MADANLAL MOHANLAL NARANG v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2006-LL-0421-12]

Citation 2006-LL-0421-12
Appellant Name MADANLAL MOHANLAL NARANG
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 21/04/2006
Assessment Year 1997-98, 1998-99
Judgment View Judgment
Keyword Tags technical knowledge • denial of exemption • actual expenditure • special allowance • actual use
Bot Summary: During the course of assessment proceedings, the Assessing Officer noticed that the assessee was paid uniform making allowance, uniform washing allowance and academic research allowance aggregating to Rs. 65,114 in respect of which t h e assessee could not produce evidence of expenses actually spent and allowance so received. Unlike the requirements of section 10(14)(ii) which provide for exemption of a prescribed allowance to the extent 'prescribed', under section 10(14)(i) exemption is indeed confined to the extent to which an exempt allowance is actually spent for the purposes for which such allowance is granted. Section 10(14)(i), categorically exempts, any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause of section 17(2) specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit as may be prescribed. What is important is whether or not the allowances are granted to meet expense wholly, necessary and exclusively incurred in the performance of the duties of an office and whether these allowances are prescribed for the purpose of section 10(14) or not. Rule 2BB of the Income-tax Rules prescribes the allowances which are exempt under section 10(14), rule 2 BB(1)(f) provides that any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit shall be eligible for exemption under section 10(14)(i). As far educational allowance is concerned, rule 2BB(1)(e) provides that any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions is eligible for exemption under section 10(14)(i). In coming to this conclusion, we have taken particularly guided by the fact that these allowances are exempt under section 10(14)(i) read with rule 2BB; quantum of allowances is not excessive or unreasonable vis-a-vis salaries of the employees or the purposes for which allowances are granted by the employer; and there is no material to establish, or even indicate, that the any portion or whole of allowances so granted has remained unspent by assessee employee.


These two appeals are filed by same assessee involving same issues and were heard together. As matter of convenience, therefore, both of these appeals are being disposed of by way of this consolidated order. 2. We will first take ITA No. 5561/Mum./2002 i.e. Assessee's appeal for assessment year 1997-98. 3. This appeal is directed against CIT(A)'s order dated 19-8-2002 in matter of assessment under section 143(3) for assessment year 1997-98. Although assessee has raised four grounds of appeal, only grievance pressed before us is against CIT(A)'s confirmation of Assessing Officer's action in declining exemption under section 10(14) in respect of 'Uniform Making Expenses' and 'Uniform Washing Expenses'and 'Academic Research Allowance'. quantum of uniform making expenses and uniform washing expenses is Rs. 51,554 and quantum of academic research allowance is Rs. 13,560. 4. assessee-appellant is employee of Shipping Corporation of India Limited and is working as Electrical Officer on Ships owned or operated by employer i.e. Shipping Corporation of India Limited. In course of his duties assessee is required to be on ships for about 6-7 months in year. During course of assessment proceedings, Assessing Officer noticed that assessee was paid uniform making allowance, uniform washing allowance and academic research allowance aggregating to Rs. 65,114 in respect of which t h e assessee could not produce evidence of expenses actually spent and allowance so received. Aggrieved assessee carried matter in appeal before CIT(A) who confirmed disallowance by observing that 'appellant has not produced evidence regarding purchases of uniform and washing expenses' and that 'appellant individual is earning salary income' it is thus seen that purchases and washing of uniform, expenses on purchase of journals and periodicals and attending seminars are personal expenses of appellant'. assessee is not satisfied and is in appeal before us. 5. We have heard rival contentions, perused orders of authorities below, duly considered factual matrix of case and legal position. 