(a) Income Tax Rules, 1982---

-----Rr. 3(2)(a) & 4---Valuation of perquisites, allowances and benefits-- House rent---Rules 3(2)(a) & 4 interpreted and explained---Basic salary as defined under R.3(2) itself includes all the allowances except for those stated in SA(i)---Such basic distinction is to be kept in mind while determining the house rent allowance receivable in cash and the corresponding exemption-- Technical and indexation pay etc. have to be included to arrive at the minimum of time salary for calculating the house rent---Only the minimum of time scale of the assessee has to be taken as determining factor.

Rule 3(1) of Income Tax Rules, 1982, states that the value of perquisites, allowances and benefits includable in the income chargeable under the head "salary" shall be determined in accordance with the provisions of Rule 4 to Rule 18 wherever applicable. Sub-rule (2) of Rule 3 defines "basic salary" for the purpose of determining the value of perquisites, allowances and benefits. A bare reading of the provision indicates that in Rule 4 another term "minimum of the time scale of basic salary" has been used which cannot be confused with the terms "basic salary" as defined in Rule 3(2) of the said Rules. Also the proviso to Rule 4 leads us to a definite conclusion that the term "basic salary" and "minimum of the time scale of basic salary" are two different terms. While basic salary has been defined in Rule 3(2)(a) of these Rules, the term "time scale" has not been defined in these Rules. However, Rule 9(31)(a)-of Fundamental Rules, Section 1, Chapter II defines a time scale in the following words:---

"Time scale pay means pay which, subject to any conditions prescribed in these rules, rises by periodical increments from a minimum to maximum. It includes the class of pay hitherto known as progressive."

Therefore, a time scale refers to a scale of pay that generally is not static and has a nexus with upward movement of salary with the flux of time and this movement is determined by steps stated in terms of amount of money to be added at the end of a specific period. Rule 4 again makes it abundantly clear that it is the "minimum of time scale" of the basic salary which is the sole criterion for determination of 45% of the house rent allowance. And, the phrase used in the proviso that "where there is no time scale" the basic salary of a particular employee against a particular post of office shall be construed to be the minimum of time scale of basic salary again leaves no doubt that the term basic salary as defined in Rule 3(2) of these Rules shall only substitute or be considered equivalent to the "minimum of the time scale of the basic salary" there is no "time scale". While the determining factor for the purpose of calculation of house rent exemption allowance shall always be the minimum of the "time scale", it is only in absence of a time scale that basic salary shall be considered equivalent to the minimum of the time scale. A time scale is normally not inclusive of any allowance or a benefit which may be otherwise in case of "basic salary" as defined in Rule 3(2)(a). In the Income Tax Rules, 1982 as originally framed, the words "starting salary" were used and it was on 11-5-1983 that these were substituted with "basic salary". This amendment was necessitated for the reason that "starting salary" and "minimum of the time scale" were almost interchangeable and, therefore, an unnecessary confusion would have been the result. The substitution of words "starting salary" by "basic salary" appears to have intended two purposes firstly, to draw a clearer distinction between a "time scale" and "basic salary" and secondly to avoid confusion between the two terms which sounded similar in nature and effect. These objects were partly achieved as the term "basic salary" already stood defined in Rule 3(2)(a) while the phrase "time scale" was again left to be understood to bear the meaning explained above. The term basic salary may include technical pay as well indexation pay but their fusion with the minimum of time scale was not correct. Proviso to Rule 4 of these Rules was applicable in case of the assessee to draw distinction between "minimum of the time scale of the basic salary," and the "basic salary" itself.

"Basic salary" as defined under Rule 3(2) of the Income Tax Rules itself includes all the allowances except for those stated in sub-clauses (1) to (4) thereof. This ,basic distinction has to be kept in mind while determining the house rent allowance receivable in cash and the corresponding exemption.

Technical and indexation pay etc. have to be included to arrive at the minimum of time scale for calculating the house rent. Only the minimum of time scale of the assessee shall be taken to be the determining factor.

