KARAMCHARI UNION, AGRA v. UNION OF INDIA AND ORS

Citation: [2000] 2 S.C.R. 33

Court: Supreme Court of India

Bench: M.B. SHAH, D.P. MOHAPATRA

Judgment text

'' KARAMCHARI UNION, AGRA V. UNION OF INDIA AND ORS. FEBRUARY29, 2000 [D. P. WADHWAAND M. B. SHAH, JJ. ] Income Tax Act, 1961 : Sections 17 and 2(24). Income Tax-DA, CCA and HRA-Taxability of-Held: DA, CCA and HRA are income under the head 'salary' and hence taxable-Contention that holding such allowances as taxable would result in hardship to honest employees, rejected. Income Tax-"Profits in lieu ofsalary"-Night allowance, tuition fee, leave encashment linked with leave travel concession, running allowance etc. - Taxability of-Question left open. Income Tax Act-Nature of-Held: Is a self-contained Code-Taxability ofan allowance has to be determined on the basis ofthe meaning given to the words or phrases in the Act. Interpretation ofStatutes : Taxing Statutes-Equity or hardship-Relevancy of-Held: Not relevant for interpretation oftax law. Words and Phrases: "Salary"-Meaning of-Jn the context ofS. 17(1) ofthe Income Tax A. ct, 1961.

"Profits in lieu ofsalary"-Meaning of-In the context ofS. 17(3) ofthe Income Tax Act, 1961. "Income"-Meaning of-In the context ofS. 2(24) ofthe Income Tax Act, . 1961. "Profits"-Meaning of The appellants were paid apart from their salary and other perquisites, allowances in the form of City Compensatory Allowance (CCA), Dearness Allowance (DA) and House Rent Allowance (HRA). The appel- ~~ lants filed a writ petition before the High Court challenging the inclusion ofthese allowances in their income for the purpose of income tax under the Income Tax Act, 1961. The High Court dismissed the petition holding that these allowances were taxable income. Hence these appeals.

On behalf of the appellant-assessees it was contended that CCA and HRA could not be included in the word 'salary' as defined in Section 17 of the Act; that if the Legislature wanted to include any payment received by the employee in its widest sense, there was no necessity to give such an exhaustive definition of the word 'salary' in Section 17 of the Act and to connect it with 'profits in lieu of salary'; that if such a simple definition that 'salary' includes 'any payment' received by the employee from the employer was intended to be given, the legislature would not have given inclusive meaning to the expression 'profits in lieu of salary' and the phrase 'any payment received by the employee' would be sufficient for all the purposes; that the legislature could have easily avoided giving of not only such exhaustive definition but number of amendments and additions to the said Section; that the expression "any payment'' occurring in Section 17(3)(ii) received by the employee was relatable to the profits of the employer and that payment out of profit was considered to be the salary by the inclusive definition thereof, that there was no question of payment of CCA or HRA out of 'profits' earned by the Government or statutory , corporations, receipt of such amount would not be covered by the phrase 'profitin lieu ofsalary'; that the word 'profit' should be understood under the Act in its natural and proper sense as is evident from Section 28 of the Act; that CCA could not be termed as 'profits' by any standard because the amount was calculated in such a manner that it reimbursed less than extra cost incurred by the employees at a station where they were posted; and that by including these payments as taxable it would cause hardship to -the honest employees.

On behalf of the respondent-Revenue it was contended that ''salary" includes profits in lieu of salary and "profits in lieu ofsalary" include'any payment' received by the assessee fi:om the employer except which are excluded and, therefore, CCA, DA and HRA were taxable income. Disposing of the appeals, this Court HELD: 1. 1. The Income Tax Act, 1961 is a self-contained Code and KARAMCHARI UNION v. U. O. I. 35 the taxability of the receipt of any amount or allowance is to be determined on the basis of the 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 Section 17(3) is any payment referable to clause (lO)[clause (10-A)], [clause lO(B)], clause (11), clause (12) or [clause (13-A)] of Section 10.

