* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 08.07.2013
Decided on: 31.07.2013
+ ITA 441/2003
YOSHIO KUBO ..... Appellant
versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ ITA 379/2007
THE COMMISSIONER OF INCOME TAX XVI ....Appellant
versus
SH. SASHI MUKUNDAN ..... Respondent
+ ITA 387/2008
THE COMMISSIONER OF INCOME TAX XVI ...Appellant
versus
MR. SHORT DONALD ..... Respondent
+ ITA 212/2009
THE COMMISSIONER OF INCOME TAX ......Appellant
versus
MR. FUMIO GOTO ..... Respondent
+ ITA 15/2010
THE COMMISSIONER OF INCOME TAX-XIV
.....Appellant
versus
MR. DUNCAN ETHERINGTION ..... Respondent
+ ITA 351/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. YASHIMITSU ZAUTSU ..... Respondent
+ ITA 408/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
ITA 441/2003 and connected cases Page 1
SH. IKUJU YABUKI ..... Respondent
+ ITA 450/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SHRI TOSHIHORU SUNAHARA ..... Respondent
+ ITA 534/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SOJITZ CORPORATION AS AGENT ..... Respondent
+ ITA 635/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. YASHIMITSU ZAUTSU ..... Respondent
+ ITA 1354/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. JASWINDER SINGH ..... Respondent
+ ITA 1556/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. MOHAMMAD RAUFF NABI BAX ..... Respondent
+ ITA 1561/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. MOHAMMAD RAUFF NABI BAX ..... Respondent
+ ITA 370/2011
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
GORAM WESTERBERG ..... Respondent
+ ITA 1557/2010
ITA 441/2003 and connected cases Page 2
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. JOHN TRIPLETT ..... Respondent
+ REV. PET. 708/2011 IN ITA 1369/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. FUMIO GOTO ..... Respondent
+ ITA 761/2005
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. K.P.HOSTELLEY ..... Respondent
+ ITA 798/2005
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. YOSHIO KUBO ..... Respondent
+ ITA 800/2005
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. YOSHIO KUBO ..... Respondent
+ ITA 680/2007
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. MOHAN RAI ..... Respondent
+ ITA 681/2007
THE COMMISSIONER OF INCOME TAX XVI ..... Appellant
versus
SH. MOHAN RAI ..... Respondent
+ ITA 1215/2008
COMMISSIONER OF INCOME TAX DELHI XIV ..... Appellant
ITA 441/2003 and connected cases Page 3
versus
MR. GHORAYEB EMILE, C/O AIR FRANCE ..... Respondent
+ ITA 494/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. HIROYASU KITADA ..... Respondent
+ ITA 508/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. HIROYASU KITADA ..... Respondent
+ ITA 577/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. SCOTT R BAYMAN ..... Respondent
+ ITA 631/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. VENKAT RAO SHRIDHAR ..... Respondent
+ ITA 699/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
MR. JEROME SUDAN ..... Respondent
+ ITA 1912/2010
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. PANKAJ SHAH ..... Respondent
+ ITA 528/2011
THE COMMISSIONER OF INCOME TAX-XVI ..... Appellant
versus
SH. MARCH FRANCOIS JEAN SOULACROUP ..... Respondent
ITA 441/2003 and connected cases Page 4
.....Appearance
Through: Mr. Rajiv Tyagi with Mr. Ajay Kumar, Mr.
Gyanendra Sharma and Ms. Renu Narula, Advocates, for
respondent in ITA 379/07.
Mr. Pawan Sharma with Ms. Madhavi Swaroop,
Advocates, in ITA 15/2010.
Mr. Piyush Kaushik, Advocate, in ITA 450/10 & ITA
534/10.
Ms. Amita Kalkal Chaudhary, Proxy for Mr. Naresh
Kaushik, Advocate, in ITA 1354/10.
Mr. S. Ganesh, Sr. Advocate with Mr. Pawan Sharma,
Ms. Madhavi Swaroop, Ms. Roohina Dua and Ms. Preeti
Goel, Advocates, in ITA 577/10.
Mr. Satyen Sethi with Mr. Arta Trana Panda, Advocates,
in ITA 1912/10.
Ms. Shreya Verma, Advocate, for Respondent in ITA
681/07 & ITA 1215/08.
Mr. Salil Kapoor, Mr. Vikas Jain, Mr. Manomeet Dalal
and Ms. Preity Goel, Advocates, for Respondents in ITA
212/09, ITA 1556/10, 1561/10, 1369/10, 370/11, 494/10,
508/10 and ITA 631/10.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.V. EASWAR
MR. JUSTICE S. RAVINDRA BHAT
%
1. This common judgment disposes a bunch of appeals in which
the court had framed several questions of law. The important
questions pertain to the applicability of Section 10 (10CC) of the
Income Tax Act; others are whether mandatory social security and
medical insurance or benefits paid in the country of the assessee, are
ITA 441/2003 and connected cases Page 5
taxable. Apart from these, other questions too require consideration
and answer.
Question No. 1: Are amounts paid towards income tax by the
employer on behalf of the assessee non-monetary perquisites, and do
they consequently fall within the scope of Section 10 (10CC) of the
Act.
The present issue arises for consideration in ITA Nos.
1990/2010; 450/2012, 534/2010; 1556/2010; 1557/2010; 494/2010;
508/2010; 577/2010; 631/2010; 1912/2010; 528/2011; 212/2009;
15/2010; 408/2010; 528/2011; 351/2010; 635/2010; 1354/2010;
1561/2010; 1912/2010.
Contentions of the revenue
2. This question arises in the above appeals preferred by the
Revenue. The assessee in all the cases were recipients or beneficiaries
of what can be termed as tax-free or tax paid income, i.e. the tax
arising out of the income earned by them from their non-resident but
taxable employers, was borne by the latter.
3. The assessees contended that by virtue of Section 10(10CC),
introduced and brought into force in the Statute with effect from
01.04.2002 by the Finance Act, 2003, they were not liable to pay tax
on such amounts which constituted the income tax component paid by
the employers. It was contended successfully on their behalf before
the Income Tax Appellate Tribunal (ITAT) that such amounts fell
outside the purview of taxation by virtue of Section 10CC and could
not be regarded as monetary payment and, therefore, treated as
ITA 441/2003 and connected cases Page 6
perquisites under Section 17(2) of the Act. The Revenue questions the
decision and the logic underlying the Tribunal`s determination on this
aspect.
4. It is contended on behalf of the Revenue by Ms. Rashmi
Chopra that the entire scheme of the Act and the interplay between
various provisions have to be taken into consideration rather than an
appreciation of Section 10(10CC) alone. Elaborating on this, it was
urged that for this purpose, the Court would have to consider the
provisions under Section 17(2); Section 40A(5); Section 192(1A),
Section 195, Section 195(1A) and Section 198. On an overall
consideration of these provisions, it was contended, leave no room for
doubt that the taxes brought by the employers are in fact monetary
payments, the benefit of which can be claimed by the employee for
the purpose of computation of income and payment of tax as a
perquisite.
5. It was emphasized that the definition of perquisite under
Section 17(2) is inclusive and extends to diverse manner of
concessions or benefits which the employee indirectly enjoys. It was
submitted that the Parliament was aware of Section 17(2)(iv), which
included all manner of liabilities, such as donations "payable" by the
assessee yet it chose to restrict the operation of Section 10(10CC)
only to the extent of its overriding Section 200 of the Companies Act.
In this context, it was further submitted that the element of income tax
is in the nature of personal obligation; it was submitted that such
personal obligation would necessarily have to be borne by the
employee. By private arrangement in individual cases, it might be
ITA 441/2003 and connected cases Page 7
borne by the employer. Nevertheless, its character as a perquisite does
not get extinguished by the mere introduction of Section 10(10CC). If
the intention was otherwise, the Parliament would well have amended
Section 17(2)(iv). Learned counsel emphasized that the matter could
be looked at from yet another angle. Section 10(10CC) operated in an
entirely different field in that it could be said to apply in those cases
where the employer receives a benefit not through a monetary
payment, but by way of reimbursement of the tax body. In other
words, if the tax is actually included in the salary, paid to the
employee, that would still amount to a monetary payment. Learned
counsel highlighted that under the scheme of the Act, Section 17(2)
was placed after Section 10(10CC). It has to be construed along with
Sections 15 and 16. Section 15 highlights that whether a salary is paid
or not, as long as it bear the character of salary due, it is deemed to be
such. The only deductions permissible from this class of income are
those provided under Section 16(2)(iii). Section 17(4) inclusively
brings within the sweep of salary perquisites which is specifically
defined under Section 17(2).
6. Learned counsel placed reliance upon the decision reported as
Emil Webber v. Commissioner of Income Tax, V&M, Nagpur AIR
1993 SC 1466 (200 ITR 483) and that of Mysore High Court in Tokyo
Shibaura Electric Company Ltd. v. Commissioner of Income-Tax,
Mysore 1964 (52) ITR 283 (Kar). It was emphasized that wherever
such income is paid by the employer on behalf of the employee, it is a
mandatory payment in discharge of his obligation which would
otherwise have been exclusively borne by him or her and
ITA 441/2003 and connected cases Page 8
consequently taxable as salary by virtue of Section 17(2).
7. It was submitted that in Emil Webber (supra), the Supreme
Court had occasion to deal with the identical question, i.e. whether
payment of an amount by the employer in order to discharge the
employees` incomes` obligation was income under the head of
salary and whether such payment amounted to perquisite. The
Supreme Court had, on that occasion, stated as follows:
"7..........................Anything which can properly be
described as income is taxable under the Act unless, of
course, it is exempted under one or the other provision of
the Act. It is from the said angle that we have to examine
whether the amount paid by Ballarpur by way of tax on
the salary amount received by the assessee can be treated
as the income of the assessee. It cannot be overlooked
that the said amount is nothing but a tax upon the salary
received by the assessee. By virtue of the obligation
undertaken by Ballarpur to pay tax on the salary
received by the assessee among others, it paid the said
tax. The said payment is, therefore, for and on behalf of
the assessee. It is not a gratuitous payment. But for the
said agreement and but for the said payment, the said tax
amount would have been liable to be paid by the assessee
himself. He could not have received the salary which he
did but for the said payment of tax. The obligation placed
upon Ballarpur by virtue of Section 195 of the Income
Tax Act cannot also be ignored in this context. It would
be unrealistic to say that the said payment had no
integral connection with the salary received by the
assessee. We are, therefore, of the opinion that the High
Court and the authorities under the Act were right in
holding that the said tax amount is liable to be included
in the income of the assessee during the said two
assessment years."
ITA 441/2003 and connected cases Page 9
8. Similarly, the observations of the High Court in Tokyo
Shibaura Electric Company Ltd. (supra) were relied upon:
"15. The royalty due to the assessee has to be paid at
Tokyo. Further, in view of clause D the same should be
paid without deduction for taxes or other charges
assessed in India, which shall be assumed by REMCO.
To put those words in the language of Somervell L.J. in
Jaworski v. Institution of Polish Engineers in Great
Britain Ltd. (1951) 1 KB 768, the remuneration is to be
"x" plus "whatever sum is necessary to leave that
available to me after you have borne the taxes." As under
the law, the tax is suffered by deduction, it means such a
sum as will after deduction leave "x".
16. Distinction between tax-free income and the "xx"
income on which tax should be paid by the employer is
well brought out in Simon's Income Tax, second edition,
vol. 11, at page 710. This is what is stated therein:
"Where remuneration is paid to an employee free
of income tax or the employer pays his employee's
income tax, the gross emoluments of the employee must
be arrived at by adding the amount to the tax paid by the
employer to the net payment. This was established by
North British Rail Co. v. Scott,[1923] AC 37 where the
company had contracted to bear the income tax in
question and Hartland v. Diggines,[1926] AC 289 where
there was no such contract, the arrangement being
simply customary."
17. In Jaworski v. Institution of Polish Engineers in
Great Britain Ltd.(supra) there was a service agreement
to pay the employee a salary of Pounds 20 nett per month
"without any deductions and taxes, which will be borne
by the association." The employers deducted tax from the
salary under section 1 of the Income Tax (Employments)
Act, 1943, and the employee brought an action to recover
the amounts deducted on the ground that the deductions
were in breach of his service agreement. It was held by
ITA 441/2003 and connected cases Page 10
the Court of Appeal, reversing the decision of Finnemore
J. in the court below, that on construction, the agreement
was one to pay net remuneration at the stated figure
together with such sum as was necessary to leave that
figure available to the employee after the association had
borne the taxes referable to him, and that, accordingly,
the agreement was valid. Though it was not necessary to
decide the point the court also expressed the view that
the agreement was not void by reason of its infringing the
general rule 28(2) since it was doubtful whether salary
or other remuneration for services assessable under
Schedule E were "annual payments" within the meaning
of the rule."
9. Learned counsel submitted that the definition of income is
not exhaustive, and all manner of receipts or entitlements are covered
within the phrase. It was argued that therefore, as long as perquisite
is widely defined and in an inclusive manner, with the phraseology
adopted under Section 17 (2) (v), the amounts paid towards tax by the
employer are included within the term perquisite. Reliance was
placed, on the judgment reported as Boeing v Commissioner of
Income Tax 250 ITR 667 (Mad) where the court emphasized that
"If the amount so received is not an amount which is
excluded from the ambit of income under the Act, such
receipt would constitute income. The fact that the amount
was given to the recipient without any demand for the
same by the recipient, or without any legal obligation on
the part of the donor to make the payment, would not
make any difference."
Counsel also relied on the ruling of the Bombay High Court, in
Commissioner of Income Tax v H.D. Dennis 1982 (135) ITR 1
(Bom), where the Court, relying on two English decisions, (North
ITA 441/2003 and connected cases Page 11
British Railway Company v. Scott [1922] 8 TC 332 (HL) and
Hartland v. Diggines [1926] 10 TC 247 (HL), held that:
"It was emphasised in this case that in effect what the
employee has received is the money paid into his hands
plus the immunity, i.e. the immunity from paying the tax.
The substance of the matter was that the salary paid to
the employee is not all that he received. He had received,
in addition, money's worth to the extent of the sum which
was paid in respect of that salary to the revenue. With
respect, we are in complete agreement with the view
expressed in the said decisions and are of the view that
the income-tax paid on behalf of the employee would be a
part of the salary of the employee by the mere
connotation of the expression "salary". There is also no
reason why the tax so paid by the employer would not
amount to an allowance even if it is held that it did not
form part of his salary, and admittedly the said rule does
not exclude from the definition of salary the allowance of
the kind paid in the present case. For all these reasons,
we are satisfied that Shri Munim is not entitled to
succeed in his contention that the definition of the word
"salary" contained in r. 3 does not include tax paid by
the employer in the present case. We are fortified in the
view we are taking by two decisions viz., one of the
Kerala High Court in CIT v. C. W. Steel (No. 1) [1972]
86 ITR 817, and the other of the Madras High Court in
CIT v. Mackintosh [1975] 99 ITR 419. In both the cases,
the very same question fell for consideration, viz.,
whether the income-tax paid by the employer was salary
for the purposes of finding out the value of the rent-free
accommodation given to the employee. Both the courts
have answered the issue in favour of the revenue and
against the assessee. The Madras High Court in its
judgment has approved of the ratio of the decision of the
Kerala High Court. We are respectfully in agreement
with the decisions of both the courts on the said point.
We are, therefore, satisfied that the revenue is entitled to
ITA 441/2003 and connected cases Page 12
succeed on the first question and the answer to the
question will have to be given in its favour and against
the assessee."
10. It was argued that Section 192(1A) obliges every employer to
deduct, at the time of payment of salary incomes on the amount
payable. Section 192(1A) grants relief only to the extent of exclusion
of perquisite which is not provided for by way of monetary relief from
the burden of obligation under Section 192(1). This is further
reinforced by Section 195A which clearly states that tax chargeable on
any income is to be borne by the person by whom it is payable for the
purpose of deduction of tax by the employer.
Assessee's contentions
11. Learned counsel for the assessee relied on the Memorandum
explaining provisions introduced in Finance Bill, 2002 with reference
to new Clause 10(10CC) which was to the following effect:
"Scheme for taxation of perquisites simplified with
employer given option to pay tax on behalf of employees
64.1 Under the existing provisions of Section 192 of the
Income-tax Act, 1961, an employer is required to deduct
tax at source on income under the head "salaries",
inclusive of the value of perquisites. In case, such tax is
paid by an employer on behalf of an employee, the same
being in the nature of an obligation which, but for such
payment, would have been payable by the employee, is
considered a perquisite, and is chargeable to tax."
64.2 The Finance Act, 2002 provides for a new
scheme of taxation of perquisites, wherein an employer
has been given an option to pay tax on the whole or part-
ITA 441/2003 and connected cases Page 13
value of perquisite (not provided for by way of monetary
payments), on behalf of an employee, without making any
deduction from the income of the employee.
64.3 To bring into effect this new scheme, a new Clause
(10CC) has been inserted in Section 10, to exempt the
amount of tax actually paid by an employer, at his
option, on the income in the nature of a perquisite, (not
provided for by way of monetary payment) on behalf of
an employee, from being included in perquisites.
64.4 Such tax paid by the employer shall not be treated
as an allowable expenditure in the hands of the employer
under Section 40 of the Income-tax Act, 1961.
64.5 The amendments will take effect from Ist April, 2003
and will, accordingly, apply in relation to the assessment
year 2003-04 and subsequent years.
64.6 Necessary changes in various provisions of
Chapter-XVII relating to collection and recovery of taxes
have been made to give effect to the new scheme.
Amendment in Section 192 has also been made, so as to
provide that an employer shall have an option to pay tax
on behalf of an employee, without making any deduction
from his income, on the income in the nature of
perquisites, (not provided for by way of monetary
payment). The employer shall, also continue to have the
option to deduct the tax on whole or part of such
income."
12. Learned Senior counsel for the assessee, Shri S. Ganesh, and
other counsel, i.e Shri Rakesh Gupta, and Shri Salil Kapoor
emphasized the phraseology of Section 10(10CC) and argued that the
expressions calling for interpretation are "a perquisite, not provided
for by way of monetary payment". Likewise, what are "provided for
by way of" has to be construed by the Court. Payment of tax by
ITA 441/2003 and connected cases Page 14
employer -on behalf of the employee is a perquisite. However, the
precise controversy is whether it is in the shape of monetary payment
to the employee. Counsel submit that the term "provided for" means
to keep something ready, in order to perform or do it. Under Section
10(10CC) the monetary payment should be provided for the
employee. It should be employee who is provided for by way of
monetary payment within the meaning of Clause (2) of Section 17. In
other words, payment of actual money to the employee (and not the
equivalent of that, or the money's worth) is what the legislature
contemplated by provision of by way of monetary payment. If some
benefit is directly or indirectly received by the assessee which has
money's worth, it is not a monetary payment.
13. It was further submitted that the distinction between a provision
by way of monetary payment on the one hand, and provision not by
way of monetary payment, on the other cannot be overlooked. The
provision under consideration only excludes from exemption
"perquisites" involving payment of money directly to the employees
for a specific amenity or benefit. The Legislature wanted to exempt
non-monetary perquisites allowed to the employee by the employer
under the provision.
14. Assessee`s Counsel further submit that Section 10(10CC) when
read other provisions to which simultaneous amendments were made
by the Legislature, i.e Section 40 (1) (c) (v) clarify that the revenue`s
position is incorrect. It was argued that the value of perquisites,
ITA 441/2003 and connected cases Page 15
otherwise deductible in the hands of the employer (subject to
conditions) has been restricted, to the extent of payment of tax.
15. It was highlighted by counsel that the interpretation pressed
upon by the revenue cannot be accepted, as it would amount to
rendering Section 10 (10CC) meaningless. It was argued that each
perquisite, paid for by the employer (even if not paid by the
employee) would become a monetary perquisite. Thus, residential
house belonging to the employer and provided to the employee -for
his residence, - would be treated as a monetary perquisite. This would
render Section 10 (10CC) a surplus age. That consequence cannot be
adopted by the Court which should strive to give meaning to each
provision.
16. It was submitted that the legislative history of Section 17 (2)
(iv) read with Section 40A (5) and Section 40 (1) (a) (v) has to be
taken into consideration in totality. Counsel submitted that what were
excluded from deduction were payments made by the employer, but
not the cash actually paid to the employee, which fell within the
definition of perquisite and was therefore taxed in his hands,
subjects to specified limits. However, such payments did not suffer
taxation and were deductible as business expenditure. On the other
hand if payments were made directly by the employer-assessee, those
were non-deductible and were subject to taxation. This pattern was
taken into consideration, by the corresponding change to Section 40
(a) (v) which rendered amounts paid by the employer towards income
tax obligation (and covered under Section 10 (10CC)) non-deductible
ITA 441/2003 and connected cases Page 16
in the hands of the employer. Counsel relied on the decision reported
as Commissioner of Income Tax v Mafatlal Gangabai 219 (ITR) 643
(SC).
