Case: 509 Karmachari Union, Agra Vs. U.O.I.

The Appellants, in C.A. No. 1843 of 1989, are all employees of the 509 Army Base Workshop, Agra, working in different offices and governed by the Rules framed by the Government. Apart from their salary and other perquisites they are getting compensatory allowance in the form of City Compensatory Allowance (hereinafter referred to as "CCA"), Dearness Allowance (hereinafter referred to as "DA" and House Rent Allowance (hereinafter referred to as "HRA"). Appellants filed Civil Misc. Petition No. 470/98 in the Allahabad High Court challenging the inclusion of DA, HRA & CCA paid to them in their income for the purpose of Income tax. Various other petitions raising similar contentions were filed by the central government employees, employees of central government undertakings, bank employees, State government employees and general insurance employees. One such petition is before us being Civil Appeal No. of 2000 @ S.L.P.(C) Nos. 15477-80 of 1988 disputing the taxability of various allowances, namely, D.A., C.C.A, HRA, Leave encashment linked with leave travel concession, running allowance, night allowances, etc. All the writ petitions were disposed of by common judgment and order dated 12.9.1988 by the High Court of Allahabad.These appeals are filed by the Commissioner of Income Tax, West Bengal-II, Calcutta against the judgment and order dated 24th July, 1987 of the High Court of Calcutta passed in Income-tax Reference No. 97 of 1977 holding that the CCA paid to the assessee did not have the character of income within the meaning and scheme ofthe Income Tax Act, 1961. Following three questions were referred to the High Court by the Tribunal for decisionWhether, on the facts and in the circumstances of the case the Tribunal was right in holding that C.C.A. cannot come within the charging sections and/or within the meaning of income of a Government Servant in accordance with Section 2(24) ofthe Income Tax Act, 1961 read with the Fundamental Rules and cannot come within the ambit of meaning of total income as contained in Section 2(45) of the Act ?2. Whether on the facts and in the circumstances of the case when the assessees case cannot come within the provisions of Sections 15 and 17 of the Act, the Tribunal was right in not considering the applicability of the provisions of Section 16(v) of the Act ?3. Whether on the facts and in the circumstances of the case upto the assessment year 1974-75 because of the deletion of section 16(v) of the Act with effect from Ist April, 1975 C.C.A. could be allowed as an admissible deduction under Section 16(v) of the Act.It was contended before the High Court that the amount received by way of CCA cannot be included in the total income of the assessee inasmuch as the same was receivable by him by virtue of the Fundamental Rules which govern the terms and conditions of service of a Government employee. The Fundamental Rules indicate that CCA is given not as a source of profit or gain. In support of this submission counsel relied upon the decisions in Commissioner of Income Tax, Bombay City-I v. D.R. Pathak, 99 ITR 14 ; Bishambar Dayal v. Commissioner of Income Tax, MP, 103 ITR 813 and Commissioner of Income Tax, Gujarat v. S.G. Pgnotale, 124 ITR 391. It was also contended that the assessee is entitled to claim exemption in respect of CCA under Section 10(14) of the Income Tax Act and in any case, CCA cannot come either within the scope of salary or within the definition of special allowance or perquisite. Hence, it cannot be termed as `income and cannot be included within the total income and cannot be assessed to tax as per sections 4 and 5 of the Income Tax Act.6. After a careful consideration of the facts, the High Court held that C.C.A. paid to the assessee was neither an `emolument nor a `fee nor a `profit nor `perquisite but was only a payment for part reimbursement of the extra expenses incurred by the assessee as of necessity by reason of his posting. The said allowance does not have the character of income within the meaning and scheme ofthe Income Tax Act, 1961. This is not an allowance granted to the assessee specifically to meet his personal expenses, but it is an allowance meant for part reimbursement of the extra expenditure necessarily to be incurred by him as a result of his being posted in a city. Amount paid to the assessee on account of this allowance does not come within the definition of income or total income nor within the purview of the computation or charging sections underthe Income Tax Act, 1961. The High Court answered Question Nos. 1 and 2 in the affirmative and in favour of the assessee. In view of answers to the said questions, the High Court did not consider it necessary to answer question No. 3.C.A. Nos. 6054/94 and 6058/94.7. Respondents-employees of the L.I.C. and G.I.C. filed petitions under Article 226 of the Constitution before the High Court of Calcutta in Matter No. nil of 1988 praying inter alia for issue of a writ or order directing the appellants herein not to treat CCA paid and payable to the employees of the appellants-Companies as their taxable income and not to deduct income tax at source on CCA paid to them. The High Court by order dated 21.3.1988 following an earlier decision given by it on 17.3.1988 in Syndicate Bank Officers Association and Others v. Union of India and Others allowed the writ petitions and passed an order restraining the appellants-Companies and other Insurance Companies from deducting any tax on C.C.A. or any allowance in the nature of CCA in computing taxable income of the employees for the year 1987-88 onwards. Hence, these appeals by special leave are filed by the Corporations.

Reasoning:
21. In our view, even though three is much substance in the contentions raised by the 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. Only exclusion provided under sub-section (3) is any payment referable to clause (10) [clause (10A)], [clause 10(B)], clause (11), clause (12), clause (13) of [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 an `advantage or `gain by receipt of any payment by the employee.May be that this is true to the extent that Government or statutory corporations do pay something less than what is required to be reimbursed and the receipt of CCA cannot be termed as `profit in common parlance. However, for `income, `salary and its taxability under the Act, the dictionary meaning given by the Legislature is to be taken into consideration as for that purpose, it is a complete code. 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. Re. Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras (1997)6 SCC 117 . Therefore, there is no question of referring to the Fundamental Rules framed by the Central Government or by the statutory authorities for payment of CCA, HRA or other such allowance for reimbursing the expenditure incurred by the employees. Further, equity or hardship would hardly be relevant ground for interpretation of tax law. It is for the Government or the statutory bodies to be the needful. However, equitable it may be that CCA cannot be held to be `profit in the hands of the assessee or it is not share out of profit, yet it cannot be helped in view of inclusive and exclusive meaning given under the Act.