Per Bench
1. These appeals are preferred by different assessees against the respective orders of the CIT(A). Since common issues are involved in these appeals, these were heard together and are being disposed off through this consolidated order.
2. The sole controversy arose in these appeals is with regard to the taxability of the salary and different allowances under various heads received by the MLAs (Member of Legislative Assemblies). The facts available on record are that the assessees have received the salary and Constituency allowance, Conveyance allowance, Telephone allowance, Clerical allowance, Medical allowance and Contingency allowance. The Assessing Officer taxed the salary and other allowances except the daily allowance over and above Rs. 24,000 in all, which were excluded under section 10(17) of the Income-tax Act. (herein after called as an Act) under the head ‘Income from other sources’. The assessee preferred an appeal before the CIT(A) with the submissions that once the income under the head ‘Salary and other allowances’ are to be assessed to tax under the head ‘Income from other sources’, the necessary expenditures incurred in earning that income is to be allowed and only a net profit is to be taxed and not the entire receipt.
3. The CIT(A) examined the issue in the light of various judgments but was not convinced with the contentions of the assessees and he confirmed the disallowance after having observed that the appellant has failed to establish any nexus that such expenditure has been incurred wholly and exclusively for the purpose of making of earning such income.
4. Now the assessee is before us. During the course of hearing of the appeal, the Ld. Counsel for the assessee has invited our attention to the fact that an MLA who is elected by the public has got a bounden duty to move from place to place in his constituency, enquire the difficulties of the people in order to recommend the necessary help or benefits to be done to the public in his constituency, to the Government. In this process, he had to incur lot of expenditure on account of moving from one place to another and also speaking with various important village heads, Government officers in his constituency. He had to incur telephone expenses, conveyance expenses and also in order to make correspondence with Government officers in high positions, the MLA also needs a clerical assistance for his work. In view of these facts that the assessee had to necessarily incur so much of expenditure and the Government is granting various allowances to meet such expenditure by fixing certain limits. It means that Government while granting fixed allowances itself is aware that immediate expenditure that one has to incur for the said purposes that were mentioned above. In fact, in most of the cases, such allowances granted by the Government are not sufficient to meet the said expenses and sometimes own funds besides various allowances granted by the Government to be utilized to keep up the reputation and future position in the constituency of an MLA. It means that the assessee had to incur and has incurred so much of expenditure and such expenditure was being reimbursed in the form of allowance by the Government.
5. The Ld. Counsel for the assessee further contended that under the identical circumstances, when reimbursement towards medi- cal expenditure to an MLA was brought to tax by treating it as a perquisite by the assessing authority, the Hon’ble High Court of Rajasthan in the case of Commissioner Of Income-Tax v. Shiv Charan Mathur [2008] 306 ITR 126 has held that the MLA having been elected and not employed under section 15 is not attracted in respect of remuneration received by him and as a necessary corollary, applicability of section 17(2) clause (4) is also ruled out in respect of reimbursement of medical expenses. It was submitted that the entire allowances that were granted to the assessees have been spent and since only profit or surplus is to be brought to tax under the head ‘Income from business/profit’ or under the head ‘Income from other sources’, the surplus out of the allowances only should be taxed.
6. The Ld. Counsel for the assessee has also placed a reliance upon the various orders passed by the Tribunal on the impugned issue and also of the High Court, which are as under :
(1)Bijjam Parthasarathi Reddy v. Asstt. CIT [IT Appeal Nos. 1158 & 1159 (Hyd.) of 2006, dated 28-2-2008]
(2)N. Indrasena Reddy v. ITO [IT Appeal Nos. 218 & 219 (Hyd.) of 2005, dated 31-1-2006]
(3)P. Kista Reddy v. Dy. CIT [IT Appeal Nos. 377 & 378 (Hyd.) of 2008, dated 23-7-2009]
(4)Y. Yella Reddy v. ITO [IT Appeal Nos. 754 to 758 (Hyd.) of 2008, dated 4-7-2008]
(5)R. Ravindranath Reddy v. ITO [IT Appeal Nos. 1136 to 1139 (Hyd.) of 2008, dated 23-7-2009]
(6)Jaswant Singh v. ITO [2005] 96 TTJ (Ind.) 660
(7)Commissioner Of Income-Tax v. Maddi Sudarsanam. [1988] 174 ITR 659 1 (AP).
7. The Ld. Counsel for the assessee further contended that in the aforesaid orders, the Tribunal has repeatedly held following the judgment of jurisdictional High Court in the case of Maddi Sudarsanam (supra) that the MLA has to necessarily maintain his office and only for that purpose, the allowance has been granted to him for the day-to-day expenses that would certainly occur for any Legislature. It was accordingly, held that he is entitled to benefit of exemption under section 10(14) of the I.T. Act.