The provisions
17. As is apparent from the above discussion, the question which
squarely falls for consideration is whether the income tax paid (to
discharge the tax obligation of the employee, on his behalf) is a
monetary perquisite or not. The question arises because of the
interplay between Section 10 (10CC) newly introduced by the
amendment of 2002, and Section 17 (2) (c) (iv). For a proper
appreciation of the controversy which calls for decision, the relevant
provisions which have to be considered for the purpose of this
judgment, are extracted below. Section 10 (10CC) states that:
"10. In computing the total income of a previous year of
any person, any income falling within any of the
following clauses shall not be included
XXXXXX XXXXXX XXXXXX
(10CC) in the case of an employee being an individual
deriving income in the nature of a perquisite, not
provided for by way of monetary payment, within the
meaning of Clause (2) of Section 17, the tax on such
income actually paid by his employer, at the option of the
employer, on behalf of such employee, notwithstanding
anything contained in Section 200 of the Companies Act,
1956 (1 of 1956).
Section 17(2) defines 'perquisite' in an inclusive manner, setting out
different kinds of benefits that are treated as perquisites and added to
ITA 441/2003 and connected cases Page 17
the salary income of the assessee. Clause (iv), which important and
reads as follows:
"(iv) any sum paid by the employer in respect of any
obligation which but for such payment, would have been
payable by the assessee."
Section 40, which lists out the deduction disentitlements of an
assessee (who would, but for such bar, have possibly claimed them as
deductible business expenses) reads, to the extent it is relevant, as
follows:
"Section 40 - Amounts not deductible
Notwithstanding anything to the contrary in sections 30
to 38, the following amounts shall not be deducted in
computing the income chargeable under the head
"Profits and gains of business or profession",
(a) in the case of any assessee
[(v) any tax actually paid by an employer
referred to in clause (10CC) of section
10:]"
Analysis and Findings
18. Till 31-3-1972, Section 40(a) (v) was in force and from 1-4-
1972, 40-A (5) came into force in its place. Both provisions were
substantially similar. Section 40(a)(v) was preceded by Section 40(c)
(iii) which was applicable only to companies. That (Section 40(c)(iii))
was introduced by Finance Act, 1973 with effect from 1-4-1963, read
as follows:
ITA 441/2003 and connected cases Page 18
"40. Amounts not deductible.-Notwithstanding anything
to the contrary in Sections 30 to 39, the following
amounts shall not be deducted in computing the income
chargeable under the head 'profits and gains of business
or profession'-
(c) in the case of any company-
(iii)any expenditure incurred after the 29th day of
February, 1964, which results directly or indirectly in the
provision of any benefit or amenity or perquisite, whether
convertible into money or not, to an employee (including
any sum paid by the company in respect of any obligation
which but for such payment would have been payable by
such employee), to the extent such expenditure exceeds
one-fifth of the amount of salary payable to the employee
for any period of his employment after the aforesaid
date:
Provided that in computing the aforesaid expenditure any
payment by way of gratuity or the value of any travel
concession or assistance referred to in clause (5) of
Section 10 or passage moneys or the value of any free or
concessional passage referred to in sub-clause (i) or any
payment of tax referred to in sub-clause (vii) of clause
(6) of that section or any sum referred to in clause (vii) of
sub-section (1) of Section 17 or in clause (v) of sub-
section (2) of that section or the amount of any
compensation referred to in clause (i) or any payment
referred to in clause (ii) of sub-section (3) of that section
or any payment referred to in clause (iv) or clause (v) or
any expenditure referred to in clause (ix) of subsection
(1) of Section 36 shall not be taken into account."
Through Finance Act, 1968, sub-clause (iii) to Section 40 (c) was
deleted; instead, sub-clause (v) was introduced to Section 40 (a). That,
as introduced by the said Finance Act, read as follows:
ITA 441/2003 and connected cases Page 19
"40. Amounts not deductible.-Notwithstanding anything
to the contrary in Sections 30 to 39, the following
amounts shall not be deducted ,in computing the income
chargeable under the head 'profits and gains of business
or profession'-
(a) in the case of any assessee-
(v)any expenditure which results directly or indirectly in
the provision of any benefit or amenity or perquisite,
whether convertible into money or not, to an employee
(including any sum paid by the assessee in respect of any
obligation which, but for such payment, would have been
payable by such employee) or any expenditure or
allowance in respect of any assets of the assessee used by
such employee either wholly or partly for his own
purposes or benefit, to the extent such expenditure or
allowance exceeds one-fifth of the amount of salary
payable to the employee, or an amount calculated at the
rate of one thousand rupees for each month or part
thereof comprised in the period of his employment during
the previous year, whichever is less."
This provision applied to all assessees. By virtue of the first proviso,
the clause did not apply where the income chargeable under the head
'salaries' of the employee concerned was Rs 7500 or less. Explanation
(II) imported the same meaning to 'salary' as was assigned to it in Rule
2(h) of Part A of the IVth Schedule to the Act.
19. From 1-4-1972, Section 40-A(5) was introduced; it substituted
Section 40(a)(v). It read as follows:
" 40-A. Expenses or payments not deductible in certain
circumstances.-
(5)(a) Where the assessee-
ITA 441/2003 and connected cases Page 20
(i) incurs any expenditure which results directly or
indirectly in the payment of any salary to an employee or
a former employee, or (ii)incurs any expenditure which
results directly or indirectly in the provision of any
perquisite (whether convertible into money or not) to an
employee or incurs directly or indirectly any expenditure
or is entitled to any allowance in respect of an asset of
the assessee used by an employee either wholly or partly
for his own purposes or benefit, then, subject to the
provisions of clause (b), so much of such expenditure or
allowance as is in excess of the limit specified in respect
thereof in clause (c) shall not be allowed as a
deduction:"
The sub-section was amended later in certain respects and was
omitted altogether by Direct Tax Laws (Amendment) Act, 1987 with
effect from 1-4- 1989.
20. The real debate here is whether the tax paid on behalf of the
employee, by the employer is a perquisite and if it is not, whether it is
to be excluded from the definition of income, by virtue of Section 10
(10CC). The latter provision operates, and applies in the following
terms:
(a) to an individual deriving income
(b) in the nature of a perquisite, not provided for by way of
monetary payment, (within the meaning of Clause (2) of Section 17)
(c) (in respect of) the tax on such income actually paid by his
employer,
(d) at the option of the employer, on behalf of such employee,
(e) Notwithstanding anything contained in Section 200 of the
Companies Act, 1956 (1 of 1956).
ITA 441/2003 and connected cases Page 21
A plain reading of the above provision would reveal that if the
perquisite that is not provided for by way of monetary payment
under Section 17 (2), the tax paid on such income would be excluded
from the calculation of income altogether; it would not be deemed a
perquisite.
