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Taxability of per diem allowance while on business travel

Organizations pay what is called per diem (per day) allowance to employees who travel for business purposes. The allowance is meant to help employees cover daily expenses pertaining to food, local travel, etc. When employees travel abroad they receive the allowance in foreign currency. Many organizations do not seek information on the actual daily expenses incurred by the employees. In other words, employees are not required to submit receipts (proof of expenditure) for the per diem allowance they receive.

Are per diem allowances non-taxable? If yes, are there are any conditions to be met for the allowance to be non-taxable?

Income tax and judicial authorities have gone through the matter of taxability of per diem allowance in a variety of cases. Let us take a look at the key issues in this regard.

Per diem allowance while on business travel is non-taxable

If the nature of a per diem allowance is as per Section 10(14) of the Income Tax Act along with Rule 2BB of the Income Tax Rules, then the per diem allowance shall not be included in the Total Income of the employee for the purpose of calculating tax on salary.

Section 10(14) states that an allowance should be “specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit” in order to be exempt from tax.

Rule 2BB(1)(b) states that “any allowance, whether, granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty” shall not be taxable.

In Saptarshi Ghosh, Kolkata vs Department Of Income Tax (ITA No. 915/Kol/2010), a Kolkata bench of the Income Tax Apellate Tribunal (ITAT) went into the issue of applicability of Section 10(14) and Rule 2BB to the taxability of per diem allowance in great detail. The bench examined the terms of the agreement (between the employee and the employer in the said case) under which employees were sent abroad for business purposes and concluded that “keeping in view the entirety of the facts and circumstances of the case, assessees were to be treated on tour and, therefore, eligible for claiming deduction under section 10(14)(i) read with Rule 2BB(1)b).”

Since the per diem allowance is not taxable, there is no requirement on the part of the employer to deduct TDS on such payments. The Andhra Pradesh High Court in Commissioner Of Income-Tax vs Coromandel Fertilisers Ltd. (Equivalent citations: 1991 187 ITR 673 AP) stated that if an employee is not liable to pay tax under the head “Salary” for a payment received by the employee, the obligation to deduct tax (by the employer) under section 192 does not arise.

Should the expenses be verified by the employer?

Judicial and tax authorities have ruled that an employer need not verify the exact nature of the expenses incurred by an employee, for the per diem allowance to be tax exempt. The Income Tax Department, by way of a circular (No. 33 (LXXVI-5) dt. 01 August 1955) has said:

Special allowance or benefit being reasonable and not disproportionately high–No details of expenses actually incurred need be asked for the purpose of granting exemption under Section 4(3)(vi) of 1922 Act.

In other words, as long as the allowance is within “reasonable” limits, the employer need not seek details of the expenses. Experts believe that the above circular is currently relevant even though it is based on the Income Tax Act of 1922. In Madanlal Mohanlal Narang vs Assistant Commissioner Of Income Tax (Equivalent citations: 2007 104 ITD 190 Mum, (2006) 101 TTJ Mum 1005), a Mumbai bench of the ITAT stated that the circular of 1955 is valid even in the context of the Income Tax Act, 1961.

8. The above circular was undoubtedly issued under the IT Act, 1922 but then all the circulars issued under Section 1922 Act do not cease to hold good in law. Section 297(2)(k) specifically provides that notwithstanding the repeal of IT Act, 1922, amongst other things, any instructions issued under any provisions of the repealed Act shall, so far as not inconsistent with the corresponding provisions of IT Act, 1961, deemed to have been issued under the corresponding provisions of the new Act, and shall continue to remain in force accordingly. In other words, to the extent the legal provisions of 1922 Act and 1961 Act are in pan materia, circulars and instructions issued under the 1922 Act will also hold good.

What is a “reasonable” per diem allowance?

Authorities say that per diem allowance is not taxable as long as the payment is a reasonable amount. Now, how does one conclude what is reasonable? Is a per diem allowance of USD 100 reasonable? What about, say, USD 300? There is nothing etched in law as to what a reasonable allowance is.

In Income Tax Officer (TDS), Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd. (ITA Nos.874, 1252 & 1586/Bang/2014), a Bangalore bench of the ITAT, while hearing a matter pertaining to per diem allowance, accepted the prior ruling of CIT (Appeals) who said:

There is no monetary limit prescribed and hence unless such allowance is said to be fictitious or abnormally high or otherwise taxable in the hands of the employee, no liability could be fastened under Section 192 on the employer to deduct tax on such allowance. Moreover, it is also not possible to collate bills for every minuscule expenses and mere non-collation of bills in support of amount expenses cannot prevail over the fact of incurring such expenses.

The CIT (Appeals), in the above case, went through a couple of circulars (No.Q/FD/695/1/90 dated 11/11/1996 and No. Q/FD/695/2/2000 dated 21/09/2010) issued by the Ministry of External Affairs, Govt. of India and concluded that the per diem allowance of USD 50 to USD 75 paid by the assessee to its employees on official trips to USA and Europe was reasonable and that the same would be tax exempt under Section 10(14) of the Income Tax Act. The circulars referred to here, issued by the Ministry of External Affairs, specify the per diem allowance payable to government officials when they travel to different countries. The authorities, in this case, determined the reasonableness of the per diem allowance by referring to the allowance paid by the Indian government.

When the above case was escalated to The High Court of Karnataka (ITA 653/2015), the honourable judges accepted the above arguments and ruled that the per diem allowance, as long as it is reasonable, is not taxable.