8. The Ld. D.R. on the other hand has emphatically argued that only those allowance given to the MLAs are exempted, which are specifically mentioned in section 10(17) of the Act. According to the section 10(17) of the Act, daily allowances received by the MLAs are to be exempted from the income of the assessees. Later on, the amendment was made by the Finance Act, 2006 with effect from 1-4-2007, according to which constituency allowance received by the MLAs was also exempted. Meaning thereby, the Legislature is quite conscious about the allowances with regard to which exemption is to be granted. Initially, they allowed the exemption of the daily allowances and other allowances not exceeding Rs. 2,000 p.m. to the MLAs but after receiving representation from various State Governments, the Parliament has made the necessary amendments by inserting clause (3) with effect from 1-4-2007 and granted the exemption of the constituency allowance given to the MLAs like the MPs. When specific provision is there to grant the exemption of particular type of allowances, the general provision of section 10(14) cannot be invoked. Accordingly, he placed heavy reliance upon the order of the CIT(A).
9. We have heard the rival submissions and carefully perused the orders of the authorities below and various orders/judgments referred to by the assessees. We have carefully examined the various orders of the Tribunal passed on this subject and we find that different Benches of the Tribunal have held in one voice that the salary given to the MLAs cannot be assessed under the head ‘Salary’. It is rather an income from other sources. The issue regarding nature of receipt was examined by the Rajasthan High Court in the case of Shiv Charan Mathur (supra) and has categorically held that the fundamental requirement for attracting section 15 is that, there should be a relationship of employer and employee whether in existence or in the past. Obviously and necessarily in the very nature of things for bringing about such relationship, the assessee, being the person concerned, employed by the employer and has a necessary corollary, the employer should have right to discharge or terminate the employee. The basic ingredient is missing in the case of MLAs and MPs as they are not employed by anybody rather they are elected by the public forming their election constituencies and in consequent upon such election that they acquire constituency position and discharge constituency functions and obligations. May be, that they receive remunerations after swearing in but that cannot be said to be the salary within the meaning of section 15. Therefore, the remunerations received by the MLAs and MPs cannot be taxed under the head ‘Income from salary’ but can only be taxed under the head ‘Income from other sources’. Therefore, there is no controversy in this regard and following the aforesaid orders, we hold that in the instant case, the revenue has rightly treated the remuneration received by the assessee-MLAs under the head ‘Income from other sources’.
10. With regard to another issue whether the provisions of section 10(14) of the Act can be invoked for other allowances given to the MLAs in the instant case, we find that the various Benches of the Tribunals in the aforesaid cases have categorically held in one stream that assessee is entitled to the benefit of exemption under section 10(14) of the Income-tax Act following the judgments of the jurisdictional High Court in the case of Maddi Sudarsanam (supra) in which it has been held that section 10(14) provides that any special allowance or benefit 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, would be exempt. Their Lordships further in that case held that the extent of expenses not actually incurred for the purpose would not earn exemption. The language of section 10(14) would clearly show that any special allowance or benefit specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or an employment of profit would be exempt. The section 10(14) does not use the expression "office of profit". The expression used is "office or employment of profit". The expression "of profit" qualifies only "employment" and does not qualify "office". It is enough if a person is holding an office and for the purpose of performing the duties associated with his office is granted an allowance or benefit specifically to meet the expenses. In the case of an MLA, he may not be holding an employment of profit but he is certainly holding an office of MLA and as such whatever allowances or benefit granted to it to meet the particular expenses, he is entitled for exemption up to the applicability of section 10(14) of the IT Act to the allowances granted to the assessee-MLAs. There is no difference in any of the aforesaid orders of the Tribunals with regard to applicability of section 10(14) of the Act.
