Bombay High Court
Life Insurance Corporation Class-I ... vs Life Insurance Corporation Of India And ... on 9 June, 1997
Equivalent citations: 1997(4)BOMCR165, [1998]229ITR510(BOM)
Author: F.I. Rebello
Bench: F.I. Rebello, M.B. Shah
JUDGMENT F.I. Rebello, J.
1. The question to be considered and decided in this petition is whether conveyance allowance paid to the members of the petitioners association is exempted from payment of tax under section 10(14) of the Income-tax Act, 1961.
2. Section 10(14) of the Income-tax Act, 1961, reads as under :
"(14)(i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of and office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose :
(ii) any such 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 the place where he ordinarily resides, or to compensate him for the increased cost of living, as may be prescribed and to the extent as may be prescribed :
Provided that nothing in sub-clause (ii) shall apply to any allowance in the nature of personal allowance granted to the assessee to remunerate or compensate him for performing duties of a special nature relating to his office or employment unless such allowance is related to the place of his posting or residence."
3. Then rule 2BB(1)(c) of the Income-tax Rules reads as under :
"any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit :
Provided that free conveyance is not provided by the employer."
4. In the present petition we are required to consider section 10(14)(i) read with rule 2BB(1)(c) and to decide whether conveyance allowance of Rs. 100 given to the employees (is) to meet expenses incurred in the performance of duties of an office. It would be clear from the following discussions that payment of Rs. 100 as conveyance allowance is not granted to meet the expenses incurred in the performance of duties of an office and has no connection with the expenditure incurred on conveyance in the performance of duties of an office.
5. The petitioner is an association of Class I officers in employment of respondent No. 1-Corporation. By a notification dated July 18, 1996, rules were framed known as the Life Insurance Corporation of India Class I Officers (Revision of Terms and Conditions of Service) (Amendment) Rules, 1996, to further amend the Life Insurance Corporation of India Class I Officers (Revision of Terms and Conditions of Service) Rules, 1985. The amended rules shall hereinafter be referred to as the Rules. By virtue of clause 11 of the said Rules, rule 9(b) has been introduced which reads as under :
"9. (b) Conveyance allowance. - Every Class I Officer, other than an officer who is in receipt of any conveyance allowance under any of the schemes of the Corporation, shall be paid conveyance allowance of Rs. 100 per month."
6. It is the contention of the petitioner that in 1996, pursuant to negotiations between the representative of the employees including the petitioner and the management of respondent No. 1, a wage settlement took place whereby the various terms and conditions of service were amended/revised. One such service condition, viz., rule 9(b), provided that an amount of Rs. 100 be paid as conveyance allowance with retrospective effect from August 1, 1994, to enable the officers to meet the expenditure incurred on conveyance in the performance of duty. As a result of the said decision every employee was to get Rs. 3,200 for the 32 month period from August 1, 1994, to March 31, 1997. The petitioner contends that it was understood by all concerned that the allowance would be exempted from Income-tax. In fact respondent No. 1 according to the petitioner issued a circular/fax message on March 21, 1996, expressly endorsing this position. It is further contended that in January, 1997, Yogakshema, an official publication of respondent No. 1, carried an article clarifying that conveyance allowance granted was not subject to tax. The petitioner, however, contends that on February 14, 1997, a circular/fax message was received by the respondent which completely reversed the position. The said circular cited instructions of respondent No. 2 which the petitioner believes to be non-existent, By the said circular, respondent No. 1 declared that conveyance allowance is to be considered as part of salary and taxed. The petitioner has also relied on an affidavit filed by Shri Sharad Chandra Kapoor, the president of the association, setting out therein that during the course of discussions, it was clearly explained that conveyance allowance would not be taxable. It was in these circumstances that the petitioners had accepted the said conveyance allowance as it was non-taxable as held out by respondent No. 1. The petitioners rely on the judgment of this court in the case of CIT v. D. R. Phatak [1975] 99 ITR 14.
7. On behalf of respondent No. 1 besides the affidavit-in-reply an additional affidavit dated April 9, 1997, has been filed on its behalf by Diwakar S. Shetty, Deputy Secretary. It is pointed out in the said affidavit that the conveyance allowance of Rs. 100 per month is not "expended in the performance of duties". It is further averred that the payment of Rs. 100 per month to every Class I officer as conveyance allowance under rule 9(b) of the Rules, who is not covered by any conveyance scheme of the first respondent, is a lump sum payment and is made even if the employee concerned be on leave of any kind other than extraordinary leave on loss of pay for any duration. An illustration has been given wherein it is pointed out that a lady officer who has availed of the maternity leave is also entitled to this allowance. It is further pointed out that this amount is paid in all the offices of the Corporation all over the country numbering more than 2,000 irrespective of classification of the city/town, or the proximity which the staff quarters/place of residence have with the office of the concerned officer. As exhibit to the said affidavit is annexed a letter from the Ministry of Finance dated April 15, 1996, addressed to the Chief General Manager, Reserve Bank of India (Establishment Section), wherein it has been pointed out that the matter of conveyance allowance has been examined by the Central Board of Direct Taxes and it is informed that the conveyance allowance paid by the Reserve Bank of India to its employees as part of salary in accordance with the terms of employment is to be treated as part of salary and is not exempted from tax. It is pointed out that in view of the said letter issued to the Chief General Manager, Reserve Bank of India, the Central Board of Direct Taxes has informed that conveyance allowance is part of salary and as such respondent No. 1 was bound to consider the same as part of the salary following which respondent No. 1 and its officers would be liable for prosecution under the provisions of the Income-tax Act. Counsel relied on the judgments in the matter of CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431 (Delhi) and in the matter of J. G. Mankad v. CIT [1965] 55 ITA 448 (Guj) to contend that conveyance allowance paid to its officers is "not expended in the performance of duties".