21. Section 10 (5B) had earlier granted a somewhat similar
exemption in respect of payment of amounts by employers in
discharge of their employees` income tax liabilities. It enabled an
individual who fulfilled the conditions of that provision, to exclude, in
the computation of his total income, the tax paid by the employer on
the salaries paid to him for a period not exceeding 48 months from the
date of his arrival in India. The individual claiming the exemption had
to satisfy the following requirements
(i) He had to be a technician as defined in the Explanation ;
(ii) He had to be in the employment of one of the several entities set
out in the clause or in any business carried on in India ;
(iii) He should not have been resident in India in any of the four
financial years immediately preceding the financial year in which he
arrived in India; and
(iv) The tax on his salary income should have been paid by the
employer.
Section 10(5B) had been inserted by the Finance Act, 1993, with
effect from April 1, 1994. Yet, this category of exemption had been in
ITA 441/2003 and connected cases Page 22
the tax statutes all along. In the Indian Income-tax Act, 1922, the
exemption was provided by Section 4(3)(xiva) inserted with effect
from April 1, 1955, and it was continued in the 1961 Act in Sections
10(6)(vi), (vii), (viia)(I) and (viia)(II). Though the provision
underwent several modifications as to the definition of "technician" as
well as the quantum and period for which the exemption was
available, the basic requirement that the technician must have been
employed in a business carried on in India existed right from the
beginning. Therefore, the contention of the revenue about the inherent
implausibility of excluding amounts paid towards tax liability which
are personal to the employee-assessee, stands negated. There is
nothing abhorrent in excluding such amounts paid on behalf of the
employee assessee, from the definition of tax.
22. Section 17 (2) outlines various perquisites, such as:
1) Value of rent-free or concessional rent accommodation provided by
the employer.
2) Value of any benefit/amenity granted free or at concessional rate to
specified employees, etc. Specified employees are company directors,
employees with substantial interest in the company and any other
employee whose salary income exclusive of non-monetary benefits
and amenities exceeds Rs. 50,000/-.
3) Any sum paid by employer in respect of an obligation, which was
actually payable by the assessee.
4) Any sum payable by the employer, directly or through a fund for
assurance on life of the employee or to effect contract for an annuity.
ITA 441/2003 and connected cases Page 23
However, sums payable to recognised provident funds or approved
superannuation funds, and certain other specified funds are exempt.
5) Value of any other fringe benefit as prescribed (excluding fringe
benefits subjected to the Fringe Benefit Tax).
Besides rent-free or concessional rent accommodation, other
perquisites taxable in the hands of the employee include provision of
services of domestic employees, supply of amenities, for household
consumption, free or concessional educational facilities for any
member of the employee`s household, interest free or concessional
loan, and benefits resulting from the use of any movable asset.
23. Section 17 (2) has not undergone any substantial change by the
amendment of 2002. The only change is in the introduction of Section
10 (10CC) which states that tax actually paid by the employer to
discharge an employee`s obligation not amounting to a monetary
benefit would not be included as the employees` income. If seen
from the context of Section 17 (2), and the previous history to that
provision, as well as the pre existing provision of Section 10 (5B)
and the interpretation placed on Section 17 (2) read with other
provisions which disallow payments made on behalf of the employee,
by the employer, so long as the benefit is not expressed in monetary
terms in the hands of the employee, in the sense that it is not funded as
part of the salary, but paid in discharge of the obligation, of any sort,
either contractual (i.e. rent, services, etc availed of by the employee)
or legal (tax) directly by the employer, it should not be treated as a
monetary benefit. The reason for this is that Section 10 (10CC) is
neutral about the kind of benefit availed by the employee. The
ITA 441/2003 and connected cases Page 24
decisions of the Supreme Court, on Section 40(1) (c) and Section 40A
are, in the context of the expressions "any expenditure which results...
in the provision of any benefit or amenity or perquisite" read with
"whether convertible into money or not." have received a liberal
interpretation. In Mafatlal Gangabai (supra) it was held that:
"6. On a consideration of both the points of view, we are
inclined to agree with the submission of the learned
Counsel for the assessees. The language employed in the
sub-clause is not capable of taking within its ambit cash
payments made to the employees by the assessee. These
cash payments will, of course, be treated as salary paid
to the employees and will be subject to the limits/ceiling,
if any, in that behalf. But they cannot be brought within
the purview of the words "any expenditure which results
directly or indirectly in the provision of any benefit or
amenity or perquisite" -- more so because of the
following words "whether convertible into money or not.
7. Now, coming to Section 40A(5), the position is no
different. It would, however, be appropriate to point out
the distinction between Section 40(a)(v) and Section
40A(5). We shall refer to the former provision as "sub-
clause " and the latter provision as "sub-section ". The
sub-section is wider in its scope and application than the
sub-clause. Sub-clause (i) of Clause (a) of Sub-section
(5) deals with "any expenditure which results directly or
indirectly in the payment of any salary to an employee or
a former employee". Sub-clause. (i) of Clause (c) of Sub-
section (5) deals with "any expenditure which results
directly or indirectly in the payment of any salary to an
employee or a former employee". Sub-clause (i) of clause
(c) of Sub-section (5) sets out the limits/ceilings on such
expenditure while Clause (a) of Expln. 2 appended to the
sub-section defines the expression "salary " for the
purposes of this sub-section. These features were absent
in Sub-clause (v) of Section 40(a). Now, coming to Sub-
ITA 441/2003 and connected cases Page 25
clause (ii) of Clause (a) of Sub-section (5) which
corresponds to Section 40(a)(v) it uses only one
expression "perquisite " as against Section 40(a) (v)
which spoke of "benefit of amenity or perquisite, but this
is no real distinction because the definition of
"perquisite: in Clause (b) of Expln. (2) to the sub-section
takes in both benefits and amenities. The said definition
also includes, inter alia, "payment by the assessee of any
sum in respect of any obligation which but for such
payment, would have been payable by the employee"-
words which are found in the main limb of Section 40(a)
(v) but which are missing in the main limb of Sub-clause
(ii) of Clause (a) of Sub-section (5). Thus, except for
certain structural changes, Section 40A(5)(a)(ii) and
Section 40(a)(v) are similar in all material aspects. It,
therefore, follows that what we have said with respect to
Section 40(a)(v) applies equally to Section 40A(5)(a)(ii).
8. There still remain the words "including any sum paid
by the assessee in respect of any obligation which but for
such payment would have been payable by such
employee" in Section 40(a)(v) and similar words found in
Section 40A(5)(a) (ii) as well, i.e., in Sub-clause (iv) of
the definition of "perquisite " in Clause (b) of Expln. 2 to
Sub-section (5). What do they mean? The said words
contemplate a situation where the assessee makes a
payment (in cash) in respect of an obligation -obligation
of the employee - which would have been payable by the
employee if it is not paid by the assessee. The payment by
the assessee contemplated by these words is not evidently
a payment to the employee but to a third party, no doubt,
on account of the employee. Sub-clause (v) of the
definition of "perquisite" in Clause (b) of Expln. 2 to
Sub-section (5) also refers to cash payment but that too is
not to the employee, though undoubtedly for his benefit.
