The Hindu Business Line : Making amends for a lost deduction

THE Finance Act, 2005 dealt a severe blow to salary earners by denying deduction for employment-related expenses by doing away with standard deduction (SD). Unfortunately, SD has been removed based on wrong premises, namely, i) it is in the nature of personal allowance; ii) exemption limit for taxpayers has been raised; and iii) tax brackets have been scaled up. But none of these justifies the withdrawal of SD.

SD was being given in a consolidated form for expenses incurred in employment. The other two grounds mentioned in (ii) and (iii) do not apply only to salary earners. All taxpayers are entitled to these benefits. Hence, denying SD to salaried employees for these reasons are not justified.

The issue that needs consideration now is whether despite the removal of the clause allowing SD, employment-related expenses can still be claimed as deduction from salary income. The answer to this has to be in the affirmative.

The basic theme in the I-T Act in the context of computation of taxable income is that income-tax is not to be levied on `gross' receipts but on the amount left after deducting the expenses incurred in earning the income. It is, no doubt, true that the I-T Act has standards and limits for allowing the expenses but it nowhere provides that no expenses shall be allowed at all in working out the taxable income.

In the context of computation of income from business, courts have held that expenditure is allowable if it is incidental to business. It has also been observed in many decisions that guided by commercial expediency, if an expenditure is incurred for earning income/profit, it would be deductible even if there is no specific provision for its deduction in the I-T Act. Even voluntary expenditure, which is ultimately incurred for furthering the objects and purposes of the assessee, is deductible.

Section 29 of the I-T Act provides that income from business/profession shall be computed in accordance with the provisions contained in Sections 30 to 43D, that is, after allowing the deductions mentioned in these sections. But it has been held in a number of decisions that an item incidental to business will be deductible even if it does not fall within any of these sections (CIT vs Chitnavis, AIR 1932 PC 178; Ramchander Shivnarayan vs CIT (1978) 111 ITR 263 (SC), and so on).

In CIT vs Mysore Sugar Co. Ltd (1962 46 ITR 649 SC), the court held that Sections 30 to 43C do not deal exhaustively with the deductions, which must be made to arrive at actual profits. The same logic should apply to Section 16 deductions.

Even if an expenditure is not mentioned in Section 16, it should be deductible in computing income under Section 15 if it has a direct nexus in earning the salary income. Therefore, salary earners should be entitled to claim deduction for employment-related expenses, which have nexus with the salary income despite the fact that the clause which permitted SD has been deleted from Section 16.

(The author is a former Chairman of CBDT.)