8. On behalf of the petitioner learned counsel contends that Notification GSR No. 286(E) dated 18th July, 1996, by which the conveyance allowance is granted to the members of the petitioner's association does not specify that the allowance is meant for coming to work or going home from work. Therefore, if the employees submit a declaration in the prescribed form that they have used the allowance "in performance of the duties of" their "office or employment of profit" then, "provided that free conveyance is not provided by the employer", the employees would be entitled to exemption prescribed in rule 2BB(1)(c) of the Income-tax Rules, 1962. It is next contended that respondent No. 2 has not directly communicated about conveyance allowance to respondent No. 1 and that the Reserve Bank of India settlement has no bearing on the notification issued by respondent No. 1 as in the case of the petitioners the conveyance allowance has been given in the nature of reimbursement whereas in the Reserve Bank of India's case it was part of the salary and that this distinguishing feature is crucial for determining the question of taxability of the allowance.
9. The question, therefore, which has to be decided is as to whether conveyance allowance which is paid to the officers represented by the petitioner association is salary or is it an allowance as set out in rule 2BB(1)(c) of the Income-tax Rules and, therefore, exempt and as such is exempted from taxation. Section 10 of the Income-tax Act specifies incomes which do not form part of total income. Clause (14) of section 10 includes special allowance or benefit, not being in the nature of perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively electrode in the performance of the duties of an office or employment of profit as may be prescribed to the extent to which such expenses are actually incurred for that purpose. In other words, the said allowance must have been used wholly, necessarily and exclusively in the performance of duty of office or employment of profit. It must be spent in the course of employment by the person concerned.
10. Can it be said that the conveyance allowance paid pursuant to rule 9(b) of the Rules is such a special allowance or benefit. The affidavit filed on behalf of respondent No. 1 indicates that the said allowance is paid to an employee whether such employee is on duty or not. It is explained that the said money is an allowance to meet the cost of expenditure spent on transportation by the officer from his residence to his office. But the allowance is not reimbursement for expenses wholly and exclusively incurred in the performance of duty as it is payable also for the period when the person is not on duty and even in case an eligible officer is on maternity leave and irrespective of the distance from the residence to the office or the place of posting at any of the 2,000 offices of respondent No. 1.
11. A similar question, whether the expenses on conveyance, wholly and necessarily incurred in the performance of duty of office of a part time professor of accountancy merits deduction under section 7(2)(iii) of the Indian Income-tax Act, 1922, came up for consideration before the Division Bench of the Gujarat High Court in the case of J. G. Mankad [1965] 55 ITR 448. In that case the assessee who was an accountant practicing and residing at Ahmedabad and who had accepted the post of part time professor of accountancy at a college at Bhavnagar on a monthly salary of Rs. 400 including travelling allowances and all other allowances, incurred expenses for travelling between Ahmedabad and Bhavnagar and claimed the sum as an exemption under section 4(3)(vi) of the Indian Income-tax Act, 1922, or as a deduction under section 7(2)(iii) of the Act. The Division Bench of the Gujarat High Court held that in order to merit deduction under section 7(2)(iii) of the Act, the expenses must be wholly and necessarily incurred in the performance of the duties of the office and, secondly, the assessee must be required by the conditions of service to incur them out of his remuneration. The Division Bench held that these are the two tests which have to be satisfied before any deduction can be claimed under section 7(2)(iii) of the Act. The Division Bench of the Gujarat High Court in answering the question relied on a judgment of the House of Lords in Ricketts v. Colquhoun [1925] 10 TC 118, wherein a similar provision, viz., rule 9 of Schedule E to the English Act had come up for consideration and which rule read as under (page 132) :
"If the holder of an office or employment of profit is necessarily obliged to incur and defray out of the emoluments thereof the expenses of travelling in the performance of the duties of the office or employment, or of keeping and maintaining a horse to enable him to perform the same, or otherwise to expend money wholly, exclusively and necessarily in the performance of the said duties, there may be deducted from the emoluments to be assessed the expenses so necessarily incurred and defrayed."