11. The only difference of the opinion is with regard to the allowability of the expenses. In the case of N. Indrasena Reddy (supra), the Tribunal has held that the MLA is holding an office though not an office of profit and section 10(14) of the Act would apply to his case. However, the expenses which are exempt are required to be prescribed by the competent authorities and the assessee is required to file the evidence that such expenditure has actually been incurred by him and for that purpose, the allowances and its expenses are to be governed by rule 2BB(1) of the Income-tax Rules. In order to establish that the allowances granted to the assessees were spent for a particular purpose to which it was granted, the assessee is required to file some evidence to the satisfaction of the Assessing Officer. In that case, since the assessee did not file any documentary evidence in support of the expenditure incurred, the Tribunal held that assessee was not entitled to the exemption under section 10(14) of the Act of those expenses which are covered as per rule 2BB(1) of the Income-tax Rules. This order was followed by another Bench in the case of Bijjam Parthasarathi Reddy (supra) but while allowing the entire claim, the Bench has not discussed the provisions of rule 2BB as discussed by the Tribunal in its earlier order in the case of N. Indrasena Reddy (supra) and the Tribunal has directed the Assessing Officer to allow deductions in respect of the all allowances given to the assessees. Thereafter other order of the same Bench was passed in the case of P. Kista Reddy (supra) in which the Tribunal has followed the order of its Bench in the case of B. Parthasarathi Reddy and allowed the entire claim of allowances given to the assessees without realizing as to why the provisions of rule 2BB are not applicable while granting the exemption under section 10(14). The similar was the position in the case of R. Ravindranath Reddy (supra) in which the SMC Bench has also followed the case of Bijjam Parthasarathi Reddy (supra). Whereas, the other SMC Bench of the Tribunal in the case of Y. Yella Reddy (supra) has directed the Assessing Officer to verify the genuineness of the expenditure claimed by the assessee in connection with the performance of duties of his office as MLA and to allow deductions of expenditure after due verifications.
12. Now the question posed before us in the light of these aforesaid orders of the Tribunal whether the compliance of rule 2BB is imposed while allowing an exemption under section 10(14) of the Income-tax Act. In this regard, we extract the provisions of rule 2B as under:—
"2BB(1) For the purposes of sub-clause (i) of clause (14) of section 10 prescribed allowances, by whatever name called, shall be the following, namely:—
(a )any allowance granted to meet the cost of travel on tour or on transfer.
(b)any allowance, whether, granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty;
(c )any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit :
Provided that free conveyance is not provided by the employer.
(d)any allowance granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of the duties of an office or employment of profit;
(e )any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions,
(f )any allowances 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.
Explanation—For the purpose of clause (a), "allowance granted to meet the cost of travel on transfer" includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer."
13. In order to ascertain whether the special allowances or the benefits other than the perquisites, forms part of the total income defined in section 2(24) of the Act, we have to carefully examine the provisions of section 2(24) of the Act. Section 2(24) of the Act defines the income of the assessee and it includes different types of receipts. As per sub-clause (iiia) of this definition, income includes any special allowance or benefit other than the perquisites included under sub-clause (iii) of this sub-section specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit. In order to bring the special allowances within the fold of income, the sub-clause (iiia) was inserted by the Direct Tax Laws Amendment Act, 1989 retrospectively with effect from 1-4-1962. This allowances which the Legislature entitled to shower the beneficial treatment may be seen in section 10(14). Thus, all those special allowances other than those specifically exempt would be taxed as an income of the assessees. We have also examined the provisions of section 10(14) and rule 2BB of the Income-tax Rules and we find that rule 2BB is supplement to section 10(14) of the Act and it puts a cap on the quantum of the allowance or benefit granted to the assessees. In section 10(14) a general reference was made with regard to the special allowances but the nature of the allowances were not spelled out in that section. This left over work is done by rule 2BB in which the special allowances were identified and their quantum of exemption from tax was also fixed to the extent as notified in the notification. These exemptions is in respect of aforesaid special allowances to the extent to which the said expenses are actually incurred in that purpose.
14. The sub-clause (1) of section 10(14) grants exemption in respect of any special allowance or benefit, not being the nature of perquisite within the meaning of clause (2) of section 17, specifically granted to meet the expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit as may be prescribed to the extent to which such expenses are actually incurred for that purpose. The sub-clause (ii) grants exemption in respect of any allowance granted to the assessees either to meet his personal expenses at the place where the duties of his office or employment of profit or ordinarily performed by him or the place where he ordinarily resides or to compensate the assessees for the increased cost of living. The allowances shall be one which is prescribed and the exemption shall be to the extent as may be prescribed. Rule 2BB has prescribed the allowance as well the amount exempt under section 10(14)( ii). From 1-4-1989 to 30-6-1995 the said allowances had to be one specified by the Central Government and quantum of exemption was to the extent specified in the concerned notification. Section 14 deals with 2 types of allowances (1) such allowances or benefit not being the nature of the 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 an employment of profit as may be prescribed to the extent to which such expenses are actually incurred for that purpose. (2) Any such allowances granted to the assessees either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides or to compensate him for the increased cost of living. The special allowances or the benefits prescribed in clause (1) are to be governed by sub-rule (1) of rule 2BB in which the special allowances were identified and are also allowed to be exempted to the extent to meet the expenditures incurred for that purpose. Whereas sub-clause (2) of clause (14) of section 10 is governed by sub-rule (2) of rule 2BB in which the allowances were also identified but they were allowed to be exempted up to a particular limit. As per sub-rule (2) the exemption of allowance is limited, irrespective of the fact that the entire allowance was spent or not for the purpose to which it was granted.