6. We find that basic reason of declining exemption claimed by assessee is that authorities below are not satisfied about evidence of assessee having actually, spent amount of allowance for purposes for which same were granted. lot of emphasis is laid on fact that section 10(14)(i) provides any allowance for purpose of meeting expenses wholly, necessarily and exclusively incurred for purpose of official duties, as may be prescribed, but exemption is available only 'to extent to which such expenses are actually incurred for that purposes'. Assessing Officer has disallowed exemption only on basis that there were insufficient proof for expenses having been actually incurred. In appeal, CIT(A) has also held that appellant has not produced evidence regarding actual use of allowances for purpose for which same were granted. Unlike requirements of section 10(14)(ii) which provide for exemption of prescribed allowance to extent 'prescribed', under section 10(14)(i) exemption is indeed confined to extent to which exempt allowance is actually spent for purposes for which such allowance is granted. In other words, 'actual use' of allowance is one of conditions precedent for exemption under section 10(14)(i). This is in sharp contrast with exemption provisions of section 10(14)(ii) under which even quantum of exemption is to be prescribed by Rules. Having taken note of this significant distinction, however, we must also appreciate background in which this actual use condition was brought in statute and true connotations thereof in context to section 10(14)(i). 7. expression 'to extent to which such expenses are actually incurred', as finds place in section 10(14)(i), is not new to Income-tax Act. It was first introduced, with effect from 1-4-1955, in section 4(3)(vi) of Indian Income-tax Act, 1922 which dealt with exemption of allowances to salaried employees. This amendment was made in backdrop of Hon'ble Bombay High Court's judgment in case of Tejaji Farasram Kharawalla v. CIT [1948] 16 ITR 260 wherein. Their Lordships had held that exemption under section 4(3)(vi) was available even if portion of allowance was not consumed and stood as surplus in hands of employees. Subsequently, though this decision was reversed by Hon'ble Supreme Court in case of CIT v. Tejaji Farasram Kharawalla Ltd. [1968] 67 ITR 95, not before section 4(3)(vi) was amended, with effect from 1-4-1955, by Finance Act, 1955. This amendment, it appears, resulted in considerable apprehension amongst salaried employees as to how can they be expected to maintain meticulous details and evidence of expenditure incurred by them for actual usage of allowance. To allay these apprehensions, Central Board of Direct Taxes, on 1-8-1955, issued circular which is reproduced below for ready reference. 'Special allowance or benefit being reasonable and not disproportionately high. No details of expenses actually incurred need be asked for purpose of granting exemption under section 4(3)(vi) of 1922 Act. exemption under section 4(3)(vi) in respect of any special allowance or benefit will be available from assessment year 1955-56 only to extent of sanctioned amounts. Generally speaking, where specific allowance are reasonable with reference to nature of duties performed by assessee and are not disproportionately high compared to salary received by him, no attempt will ordinarily be made to call for details of expenses actually incurred by him with view to disentitling him to some extent from exemption. enquiry will, of course, be justified and will be made in cases where allowances are prima facie unreasonably high.' Source: Direct Taxes Circulars Volume 1 - 1994 Edition - Page 1.130 It is, therefore, clear that even as provisions were amended so as to allow exemption of allowance only to extent allowances were used for purposes for which same were- granted, even in this amendment did not vest Assessing Officers powers to call for details of actual expenditure unless, generally speaking, allowances are unreasonably high vis-a-vis salaries of assessee or with reference to nature of duties performed by assessees. 8. above circular was undoubtedly issued under Income-tax Act, 1922 but then all circulars issued under section 1922 Act do not cease to hold good in law. Section 297(2)(k) specifically provides that notwithstanding repeal of Income-tax Act, 1922, amongst other things, any instructions issued under any provisions of repealed Act shall, so far as not inconsistent with corresponding provisions of Income-tax Act, 1961, deemed to have been issued under corresponding provisions of new Act, and shall continue to remain in force accordingly. In other words, to extent legal provisions of 1922 Act and 1961 Act are in pari materia, circulars and instructions issued under 1922 Act will also holds good. expression view of provisions of section 297(2)(k) it still holds good and continued to be in force. expression used i.e., 'to extent to which such expenses are actually incurred' being absolutely identical in both Acts, provisions of above circular, in our humble understanding, apply under 1961 Act as well. 9. In light of aforesaid circular it is not open to revenue to call for details of expenses actually incurred