In view of the specific inclusion and exclusion in the meaning of the word 'Income' and 'salary', the 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' received by the employee. [48-E-H] Webster's Comprehensive Dictionary, Earl Jowitt. "The Dictionary of English Law" and Black's Law Dictionary, referred to. 1. 2. Applying the general meaning given 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'. Since the inclusive meaning given to the phrase 'profits in lieu of salarv' would include 'any payment' due to or received by an assessee from a~. employer, even though it has no connection with the profits of the employer.

It is true that Legislature might have avoided giving of inclusive meaning 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). However it is for the Legislature to decide the same. This would not mean that by giving 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. Hence, it is to possible to accept the contention of the employees that as the City Compensatory Allowance (CCA) 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. Hence, it would be part and parcel of income by way of salary, which would be a taxable one.

[49-C-H] 2. It 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. Tuxation of income is not dependent upon its destination or the manner of its utilisation. [50-E-F] TuticorinAlkali Chemicals &Fertilizers Ltd. v. CIT, (1997) 6SCC117, relied on. CIT v. R. R. Bajoria, (1998) 169 ITR 162 (Cal. ); CIT v. D. R. Pathak, (1975)99 ITR 14 (Born. ) and Syndicate Bank Officers' Association v. Union . ofIndia, (1989) 176 ITR 223 (Cal. ), overruled. Bishambar Dayal v. CIT, 103 ITR 813 (MP); CITv. S. G. Pgnotale, 124 ITR 391; Pondicherry Railway Co. Ltd. v. CIT, AIR (1931) PC 165; U. S. v. Mintzes, D.

C. MD. , 304 F. Supp. 1305, 1312 and Regional Director, ES/ v. High Land Coffee Works of P. F. X. Saldanha & Sons, AIR (1992) SC 129, referred to. 3. Thus, DA, CCA and HRA would be taxable income. However, itis not necessary to pass any order with regard to other allowances like night allowance, tuition fee, leave encashment linked with leave travel concession, running allowance etc. since no arguments were advanced on these issues. [51-A-B] CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1843of1989. From the Judgment and Order dated 12. 9. 88 of the Allahabad High Court in C. M. W. P. No. 470 of 1988. With Civil Appeal Nos. 1784-86/88, 6054/94, 1853-56/2000 and 6058/94 From the Judgment and Orders dated 24. 7. 87, 21. 3. 88, 12. 9. 88, 21. 3. 88 of the Calcutta, Allahabad and Calcutta in I. T. R. No. 97/77, Matter No. Nil/ 88, C. M. W. P. Nos. 328, 366, 400 and 1295/88 and Matter No. Nil/88. K. N. Shukla, Shanti Bhushan, Sanjeev Kapoor, N. Verma, Prashant Bhushan, A. Shrivastava, Ms.

Renu George, S. K. Dwivedi, S. C. Dhanda, Rajesh Srivastava, Ujjwal Banerjee, S. K. Puri, H. K. Puri, P. Parameshwaran, K. R. Nambiar, Buddy A. Ranganadhan, A. V. Rangam. P. I. Jose, Jenis Francis, B. K. Prasad, V. J. Francis, Ms. A. Subhashini and A. V. Ranganadhan for the appearing parties. The Judgment of the Court was delivered by SHAH, J. Leave granted in special leave petitions. Civil Appeal No. 1843 of 1989 & C. A. Nos. 1853-1856 Of 2000 @SLP(C) Nos. 15477-80 of 1988: 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 Nos. 1853-56 of 2000 @ S. L. P. (C) Nos. 15477- 80 of 1988 disputing the taxability of various allowances, namely, D. A. , CCA, HRA, Leave encashment, linked with leave, travel concession, running allowance, night allowance, etc. All the writ petitions. were disposed of by common judgment and order dated 12. 9. 1988 by the High Court of Allahabad. The question for consideration before the High Court was - whether the receipts on account of CCA, HRA and DA are in the nature of income entailing tax liability?