(b) Income-tax---

----Practice and Procedure---Mere adoption of a particular mode of calculation would not non-suit the Revenue in those matters which were already pending before the Income Tax Appellate Tribunal for there was no estoppel against taw.

(c) Income Tax Rules, 1982---

----R.4---Language of R.4, as couched, creating confusion which lead the authority to intermingle the concepts of "time scale" and "basic salary"-- Income Tax Appellate Tribunal suggested the amendment in the Rule to make it intelligible.

Existing language of Rule 4 of the Income Tax Rules, 1982, as couched, does create a confusion which led authority to intermingle the concepts of the time scale and basic salary. Further, the substitution of word "starting salary" for "basic salary" in 1983 made the provision all the more complex. It appears that Rule 4 is either not happily drafted or otherwise word "of as used in this Rule after the word "time scale" and before the word "basic salary" is a result of misprinting in the Gazette. If the word "or" is used or read in place of "of at the relevant place, whole of the Rule becomes readily intelligible. Moreover, the repetition of word "basic salary" at the end of the proviso appears unnecessary. The things, however, can still be made straighter and expressive of the real intention o` the legislature, if the word "of" is substituted by word "or" and the words "of basic salary" at the end of the proviso are excised to read as under:---

4. House rent allowances receivable in cash.---Where the house rent allowance is receivable by the employees in cash, the amounts if any, by which the house rent allowance so receivable exceeds forty-five per cent of the minimum of the time scale or the basic salary shall be included in his income:---

Provided that where there is no time scale, the basic salary of a particular employee against a particular post or office shall be construed to be the minimum of time scale.

The rule making authority may like to consider the matter in the light of these observations.

Qaiser M. Yahya, D.R. for Appellant.

Ch. Muhammad Ismail, I.T.P. for Respondent.

Date of hearing: 5th June, 1993.

ORDER

This departmental appeal raises a controversy that revolves around the provisions of Rules 3 and 4 of the Income Tax Rules, 1982 which respectively define the phrase "basic salary" and prescribe the limit and mode of calculation of house rent allowance receivable in cash.

2. Briefly stated the facts of the case are that the respondent is an employee of M/s. NESPAK (Pvt.) Limited, Lahore. He filed a return under section 59(1) of the Ordinance declaring certain income which was accepted by the Revenue. However, an addition/adjustment under section 59(3) of the Ordinance was made for the reason that the assessee did not declare its correct minimum of time scale of the basic salary and that the scale provided by General Manager (Finance) of the NESPAK Limited was the correct one. Therefore, accepting the same, the assessee was allowed a house rent allowance @ 45% of the minimum of the time scale of the basic salary as contemplated under Rule 4 of the Income Tax Rules, 1982 and the rest of the amount was added-back and included in the declared total income. The relevant portion of the assessment order is reproduced below to clarify the view adopted by the assessing officer:---

"The minimum of the 'time scale of assessee is taken at Rs.2,260 in Grade-9 as is evident from General Manager, Finance's letter No. NESPAK/Tax/88, dated 23-2-1988 and also confirmed on LS-3-1988 by Mr. Amir Rashid (General Manager, Finance) in his personal assessment for the year 1987-88. Admissible H.RA. @ 45% under Rule 4 comes to Rs.12,204 and the balance is added-back."

3. On appeal the learned first appellate authority after making certain observations which did not arise out of the impugned assessment order proceeded to direct the assessing officer to include "technical" and "indexation pay" in the basic salary of the assessee/respondent to arrive at "the minimum of time scale of the basic salary" for calculating exemption on account of house rent allowance at 45%. The relevant portion of the impugned order is also stated below to bring out the difference between the approaches adopted by the assessing officer and the first appellate authority:

"Rule 4 of the Income Tax Rules, 1982 clearly lays down that where the House Rent Allowance is receivable in cash, the amount, if any, by which the H.RA so receivable exceeds 45% of the minimum of the time scale of the basic salary shall be included in his income. Proviso to the said rule which is being referred emphatically by the ITO, has no application in the appellant's case the proviso takes care of a situation where there is no time scale. Moreover, the proviso, instead of supporting the ITO, goes against his own arguments. Both Rule 4 and the proviso thereto speak of Basic Salary, which is defined under Rule 3(2)(a) to include pay and allowances payable monthly or otherwise, but does not include dearness allowances, employer's contribution to a recognized Provident Fund, exempted allowances, and the perquisites etc. which are taxable under Rules 3 to 18. Clearly, therefore, Technical and Indexation pay etc. which are payable monthly, are very much included in the expression "Basic Salary" as appearing in Rule 4. The ITO's objection is, therefore, overruled."....

... ... "Therefore, the ITO is directed to recompute the exemption on account of House Rent Allowance and the taxable amount, if any, under Rule 4 on the basis of the minimum of the actual time scale of the basic salary which in the appellant's case is as follows:---

4. The parties have been heard. Learned D.R. contends that both the assessing officer as well as the first appellate authority referred to Rule 4 of the Income Tax Rules, 1982 but made different interpretations thereof. It is further stated that the learned first appellate authority was clearly wrong in confusing the two different terms, namely "minimum-of the time scale of the basic salary" and the "basic salary". Resultantly, he submits the assessee-respondent was allowed a relief which was not due to him and that since this is a case of an employee, the view adopted by the learned first appellate authority would affect countless number of similar other salaried employees both in public and private sectors. Learned A.R. for the respondent on the other hand has repeated his submissions that he earlier made before the learned first appellate authority. He supports the impugned order by and large on the grounds stated therein. Besides, he claims that in subsequent years not only in respect of the present respondent but also other employees of the NESPAK (Pvt.) Ltd. the Revenue has adopted the interpretation of these Rules as expounded by the first appellate authority and therefore, included technical and indexation pay in the minimum of time scale of the employees to arrive at the "minimum of the 'time scale of the basic salary" for the purpose of calculation of house rent exemption/allowance.

5. After hearing the parties and going through the orders of the authorities below we tend to agree with the submissions made by the learned D.R. In this appeal, as remarked in the beginning, it is the provisions of Rule 3(2)(a) and Rule 4 of the Income Tax Rules, 1982, which call for an interpretation and explanation in the light of the facts of the present case. For facility of reference, both of these Rules are re-produced:---

3. Valuation of perquisites. allowances benefits:--

(1) For the purpose of computing the income chargeable under the head "Salary", the value of perquisites, allowances and benefits includible in the said income shall be determined in accordance with the provisions of rule 4 to rule 18, wherever is applicable.

(2) For the purpose of determining the value of perquisites, allowances and benefits under sub-rule (1); -

(a) "basic salary" means the pay and allowances payable monthly or otherwise, but does not include:-

(i) dearness allowances or dearness pay unless it enters into the commutation of superannuation or retirement benefits of the employee concerned:

(ii) employer's contribution to a recognised provident fund or a fund to which the Provident Fund Act 1925 (XIX of 1925). applies and the interest credited on the accumulated balance of an employee in such fund.

(iii)allowances which are exempt from the payment of tax; and

(iv) allowances, perquisites annuities and benefits referred to in the said sub-rule:

(b) "Salary" means remuneration or compensation for services rendered, paid or to be paid to regular intervals and includes overseas, dearness or cost of living allowance, by whatever name it may be described, and bonus or commission which is payable to an employee in accordance with the terms of his employment as remuneration or compensation for services but does not include the employer's contribution to a recognised provident or superannuation fund or gratuity fund or any other sum which does not enter into the computation for pension or retirement benefits; and

(c) "employee" includes a director of a company working whole time for one company.

