1. This reference relates to a claim for exemption or deduction of the amount received by a Government servant for compensatory (city) allowance. The assessee was the Income-tax Officer posted at Bombay during the previous year relevant to the assessment year 1965-66. He received compensatory (city) allowance of Rs. 741 for that year. He claimed exemption of this amount under section 10(14) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), or, alternatively, as a deduction under section 16(v) of the Act. The Income-tax Officer rejected the claim of the assessee on the ground that in earlier years similar claims were rejected and such orders of the Income-tax Officer were confirmed in appeal by the Appellate Assistant Commissioner. On an appeal by the assessee the Appellate Assistant Commissioner dismissed the same relying upon the orders in the earlier years. On a further appeal before the Tribunal, the Tribunal has allowed the appeal. It took the view that all the conditions required by section 10(14) of the Act were satisfied and the amount of compensatory (city) allowance received by the assessee was, therefore, exempt under that provision. It also accepted the alternative contention of the assessee that it was a permissible deduction under section 16(v) of the Act. At the instance of the revenue the following two questions are referred for our determination :
'1. Whether, on the facts and in the circumstances of the case, the compensatory (city) allowance received by the assessee was exempt from tax under section 10(14) of the Income-tax Act, 1961
2. Whether, on the facts and in the circumstances of the case, the compensatory (city) allowance received by the assessee was deductible under section 16(v) of the Income-tax Act, 1961, in computing his total income ?'
2. As we are inclined to answer question No. 1 above in favour of the assessee, it is unnecessary for us to express any opinion on question No. 2 above referred to.
3. Section 10 of the Act enumerates the various things which are not to be included in computing the total income of a previous year of any person. We are concerned in the present case with the provisions of section 10(14) and they are as under :
'10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - .......
(14) any special allowance or benefit, not being in the nature of an entertainment allowance or other 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 an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose.'
4. Before the provisions of clause (14) can be attracted, the following conditions are required to be fulfilled :
1. Any special allowance or benefit should be specifically granted to meet expenses.
2. The allowance or benefit should not be in the nature of an entertainment allowance or perquisite within the meaning of section 17(2).
3. The expenses should be wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit; and
4. The exemption is only to the extent to which such expenses are actually incurred.
5. On behalf of the revenue the argument of Mr. Joshi is that the exemption under section 10(14) of the Act is not available to the assessee in respect of the amount received by him as compensatory (city) allowance, firstly, because it is a perquisite within the meaning of this section. Secondly, he submitted that compensatory (city) allowance has no nexus with the performance of the duties of an office; that it is a part of the additional remuneration paid to a Government servant to wipe off the burden of the cost of living prevailing in the particular city where he is posted. Alternatively, he submitted that there is a clear distinction in law between expenses incurred for performance of duties of an office or employment and those incurred in the performance of duties of an office or employment. His submission is that every expense incurred for performance of duties of an office or employment is not exempted under this section, because such expense cannot be regarded as having been incurred in the performance of duties. Mr. Palkhivala, on the other hand, on behalf of the assessee contended that this is clearly not a perquisite and the contention on behalf of the revenue that there is no nexus between receipt of compensatory (city) allowance and the performance of duties is clearly unjustified. He further contended that the distinction made in respect of an expense incurred for performance of duties and that incurred in performance of duties is really unjustified in law, qua section 10(14). His submission was that even personal expenses incurred at a time which does not synchronise with the hours of duty is a permissible deduction or exemption under section 10(14) because but for the holding of the office he would not have incurred such an expenditure.
6. It will be useful to refer to the relevant provisions of the rules and orders under which compensatory (city) allowance is received by a Government servant. The expression 'compensatory allowance' is defined in Fundamental Rule 9(5) as under :
'9. (5) Compensatory allowance means an allowance granted to meet personal expenditure necessitated by the special circumstance in which duty is performed. It includes a traveling allowance but does not include a sumptuary allowance nor the grant of free passage by sea to or from any place outside India.'
7. An allowance to meet personal expenditure necessitated by exceptional circumstances in which a duty is to be performed is included within the definition of the expression 'compensatory allowance.' Fundamental Rule 93 provides for when a compensatory allowance should ordinarily be drawn by a Government servant. It provides as under :
'A compensatory allowance should ordinarily be drawn only by a Government servant actually on duty, but a local Government may make rules specifying the conditions under which a Government servant on leave may continue to draw a compensatory allowance, or a portion thereof, in addition to leave-salary. One of these conditions should be that the whole or a considerable part of the expense to meet which the allowance was given continues during the leave.'
8. Fundamental Rule 44 provides that subject to any restrictions which the Secretary of State in Council may by order impose upon the powers of the Governor-General in Council or the Governor in Council, as case may be, and to the general rule that the allowance is not on the whole a source of profit to the recipient a local Government may grant such allowances to any Government servant under its control and may make rules prescribing their amounts and the conditions under which they may be drawn. Different types of compensatory allowances are contemplated under supplementary rules. Under supplementary rule 6-A grant is permitted in respect of grain compensation allowance. Under supplementary rule 6-B grant is permitted owing to expensiveness of living, other than a grain compensation allowance or a house rent allowance. Under supplementary rule 6-C compensatory allowance by way of house rent allowance is permitted. The specific order of the President of India which was applicable to the assessee for the assessment year 1965-66 has not been produced by any party, but we are informed by the counsel on both the sides that it was on the same lines as those contained in the order of the President of India dated November 27, 1965, which is annexed as annexure 'L' to the statement of case. Under this order the rates of compensatory (city) allowance vary with the class of city.
9. Fundamental Rule 11 provides that unless in any case it be otherwise distinctly provided, the whole time of a Government servant is at the disposal of the Government which pays him, and he may be employed in any manner required by proper authority, without claim for additional remuneration, whether the services required of him are such as would ordinarily be remunerated from general revenues, from a local fund or from the funds of a body incorporated or not, which is wholly or substantially owned or controlled by the Government.
10. It is not disputed on behalf of the revenue that the grant of compensatory (city) allowance is a special allowance or benefit specifically granted to meet expenses, nor is it the contention on behalf of the revenue that it is an allowance or benefit in the nature of entertainment allowance. It was, however, urged on behalf of the revenue that grant of compensatory (city) allowance is a perquisite within the meaning of section 17(2). In section 17(2) an inclusive definition of the word 'perquisite' has been given. What is normally meant by the word 'perquisite' can never be a matter of much dispute. The word word 'perquisite' is defined in the Oxford English Dictionary as any casual emolument, fee or profit attached to an office or position, any addition to salary or wages. In order to come within the definition of the word 'perquisite' it ought to be emolument, fee or profit attached to the office or position or an addition to salary or wages. Payment of compensatory (city) allowance under the order of the Government is neither an emolument nor fee nor profit but it is a reimbursement of personal expenses required by a Government servant to be incurred on account of expenses of living at a particular place. Thus, the contention on behalf of the revenue that this is a perquisite cannot, therefore, be accepted.
11. The second contention on behalf of the revenue is just in contradistinction with each other in the alternative. In the first place, it is urged on behalf of the revenue that compensatory (city) allowance has no nexus with the performance of duty of office but it is a part of additional remuneration to a Government servant to wipe off or lighten the burden of cost of living in a particular specified city where he is posted. In the alternative it is contended that even though compensatory (city) allowance may have nexus with the performance of duty and not in performance of duty as required by section 10(14) of the Act. Reliance was placed by Mr. Joshi upon the decision of the Kerala High Court in A. K. Venkiteswaran v. Commissioner of Income-tax and the decision of the House of Lords in Ricketts v. Colquhoun. In the case before the Kerala High Court the question that was considered by the High Court was whether the amount of room-rent paid by the Government servant on the ground that the conditions of his service required his stay at a particular place was deductible under section 16(v) before it can be regarded as a permissible deduction one of the conditions to be fulfilled must be that it is an amount actually expended by the assessee which by the conditions of his service he is required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties. It is not sufficient if the expenditure claimed is wholly met in the performance of the assessee's duties or has necessarily to be so met nor is it sufficient if it is shown that it was not exclusively in the performance of the duties of the assessee. The requirements are cumulative and, therefore, it must be shown that the assessee. The requirements are cumulative and, therefore, it must be shown that the assessee was required to spend the amount out of his remuneration not only wholly but also necessarily and exclusively in the performance of his duties. The High Court took the view that the term 'in the performance'. Many items of expenditure may be incurred by an assessee to enable him to perform his duties properly. These are not expenses incurred in the performance of his duties as the latter class is limited to those expenses incurred during the process of the performance of the duties. In other words, according to the Kerala High Court in order to be a permissible deduction under section 16(v) it must be an expenditure incurred at a point of time which synchronise with the commencement of the hour of duty or which must be during the performance of the duties.
12. One of the decisions that was referred to by the Kerala High Court was the decision of the House of Lords in Ricketts v. Colquhoun. In the case before the House of Lords, the appellant, a barrister, residing and practicing in London, held the Recordership of Portsmouth, and was assessed to income-tax under Schedule E in respect of the emoluments of that office. In assessment for income-tax purposes he claimed deduction from the emoluments of his office as recorder the cost of traveling between London and Portsmouth in order to attend the quarter sessions, his hotel expenses at Portsmouth, or the cost of the conveyance of his robes to the court there. The House of Lords held that he was not entitled to any of the said deductions for income-tax purposes. The claim in respect of traveling expenses was rejected because, in the opinion of the House of Lords, in order that traveling expenses may be deductible under this rule from an assessment under Schedule E, they must be expenses which the holder of an office is necessarily obliged to incur, - that is say, obliged by the very fact that he held the office, and has to perform its duties, and they must be incurred in, that is, in the course of, the performance of those duties. According to the House of Lords the traveling expenses did not satisfy any of the said tests. So far as the hotel expenses were concerned, the claim was rejected on the ground that in considering the meaning of the words 'expenses expended wholly, exclusively and necessarily in the performance of the said duties', it is to be remembered that a decision in favour of the appellant under that head would operate in favour, not only of recorders, but of holder of an office or employment of profit who is liable to be assessed under Schedule E, and would or might enable every holder of such a position to deduct his living expenses while away from his house. The words quoted, which are confined to expenses incurred in the performance of the duties of the office, and are further limited in operation by the emphatic qualification that they must be wholly, exclusively and necessarily to incurred, do not cover such a claim. A man must eat and sleep somewhere, whether he has or has not been engaged in the administration of justice. Normally, he performs those operations in his own home, and if he elects to live away from his work so that he must find board and lodging away from home, that is by his own choice, and not by reason of any necessity arising out of his employment; nor does he, as a rule, eat or sleep in the course of performing his duties, but either or before of after their performance.
13. Relying upon these decisions the argument of Mr. Joshi on behalf of the revenue was that if the allowance is for personal expenses and the incurring of expenditure does not synchronise with the hours of duty, then it will not be a permissible exemption under section 10(14) because it cannot be said to be expenses incurred in the performance of the duties though they may be expenses incurred for the performance of duties. If the view expressed by the Kerala High Court and by the House of Lords in Rickett's case is regarded as correct law, then the contention of Mr. Joshi is right, but in a later decision of the House of Lords in Owen v. Pook (Inspector of Taxes) Lord Pearce has doubted the correctness of the view expressed by the House of Lords in Rickett's case and he has observed that the decision in Rickett's case is unsatisfactory in its result and in its reasoning and should be considered afresh. In Owen's case the facts were that the taxpayer carried on practice as a general medical practitioner in Fishguard. He also held two part-time appointments with the South Wales Hospital Management Committee as obstetrician and anesthetist at a hospital in Haverfordwest, 15 miles from Fishguard. Under those appointments the taxpayer was on stand-by duty at certain specified times, to deal with emergency cases at the hospital, and at such times was required to be accessible by telephone. On receipt on a telephone call from the hospital the taxpayer gave instructions to the hospital staff, and then either advised and awaited a further report or set out immediately for the hospital. His responsibility for a patient began as soon as he received the telephone call, but not every such call resulted in his going to the hospital. Under the terms of his appointment, the hospital management committee paid the taxpayer's traveling expenses at a fixed rate per mile for journeys between Fishguard and the hospital up to a single journey of 10 miles. The taxpayer bore the cost of the additional five miles. The taxpayer sought to deduct the whole cost of traveling incurred, which for 1962-63, was pounds 150, and 1963-64, pounds 123. He appealed to the General Commissioners against assessments to income-tax under Schedule E of those amounts, and his appeal was allowed on the grounds that the expenses were incurred 'Wholly, exclusively and necessarily' in the performance of his duties under appointment and deductible under rule 7 of Schedule 9 to the Income Tax Act, 1952. Stamp J., allowing an appeal by the inspector, held that the expenses were not incurred ex necessitate the taxpayer's office but were personal to the taxpayer himself since he chose to live 15 miles away from the hospital and therefore rule 7 did not apply. The Court of Appeal affirmed Stamp J.'s decision and also held that a miles allowance payable to a holder of an office, whether the expense was actually incurred or not, was properly to be regarded as part of the holder's emoluments. On a further appeal by the taxpayer, the House of Lords, allowing the appeal, held that on the basis that the traveling allowance paid by the hospital committee was a reimbursement for actual expenditure, it was not an emolument of the taxpayer's office or employment and did not fall to be charged. Majority of the Law Lords said that the taxpayer had shown that the he performed the duties of his office in two places, namely, the hospital and the place where he received the telephone call, and that the expenses incurred in traveling from one to the other were incurred in the performance of his duties. One of the contentions before the House of Lords was that, in view of the decision in Rickett's case the decision of the House of Lords ought to be upheld. While dealing with this contention Lord Pearce at page 157 points out as under :
'With all respect to their Lordships who decided that case, I find it, as some others have done, very unsatisfactory both in its result and in its reasoning. In order to carry out his duties as recorder, the taxpayer had to travel to Portsmouth, since he was a London Practitioner (and it was, no doubt, by virtue of his London Practice that he was appointed recorder). It was therefore unreasonable to tax him on the emoluments of his office without allowing the travelling expenses. For that would be to tax him on a sum larger than the true profit of the office.'
14. Our attention is drawn by Mr. Palkhivala to more than one decision of the English court where even personal expenses the incurring of which does not synchronise with the performance of the hours of duty, have been allowed as permissible deductions under provisions corresponding to section 16(v). The first case referred to by him was that of Lomax (H. M. Inspector of Taxes) v. Newton. In that case a territorial army officer appealed against an assessment to income-tax under Schedule E in respect of his pay, claiming that a deduction should be allowed under rule 9, Schedule E, Income Tax Act, 1918, in respect of certain mess expenses, etc. The General Commissioners decided that the following expenses had been incurred wholly, exclusively and necessarily in the performance of the officer's duties : (1) mess subscription, (2) share of mess guests expenditure, (3) payments to batman, (4) hire of camp furniture, (5) cost of hotel accommodation in excess of allowance, (6) cost of tickets to sergeants' dances, etc., and reduced the assessment by the sum of these expenses. Upon further appeal by the Crown, Vaisey J. held that except as to the item pertaining to cost of hotel accommodation in excess of allowance, there was insufficient evidence to support the Commissioner's decision. Thus, the court permitted as permissible deduction amounts spent by way of cost of hotel accommodation in excess of allowance.
