The AO added my performance bonus to salary and cut my HRA exemption. Can he do that?
No. 'Salary' for the house rent allowance exemption is not the general definition in s.17 but the one in clause (h) of rule 2 of Part A of the Fourth Schedule, which rule 2A picks up: it takes in basic salary and dearness allowance where the terms of employment so provide, and excludes all other allowances. A performance bonus therefore stays out, the ten per cent test ran on the basic salary of Rs 30 lakhs, and the assessee was held entitled to about Rs 5.20 lakhs of exemption.
Decided by the ITAT (ITAT Kolkata Bench 'A' — A.T. Varkey (Judicial Member) and Dr. A.L. Saini (Accountant Member)) on 2020-01-10, reported as (2020) 181 ITD 165 / 77 ITR 63 (SN) (Kol.)(Trib.); [2020] 113 taxmann.com 295 (Kolkata - Trib.); IT Appeal No. 2370 (Kol) of 2017; AY 2011-12. It bears on section 10(13A), section 15, section Rule 2A, section Fourth Schedule, Part A, rule 2(h) of the Income Tax Act 1961, in Salary & Perquisites matters.
Loading variable pay into 'salary' raises the 10% threshold and shrinks the exemption, which is how a large part of an HRA claim gets disallowed - here Rs. 8.48 lakhs was denied on that basis. The point is one of construction, not of evidence, so it can be argued on the Form 16 alone. It applies wherever a salary structure carries a bonus or other variable element outside basic pay and dearness allowance.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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For assessment year 2011-12 the assessee, a salaried individual, returned a total income of about Rs 2.62 crores and claimed exemption for house rent allowance under s.10(13A), supported by his Form 16. Rent paid for the year was about Rs 8.20 lakhs and his basic salary was Rs 30 lakhs, ten per cent of which is Rs 3 lakhs. The Assessing Officer took the view that the performance bonus paid to the assessee formed part of 'salary' for the purpose of the exemption; loading it in raised the ten per cent threshold and cut down the excess of rent paid over that threshold, and on that basis about Rs 8.48 lakhs of the exemption claimed was disallowed.
A performance bonus does not form part of 'salary' for the purpose of computing the house rent allowance exemption. On the figures, rent paid for the year was Rs. 8.20 lakhs and ten per cent of the basic salary of Rs. 30 lakhs was Rs. 3 lakhs, so the excess of rent over ten per cent of salary was Rs. 5.20 lakhs. The Assessing Officer was directed to allow the exemption at Rs. 5.20 lakhs and the appeal was allowed. The relief is a direction to allow a stated figure, not a remand for verification.
The Tribunal's own words are not available. The document carried in a subscription research database consists of the publisher's editorial blocks only, with no order text and no numbered paragraphs, and no other source consulted reproduces the Bench's words. What that report shows of the Bench's route is short: it found the Kerala High Court decision in CIT v. B. Ghosal to be on identical facts, applied it, and then did the arithmetic. The fuller route usually attributed to this decision - that the governing definition is not the general one in s.17 but the one in clause (h) of rule 2 of Part A of the Fourth Schedule, which rule 2A picks up through its Explanation, under which salary includes dearness allowance where the terms of employment so provide and excludes all other allowances and perquisites - appears in that report as the assessee's submission, not as a finding of the Bench. A performance bonus, being neither basic pay nor dearness allowance provided for by the terms of employment, falls outside that definition, so the base for the ten per cent computation is basic salary alone.
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Handle my notice → Ask a CA on WhatsAppNo. 'Salary' for the house rent allowance exemption is not the general definition in s.17 but the one in clause (h) of rule 2 of Part A of the Fourth Schedule, which rule 2A picks up: it takes in basic salary and dearness allowance where the terms of employment so provide, and excludes all other allowances. A performance bonus therefore stays out, the ten per cent test ran on the basic salary of Rs 30 lakhs, and the assessee was held entitled to about Rs 5.20 lakhs of exemption. This was decided by the ITAT (ITAT Kolkata Bench 'A' — A.T. Varkey (Judicial Member) and Dr. A.L. Saini (Accountant Member)) and bears on section 10(13A), section 15, section Rule 2A, section Fourth Schedule, Part A, rule 2(h) of the Income Tax Act 1961. It is reported as (2020) 181 ITD 165 / 77 ITR 63 (SN) (Kol.)(Trib.); [2020] 113 taxmann.com 295 (Kolkata - Trib.); IT Appeal No. 2370 (Kol) of 2017; AY 2011-12. Loading variable pay into 'salary' raises the 10% threshold and shrinks the exemption, which is how a large part of an HRA claim gets disallowed - here Rs. 8.48 lakhs was denied on that basis. The point is one of construction, not of evidence, so it can be argued on the Form 16 alone. It applies wherever a salary structure carries a bonus or other variable element outside basic pay and dearness allowance. If it applies to you, the first step is this: Recompute the exemption using only basic salary, and dearness allowance where the terms of employment so provide, and put the working in the reply.