(4) House rent allowances receivable in cash.---Where the house rent allowance is receivable by the employee in cash, the amount, if any, by which the house rent allowance so receivable exceeds forty-five per cent of the minimum of the time scale of the basic salary shall lie included in his income:

Provided that where there is no time scale the basic salary of a particular employee against a ,particular post or office shall be construed to be the minimum of time scale of basic salary.

6. Rule 3(1) of these Rules states that the value of perquisites allowances and benefits includable in the income chargeable under the head salary shall be determined in accordance with the provisions of Rule 4 to Rule 18 wherever applicable. In this case, it is only Rule 4 which relates to house rent allowances receivable in cash. Sub-rule (2) of Rule 3 defines "basic salary" for the purpose of determining the value of perquisites allowances and benefits. A bare reading of the provision indicates that in Rule 4 another term "minimum of the time scale of basic salary" has been used which cannot be confused with the term "basic salary" as defined in Rule 3(2) of the said Rules. Also the proviso to Rule 4 leads us to a definite conclusion that the term "basic salary" and "minimum of the time scale of basic salary" are two different terms. As stated above, while basic salary has been defined in Rule 3(2)(a) of these Rules, the term "time scale" has not been defined in these Rules. However, Fundamental Rules, Section 1, Chapter II, Rule 9(31)(a) defines a time scale in the following words:---

"Time scale pay means pay which, subject to any conditions prescribed in these rules, rises by periodical increments from a minimum to a maximum. It includes the class of pay hitherto known as progressive."

Therefore, a time scale refers to a scale of pay that generally is not static and has a nexus with upward movement of salary with the flux of time and this movement is determined by steps stated in terms of amount of money to be added at .the end of a specific period. Rule 4 again makes it abundantly clear that it is the "minimum of time scale" of the basic salary which is the sole criterion for determination of 45% of the house rent allowance. And, the phrase used in the proviso that "where there is no time scale the basic salary of a particular employee against a particular post of office shall be construed to be the minimum of time scale of basic salary again leaves no doubt that the term `basic salary' as defined in Rule 3(2) of these Rules shall only substitute or be considered equivalent to the "minimum of the time scale of the basic salary" where there is no "time scale". While the determining factor for the purpose of calculation of house rent exemption allowance shall always the minimum of the "time scale", it is only in absence of a time scale that basic salary shall be considered equivalent to the minimum of the time scale. A time scale is normally not inclusive of any allowance or a benefit which may be otherwise in case of "basic salary" as defined in Rule 3(2)(a). It may also be noticed that in Tax Rules, 1982 as originally framed, the words "starting salary" were. used and it was on 11-6-1983 that these were substituted with "basic salary". This amendment to my mind was necessitated for the reason that "starting salary" and "minimum of the time scale" were almost interchangeable and, therefore, an unnecessary confusion would have been the result. The substitution of words "starting salary" by "basic salary" appear to have intended two purposes firstly, to draw a clearer distinction between a "time scale" and "basic salary" and secondly as stated above to avoid confusion between the two terms which sounded similar in nature and effect. These objects were partly achieved as the term "basic salary" already stood defined in Rule 3(2)(a) while the phrase "time scale" was again left to be understood to bear the meaning explained above. Learned first appellate authority rightly found that the term basic salary may include technical pay as well as indexation pay but he clearly fell into error by ordering their fusion with the minimum of time scale as was available in case of the appellant. In other words the learned first appellate authority adopted a correct approach by saying that proviso to Rule 4 of these Rules was applicable in case of the appellant to draw distinction. between "minimum of the time scale of the basic salary" and the "basic salary" itself. However, what he did thereafter is that he allowed all these allowances which could only be included in a basic salary as defined in the Rules to be included in minimum of the time scale. This is where, after earlier having agreed of the difference between the two terms he amalgamated them and thus rendered the proviso to Rule 4 as redundant.