15. In the case of Coal Mines Officers Association of India v. Union of India [1990] 181 ITR 346 (MP) it was held that any particular allowance unless it is notified by the Central Govern- ment for its exemption under section 10(14), read with rule 2BB it cannot be allowed to be exempted. Meaning thereby that the allowance shall be one which is prescribed and the exemption shall be to the extent as may be prescribed. Rule 2BB has prescribed the allowances as well as the amount exempt under section 10(14)( ii) [From 1-4-1989 to 30-6-1995, the said allowance had to be one specified by the Central Government and the quantum of exemption was to the extent specified in the concerned notification.] It has also been clarified through various judicial pronouncements that in order to avail the exemption under this clause, the assessee has to prove that the expenditure in respect of which special allowance or benefit was granted, has been incurred wholly, necessarily and exclusively in the performance of his duties of an office or employment of profit. The requirement of ‘wholly, necessarily and exclusively’ is cumulative and not alternative. Assessee must establish that he is required to spend such special allowance or benefit not only wholly but also necessarily and exclusively in the performance of his duties. In the case of J.G Mankad v. Commissioner Of Income-Tax, Gujarat. [1965] 55 ITR 448 (Guj.) assessee who was practising Chartered Accountant was appointed as a part time professor in a college situated at another place. He was paid a certain monthly salary including travelling allowances and all other allowances. The Gujarat High Court held that assessee was not entitled to claim exemption under section 4(3)(vi) of 1922 Act [corresponding to section 10(14) of the Income-tax Act, 1961], as it felt that the said travelling allowance was not a special allowance or benefit granted to the assessees, much less specifically granted to meet the expenses of travelling.
16. We are therefore, of the view that while dealing with the issue of special allowances given to the assessees one has to examine the provision of sections 2(24) and 10(14) of the Income-tax Act and rule 2BB of the Income-tax Rules. As per section 2(24) all allowances forms part of the income of the assessees. Section 10(14) deals with the exemption of certain special allowances and rule 2BB identify the allowances and their limit of exemption from tax.
17. So far as proof of actual expenditure of the allowances are concerned, we have examined the various judgments including the judgment of the Apex Court in the case of CIT v. Tejaji Farashran Kharwalla Ltd. [1968] 67 ITR 95 in which it has been observed that to qualify the exemption the allowance must be granted to meet expenses incurred or to be incurred wholly, and necessarily in the performance of duties of an office or employ-ment of profit. The purpose for which the allowance is granted is alone not determinative of claim of exemption. The intention of the framers of the Act was to grant exemption in respect of amounts received by the assessees not for his own benefit but for the specified purpose of meeting the expenses wholly and necessarily to incur or to be incurred for the performance of the duties. Therefore, the allowances granted to meet the expenses wholly and necessarily incurred or to be incurred for the performance of the duties of the office or employment of the grantee alone qualifies for exemption under the Act and any surplus remaining in the hands of the grantee after meeting the expenses does not bear the character of the allowances for the meeting expenses but for performing their duties of the office for employment. This would be so even if the employer has disabled himself from demanding refund of the amount not expended for meeting the expenses incurred or to be incurred in the performance of duties of office or employment of profit and the surplus remaining in the hands of the grantee acquires for the purpose of Income-tax Act the character of the additional remuneration. Meaning thereby, the onus is upon the assessee to place relevant evidence in order to prove that the allowances given to him are spent for the purpose to which it was granted.
18. Turning to the facts of the case, we find that the assessee was granted the constituency allowance, conveyance allowance, telephone allowance, clerical allowance, medical allowance and contingency allowance besides salary. During the relevant assessment year as per section 10(17), the MLAs are entitled for exemption of the daily allowances and all other allowances not exceeding Rs. 2,000 p.m. Though with effect from 1-4-2007 MLAs are also entitled for exemption of any constituency allowance received by them by virtue of an amendment in section 10(17) but it was with the prospective effect and in the impugned assessment years the assessee cannot take the benefit of it and all other allowances are limited to Rs. 2,000 p.m. only. Though in section 10(17), the Legislature has restricted the exemption of all other allowances up to Rs. 2,000 p.m. yet through various judicial pronouncements it has been held that the MLAs are entitled to take the benefit of section 10(14) also. We therefore of the view that according to the rule 2BB read with section 10(14) of the Act, only the conveyance allowance or the clerical allowance are required to be exempted, subject to proof that it was incurred in performance of duties of an office. So far as the telephone allowance and constituency allowance are concerned, we do not find any specific clause in rule 2BB(1) of the Income-tax Rules. Thus, these allowances cannot be allowed under section 10(14) of the Income-tax Act. With regard to the medical allowances the complete facts are not available on record whether it was a reimbursement or it was an allowance like other allowances granted to the MLA. If it is a reimbursement of the medical expenditure, it can be allowed in the light of the judgment of the Rajasthan High Court in the case of Shiv Charan Mathur (supra). Otherwise no deduction can be allowed as it does not find place in rule 2BB(1) of the IT Rules.
