Generally when an allowance is exempt from income-tax, there is a sigh of relief from the recipient. However, lately, the manner in which assessments are being completed by the officers of the Department, the relief (whether by way of a sigh or actual by way of reduction of taxes) is conspicuous by its absence.

Before proceeding to deal with some of the issues arising, I am enlisting two exemption which are normally availed of by many assessees. They are :

1. Section 10(13A) House rent allowance. This allowance is specifically granted by the employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee. The exemption is not available in a case where, residential accommodation is owned by the assessee, if expanditure of the nature of rent is not incurred by him. The exemption is restricted to the least of the following :

   1. Actual amount of allowance

   2. Amount of rent paid to the extent that it exceeds one-tenth of salary.

   3. An amount equal to 50% of salary where such accommodation is situated at Mumbai, Kolkatta, Delhi or Chennai, or 40% of the salary if the accommodation is situated at any other place.

2. Section 10(14) — The section provides an exemption of a special allowance specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance the duties. The exemption is available to the extent of the expenditure incurred by the assessee. Rule 2BB prescribes the extent of the exemption. Most of the allowances specified are for employees posted in remote areas. The common allowances in this category are :
   1. Children education allowance to the extent of Rs. 100 per month upto a maximum to two children.
   2. Allowance for meet hostel expenditure on the child upto Rs. 300 per month per child.

   3. Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between his residence to place of duty (Maximum Rs. 800 per month).

   It is advisable to inform clients that the exemption is available only if the expenditure is actually incurred and prima facie evidence is available with the assessee.

   I now proceed to discuss the important areas of allowances and reliefs which are gaining increasing significance and are proving to be highly controversial –

   • Gratuity, Leave Encashment and LTA etc.

   • Compensation received under a Voluntary Retirement Scheme (VRS)

   • Relief u/s. 89

Gratuity, Leave Encashment and LTA etc.

Readers are aware of the relevant sections which grant exemption to such receipts –

• 10(10) deals with death-cum-retirement Gratuity

• 10(10A) deals with commutation of Pension

• 10(10AA) deals with Leave Encashment at the time of retirement

• 10(10C) deals with amount received/receivable at the time of Voluntary Retirement

VRS – Exemption u/s. 10(10C) and relief u/s. 89

A raging controversy that is being faced by salaried tax-payers who have opted for VRS from their employers is whether the compensation received at the time of VRS is eligible for relief u/s. 89 in addition to the exemption u/s. 10(10C).

The gist of the Department’s stand on this issue is as under:

1. Amount received under VRS is neither arrears or advance of salary nor a gratuity or compensation in connection with termination of services envisaged u/r 21A.

2. Voluntary retirement is different from "Termination of services by the employer".

3. Rule 2BA and section 10(10C) do not cover "Termination"

4. The intention of the legislature is to provide only one time exemption; i.e., u/s. 10(10C) in respect of VRS only in one year whereas section 89 covers more than one year.

5. There is no provision u/r 21A for providing relief u/s. 89 on ex gratia payment.

6. Once an exemption is claimed u/s. 10(10C), the Second Proviso to this clause rules out the possibility of claiming any other exemption/relief under any other section.

Thus, the Assessing Officers are stressing on their interpretation that a Voluntary Retirement does not get covered under the term "Termination of Services" and that section 89 deals only with compensation received on termination of services. Therefor, according to the Assessing Officers, section 10(10C) and section 89 both are exclusive provisions and both deal with different situations and consequently, the tax-payer is not entitled to Relief u/s. 89 if he is covered by section 10(10C).

In the opinion of the author, this stand is not justified on account of the following reasons:

1. Generally, a VRS is an approved scheme brought out by the employer organisation.

2. All the amounts that the tax-payer receives would have been chargeable to tax under the head "Salaries" if the exemption u/s. 10 had not been provided for.

3. Generally, even the Assessing Officer takes a view that the amount received under the VRS is a "Profit in Lieu of Salary".

4. Section 17(3) covers compensation from an employer on termination of services. Similarly, section 17(3)(ii) does not specifically mention a payment covered by section 10(10C). By implication therefor, it means that a payment which is covered u/s. 10(10C) would first of all fall under the definition of Salary.

5. Once an amount is considered for tax purposes under the head "Salaries", if it is in the form of an arrears or advance salary as envisaged u/s. 89, then it would qualify for relief u/s. 89 because this section covers any "sum in the nature of salary".

