Saturday, 9 March 2019

Whether Sumptuary allowance granted to judicial officer is exempt from payment of Income Tax?

 Sumptuary allowance:- The learned counsel for the assessee has submitted that the sumptuary allowance paid to the judicial Officer is excluded from the income as it is in the nature of entertainment allowance and not an income of the assessee. He has further contended that this allowance is paid only to meet the expenses to be incurred by the Judicial Officer on account of entertainment. He has referred to the CBDT Circular No. 35/32/66-IT(B), dated 24-9-1966 and submitted that the CBDT has clarified that the Sumptuary allowance received by a persons who is in receipt of salary from the Government is required to be deducted in computing the income chargeable under the head salaries. Thus, the learned counsel for the assessee has submitted that this amount cannot be included in the salary of the assessee for the purpose of income tax.

10. On the other hand, the ld. DR has relied upon the orders of the authorities below.

11. We have considered the rival submissions as well as the relevant material on record. The ld. CIT(A) has rejected the claim of the assessee on the ground that the assessee has not brought on record any section, notification, circular etc. as issued by the CBDT. We find that the CBDT vide letter No. 35/32/66-IT(B), dated 24-9-1966 has made it clear that sumptuary allowance has to be treated as an entertainment allowance and accordingly, the said allowance received by a person who is in receipt of salary from the Government, to the extent of such allowance are required to be deducted in computing the income chargeable under head salaries U/s. 16(ii)(a) Thus, the CBDT circular has clarified that this allowance may be regarded as entertainment allowance and exempt from payment of income tax. For ready reference we reproduced the said letter of CBDT as under:-

"Section 17 of the Income Tax Act, 1961- salary perquisite and profits in lieu of salary- sumptuary allowance being in the nature of entertainment allowance not to be included in term "salary" for the purpose of determining perquisite value of residential accommodation under Rule 3(a) of Income Tax Rules.

Letter F. No. 35-32/66-IT(B), Dated 24-9-1966

According to the Board's instruction "sumptuary allowance" has to be treated as an entertainment allowance. In view of this, the sumptuary allowance received by a person, who is in receipt of salary from the Government, to the extent that such allowance is required to be deducted in computing the income chargeable under the head "Salaries" under section 16(ii)(a), may be regarded as an allowance exempted from payment of income-tax. Allowance in the nature of entertainment allowance, to the extent such allowance is deductible under clause (ii) of section 16 is excluded from the term "salary" under Explanation (2)(iv) [as it stood before the amendment made by the Income-tax (Amendment) Rules, 1974], to rule 3(a) of the Income-tax Rules, and, therefore, sumptuary allowance may not be included in the term "salary" for the purposes of said rule."

In view of the above CBDT clarification we hold that the Sumptuary allowance is exempt from payment of income tax and accordingly to be excluded as a deduction while computing income under the head salary.

IN THE ITAT, JAIPUR BENCH, JAIPUR

ITA No. 614/JP/2016

Assessment Year: 2011-2012

Decided On: 19.06.2018

 Ajay Godara Vs. The ITO, Ward-1(3)

Hon'ble Judges/Coram:
Vijay Pal Rao, Member (J) and Vikram Singh Yadav, Member (A)




1. This appeal by the assessee is directed against the order of dated 02.03.2016 of CIT (A), Jaipur for A.Y. 2011-12. The assessee has raised the following grounds as under:-

"1. That the learned CIT Appeals-1 Jaipur was not allowed house rent allowance of Rs. 120760/-, medical allowance of Rs. 57000/-, sumptuary allowance of Rs. 68000/-, residence office allowance of Rs. 3000/- received by the assessee as exempt allowance.

2. That the learned CIT Appeals-1 Jaipur was not allowed leave encashment of Rs. 51,983 as exempt income received by the assessee from the employer, which is exempt from the tax as per judgment of Hon'ble Supreme Court of India in the civil appeal No. 4101 of 2002.

3. That the appellant have crave permission to add, alter, amend or delete any ground or grounds of appeal on or before the filing of this appeal."