9. For the above reasons, we hold that cash payments by
an assessee to his/its employees do not fall within the
ambit of Section 40(a)(v) or Section 40A(5)(a)(ii), as the
ITA 441/2003 and connected cases Page 26
case may be. We disagree with the opinion of the Kerala
High Court in Commonwealth trust Ltd. (supra) and
agree with the other High Courts which have taken a
view according with our view, viz., CIT v. Mysore
Commercial Union Ltd. , CIT v. Shriram Refrigeraiton
industries Ltd."
In V.M. Salgaocar & Bros. Pvt. Ltd. vs. Commissioner Of Income Tax
2000 (243) ITR 383 (SC) the Court had to deal with the benefit of
concessional rate of interest extended to the employee. The Court held
as follows:
"It would be evident from a perusal of Sub-section (5)
that it contemplates disallowance of certain expenditure
incurred by the assesses which it claims as a deduction.
Certain ceilings are fixed in the case of such expenditure.
The assessee's contention is that it has not incurred any
expenditure by giving the loans to its employees at a
concessional rate of interest and, therefore, the said
provision has no application. On the other hand, learned
standing counsel for the Revenue says that if this money
had not been lent to the employees at a concessional rate
of interest, it would have earned interest at a higher rate
had it been put in fixed deposit in a bank. But, this
argument involves importing a fiction into Sub-section
(5) of Section 40A of the Act. We must assume that this
money, if not lent to the employees, would have been put
in a fixed deposit or would have been invested in some
other profitable manner and then say that the difference
amount should be disallowed. We do not think that the
language of Sub-section (5) of Section 40A of the Act
provides for or permits such a course. Sub-section (5)
applies where an assessee claims a certain deduction
saying that he has spent that money in providing, directly
or indirectly, either as salary to an employee or in the
provision of perquisite to an employee. Only then do the
ceilings prescribed in the said Sub-section come into
ITA 441/2003 and connected cases Page 27
play. It is true that in some cases this facility may be
abused. We know public corporations like banks lending
money to their own employees at practically no interest,
say for example, one or two per cent, interest per annum,
whereas those very banks lend to people at rates of
interest ranging from 13% to 19% per annum. But the
remedy for that must lie elsewhere, either in the proper
control of the public corporations or in the amendment of
the Income-tax Act, as the case may be. As the provision
of law of Section 40A(5) of the Act now stands, it is not
possible to answer the said question in the manner
suggested by the Department. Accordingly, we answer
question in the affirmative, i.e., in favour of the assessee
and against the Revenue."
24. Parliament was aware of the pre-existing law, and therefore,
stepped in to clarify that only a monetary benefit directly in the hands
of the employee as a payment by the employer would be excluded
from Section 10 (10CC). This may be in the form of any benefit to
pay rent, or discharge any manner of obligation, tax not excluded.
This intention is manifest from the expression tax on such income
actually paid. To construe this newly introduced provision in any
other manner would be to defeat Parliamentary intent. Section
40(a)(v) fortifies the interpretation of this court in providing that while
calculating income of the employer, the tax paid by the employer on
non-monetary perquisites is not deductible. This provision too was
introduced in 2002. The logic of excluding as a non monetary
perquisite amounts paid to discharge obligations of the employee,
from the meaning of income, by virtue of Section 10 (10CC) is that
now, with the introduction of Section 40 (c) (v), such amounts are not
ITA 441/2003 and connected cases Page 28
deductible in the employer`s hands a situation which did not exist
when the above judgments were rendered.
25. In the light of the above discussion, it is held that amounts paid
directly by the employer to discharge its employees` income tax
liability do not fall within the excluded category of monetary benefits
payable to the employee; they fall within the included category,
under Section 10 (10CC) as amounts paid directly as taxes.
Correspondingly, they cannot now be claimed as deductions by virtue
of Section 40 (c) (v). The revenue`s appeals on this aspect have to fail.
Point No. 2. Social security, pension and medical insurance
contributions
26. This issue arises for consideration in ITA Nos. 441/2003;
761/2005; 798/2005; 800/2005; 379/2007; 1215/2008; 450/2010;
680/2007; 681/2007; 577/2010; 528/2011 and 370/2011 .
27. The revenue is in appeal on this score. In all the cases, the
foreign employer had made contributions in compliance with legal
requirements in the country of its incorporation, towards social
security benefits of the employee. These employees were seconded to
India to serve in the Indian subsidiary, or assist in the Indian
operations of the foreign company. The revenue sought to bring to tax
such social security contributions, contending that they were for the
benefit of the employee, and vested in the latter. In all the cases before
the Court, the revenue had unsuccessfully contended that the amounts
paid by the employer to the social security funds- admittedly in
accordance with the laws and regulations governing the country of its
ITA 441/2003 and connected cases Page 29
incorporation fell within the description of "sum payable by the
employer, whether directly or through a fund, ....to effect, an
assurance on the life of the assessee or to effect a contract for an
annuity." It was also argued that to fall outside the mischief of the
provision, the contribution had to be to a "recognized provident fund
or an approved superannuation fund or a Deposit-linked Insurance
Fund established under section 3G of the Coal Mines Provident Fund
and Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case
may be, section 6C of the Employees Provident Funds and
Miscellaneous Provisions Act, 1952 (19 of 1952)..." The revenue
further argues that since the contributions did not match the
description of the excluded category, they were covered by the main
provision of Section 17 (2) (v) and taxable as part of the salary.
28. It is argued by Mr. Deepak Chopra for the revenue that there is
a significant difference between the language of the old Income Tax
Act (of 1922) and the present one. Highlighting that the old Act made
no distinction between approved and unapproved funds, it was argued
that such a differentiation has been made under the 1961 Act.
Therefore, all that the Court should satisfy itself is whether the
employer contributes to a superannuation or annuity fund; if it is
approved, it is not deemed a perquisite. Otherwise, it is part of taxable
salary.
29. It was submitted that the term salary has wide connotation;
according to the Random House Dictionary of the English language
salary has been defined as
ITA 441/2003 and connected cases Page 30
"A fixed compensation periodically paid to a person by
regular work or services specially work other than that of
manual, mechanical or mental kinds. It has been
described as synonymous to pay."
Likewise Webster English International Dictionary defines perquisite
as:--
"A gain or profit incidentally made from employment in
addition to regular salary or wages especially one of a kind
expected or promised".
The Oxford Dictionary gives perquisite its meaning as:--
"A casual emolument, fee or profit attached to an office or
position in addition to salary or wages."
The Random House Dictionary of English Language says perquisite`
to be :--
"An incidental emolument fee or profit over and above fixed
income, salary or wages. Also called perk, [perq]".
Central to the theme of a perquisite is the idea that the employer pays
to, or for the benefit of the employee amount(s) which would inure to
the latter`s exclusive benefit or advantage. Such being the case, the
amounts are said to have vested in the employee, irrespective of when
they have to be paid. In this context, counsel relied on the meaning of
"Annuity" in the Shorter Oxford Dictionary i.e., "an investment of
money, entitling the investor to receive a series of equal annual
payments, made up of both principal and interest" . He contended that
the Supreme Court referred to and relied upon the above definition of
"annuity" given in the Oxford Dictionary. According to the Supreme
Court, "an annuity is a certain sum of money payable yearly either as
ITA 441/2003 and connected cases Page 31
a personal obligation of the grantor or out of property". The hallmark
of an annuity, is (1) it is money; (2) paid annually; and (3) in fixed
sum. Counsel referred to a decision of the Supreme Court in CWT v.