For assessment year 2011-12 the assessee, a salaried individual, returned a total income of about Rs 2.62 crores and claimed exemption for house rent allowance under s.10(13A), supported by his Form 16. Rent paid for the year was about Rs 8.20 lakhs and his basic salary was Rs 30 lakhs, ten per cent of which is Rs 3 lakhs. The Assessing Officer took the view that the performance bonus paid to the assessee formed part of 'salary' for the purpose of the exemption; loading it in raised the ten per cent threshold and cut down the excess of rent paid over that threshold, and on that basis about Rs 8.48 lakhs of the exemption claimed was disallowed. The matter was decided on 2020-01-10 by the ITAT (ITAT Kolkata Bench 'A' — A.T. Varkey (Judicial Member) and Dr. A.L. Saini (Accountant Member)). On those facts the ITAT held as follows. A performance bonus does not form part of 'salary' for the purpose of computing the house rent allowance exemption. On the figures, rent paid for the year was Rs. 8.20 lakhs and ten per cent of the basic salary of Rs. 30 lakhs was Rs. 3 lakhs, so the excess of rent over ten per cent of salary was Rs. 5.20 lakhs. The Assessing Officer was directed to allow the exemption at Rs. 5.20 lakhs and the appeal was allowed. The relief is a direction to allow a stated figure, not a remand for verification.
The Tribunal's own words are not available. The document carried in a subscription research database consists of the publisher's editorial blocks only, with no order text and no numbered paragraphs, and no other source consulted reproduces the Bench's words. What that report shows of the Bench's route is short: it found the Kerala High Court decision in CIT v. B. Ghosal to be on identical facts, applied it, and then did the arithmetic. The fuller route usually attributed to this decision - that the governing definition is not the general one in s.17 but the one in clause (h) of rule 2 of Part A of the Fourth Schedule, which rule 2A picks up through its Explanation, under which salary includes dearness allowance where the terms of employment so provide and excludes all other allowances and perquisites - appears in that report as the assessee's submission, not as a finding of the Bench. A performance bonus, being neither basic pay nor dearness allowance provided for by the terms of employment, falls outside that definition, so the base for the ten per cent computation is basic salary alone. The decision followed or applied CIT v. B. Ghosal [1980] 4 Taxman 55 / 125 ITR 744 / 18 CTR 197 (Ker.)(HC) — followed, para 9.
It was decided by the ITAT on 2020-01-10 and is reported as (2020) 181 ITD 165 / 77 ITR 63 (SN) (Kol.)(Trib.); [2020] 113 taxmann.com 295 (Kolkata - Trib.); IT Appeal No. 2370 (Kol) of 2017; AY 2011-12. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 10(13A), section 15, section Rule 2A, section Fourth Schedule, Part A, rule 2(h), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. A performance bonus does not form part of 'salary' for the purpose of computing the house rent allowance exemption. On the figures, rent paid for the year was Rs. 8.20 lakhs and ten per cent of the basic salary of Rs. 30 lakhs was Rs. 3 lakhs, so the excess of rent over ten per cent of salary was Rs. 5.20 lakhs. The Assessing Officer was directed to allow the exemption at Rs. 5.20 lakhs and the appeal was allowed. The relief is a direction to allow a stated figure, not a remand for verification. It arises in Salary & Perquisites matters, on section 10(13A), section 15, section Rule 2A, section Fourth Schedule, Part A, rule 2(h) of the Income Tax Act 1961, and was decided by ITAT Kolkata Bench 'A' — A.T. Varkey (Judicial Member) and Dr. A.L. Saini (Accountant Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask the officer to identify the words in the definition of 'salary' in clause (h) of rule 2 of Part A of the Fourth Schedule under which he is treating a bonus as salary. Cite CIT v. B. Ghosal [1980] 125 ITR 744 (Ker.)(HC), which the Tribunal followed on this construction, and be ready for the contrary Madras line in CIT v. India Radiators Ltd. [1976] 105 ITR 680, from which B. Ghosal expressly dissented. Where the bonus is written into the contract of employment as remuneration for service, expect the argument that it is one of the exceptional cases B. Ghosal reserved.