2. Ground No. 1 is regarding disallowance of house rent allowance, medical allowance, sumptuary allowance and residence office allowance claimed by the assessee as exempt. The assessee is a judicial Officer of Rajasthan judicial services and at present working as Additional District Judge. The assessee filed his return of income on 02.07.2011 declaring total income of Rs. 11,97,350/-. The AO noted that the assessee has received various allowances apart from the salary and claimed the allowance as exempt from tax as under:-

1. H.R.A. allowances Rs. 1,20,760/-

2. Medical allowances Rs. 57,000/-

3. Sumptuary allowance Rs. 68,000/-

4. Residence office allowance Rs. 3,000/-

The AO disallowed the claim of the assessee by holding that as per the provisions of Income Tax Act these allowances are not exempt from tax but are part of the salary income of the assessee. The assessee challenged the action of the AO before the ld. CIT(A) and contended that as per the recommendation of the Shetty Commission these allowances are tax free and not to be included in the salary income of the assessee for the purpose of income tax. The ld. CIT(A) did not accept the contention of the assessee and confirmed the disallowance made by the AO.

3. Before us, the ld. Counsel for the assessee has submitted that these allowances have been paid to the members of higher judicial services i.e. cadre of District Judges as per outcome of the decision of Hon'ble Supreme Court and in pursuant to the recommendation of the Shetty Commission. One of the recommendation of the Shetty Commission was in relation to the grant of the house rent allowance. The recommendation was that official accommodation should be made available to the members of the judicial service who should paid as 12.5% of the salary as rent. In addition to the allotment of the government accommodation, judicial Officer should also get house rent allowance. However, the Hon'ble Supreme Court vide decision dated 21.03.2002 has held that the accommodation allotted to the judicial Officer be free of charge but no house rent allowance will be payable on such allotment being made and only when government accommodation is not made available the judicial Officer would be entitled to get house rent allowance similar to that which has been as existing or as directed by the Shetty Commission whichever is higher. Thus, the learned counsel for the assessee has submitted that house rent allowance in lieu official residence is not taxable as the same is exempted from liability to pay from the income tax in view of Section 22D of the High Court judges (salaries and conditions of service) Act, 1954. The learned counsel for the assessee has submitted that the Hon'ble Supreme Court has accepted the HRA to the extent of in lieu of official accommodation which has been existed or as directed by the Shetty Commission whichever is higher and therefore, as per the recommendation of the Shetty Commission the HRA received by the judicial officers is excluded in computed the total taxable income.

4. On the other hand, the ld. DR has submitted that only official accommodation is excluded from prerequisite received by the government official including the judges and not the HRA received in lieu of the official accommodation. The ld. DR has referred to the provisions of Section 10(13A) of the Act as well as Rule 2A of the Income Tax Rules and submitted that the HRA is exempt from income tax only to the extent of the amount to be computed in accordance with Rule 2A of Income Tax Rules. She has relied upon the orders of the authorities below.

5. We have considered the rival submissions as well as the relevant material on record. The learned counsel for the assessee has placed reliance on the recommendation of the Shetty Commission and submitted that as per the recommendation of the Shetty Commission, the HRA received by the judicial officer is exempt from tax. However, we find that this issue of entitlement of judicial official of salary and allowances as per the recommendation of the Shetty Commission was considered by the Hon'ble Supreme Court in case of All India judges Association & Ors. v. Union of India & Ors MANU/SC/0251/2002 : 2002(2) SCR 712 and held as under:-

