, falls within "profits in lieu of salary" and is taxable as salary, irrespective of the nomenclature used for the payment.

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