P.K. Banerjee [1980] 125 ITR 641.
30. The revenue thus argues that welfare insurance schemes and
social security schemes to which the employers contribute on account
of the employee, are nothing but an annuity. It also relies on Section
198 (4) of the Companies Act. Counsel submits that the decision of
the Supreme Court in Commissioner Of Income-Tax v L. W. Russel
AIR 1965 AIR SC 49 which was relied upon by the ITAT to hold in
favour of the assesees in all these cases, cannot be considered binding
in view of the change in the wording of the statute. It was submitted
that undue importance cannot be attached upon the test indicated in
that decision, i.e. whether the payment vests in the employee. What
is determinative, submitted the revenue`s counsel, is the purpose or
objective of the expenditure. Taking a cue from the decision reported
as Karamchari Union v Union of India (243 ITR 143). Counsel placed
reliance on the term vested interest in Black`s Law Dictionary to
say that even that term comprehends deferred enjoyment of an
advantage or benefit. The definition of the term vested right in
Blakck`s Law Dictionary is as follows:
"A present right or title to a thing which carries
with it an existing right of alienation even though the
right to possessing or enjoyment may be postponed to
some uncertain time in the future as distinguished from a
future right which may never materialise or ripen into
title and it matters not for how long or for what length of
time the future possession or right of enjoyment may be
ITA 441/2003 and connected cases Page 32
postponed.... It is not the uncertainty of enjoyment in
the future but the uncertainty of the right of enjoyment
which makes a difference between a vested and
contingent interest..."
Further reliance is placed upon Black`s Law dictionary and the
definition "vested right" which inter alia, is as follows:
"... Immediate or fixed right to present or future
enjoyment and one that does not depend on an extent that
is uncertain."
It is therefore argued that since there is no uncertainty of the right to
enjoyment of the ultimate benefits which accrue to the employee-
assessee, the contributions by their employers to Social Security and
medical insurance benefits in fact inured or vested in them
immediately even though the occasion or event for their enjoyment
was postponed.
31. The revenue relied on the judgment of a Division Bench of the
Patna High Court in Commissioner of Income Tax v J.G. Keswani
(202 ITR 391), where after noticing L.W. Russel the High Court held
that in view of the new provisions, the observations of the Supreme
Court and the observations regarding annuity policies not vesting any
advantage that fell within the definition of perquisites was held to
be inapplicable, in the following terms:
"Therefore, their Lordships have held the amount in
dispute as non-taxable keeping in view the language
employed in the relevant provisions of the old Act. In this
case, it was not held as an absolute proposition of law
that sums payable by the employer to effect an insurance
on the life of the assessee or to effect a contract for
annuity can never be declared by the Legislature to form
part of his income during the year it is spent. The
ITA 441/2003 and connected cases Page 33
provisions of Section 15 read with Sections 17(1)(iv) and
17(2) (v) of the Act are materially different from Section
7(1) of the old Act. The words and phrases which were
the subject-matter of interpretation before the Supreme
Court leading to the law laid down by them have not
been retained by the Legislature in the relevant
provisions of the Act as is clear from Sections 15 and 17
thereof. Section 15 of the Act now clearly provides that
any salary which fictionally includes any sum payable by
the employer to effect a contract for annuity allowed to
the assessee though not due to him, shall also be
chargeable to income-tax under the head "Salaries".
Therefore, if the employer provided a certain amount to
effect a contract for annuity for the benefit of the
employee, then irrespective of the fact whether such
benefit was due to the employee in the previous year or
not, they will form part of his taxable income under the
Act."
32. Counsel for the assessees on the other hand, argued that the
revenue`s submissions are without merit. It is contended that the
nature of payment in question in each of the cases, whether it is for
coverage of social security benefits, in compliance with the foreign
holding company`s laws for such social security, or medical benefits,
did not make any difference. It was submitted that these were
involuntary payments (in the case of social security) and could not
confer benefit in praesenti to the employee, but did so in the event of
loss of employment due to invalidity on account of ill health, before
the attainment of 65 years, or death, and in the case of medical
benefit, on the happening of an event, i.e. illness or any other incident
which entitles the flow of benefits.
ITA 441/2003 and connected cases Page 34
33. Counsel emphasized that even after the new Act, of 1961,
courts in India have been following L.W. Russel; the decisions
reported as Commissioner of Income Tax v J. N. Vats 1999 (240) ITR
101 (Bom), J.H.Doshi v Commissioner of Income Tax 1995 (212)
ITR 211 (Bom) and Commissioner of Income Tax v Nandkishore
Sakarlal 208 (1994) ITR 14 (Guj) were relied on.
34. It was argued by the assesses that the revenue did not establish
from the record, through any supporting material, that any benefit or
advantage either pecuniary, or capable of expression in monetary
terms accrued during the year in question, to say that the contribution
to the social security or medical benefits fund, was not contingent, or
that it vested in law.
The provision
Section 17(2)(v) of the Income Tax Act provides as under :
"For the purposes of sections 15 and 16 and of this
section (1) :
(2) perquisite includes
(i) to (iv)**
(v) any sum payable by the employer, whether directly or
through a fund, other than a recognized provident fund
or an approved superannuation fund or a Deposit-linked
Insurance Fund established under section 3G of the Coal
Mines Provident Fund and Miscellaneous Provisions Act,
1948 (46 of 1948), or, as the case may be, section 6C of
the Employees Provident Funds and Miscellaneous
Provisions Act, 1952 (19 of 1952), to effect, an assurance
on the life of the assessee or to effect a contract for an
annuity."
ITA 441/2003 and connected cases Page 35
Section 7 (1) was the pre-existing provision under the Indian Income
Tax Act, 1922; it read as follows:
"Section 7(1)-The tax shall be payable by an assessee
under the head "salaries" in respect of any salary or
wages, any annuity, pension or gratuity, and any fees,
commissions, perquisites or profits in lieu of, 'or in
addition to, any salary or wages, which are allowed to
him by or are due to him, whether paid or not, from, or
are paid by or on behalf of................ a
company.....................
Explanation I-
For the purpose of this section perquisite includes-
(v) any sum payable by the employer, whether directly or
through a fund to which the pro. visions of Chapters IX-A
and IX-B do notapply, to effect an assurance on the life
of the assessee or in respect 'of a contract of annuity on
the life of the assessees."
In L.W. Russel, the Supreme Court observed that:
"Now let us look at the provisions of s. 7(1) of the Act in
order to ascertain whether such a contingent right is hit
by the said provisions. The material part of the section
reads: -
"Section 7(1)-The tax shall be payable by an
assessee under the head "salaries" in respect of
any salary or wages, any annuity, pension or
gratuity, and any fees, commissions, perquisites or
profits in lieu of, 'or in addition to, any salary or
wages, which are allowed to him by or are due to
him, whether paid or not, from, or are paid by or
on behalf of................ a company.....................