"One of the recommendations of the Shetty Commission is in relation to the grant of the house rent allowance. The recommendation is that official accommodation should be made available to the members of the judicial service who should pay 12.5% of the salary as rent. The Commission further recommends that in addition to the allotment of the said premises, the judicial officer should also get house rent allowance. In our opinion, this double benefit is uncalled for. It is most desirable and imperative that free government accommodation should be made available to the judicial officers. Taking income consideration, the fact that the accommodation which is made available to the judges of the Supreme Court as well as the High Courts is free of charge, we direct that the official accommodation which is allotted to the judicial officers should likewise be free of charge but no house rent allowance will be payable on such an allotment being made. If, however, the Government for any reasons is unable to make allotment, or make available official accommodation, then in that event the Judicial Officer would be entitled to get house rent allowance similar to that which has been as existing or as directed by the Shetty Commission whichever is higher. However, it is made clear that once a Government or official accommodation is allotted to an officer and in pursuance thereof he occupies such an accommodation, he would not be entitled to draw house rent allowance."
Thus, the Hon'ble Supreme Court has declined to accept the recommendation of the Shetty Commission for payment of house rent allowance over and above the official accommodation provided to the Judicial Officer. Therefore, the Hon'ble Supreme Court has held that the Judicial Officers are entitled for house rent allowance only when the Government, for any reason, is not able to make allotment or make available official accommodation. Thus as per the judgment of Hon'ble Supreme Court the Judicial officers are entitled for the house rent allowance at par with the other government officials and even equal to the judges of Hon'ble High Courts subject to the quantum of allowance varies from case to case depending upon the percentage of salary. Though the house rent allowance is exempt from tax as per provisions of High Courts judges (salaries and conditions of service) Act, 1954 as well as Supreme Court judges (Salaries and conditions of service) Act, 1958 however, the payment of HRA to the Judicial Officer is not governed by the provisions of these Acts. Section 22D of High Court judges (Salaries and conditions of service) Act 1954 and Section 23D of Supreme Court judges (Salaries and conditions of service) Act 1958 are pari material. For shake of ready reference Section 23D of Supreme Court judges (Salaries and conditions of service) Act 1958 is quoted as under:-

"23D. Notwithstanding anything contained in the Income-tax Act, 1961(43 of 1961),-

(a) the value of rent-free official residence provided to a judge under sub-section (1) of section 23 or the allowance paid to him under sub-section (1A) of that section;

(b) the value of the conveyance facilities provided to a judge under section 23A;

(c) the sumptuary allowance provided to a judge under Section 23B;

(d) the value of leave travel concession provided to a judge and members of his family,

shall not be included in the computation of his income chargeable under the head "salaries" under section 15 of the Income-tax act, 1961."

Thus, it is clear that the value of rent free official residence provided to a judge or the allowance paid to him under sub-section (1A) of Section 23 is excluded is exempt from liability to pay income tax. The provisions of High Court judges (Salaries and conditions of service) Act 1954 and as well as the Hon'ble Supreme Court judges (Salaries and conditions of service) Act 1958 are applicable only in respect of the judges of Hon'ble High Courts and Hon'ble Supreme court. The Judicial Officers government by the service conditions of the state higher judiciary cannot claim the benefit of High Courts judges (Salaries and conditions of service) Act 1954 as well as the Supreme Court Judges (Salaries and conditions of service) Act 1958. Therefore, the HRA drawn by the judicial officer of state higher judiciary is exempt only to the extent of the provisions of section 10(13A) r.w.r. 2A of the Income Tax Rules. The ld. CIT(A) has considered this issue in para (iv) as under:-

"(iv) I have gone through the above submission of the appellant and found it not be convincing at all. In the above referred case, the Hon'ble Apex Court has directed the governments to provide residential accommodation to the judicial officers and in case of non-availability, HRA is to be provided. Nowhere, it is stated that the HRA would be exempt from income tax. It may be mentioned that the HRA is exempt u/s. 10(13A) of the Act and the method of computation of exempt HRA is provided in Rule 2A of the IT Rules and the amount of HRA which is exempt from income tax is to be computed according to Rule 2A. The appellant has not been able to draw my attention towards any provision of the IT Act which grant exemption on account of HRA to judicial officers. It is therefore, held that the AO was justified in making addition of Rs. 1,20,760/- on account of HRA which was claimed by the appellant as exempt."
Thus, in view of the above discussion, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue.

6. Medical allowance:- The learned counsel for the assessee has submitted that as per the provisions of section 17 and section 80D the amount not exceeding Rs. 15,000/- in a year is exempt. Thus, the ld. AR has submitted that the Hon'ble Supreme Court in its judgment dated 21.03.2002 has accepted the recommendation of the Shetty Commission for medical allowance which is given in addition to the other medical benefit as reimbursement to pay certain amounts every months to meet ordinary day to day medical needs. In case of Smt. Shilpa Sameer the Judicial Officer the Assessing officer while passing the assessment U/s. 143(3) of the Act dated 30.09.2013 has allowed the medical allowance as exempt to the extent of Rs. 15,000/-. The ld. AR has filed a copy of the assessment order dated 30.09.2013.