Validity check could not be completed. No later treatment was found, and the reason for the status is now twofold. A full-text search of a subscription research database on the party name returns four records: the decision itself, an editorial article listing it among notable rulings of its year, and two unrelated matters. Nothing applies, follows, affirms or doubts it. Absence of contrary authority is not good law. Separately, the order's own text is not available: the document carried in that database consists of editorial blocks only, with no judgment paragraphs, so the reasoning published here is taken from a report of the decision rather than from the Bench. What that report does confirm is the Bench - A.T. Varkey (Judicial Member) and Dr. A.L. Saini (Accountant Member), Kolkata Bench 'A' - the appeal number IT Appeal No. 2370 (Kol.) of 2017, the assessment year 2011-12, the date of 10 January 2020, and that CIT v. B. Ghosal (Ker.) was followed. The underlying question is contested between High Courts: B. Ghosal expressly declined to follow CIT v. India Radiators Ltd. [1976] 105 ITR 680 (Mad.), which held that after the Payment of Bonus Act 1965 bonus forms part of salary or wages, and India Radiators has not been shown to be overruled. On the statutory side, the exemption is not available under the alternative regime in s.115BAC, which became the default from assessment year 2024-25; whether the definition of 'salary' this decision construes survives unchanged in the successor rules is not established. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
No quotation is published on this entry. The sentence formerly quoted here was a digest headnote rather than the words of any court, and the order's own numbered paragraphs could not be obtained: the document available in a subscription research database consists of editorial blocks only, with no judgment text, so nothing on it can be quoted. What that database does establish is the Bench - A.T. Varkey (Judicial Member) and Dr. A.L. Saini (Accountant Member), ITAT Kolkata Bench 'A' - the appeal number IT Appeal No. 2370 (Kol.) of 2017, the assessment year 2011-12 and the date of 10 January 2020. Whoever next works this case should obtain the order from a law report and restate the reasoning from the numbered paragraphs; the route usually attributed to this decision appears in the available report as the assessee's submission, and all the report shows the Bench doing is following CIT v. B. Ghosal on identical facts and computing the figure. Two corrections of substance stand. B. Ghosal [1980] 4 Taxman 55 / 125 ITR 744 is a decision of the Kerala High Court, not the Karnataka High Court as this entry previously stated. And there is no clause (h) in rule 2A: the definition of 'salary' sits in clause (h) of rule 2 of Part A of the Fourth Schedule, which rule 2A picks up through its Explanation. The arithmetic as published is right: Rs. 3 lakhs is ten per cent of the basic salary of Rs. 30 lakhs, rent paid was Rs. 8.20 lakhs and the exemption allowed was Rs. 5.20 lakhs. B. Ghosal reserves exceptional cases which may stand on a different legal footing, and neither decision addresses a performance bonus written into the contract of employment as remuneration for service. The Tribunal's own words are still not available: the subscription database carries editorial blocks only for this order, with no judgment text, so the reasoning here comes from a report and not from the Bench. The decision applies to a performance bonus a rule about bonus generally; the Kerala High Court decision it follows reserves exceptional cases standing on a different legal footing, and neither decision deals with a bonus written into the contract of employment as remuneration for service. The contrary Madras High Court line has not been shown to be overruled. The reporting of B. Ghosal's ITR citation is itself inconsistent, appearing as 125 ITR 744 in one block and 125 ITR 444 in another, so check it before citing. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
A performance bonus does not form part of 'salary' for the purpose of computing the house rent allowance exemption. On the figures, rent paid for the year was Rs. 8.20 lakhs and ten per cent of the basic salary of Rs. 30 lakhs was Rs. 3 lakhs, so the excess of rent over ten per cent of salary was Rs. 5.20 lakhs. The Assessing Officer was directed to allow the exemption at Rs. 5.20 lakhs and the appeal was allowed. The relief is a direction to allow a stated figure, not a remand for verification.
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