12. The Division Bench held that the assessee failed to satisfy the twin tests and consequently rejected his claim.
13. The question whether car allowance could not be treated as part of salary for the purpose of calculating the excess amount of perquisites to be disallowed under section 40A(5) of the Income-tax Act came up for consideration before the Division Bench of the Delhi High Court in the case of CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431. The Division Bench of the Delhi High Court, relying on another Division Bench judgment, held as under (page 438) :
"In our opinion, on a correct reading of section 17 of the Act, it is clear that any money given by an employer to an employee by virtue of that relationship must be regarded as salary. This court, therefore, rightly, in Instalment Supply P. Ltd.'s case [1984] 149 ITR 457, observed that such cash payment may not be regarded as perquisite, but could well be regarded as payment of salary."
14. The apex court in the case of CIT v. Tejaji Farasram Kharawalla Ltd. [1968] 67 ITR 95 had occasion to consider whether certain commission received, was wholly exempt from tax under section 4(3)(vi) of the Indian Income-tax Act, 1922 (prior to its amendment in 1955), as a special allowance, benefit or perquisite specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit from his place.
15. In that case the respondent acted as a selling agent of Ciba (India) Ltd. and was entitled to a commission of 121/2 per cent. on the sales, of which 71/2 per cent. was to be treated as selling commission and 5 per cent. as compensation in lieu of the contingency expenses which it had to meet, such as commission to dyeing masters, agents, etc. For the assessment year 1949-50, the respondent received Rs. 1,90,538 towards the 5 per cent. of the selling agency commission but had spent only Rs. 1,32,512 for meeting the contingency expenses and the question was whether the 5 per cent. of the selling agency commission was wholly exempt from tax under section 4(3)(vi) of the Indian Income-tax Act, 1922 (prior to its amendment in 1955).
16. Section 4(3)(vi) of the Indian Income-tax Act, 1922, as it then stood read as under :
"Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :
......
(vi) any special allowance, benefit or perquisite specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit."
17. The words herein are similar to the language employed in rule 2BB(1)(c) of the Income-tax Rules. The apex court on a consideration of the facts and law observed as under (page 98) :
"The clause grants exemption in respect of expenses 'incurred', but on that account an allowance granted to meet expenses to be incurred in future in the performance of the duties of an office or employment of profit is not outside the exemption claimed. In the context in which the expression 'incurred' occurs, it undoubtedly means 'incurred or to be incurred'. To qualify for exemption, the allowance must, it is clear, be granted to meet expenses incurred or to be incurred wholly and necessarily in the performance of the duties of an office or employment of profit. But the purpose for which the allowance is granted, in our judgment, is alone not determinative of the claim to exemption. An allowance, though made to a person holding an office or employment of profit, intended for appropriation towards expenditure incurred or to be incurred in the discharge of the duties, does not constitute any real income of the grantee. It is in truth expenditure incurred by the employer through the agency of the grantee. The intention of the framers of the Act was to grant exemption in respect of amounts received by the assessee, not for his own benefit, but for the specific purpose of meeting the expenses wholly and necessarily incurred or to be incurred in the performance of his duties as an agent. It would, therefore, be reasonable to hold that the allowance granted to meet the expenses wholly and necessarily incurred or to be incurred in the performance of the duties of the office or employment of the grantee alone qualifies for exemption under the Act, and any surplus remaining in the hands of the grantee after meeting the expenses does not bear the character of the allowance for meeting the expenses but for performing the duties of the office or employment. This would be so even if the employer has disabled himself from demanding refund of the amount not expended for meeting the expenses incurred or to be incurred in the performance of the duties of an office or employment of profit, and the surplus remaining in the hands of the grantee acquires for the purpose of the Income-tax Act the character of additional remuneration."
18. From a consideration of the above judgments, it is clear that the conveyance allowance must be necessarily expended for meeting expenses wholly and necessarily incurred or to be incurred in the performance of duties of an office or, as observed by the Division Bench of the Gujarat High Court in the case of J. G. Mankad [1965] 55 ITR 448, the assessee must satisfy two tests, viz., that they are expenses of which it can be said at the least that they are wholly and necessarily incurred in the performance of the duties of the office and, secondly, the expenses were also expenses which the assessee is required by the conditions of his services to incur out of his remuneration. In view of the judgment of the apex court, we have no hesitation to hold that mere use of the phrase "conveyance allowance" by itself would not mean that it is to be exempted from tax. It can be exempted only in the event the amount is expended or spent on conveyance in performance of duties of an office or employment of profit.
19. In the instant case, the affidavit filed on behalf of respondent No. 1 clearly demonstrates that the conveyance allowance in terms of rule 9(b) of the Rules is not reimbursement for expenditure incurred on conveyance in performance of duties of office. It is an allowance paid to all employees whether on duty or not irrespective of his place of residence and the place of his work and also irrespective of whether he is posted in any of the 2,000 offices of respondent No. 1. Clearly, therefore, there is no doubt whatsoever that the said allowance would not be exempt under section 10(14) of the Income-tax Act, 1961, read with rule 2BB(1)(c) of the Income-tax Rules, 1962.
20. In view of the above there is no need to consider the judgment of the Division Bench cited by the petitioners in the case of CIT v. D. R. Phatak. [1975] 99 ITR 14 (Bom).
21. For the aforesaid reasons, the writ petition is rejected. Rule is discharged, In the circumstances of the case there shall be no order as to costs.