Salaried can claim deduction for employment-related expenses.........Employees need to incur expenses to upgrade their skills

Salaried can claim deduction for employment-related expenses

Employees need to incur expenses to upgrade their skills

The most wronged persons in the income-tax regime are salaried persons. The scheme of the Income-Tax Act, 1961 clearly shows that the income to be taxed under the Act has to be worked out after allowing the expenses, which are permitted under the Act or are allowable on the basis of commercial expediency/practices.

However, in the cases of incomes from ‘salary' or ‘house property', the expenses are deductible not on the basis of actual expenditure but on estimated basis by way of standard deduction (SD) to ensure simplicity in tax administration.

On this analogy, persons deriving income from salary were allowed deduction on standard basis (up to a maximum limit of Rs 30,000) in the computation of taxable income.

It needs to be appreciated that a salaried employee too has to incur expenses, to continue and progress in the present day competitive environments, on books, newspapers, journals, computers, stationery, floppies, traveling, training, etc., on his own account. If he does not incur such expenses, he may stagnate and may even lose his job. These expenses cannot be considered as ‘personal expenses'. Even the history of SD shows that it was being given in lieu of individual employment-related expenses.

Untenable grounds

However, ignoring these realities, the then Finance Minister, Mr P. Chidambaram, vide Finance Act, 2005, withdrew the SD available to salaried employees on totally untenable grounds, 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.

None of these justify withdrawal of SD, which was being given, in a consolidated way, for expenses incurred in the context of employment. The other two grounds — (ii) and (iii) — do not apply only to salary earners. All taxpayers are entitled to these benefits. Hence, there were no grounds to deny SD to salaried employees for these reasons too.

However, despite the withdrawal of SD, salary earners can still claim deduction for employment-related expenses for the reasons mentioned hereinafter.

As mentioned earlier, the ‘gross receipts' are not to be taxed under the I-T Act. Taxable income is to be computed after deducting the expenses incurred in earning the income.

The expenses allowable could be of two categories: (i) specifically mentioned in the Act; and (ii) allowable on commercial principles/expediency basis. It is, no doubt, true that the I-T Act has laid down its own standards and limits for allowing the expenses, but it nowhere provides that other expenses relating to earnings should not be allowed at all. In this context, the courts have held that expenditure is allowable if it is incidental to the business and is incurred in the character of a trader.

Commercial principles

Decisions in this regard are to be guided by commercial principles and expediency and if an expenditure is incurred for earning income/profit, it would be deductible even if there is no specific provision for the same in the Act.

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 candidly held in many decisions that an item incidental to the business, will be deductible even if it does not fall within any of these sections (see CIT vs Chitnavis, AIR 1932 PC 178; Ramchander Shivnarayan v. CIT (1978) 111 ITR 263 (SC), and so on).

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

Even if an expenditure is not mentioned in Section 16, but it is necessary in the context of employment, it should be deductible in computing income under Section 15 if it has a direct nexus in earning the salary income.

Hence, salary earners can claim employment-related expenses now (without any limits) if these (i) have nexus with the employment; (ii) have been genuinely incurred; and (iii) are prima facie reasonable