In our view, the judgment should not be construed to mean that there is no requirement of retaining the evidence to claim exemption for LTA under Section 10 (5) read with Rule 2B of the Rules. It merely means that in absence of any specific provision/instruction under the Act/the Rules/circular issued by the CBDT, the employer is under no obligation to collect the evidence. The onus is therefore on the employee himself for retaining and storing the supporting evidence to justify the claim for exemption in respect of LTA during the course of regular assessment, if any, to the satisfaction of his assessing officer.

Further, in any case, it is possible that the Ministry of Finance/CBDT may seek to overwrite the above decision by amending the Act/the Rules or by issuing a clarificatory circular stating that since the employer is liable to withhold tax on behalf of the employee, he was always under the obligation of verifying the employee’s claim before allowing such exemptions/ deductions from the salary income. Such an amendment/clarification may also be sought to be applied retrospectively.

In view of the above, we may caution our clients that it would be prudent to continue the current practice of disbursing the LTA claimed by the employee after collecting the appropriate proofs and after due verification.

On the other hand, in the event that such a policy has not been adopted by any employer, such employer may take shelter of the Honourable Supreme Court’s view in the above judgment and defend itself on this basis.

Additional comments/suggestions:

In light of the Honorable Supreme Court’s judgement and on closely examining the annual circular issued by the CBDT for the current financial year read³ with the Act and the Rules, the responsibility of the employer and the employee for verifying/furnishing the details for some of the important components of standard salary structures are summed up below:

1. Perquisites and profits in lieu of salary (like free/ concessional residential accommodation, personal attendants, interest free/concessional loans, etc.)
   Under Section 192(2C) read with Rule 26A(2) of the Rules, the employer is required to furnish the details of the perquisites and profits in lieu of salary to the employee in Form 12BA. The employer could be called to produce the forms before the assessing officer.
2. Incomes exempt under Section 10 of the Act (like HRA, LTA, Conveyance Allowance, Children Education and Hostel Allowance, etc.)
   Except in case of House Rent Allowance where the circular⁴ requires the employer to insist on production of evidence of actual payment of rent before allowing exemption under Section 10(13A) of the Act, the employee would be required to maintain adequate supporting for claiming such exemptions under the Act. It may be noted that the provisions of the Act relating to some of the allowances like conveyance allowance, Children Education Allowance etc. do not require the production of any evidence by the employee. However, it is possible that if an employee’s personal tax return is selected for scrutiny, the tax officer may call upon the employee to substantiate such claims. It is worth a mention here that a circular issued by the CBDT is binding only on the income-tax authorities and not on the taxpayer. Nevertheless, though not statutorily bound to follow the said instructions, the employer in this case, is advised to follow the same to err on the safe side.
3. Deductions under Section 16 of the Act (like professional tax paid and entertainment allowance in case of government employees) Since the employer is, in any case, making payment of the Profession Tax to the Government, the proof of that payment would be available with the employer.
4. Deductions under Chapter VI A of the Act (80C, 80D etc.)
   In continuation of our above view on applicability of the circular to the taxpayer, the employer can allow only certain specified deductions from the gross taxable income as stated in the circular⁵ after satisfying himself about the genuineness of the actual deposits/subscriptions/payments⁶.
5. Salary From More Than One Employer
   Under Section 192(2) of the Act read with Rule 26A(1), the employee may furnish details of the salary, tax withheld on the same, etc. in Form 12B and the employer would be required to take it into account for the purposes of withholding tax from the total salary. Accordingly, the onus of furnishing the details is on the employee, and that of taking the same into account while deducting tax on the salary income is on the employer.
6. Income under any head other than ‘Salaries’ (loss only under income from house property)
   Under Section 192(2B) of the Act read with Rule 26B, the employee may furnish details of income under any head other than ‘salary’ in a simple statement in the same manner as was earlier required to be done in the erstwhile Form 12C⁷ and the employer would be required to take it into account for the purposes of withholding tax. As in the case of salary from another employer, the onus of furnishing these details is also on the employee, and taking the same into account while deducting tax on the salary income is the responsibility of the employer. However, the employer would be well advised to ask for proof of the interest payment in case of housing loans to ensure that the claim for Loss under the head “Income from House Property” is a valid claim.

Notes: