1. This departmental appeal seeks to challenge the order of the Commissioner (Appeals), Central I, Calcutta, on two grounds.
2. The first ground is that the Commissioner (Appeals) erred in directing the ITO to include dearness allowance as salary for the purpose of perquisites under Section 40A(5) of the Income-tax Act, 1961 ("the Act"). The relevant facts are that in calculating the aggregate of the expenditure and allowance to be disallowed under Section 40A(5)(c)(ii) the ITO did not include the dearness allowance payable to the concerned employees as a part of their salary. The ITO decided to exclude the dearness allowance for this purpose on the ground that the same was not being taken into account for calculation of superannuation benefits.
3. The Commissioner (Appeals) reversed the order of the ITO on this point. He held that for the purpose of Section 40A(5), salary is to be taken as defined in Explanation 2(d) to the said provision. As under this Explanation, dearness allowance is part of salary, the Commissioner (Appeals) held that the ITO was not justified in excluding the dearness allowance for the purpose of the aforesaid provision.
4. Before us, the learned departmental representative contended that under Explanation 2 to Rule 3 of the Income-tax Rules, 1962, dearness allowance is not. to be included as part of salary unless it enters into the computation of the superannuation or retirement benefits of the employees concerned. Me, therefore, urged that the ITO was justified in excluding the dearness allowance for the purpose of applying the provisions of Section 40A(5) as well. The learned counsel for the assessee, on the other hand, relied on the order of the Commissioner (Appeals).
5. We have considered the rival submissions. We are of the view that the order of the Commissioner (Appeals) on this point is in conformity with the provisions of Section 40A(5). As rightly pointed out by him, the term "salary" occurring in Section 40A(5) has to be construed according to the meaning assigned to that term by Explanation 2 to Section 40A(5). Clause (a) of the said Explanation provides that in the aforesaid provisions "salary" has the meaning assigned to it in Clause (7) read with Clause (3) of Section 17 of the Act, subject to certain modifications which are not relevant for the purpose of the present discussion.
A perusal of Section 17(1) and (3) would show that the aforesaid definition of "salary" is wide enough to include dearness allowance. On the other hand, definition of "salary" contained in Explanation I to Rule 3, which has been relied upon by the learned departmental representative, has absolutely no application for the purpose of Section 40A(5). The definition in the aforesaid Explanation 1 has been given only for the purpose of Rule 3, namely, for valuation of the perquisite by way of rent-free residential accommodation provided by an employer to the employee. This definition has clearly no relevance to the provisions of Section 40A(5). We, therefore, hold that there is no merit in the departmental appeal on this point and that the Commissioner (Appeals) was justified in directing the ITO to include dearness allowance as a part of salary for the purpose of Section 40A(5).
6. to 9. [Paras 6 to 9 are not reproduced here as they decide the issues following earlier decisions of the Tribunal].