19. We do not agree with the proposition of the Ld. Counsel for the assessee that all types of allowances granted to the assessee are eligible for exemption under section 10(14) of Act. If that be the case, there was no need of providing a separate sub-section (17) in section 10 for allowing certain other allowances; like daily allowance to MLAs for its exemption from the total income of the assessee. Meaning thereby, both the provisions relating to the exemption of the allowances i.e., section 10(14) and 10( 17) are to be read together and in case of MLAs and MPs they are entitled for the exemption of allowances under both the clauses simultaneously. In the case of section 10(17), the MLAs and MPs are granted a lump sum exemption of particular allowance without producing any evidence with regard to its expenditure, whereas under section 10(14), the allowances are only allowed to be exempted subject to proof that it was incurred to meet a particular purpose.
20. We have also gone through the history of provisions of section 10(17) of Act and we find that at the time of enactment of the Income-tax Act, 1961, only daily allowances received by the MPs or the MLAs or any member of the committee thereof are exempted from the total income. The scope of the exemption was widened time to time and by Taxation Laws Amendment and Miscellaneous Provisions Act, 1986 with effect from 1-4-1986, the amendment was made and besides the daily allowances, all other allowances up to Rs. 1,250 p.m. in aggregate in the case of MP and Rs. 600 p.m. in the case of MLA were exempted from tax. Further amendment was made in this clause by the Finance Act, 1997 and the amount of Rs. 600 p.m. in case of MLAs was increased to Rs. 2,000 p.m. Thereafter, further amendment was also made by the Finance Act, 2006 and like the MPs, the constituency allowance received by the MLAs was also made exemptive from the total income of the assessees. Amendment by Finance Act, 2006 was brought in order to bring the uniformity of constituency allowances allowed by different States through their independent notifications with respect to other allowances by amending clause (3) of section 10(17) and the Legislature has allowed the exemption of the entire constituency allowance granted to MLAs.
21. From a careful study of the amendments brought time to time in section 10(17) of the Act, we are of the view that Legislature has been quite conscious about the allowances granted to the MLAs or the MPs and time to time they are bringing enactments to grant exemption of particular type of allowances from the total income of the MLAs or MPs. Had it been a case that for all allowances section 10(14) can be invoked subject to proof of the expenditure to be incurred in respect of that purpose to which the allowances are given, there would be no need to make a necessary amendment time to time in section 10(17). We therefore, of the view that while dealing with the issue of special allowances granted to the MLAs or MPs one has to keep in mind both the provisions of sections 10(17) and 10(14) of the Act and only those allowances are to be exempted from the total income of the assessees which are specified in these sections or rule 2BB of the IT Rules. Under section 10(17), the Legislature has prescribed a particular limit up to which the allowances are to be exempted from the total income of the assessees but section 10(14) is to be read with rule 2BB of the IT Rules and only those allowances are to be allowed to be exempted from the total income of the assessees which are specifically mentioned in rule 2BB subject to proof of its being spent for the purpose to which it is received or granted. We therefore, set aside the order of the CIT(A) and restore the matter to the file of Assessing Officer with a direction to re-examine the issue and grant an exemption of the conveyance allowance and the clerical allowance after making necessary verification of the expenditure incurred for the said purpose. Rest of the allowances i.e., Telephone allowance, constituency allowance and contingency allowance do not fall either in the purview of section 10(14) or 10(17 ) and they cannot be allowed to be exempted from the total income of the assessees. So far as medical allowances are concerned, the Assessing Officer should verify the nature of these allowances. If it is a reimbursement of the medical expenses incurred by the MLA, it may be allowed in the light of the judgment of the Rajasthan High Court in the case of Shiv Charan Mathur (supra) Otherwise, no exemption can be allowed as it does not fall either in the purview of section 10(14) and 10(17) of the Income-tax Act. Accordingly, these appeals are disposed of.
22. In the result, appeals of the assessees are partly allowed for statistical purposes.
189/110
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