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Taxability of Attire/Uniform Allowance

Rule 2BB of the Income Tax Rules specifies the allowances paid to employees which are not taxable. One of the allowances which is exempt from tax is what is commonly called Uniform Allowance.

Rule 2BB exempts from income tax:

any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

Recently, a payroll manager known to us wished to introduce a head of pay called Attire Allowance in his organization. A certain sum of money was to be provided to employees under the head for the purpose of buying clothes for office wear. The entire amount paid under the head was to be tax exempt as long as the employees provided proof of expenditure by way of receipts for purchase of clothes. The organization did not enforce uniform clothing for its employees. The payroll manager was of the view that the amount paid under Attire Allowance shall be fully non-taxable. His argument was that the term uniform stated in Rule 2BB can be liberally interpreted as any clothing which is used for office wear, and hence Attire Allowance can be tax exempt.

We are not in agreement with the above view.

Rule 2BB refers to “uniform.” According to the Oxford English Dictionary, the meaning of the word uniform is as follows.

The distinctive clothing worn by members of the same organization or body or by children attending certain schools.

The term distinctive clothing in the above denotes that unless the clothing reflects similar design, colour, etc. it cannot be referred to as uniform. Employees can be said to be wearing uniform only when their outfits are identical and as per the design standard prescribed by the organization. Of course, there can be differences in uniform among certain classes of employees on the basis of, say, seniority or nature of work, within the same organization.

Why should the word uniform be interpreted strictly and not be understood as any formal attire worn at workplace?

Legislative Intent

Rule 2BB presents the allowances for the purposes of clause (14) of section 10 of the Income Tax Act. Section 10, as you may know, specifies the income which are not to be included in Total Income for taxation. Section 10(14) refers to

any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose.

According to Section 10(14), the allowance should be granted to meet expenses incurred wholly, necessarily and exclusively for the performance of official duties, for it to be tax exempt. While expenses on uniform can be deemed to be wholly for official purpose, expenses on other clothing, even if formal wear, cannot be said to have been incurred wholly for official purposes. Hence, it is important to interpret the word uniform in Rule 2BB in a strict manner.

Case Laws

The income tax authorities have, on more than one occasion, held that allowances for clothing shall be fully taxable unless the organization has a defined policy for employee uniform.

1. ITA No. 155, 159, 287 & 332 Ahd 2012

The Income Tax Department’s below argument was accepted by the adjudicating authority.

"Appellant's contention that the normal dress worn by its 
employees in office is "uniform" cannot be accepted. 
 
If appellant's interpretation of 'uniform' were to 
be accepted, in every office, any dress worn by the employees'
would qualify as 'uniform'.

There is no doubt that there was no 'uniform' prescribed in 
ONGC during the period under consideration and this fact was
well within the knowledge of appellant.
 
Conclusion drawn by the ACIT(TDS) that additional salary in the
garb of 'uniform allowance' was being paid is therefore, on 
sound footing. Since the payment in question was not towards
purchase or maintenance of "uniform', it cannot be covered under 
Rule 2BB(l)(f) read with section 10(14)(i)."

2. ITA Nos. 674 to 676, 856 and 857 Ahd 2011

The adjudicating authority rejected that the head of pay called Office Wear Allowance can be tax exempt in the absence of uniform clothing policy.

"At the time of hearing before us, the ld. Counsel for the assessee
could not establish how the wear-allowance paid to the employees was 
exempt u/s 10(14). During the course of argument before us, he fairly 
admitted that there was no dress code for the employees. Thus, the 
employees were free to wear any dress.

When there was no dress code and the employees were free to wear any 
dress, how the wear-allowance can be said to be granted to meet the 
expenses wholly, necessarily and exclusively in the performance of 
duties of an office."