Before deciding the above question, the Court considered the legislative intent behind the passing of relevant section 17 which defines 'salary', and the addition of Explanation to sub-section (14) of Section 10. The High Court dismissed the writ petitions holding inter alia that: (1) the Income Tax, 1961 is a self contained code to judge the taxability of a particular receipt and the taxability of D. A. , H. R. A. and CCA will have to be seen only within the scheme of the Act. That HRA, CCA and DA are not the reimbursements of necessary disbursements. It is only for determina- tion of CCA that the Central Govt. will take care that grant of compensatory allowance does not become a source of profit to the employees, but it does not mean that the allowance in the nature of HRA, CCA and DA do not amount to an advantage. The allowances are surely in addition to pay. (2) The tuition fee's reimbursement is fully covered by S.

17(3)(ii), and the payment is not covered by any of the clauses of Section 10. (3) The leave encashment linked with leave travel concession is taxable, being the 'profits in lieu of salary' within the meaning of Section 17(3)(ii). (4) The running allowance and night allowance come to th. :: employees as an advantage by virtue of their employment. They are, therefore, 'perquisite' within the meaning of s. 17(1)(iv) read with s. 17(2) and hence are taxable under the head 'salaries' under s. 14, read with s. 17. The Court held that any type of reimbursement is fully covered by Section 17(3)(ii) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") inasmuch as the payment is not covered by any of the clauses of Section 10 as mentioned in parenthetical clause of Section l7(3)(ii). The Court, therefore, held that CCA, HRA and D. A. would be taxable income. Civil Appeal, Nos. 1784-86 of 1988.

->-,- 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 p holding that the CCA paid to the assessee did not have the character of income within the meaning and scheme of the Income Tax Act, 1961. Following three questions were referred to the High Court by the Tribunal for decision: - l. Whether, 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) of the 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 assessee's 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 admissibie 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 ofIncome 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. 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 of the 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 under the Income Tax Act, 1961. The High Court answered Question Nos. I 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. 6054194 and 6058194. Respondents-employees of the L. l. C. and G. l. 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 ofIndia 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 Cor}Jorations. Whether CCA, HRA orother such payment to the employee is covered by the word 'income' as defined under the Act? In all these appeals it is conceded that in view of the amendment of clause (24) of Section 2 of the Act, it would be difficult to say that the amount received as CCA or HRA would not be covered by the inclusive definition of the word 'income': Relevant clauses of Section 2(24) read as under: - "2(24) "Income includes- (i) to (iii) ...

(iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit; (iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living.. " The said clauses are added by Direct Tax Laws (Amendment) Act, 1989, w. e. f. 1. 4. 1962. In C. I. T. , Calcutta v. R. R.

Bajoria, (1988) 169 ITR 162, the Calcutta High Court considered this argument in detail and arrived at the conclusion that considering Rule 44 of Fundamental Rules applicable to the Central Government employees, CCA paid to them is neither an emolument nor a fee nor a profit nor even a perquisite but was only a payment for part of the reimbursement of the extra expenses incurred by the assessee as of necessity by reason of his posting. The Court observed "the said allowance does not have the character of income within the meaning and scheme of the 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 assessee for the extra expenditure necessarily to be incurred by him as a result of his being posted in a city".

In view of the afore-quoted amendment of the word 'income', any special allowance or _penefit specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the purpose of the duties of an office would be included in the word 'income'. It has also been pointed out that under sub-clause (iii b) any allowance granted to the assessee either to meet his person orations do pay something less than what is required to be reimbursed and the receipt of CCA can not 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 hal'dly be 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 CCA cannot be held to be 'profit' in the hands of the assessee or it is not share out of 11rofit, yet it cannot be helped in view of inclusive and exclusive meaning given under the Act. In the result, we hold that DA, CCA and HRA 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 encashment linked with leave travel concession, running allowance etc. we do not pass -- any order with regard to those allowances. A Accordingly, Civil Appeal Nos.

1784-86 of 1988, 6054/94 and 6058/94 filed by the Revenue and General Insurance Corporation and others respectively are allowed and Civil Appeal Nos. 1843/89 and C. A. Nos. 1853-1856 of 2000 @ SLP (C) Nos. 15477-80 of 1988 filed by Karamchari Union. Agra and All India Defence Accounts Association, Poona and others respectively B are dismissed. There shall be no order as to costs. v. s. s. Appeals allowed/dismissed.