DA and HRA taxable, says Supreme Court

In a significant judgment adversely affecting millions of employees both in public and private sectors, the Supreme Court has held that the dearness allowance (DA), city compensatory allowance (CCA) and the house rent allowance (HRA) given to them would be ''taxable income.''

''There is no question of referring to the fundamental rules, framed by the Central government or by the statutory authorities, for the payment of the CCA, HRA or other such allowances for reimbursing the expenditure incurred by the employees. Further, equity or hardship would hardly be a relevant ground for interpretation of tax law. It is for the government or the statutory authorities to do the needful. However equitable it may be that the CCA cannot be held to be 'profit' in the hands of the assessee or it is not a share out of profit, yet it cannot be helped in view of inclusive and exclusive meaning given under the Income Tax Act, 1961,'' the Court observed.

The ruling was handed down by a division bench comprising Justice D P Wadhwa and Justice M B Shah while allowing appeals filed by the Revenue Department, General Insurance Corporation and others and dismissing those filed by the Karmoohari Union, Agra and the All India Defence Accounts Association, Poona and others.

The appeals were directed against the judgments of the high courts of Allahabad and Calcutta. While the Allahabad high court had held that the CCA, HRA and DA would be taxable income, the Calcutta high court had come to the conclusion that these did not leave the character of income within the meaning and scheme of the Income Tax Act, 1961.

The Supreme Court said that in view of the amendment with effect from April 1, 1962 of section 2 of the Act, it would be difficult to say that the amount received as the CCA or the HRA would not be covered by the inclusive definition of the word "Income.''

In view of the amendment in the definition of the word ''income,'' the court pointed out, any special allowance or benefit, specifically granted to an 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) of clause (24) of section 2 of the Act, any allowance granted to an employee-assessee either to meet his personal expenses at his place of work or his place of residence or to compensate him for the increased cost of living is also to be included in income. Therefore, it is conceded that the payment of the HRA or the CCA would be covered by the word 'income'. Hence, the basis of the decision rendered by the Calcutta high court would not survive,'' the court held.

It noted that the Act was a self-contained code and the taxability of the receipt of any amount or allowance was 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 a wide inclusive definition to the word 'income', similarly, for levying tax on salary income, an exhaustive definition is given under section 17, which includes perquisites and profits in lieu of salary. The only exclusion provided under sub-section 3 is any payment referable to clause (10), clause (10 a), clause 10 (b), clause (11), clause (12), clause (13), or clause (13 a) of section 10,'' the court added.

It said in view of this specific inclusion and exclusion in the meaning of the words ''income'' and ''salary,'' it was rightly submitted that payment received by the assessee had 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,'' the court clarified.

Applying the general meaning of the word 'profits' and considering the dictionary meaning given to it under section 17(i)(iv) and 3(ii), the court was of the view that 'advantage' in terms of payment of money received by an employee from his employer in relation or in addition to any salary or wages would be covered by the inclusive definition of the word 'salary.'

''Under the Act, such receipt of the amount as conceded is covered by the definition of the word 'income' and as provided, it would be in addition to salary. Hence, it would be part and parcel of income by way of salary, which would be taxable,'' the court held in its 25-page judgment.

Back