MP, MLA allowances: All are not tax-exempt

The common perception that all allowances received by MPs and MLAs are tax-free is dispelled by the decision of the Visakhapatnam Bench of the Income Tax Appellate Tribunal in the case of M. Venkata Subbaiah v. ITO (2010) 7 Taxman.Com 96. Section 10(17) of the Income Tax Act, 1961 (Act) provides exemption to Members of Parliament and State legislators in respect of their daily allowances in entirety. In the case of MPs, the amount received as constituency allowance and in the cases of MLAs, such allowance is exempt from tax from the A.Y. 2007-08 in entirety. The issue that arose for the consideration of the Tribunal was whether allowances such as conveyance , telephone , clerical , medical and contingency are also tax exempt. The Tribunal has decided that such allowances are exempt subject to limitation mentioned in Section 10(14). The nature of receipts received by the Central and State legislators was examined by the Rajasthan High Court in the case of CIT v. Shive Charan Mathur (2008) 306 ITR 126 and it was decided that MPs and MLAs cannot be considered as employees as they are not employed by any body but are elected by the public from their respective constituencies and discharge constituency functions. Hence, salary and allowances received by them cannot be taxed under the head ‘salary', but are taxable under the head ‘income from other sources'. The Tribunal has followed this view in the case before them. However, it has held that in the case of legislators, they would be entitled to exemption u/s 10(14) of the Act subject to condition mentioned in this provision. All special allowances, other than those specifically exempt, would be taxed as income. The reasoning for this view is that the purpose for which allowance is granted is alone not determinative of claim of exemption u/s 10(14), which stipulates grant of exemption, to the extent prescribed specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment to the extent to which such expenses are actually incurred for that purpose.

Surplus taxable

Therefore, any surplus remaining in the hands of the grantee after meeting the expenses loses the character of an allowance entitled to exemption. This would be so even if the grantor disabled himself from demanding the refund of the amount not expended for meeting the expenses, for which it is granted, for the performance of duties of office or employment. The surplus remaining out of such grants shall assume the character of ‘additional remuneration' and unless the grantee proves that the entire amount was spent, the balance left shall be liable to tax. According to the Tribunal, under Rule 2BB, read with section 10(14), only the conveyance allowance or the clerical allowance is required to be exempted subject to proof that it was incurred in the performance of the duties of an office. Regarding medical reimbursement received by such persons, the view expressed is that if it is a reimbursement of the medical expenditure, it will be allowed in view of Rajasthan High Court's decision in Mathur's case (supra). Otherwise, the deduction cannot be allowed as it would be not in accordance with Rule 2BB. Rest of the allowances i.e. telephone allowance, contingency allowance, etc., do not fall either in the purview of Section 10(14) or 10(17) and as such cannot be allowed. The medical allowance would be allowable subject to the condition specified earlier. – www.thehindubusinessline.com