| Unwarranted discrimination against disciplined taxpayers
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It was wrong to withdraw standard deduction and discriminate against salaried assessees, who are not only the largest but the most disciplined segment of taxpayers.
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Income-tax is a levy not on gross receipts but on income remaining after deducting the expenses incurred in earning it. But in the case of salaried taxpayers, this solemn principle, which is discernible in all the charging sections of the Income-Tax Act, has been discarded. The Finance Minister, Mr P. Chidambaram, in his Budget speech for 2005, justified the removal of standard deduction (SD) given in lieu of employment-related expenses on the following grounds:
"Given the higher exemption limits and the scaling up of brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the standard deduction." (Para 153 of the Budget speech.)
None of these justify the removal of SD. Up to assessment year (AY) 1974-75, salaried assessees were entitled to get deduction from their salaries to arrive at taxable income, expenses for (i) conveyance used for employment; (ii) expenses on books and other publications; (iii) taxes on profession; and (iv) other expenses, which, by the conditions of service, the employees were required to spend. This was in consonance with computational provisions of `other income' in the I-T Act.
The practice of giving deduction for individual items of expenses falling in the four categories was given up from AY 1975-76 to save time and energy in scrutinising such claims, and salaried assessees were compensated for such expenses by a lumpsum deduction called SD.
The deduction was not given in lieu of personal expenditure but for employment-related expenses earlier deductible as individual items of expenditure.
Discriminated against
The principle of allowing expenses relatable to taxable incomes has been recognised in taxing business income (Section 29), property income (Section 24), income from other sources (Section 57) and capital gains (Section 48). The issue then is why only salaried employees should be discriminated against in this respect?
None of the reasons given by the Finance Minister justify the withdrawal of SD. The basic exemption limit has been increased and tax brackets re-arranged for all categories of taxpayers not merely for salaried employees. It was never a `separate personal allowance' as presumed by the Finance Minister. And the removal is not in accordance with "growing international practice", as many countries are giving such allowance to salaried taxpayers.
Thus, prima facie, it was wrong to withdraw SD and discriminate against salaried assessees, who are not only the most disciplined but also among the largest segment of taxpayers. Relief to salaried employees by way of SD must, therefore, be restored. Else, the salaried can claim deduction for employment-related expenses despite the withdrawal of SD from Section 16.
Section 29 provides that income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D (relating to expenses). Despite this, courts have held that where there is no specific statutory provision for a deduction in the computation of taxable business profits, it does not mean that the item goes without any deduction at all.
The issue will have to be resolved on the basis of commercial, trading and accounting principles/practices. In Indequip Ltd vs CIT (1993 202 ITR 421 Bombay), the Bombay High Court held that "when a claim is made for deduction, for which there is no specific provision in law, whether it is admissible or not will depend on whether having regard to the accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and is incidental to it." The same principle should apply in the context of employment-related expenses.
Making the salaried taxpayers disgruntled is not a wise policy. The SD provisions should be brought back, else there will be considerable litigation which would not benefit anyone.
T. N. Pandey
(The author is a former Chairman of CBDT.)
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