6. Rule 21A also covers compensation received on termination of services.

7. The Hon'ble Madras High Court has held in the case of Commissioner of Income Tax vs. J . Visalakshi (Reported at 206 ITR 531) as under:

   1. Ex gratia amount and Compensa-tion received consequent to resig-nation or voluntary retirement is also entitled to relief u/s. 89;

   2. Section 89(1) r.w.s. 17(3) is a beneficial provision intended to grant certain benefits to employees or persons in service and therefor, this object should be borne in mind while interpreting the provisions;

   3. If the ex gratia amount received by the assessee by reason of his resignation from employment is not held as falling under clause (3) of section 17 of the Act, it cannot also be construed as an income charitable to Income Tax, because it is not an amount earned or paid for the services rendered. In such a situation, it may be a capital receipt.

The above view has been followed in the following cases also:

• G. N. Badami vs. CIT 240 ITR 263 (Mad.)

• P. Arunachalam vs. CIT 241 ITR 827 (Mad.)

• CIT vs. M. Raman 245 ITR 856 (Mad.)

Thus, in view of the foregoing, the amounts received under the VRS in excess of the limit specified u/s. 10(10C) are eligible for relief u/s. 89.

The only issue that remains is whether once exemption is claimed u/s. 10(10C), the Second Proviso debars the assessee from claiming any other exemption. This proviso states that where an exemption has been allowed under s. 10(10C) then no exemption thereunder will be allowed to such assessee for any other assessment year. Thus, the Second Proviso merely says that an assessee would not be entitled to claim exemption u/s. 10(10C) in respect of the same amount in more than one assessment year. It does not debar the assessee from claiming any relief/exemption under any other section in the same assessment year.

However, to err on the safe side, first, the assessee must claim the exemption u/s. 10(10C) to the extent of Rs. 5 lakhs and then only on the balance amount remaining, Relief u/s. 89 should be claimed subject to the conditions of the said section. Thus, it would be clear that the exemption u/s. 10(10C) and the relief u/s. 89 have been claimed separately in respect of different amounts.

This contention has already been accepted in appeal by CIT(A) in Mumbai and Bangalore and the assessees of several large public sector banks who had opted for the VRS some years back have been successful in getting both the benefits.

Leave Encashment – Exemption u/s. 10(10AA) and relief u/s. 89

Similar question arises for Encashment of Leave at the time of retirement. Would the assessee be entitled to exemption u/s. 10(10AA) as well as relief u/s. 89? The answer to this question has been given in favour of the tax-payer by the Delhi High Court in the case of CIT vs. S. N. Chadha 249 ITR 31 and by the Nagpur Bench of ITAT in the case of Second ITO vs. M. R. Upasani 12 ITD 330.

The issue regarding whether the term "at the time of retirement" includes voluntary retirement by way of resignation or not is by now, settled in favour of the assessee by the decisions of the Bombay High Court in the case of CIT vs. D. P. Malhotra 229 ITR 394 and of the Madras High Court in the case of CIT vs. R. J. Shahney 159 ITR 160.

Leave Travel Allowance – Exemption nu/s. 10(5)

Readers might have already encountered the overzealous officers in the TDS Cell of the Income-tax Department. Apart from the normal (?) scrutiny that tax payers have to face u/s. 143(3) in respect of the Tax Returns, the TDS returns too are now being subjected to rigorous scrutiny. One of the main areas where the Salary TDS Cell enters into a dispute with the tax deductor is when exemption has been granted u/s. 10(5) in respect of LTA or LTC.

Nowadays, the scrutinizing officers are calling for proof in respect of all exemptions claimed. Now, generally, the proof that an employee submits to his employer for LTA/LTC is the bill issued by the travel agent. Some of the practical issues that are being faced in this regard are as under:

• If the journey is undertaken by a private taxi then what kind of supporting would be acceptable?

• Whether the air/train tickets (original or photocopies) are essential in addition to the travel agents’ bills?

• Whether, in case of air travel, the boarding pass would also be required to substantiate the journey?

All these doubts have arisen on account of the fact that the TDS officers are now asking for such documentary evidence. The real reason for this not too difficult to understand. It has been observed that in most companies all employees are submitting bills of the same travel agent. In many cases, upon inquiry, it is found that the travel agent does not exist. Such blatant tax evasion will obviously initiate a harsh reaction from the Income-tax Department.

In the opinion of the author, the employer must take all steps to obtain genuine documentary evidence from its employees. Reasonable care must be taken to verify the prima facie genuineness of the claims. If the tickets or the boarding passes are available then the claim gets further strengthened. At the same time it must be appreciated that the duty of the employer is that he has to have prima facie evidence before considering the exemption for the purpose of TDS. The employer is not an investigating agency. If the employee makes a fraudulent claim, the responsibility should be that of the employee. and not the employer.