7. The Revenue has produced a letter U.O. No.9(9)-DFA(W&P) 54/84, dated 28th January, 1984 in support of the view adopted by the ITO of the minimum of the time scale in case of the appellant. From this letter it is clear that only Pay Scale 8 as provided for the employees of NESPAK had two, sub scales namely Scale 8(b) and Scale 8(a). The observation of the learned first appellate authority in this connection that Scale 9 also had 2 sub-clauses as in case of scale 8 appears incorrect. In case of Scale 9 it is only a further step in the time scale rather its being an altogether a different sub-scale. Be that as it may, the aforesaid letter established at least one thing that NESPAK employees certainly had a time scale and, therefore, they were not covered under the proviso to Rule 4 which laid down that basic salary shall be taken into account only in cases where there was no time scale. Therefore, the order of the learned first appellate authority in directing the assessing officer to add "technical pay" as also "indexation pay" in the minimum of time scale to calculate the house rent allowance was clearly erroneous. The fact of the matter is that "Basic salary" as defined under Rule 3(2) of the Income Tax Rules itself includes all the allowances except for those stated in sub- clauses (1) to (4) thereof. This basic distinction had to be kept in mind while determining the house rent allowance receivable in cash and the corresponding exemption.

8. Ch. Muhammad Ismail learned A.R. has placed a lot of stress on the fact that in the subsequent years the Revenue adopted the method as ordered by the learned first appellate authority to determine house rent allowance in respect of the NESPAK employees. This meant that indexation pay and technical pay of the employees of the NESPAK was included in the minimum of their time scales in order to reach house rent allowance. However, he was not able to convince us as to the effect of subsequent practice of the Revenue in this regard. In the first place we feel that the assessing officer must have adopted the formula to implement the order of the first appellate authority which is being impugned before us. Secondly, mere adoption of a particular mode of calculation would not non-suit the Revenue in those matters which are already pending before the Tribunal. There being no estoppel against law, the Revenue could still very well press these appeals in order to get resolved an issue of vital importance. The contention of the learned A.R. that these appeals have become infructuous, therefore, is rejected.

9. In view of what has been stated above we will allow this departmental appeal, cancel the order of the first appellate authority and therefore, the direction to include technical and indexation pay etc. to arrive at the minimum of time scale for calculating the house rent. Resultantly only the minimum of time scale of the assessee shall be taken to be the determining factor. The parties are at variance even on the exact figures of time scale. The Finance Division letter of 28-1-1984 speaks of different scales while- the respondent relies upon a letter of Ministry of Water and Power, dated 28-3-1990 which states different pay scales of employees in Scale 8 to 12 and V.P' s. We will, therefore, keep this issue open with a direction that assessee may provide fresh evidence in the form of official pay scales of the NESPAK Limited employees. The assessing officer may also require the concerned quarter to provide such an information.

10. Appeal accepted.

11. Before parting with this order, I would like to record that existing language of Rule 4 of the Income Tax Rules, 1982, as couched, does create a confusion which led the learned first appellate authority to intermingle the concepts of the time scale and basic salary. Further, the substitution of word "starting salary" by "basic salary" in 1983 made the provision all the more complex. It appears that Rule 4 is either not happily drafted or otherwise word "of as used in this Rule after the word "time scale" and before the word "basic salary" is a result of misprinting in the Gazette. If the word or" is used or read in place of "of at the relevant place, whole of the Rule becomes readily intelligible. Moreover, the repetition of word "basic salary" at the end of the proviso appears unnecessary. The things, however, can still be made straighter and expressive of the real intention of the legislature, if, as observed earlier, the word "of is substituted by word "or" and the words "of basic salary" at the end of the proviso are excised to read as under:---

I

4. House rent allowances receivable in cash.-'--Where the house rent allowance is receivable by the employees in cash, the amounts if any, by which the house rent allowance so receivable exceeds forty-five per cent of the minimum of the time scale or the basic salary shall be included in his income:

Provided that where there is no time scale, the basic salary of a particular employee against a particular post or office shall be construed to be the minimum of time scale.

The Rule-making authority may like to consider the matter in the light of these observations.

M.B.A./12/T.T.Order accordingly.