unless specific allowances are disproportionately high compared to salary received by him or unreasonable with reference to nature of duties performed by assessee. It is, however, not case of revenue that allowance granted to assessee was unreasonable or excessive having regard to salary of assessee or legitimate minimum requirement for purpose for which allowances were granted. We have also noted that quantum of these allowances is prima facie reasonable vis-a-vis salary of assessee and purposes which allowances were given. Uniform washing and making allowance of Rs. 51,554 per year, which is required to be spent when half time assessee is on ships abroad cannot be, in our humble understanding, said to be excessive. Similarly, academic research allowance of Rs. 13,560 to Electrical Officer, who is qualified engineer and is required to keep abreast of technical knowledge cannot either be said to be excessive or unreasonable. In light of aforesaid circular it is not open to revenue to call for details of expenses actually incurred unless specific allowance are disproportionately high compared to salary received by him or unreasonable with reference to nature of duties performed by assessee. None of conditions is satisfied in present case. It is also not case of revenue that there is any material to indicate or establish that assessee has any unspent portion out of allowances so paid to assessee. disallowance sustained by CIT(A) therefore does not meet our approval, so far as objections taken by him are concerned. 10. There is, however, one more aspect of matter, CIT(A) has held that these allowances are in nature of personal expenses and therefore exemption under provisions of section 10(14) in respect of same cannot be granted. Section 10(14)(i), categorically exempts, any such special allowance or benefit, not being in nature of perquisite within meaning of clause (2) of section 17(2) specifically granted to meet expenses wholly, necessarily and exclusively incurred in performance of duties of office or employment of profit as may be prescribed. Therefore, what is important is whether or not allowances are granted to meet expense wholly, necessary and exclusively incurred in performance of duties of office and whether these allowances are prescribed for purpose of section 10(14) or not. Rule 2BB of Income-tax Rules prescribes allowances which are exempt under section 10(14), rule 2 BB(1)(f) provides that any allowance granted to meet expenditure incurred on purchase or maintenance of uniform for wear during performance of duties of office or employment of profit shall be eligible for exemption under section 10(14)(i). As far educational allowance is concerned, rule 2BB(1)(e) provides that any allowance granted for encouraging academic, research and training pursuits in educational and research institutions is eligible for exemption under section 10(14)(i). But then, assessee is working in ship and it cannot be said that allowance was granted to him for 'encouraging academic, research and training pursuits in educational and research institutions'. In our humble understanding, academic or research allowance could be eligible for exemption under section 10(14)(i) read with rule 2BB only when 'academic, research and training pursuits' are in educational and research institutions. There is no material to establish that this condition is fulfilled in present case. Therefore, even as we hold that observations of CIT(A) are not sustainable in law, we also hold that, on facts of present case, academic research allowance is not eligible for exemption under section 10(14)(i) of Act. In effect, CIT(A)'s action of sustaining denial of exemption to uniform making and uniform washing allowances is reversed. In coming to this conclusion, we have taken particularly guided by fact that (i) these allowances are exempt under section 10(14)(i) read with rule 2BB; (ii) quantum of allowances is not excessive or unreasonable vis-a-vis salaries of employees or purposes for which allowances are granted by employer; and (iii) there is no material to establish, or even indicate, that any portion or whole of allowances so granted has remained unspent by assessee employee. For reasons set out above, we are of considered view that CIT(A) committed error in declining exemption under section 10(14)(i) of Act in respect of 'Uniform Making Expenses' and 'Uniform Washing Expenses'. We, therefore, direct Assessing Officer to grant exemption under section 10(14)(i) in respect of above allowances. appeal is partly allowed in terms indicated above. 11. ITA No. 5561/Mum./2002 is thus partly allowed. 12. to 21. [These paras are not reproduced here as they involve minor issues]. *** MADANLAL MOHANLAL NARANG v. ASSISTANT COMMISSIONER OF INCOME TAX
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