15. In Nolder (H. M. Inspector of Taxes) v. Walters an aeroplane pilot employed by a limited company claimed deduction in the assessment of his remuneration to income-tax under Schedule E in respect of various items of expenditure. The court held that no deduction could be allowed in respect of (a) the upkeep of a motor-car to convey the pilot between the aerodrome and his home, or (b) a telephone at his home; but that a decision of the General Commissioners allowing a deduction for an excess of actual subsistence expenses when away from home on duty over subsistence allowance granted by the company could not be disturbed as being erroneous in law. Thus, in the opinion of the court, excess expenditure incurred for subsistence expenses was regarded as permissible deduction.
16. In Elwood (H. M. Inspector of Taxes) v. Utitz, the respondent was managing director of a company operating in Northern Ireland. He was obliged in the performance of his duties to visit London from time to time and stay at a first-class hotel or similar establishment. With the sole object of obtaining the requisite accommodation and facilities at the lowest possible cost he joined two clubs there, the cost of his subscription to which was borne by the company. There was a consequent saving to the company of pounds 64 in the year 1958-59 and pounds 22 in the year 1959-60 as compared with the cost of paying for suitable hotel accommodation for the respondent. On appeal against assessment to income-tax under schedule E for the year 1958-59 and 1959-60 in amounts which included the club subscriptions, the respondent that they were spent wholly, exclusively and necessarily in the performance or the duties of his office or, alternatively, were expenses of travelling in the performance of those duties. On behalf of the Crown it was contended that the subscriptions entitles him to amenities which were personal to him and not connected with the performance of his duties. The Special Commissioners found that in the unusual circumstances the subscriptions were no more than a retaining fee paid to secure suitable inexpensive accommodation for the respondent on his visits to London and were money spent wholly, exclusively and necessarily in the performance of his duties. On a further appeal the court upheld the decision of the Commissioners.
17. These decisions clearly show that even expenses incurred by way of personal expenses, and even though the incurring of such expenses does not synchronise with the hours of duty, can be claimed as permissible deduction as provided under section 16(v). This aspect if the matter was overlooked by the Kerala High Court in A. K. Venkiteswaran's case and it will be, therefore, difficult to follow the reasoning and the ration of that decision.
18. Judged by this standard we have to consider whether the compensatory (city) allowance is specifically granted to meet the expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit. The mere fact that they are personal expenses or such expenses are incurred at a time which does not synchronise with the hours of duty is not sufficient to come to the conclusion that it is not a permissible allowance. Apart from this the relevant rules clearly show that the assessee is entitled to claim exemption in respect of compensatory (city) allowance under section 10(14). The very definition of the expression 'compensatory allowance' shows that it is an allowance granted to meet personal expenses necessitated by special circumstances in which the duty is performed. Thus it cannot be said that there is no nexus with the performance of duty when such allowance is received by the assessee. The general rule as indicated by fundamental Rule 44 about grant of compensatory allowance is that the amount of compensatory allowance should be so regulated that the allowance is not on the whole a source of profit to the recipient. Thus it is not even disputed that the actual amount received by the Government servant is much less than what he ordinarily spends by reason of his posting at a particular place. Therefore, such expenses are wholly, exclusively and necessarily incurred in the performance of the duties. In coming to this conclusion one should not overlook the provisions of Fundamental Rule 11 which provides that ordinarily the whole time of a Government servant is at the disposal of the Government which pays him. The sole object of compensatory (city) allowance is to compensate the Government servant for the extra expenditure which he will be called upon to bear by reason of his posting at a particular place. The receipt of such an amount, in our opinion, has been rightly held by the tribunal as a permissible allowance under section 10(14) of the Act.
19. Thus our answer to question No. 1 is in the affirmative. In view of our answer to question No. 1 it is unnecessary to answer question No. 2 referred to us. As this reference is made by way of a test case, each party will bear its respective costs of the reference.