7. On the other hand, the ld. DR has submitted that there is no provisions in the Income Tax Act to exclude the medical allowance from prerequisite and only deduction is provided for reimbursement of medical expenses. Further, the recommendation as accepted by the Hon'ble Supreme Court is only for medical allowance of Rs. 100 per month. She has relied upon the orders of the authorities below.

8. We have considered the rival submissions as well as the relevant material on record. In view of the assessment order in case of Smt. Shilpa Sameer, we direct the AO to reconsider this issue of allowing the claim of exemption of medical allowance to the extent of Rs. 15,000/-. If the Assessment order in case of Smt. Shilpa Sameer is not disturbed till date then the claim of the assessee shall also be allowed to the extent of Rs. 15,000/-.

9. Sumptuary allowance:- The learned counsel for the assessee has submitted that the sumptuary allowance paid to the judicial Officer is excluded from the income as it is in the nature of entertainment allowance and not an income of the assessee. He has further contended that this allowance is paid only to meet the expenses to be incurred by the Judicial Officer on account of entertainment. He has referred to the CBDT Circular No. 35/32/66-IT(B), dated 24-9-1966 and submitted that the CBDT has clarified that the Sumptuary allowance received by a persons who is in receipt of salary from the Government is required to be deducted in computing the income chargeable under the head salaries. Thus, the learned counsel for the assessee has submitted that this amount cannot be included in the salary of the assessee for the purpose of income tax.

10. On the other hand, the ld. DR has relied upon the orders of the authorities below.

11. We have considered the rival submissions as well as the relevant material on record. The ld. CIT(A) has rejected the claim of the assessee on the ground that the assessee has not brought on record any section, notification, circular etc. as issued by the CBDT. We find that the CBDT vide letter No. 35/32/66-IT(B), dated 24-9-1966 has made it clear that sumptuary allowance has to be treated as an entertainment allowance and accordingly, the said allowance received by a person who is in receipt of salary from the Government, to the extent of such allowance are required to be deducted in computing the income chargeable under head salaries U/s. 16(ii)(a) Thus, the CBDT circular has clarified that this allowance may be regarded as entertainment allowance and exempt from payment of income tax. For ready reference we reproduced the said letter of CBDT as under:-

"Section 17 of the Income Tax Act, 1961- salary perquisite and profits in lieu of salary- sumptuary allowance being in the nature of entertainment allowance not to be included in term "salary" for the purpose of determining perquisite value of residential accommodation under Rule 3(a) of Income Tax Rules.

Letter F. No. 35-32/66-IT(B), Dated 24-9-1966

According to the Board's instruction "sumptuary allowance" has to be treated as an entertainment allowance. In view of this, the sumptuary allowance received by a person, who is in receipt of salary from the Government, to the extent that such allowance is required to be deducted in computing the income chargeable under the head "Salaries" under section 16(ii)(a), may be regarded as an allowance exempted from payment of income-tax. Allowance in the nature of entertainment allowance, to the extent such allowance is deductible under clause (ii) of section 16 is excluded from the term "salary" under Explanation (2)(iv) [as it stood before the amendment made by the Income-tax (Amendment) Rules, 1974], to rule 3(a) of the Income-tax Rules, and, therefore, sumptuary allowance may not be included in the term "salary" for the purposes of said rule."

In view of the above CBDT clarification we hold that the Sumptuary allowance is exempt from payment of income tax and accordingly to be excluded as a deduction while computing income under the head salary.

12. Residence Office Allowance:- The assessee received residence office allowance of Rs. 3,000/- which was claimed as exempt from tax. The AO has added the said amount to the income of the assessee. The ld. CIT(A) has confirmed the addition made by the AO.

13. Before us, the learned counsel for the assessee has submitted that this allowance is paid to the Judicial Officer on account of the expenditure incurred in maintaining the residence office and therefore, the same cannot be treated as income of the assessee.

14. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that there is no provision in the Income-tax Act to exempt the said allowance from tax.

15. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that residence office allowance of Rs. 3,000/- received by the assessee is on account of minimum day to day expenses incurred by the assessee for keeping the residence office functional. Therefore, the expenses incurred on account of official work which is reimbursed by the Government in the shape of allowance cannot be treated as income of the assessee. In our view the allowance is paid to the Judicial Officer to avoid the furnishing accounts of petty expenses by the Judicial Officer for reimbursement. Thus, to avoid the production or furnishing of account of petty expenses in respect of residence office, the allowance is paid in lieu of reimbursement of such petty expenses. Accordingly, the residence office allowance cannot be treated as income of the assessee and the same has to be excluded from the salary income.

16. Leave Encashment:- The assessee has received a sum of Rs. 51,983/- on account of leave encashment which were claimed as exempt from tax. The AO added the said amount to the total income of the assessee. The ld. CIT(A) has also confirmed the addition made by the AO.

17. Before us, the learned counsel for the assessee has submitted the Hon'ble Supreme Court in decision dated 07.02.2006 has accepted encashment of leave and leave salary of Judicial officer as tax free. He has further contended that though subsequently there is notification by the Government of Odisha dated 25.06.2013 whereby the encashment of leave admissible to Judicial Officer is made taxable. The ld. AR has thus submitted that the said notification dated 25.06.2013 cannot be applied retrospective, therefore, leave encashment for the year under consideration is tax free. Thus, the ld. AR has submitted that encashment of earned leave has been declared tax free by the Hon'ble Supreme Court which binding till the notification dated 25.06.2013.

18. On the other hand, the ld. DR has submitted that as per the provisions of Section 10(10AA)(i) of the Act the leave encashment is exempt at the time of superannuation and not during the service period. She has relied upon the orders of the authorities below.

19. We have considered the rival submissions as well as the relevant material on record. Though there is no provisions under the Income Tax Act to exempt the leave encashment from tax during the service of Government employee except the provisions of Section 10(10AA)(i) of the Act applicable at the time of superannuation. There is a notification of Government of Odisha Gazette dated 25.06.2013 which reads as under:-

"In pursuance of Government of India, Ministry of law and justice (Department of Justice), New Delhi in their letter No. 19018/03/2012-Jus, dated 19th February, 2013 and direction of Hon'ble Supreme Court, the State Government after careful consideration have decided that the encashment of leave admissible to Judicial Officers in the State shall continue to be subject to applicable taxes.

This Department earlier Resolution No. 9033/L., dated the 17th August, 2010 modified accordingly.

This has been concurred in by Finance Department vide their U.O.R. No. 41 CS-II, dated the 30th May, 2013."

Therefore, vide this notification the Government of Odisha after consulting the Ministry of Law and Justice Government of India has decided that encashment of leave admissible to Judicial Officer in state shall continue to subject to applicable taxes. The language of the said gazette notification shows that the earlier resolution dated 17.08.2010 was modified vide this gazette notification dated 25.06.2013. Therefore, the said notification cannot be applied to the assessee before us with retrospective effect. The Hon'ble Supreme Court vide decision dated 07.02.2006 has reproduced the recommendation of the Shetty Commission as enumerated from serial No. 1 to 16 and at serial No. 12 the recommendation regarding encashment of leave and leave salary is reproduced as under:-

"(12) Encashment of leave and leave salary (Judicial Officers to be allotted to encash leave not exceeding one month in a block of two years --- and tax free) "
Thereafter, vide judgment dated 21.03.2002 in case of All India Judges Association & Ors. v. Union of India and Ors. reported in MANU/SC/0251/2002 : 2002(2) SCR 712 subject to the modification all the recommendations of the Shetty Commission were accepted. The recommendation for leave encashment and leave salary was not modified by the Hon'ble Supreme Court but was accepted as recommended by the Shetty Commission. Therefore, in view of the fact that the leave encashment was recommended as tax free and accepted by the Hon'ble Supreme Court prior to the notification dated 25.06.2013 the leave encashment would be tax free. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 19/06/2018.


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