In the case of Sudip Rungta Vs DCIT, Circle-49, Kolkata before ITAT “A” bench Kolkata; ITAT No. 2370/Kol/2017; Date of Pronouncement: 10/01/2020
In the above order the ITAT has discussed and decided that performance bonus cannot be treated as salary for the purpose of calculation of exemption of HRA under section 10(13A);
Let us examine the facts as this decision can prove to be beneficial to the n-number of salaried employees at a time when calculations to determine the final tax liabilities for the financial year 2019-2020 and quantum of tax to be deducted by the employers is being informed to the employees.
Section 10(13A) of the Income Tax Act 1961 says: “any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent ( by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situated subject to other relevant considerations.
In the explanation to the above exemption under this section is available to those assessees who occupy residential accommodation not owned by them and are incurring expenditure on payment of rent.
“Salary” for the purpose of this section includes basic salary as well as dearness allowance if the terms of employment so provide. It also includes a commission based on the fixed percentage of the turnover achieved by an employee as per the contract of employment but excludes all other allowances and perquisites.
The appellant was an employee and had filed his income tax return in a regular manner. His basic pay was Rs 30,00,000 and has paid a rent of Rs 8,20,000. The assessing officer asked the appellant the basis of calculation for claiming the exemption under section 10 (13A). In reply, the appellant provided the calculation as Basic Pay Rs. 30,00,000, Rent paid during the year Rs 8,20,2000/- only, 10% salary comes to Rs 3,00,000 lakhs thus excess of 10% of salary comes to Rs 5,20,000 lakhs (i.e. rent paid reduced by 10% of basic pay Rs. 3,00,000). The assessing officer rejected the claim of exemption since the performance bonus received by the assessee is to be added to the basic salary. The revised 10% of the Basic salary plus performance bonus comes to Rs. 18,00,000/- thus no exemption can be allowed as the 10% of salary is more than the actual rent paid (i.e. Rs. 8,20,000 less Rs.18,00,00). The assessing officer was of the view that performance bonus is nothing but part of salary as under section 10(13A) of income tax act 1961 the definition of salary includes “commission based on the fixed percentage of the turnover achieved by an employee”. The assessing officer was of the view that the nature of the performance bonus is that of commission and is to be added to salary for the calculation to determine exemption from the house rent allowance received during a particular financial year.
The appellant pleaded that the stand taken by the assessing officer is contrary to the extent provisions contained in Rule 2A of income tax rules 1962, clause (h) where it has been specifically provided that ‘Salary’ includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. Since the nature of performance bonus is that of perquisite and not commission thus it cannot be added to the ‘salary’ for the purpose of calculation of exemption under section 10(13A).
In the case of CIT Vs. B. Ghosal (125 ITR 444) the Hon’ble Kerala High Court under the identical facts was of the same view. Thus, the assessing officer is directed to accept the calculations provided by the appellant in the income tax return filed by him. Therefore, for the purpose of calculation of exemption under section 10(13A), the Basic salary will be Rs 30,00,000 and the rent paid by the appellant for the relevant financial year will be Rs. 8,20,000.