Explanation I-For the purpose of this section
perquisite includes-
ITA 441/2003 and connected cases Page 36
(v) any sum payable by the employer, whether
directly or through a fund to which the provisions
of Chapters IX-A and IX-B do not apply, to effect
an assurance on the life of the assessee or in
respect 'of a contract of annuity on the life of the
assessees."
This section imposes a tax on the remuneration of an
employee. It presupposes the existence of the relationship
if employer and employee. The present case is sought to
be brought under the head "perquisites in lieu of, or in
addition to, any salary or wages, which are allowed to
him by or are due to him, whether paid or not, from, or
are paid by or on behalf of a company". The expression
"perquisites" is defined in the Oxford Dictionary as
"casual emoluments. fee or profit attached to an office or
position in addition to salary or wages". Explanation 1 to
s. 7(1) of the Act gives an inclusive definition. Clause (v)
thereof includes within the meaning of "perquisites" any
sum payable by the employer, whether directly or
through a fund to which the provisions of Chs. IX-A and
IX-B do not apply, to effect an assurance on the life of the
assessee or in respect of a contract for an annuity on the
life of the assessee. A combined reading of the
substantive part of s. 7(1) and cl. (v) of Expl. 1 thereto
makes it clear that if a sum of money is allowed to the
employee by or is due to him from or is paid to enable the
latter to effect an insurance on his life, the said sum
would be a perquisite within the meaning of s. 7(1) of the
Act and, therefore, would be eligible to tax. But before
such sum becomes so exigible, it shall either be paid to
the employee or allowed to him by or due to him from the
employer. So far as the expression "paid" is concerned,
there is no difficulty, for it takes in every receipt by the
employee from the employer whether it was due to him or
not. The expression "due" followed by the qualifying
clause "whether paid or not" shows that there shall be an
obligation on the part of the employer to pay that amount
and a right on the employee to claim the same. The
ITA 441/2003 and connected cases Page 37
expression "allowed", it is said, is of a wider connotation
and any credit made in the employer's account is covered
thereby. The word "allowed" was introduced in the
section by the Finance Act of 1955. The said expression
in the legal terminology is equivalent to "fixed, taken into
account, set apart, granted". It takes in perquisites given
in cash or in kind or in money or money's worth and also
amenities which are not convertible into money. It
implies that a eight is conferred on the employee in
respect of those perquisites. One cannot be said to allow
a perquisite to an employee if the employee has no right
to the same. It cannot apply to contingent payments to
which the employee has no right till the contingency
occurs. In short, the employee must have a vested right
therein. If that be the interpretation of s. 7(1) of the Act,
it is. not possible to hold that the amounts paid by the
Society to the Trustees to be administered by them in
accordance with the rules framed under the Scheme are
perquisites allowed to the respondent or due to him. Till
he reaches the age of superannuation, the amounts vest
in the Trustees and the beneficiary under the trust can be
ascertained only on the happening of one or other of the
contingencies provided for under the trust deed. On the
happening of one contingency, the employer becomes the
beneficiary, and on the happening of another
contingency, the employee becomes the beneficiary..."
35. In the case of Yoshio Kubo, one of the appeals in the present
batch, the assessee employee was a Japanese national, and an official
of M/s Sony Corporation of Japan. He was deputed to work in M/s
Sony India Ltd. The welfare pension scheme in that case contained
the following elements:
(a) The contribution was covered by the welfare pension law enacted
by the Government of Japan;
ITA 441/2003 and connected cases Page 38
(b) Establishments and concerns with at least five employees had to
register with the pension fund authorities and both the employer and
the employee were required to contribute to the pension insurance
scheme;
(c) The monthly contribution of both the employer and the employees
were to be deposited with the National Bank of Japan;
(d) The benefit from the scheme took the form of annuity payment
until death and the individual employees were eligible to receive the
first tier of benefits from the welfare pension plan only on attaining
the age of 65 and not prior to it.;
(e) The contribution of the employer was not refundable.
36. The Tribunal held, after noticing the nature of the scheme that
before attaining the age of 65 or before death, neither the assessee nor
his survivors were entitled to get any benefit from the scheme and at
the most the employee only had a contingent right which cannot
attract Section 17(2)(v) of the Act. The Tribunal also noticed the
salient features of the welfare insurance scheme and held that any
benefit actually obtained or received by the assessee under the scheme
during the relevant previous year will have to be assessed as per
provisions of Section 17(2)(v) of the Act. In all other respects, the
decision otherwise was that the assessee did not get any vested right in
such contributions when they were actually made. This reasoning was
adopted by the Tribunal in several other cases, some of which are
before this court in the present batch of appeals.
ITA 441/2003 and connected cases Page 39
37. In CIT v. Lala Shri Dhar (1972) 84 NR 192 (Del))this Court
was concerned with contributions made by the employers under
policies of personal accident taken out by them for protecting
themselves against the liability for payment of compensation to their
employees. It was held by the Court that the decision to take the
policy was of the company, which paid the premium, that the assessee
himself did not want to take out the insurance. If the company had
stopped paying the premium, the assessee would not have continued
the same from year-to-year and, therefore, the contribution paid by the
company to keep the policy alive could not be considered as a
perquisite in the hands of the employee.
38. In the present case, the assessee does not acquire any vested
right over the payment at the time of contribution. With regard to the
insurance plans, the CIT(A) had held that the contributions are made
to benefit the employer and to protect him from loss of employment,
sickness, death, accident, etc. of the employee and that the policies
themselves are contingent in nature, the benefit under' which would
depend on whether the contingency takes place or not.
39. This court is of the opinion that the revenue`s contentions are
insubstantial and meritless. The assessee does not- in any appeal, get
a vested right at the time of contribution to the fund by the employer.
The amount standing to the credit of the pension fund account, social
security or medical or health insurance would continue to remain
invested till the assessee becomes entitled to receive it. In the case of
medical benefit, the revenue could not support its contentions by
ITA 441/2003 and connected cases Page 40
citing any provision in any policy or scheme which is the subject
matter of these appeals, which entitle The vesting right to receive the
amount under the scheme or plan did not occur. This court is also of
the opinion that the judgment of the Supreme Court in L.W. Russel
applies. There, it was held that one cannot be said to allow a
perquisite to an employee if the employee has no right to the same. It
cannot apply to contingent payments to which the employee has no
right till the contingency occurs. The employee must have a vested
right in the amount. In this context, it would be useful to recollect the
decision of this court in CIT v. Mehar Singh Sampuran Singh Chawla
(1973) 90 ITR 219 (Del) where it was held that the contribution made
by the employee towards a fund established for the welfare of the
employees would not be deemed to be a perquisite in the hands of the
employees concerned as they do not acquire a vested right in the sum
contributed by the employer.
40. The reliance placed by the revenue on the judgment of the
Patna High Court case of J.G. Keshwani(supra) is misplaced as the
facts of that case were entirely different. There, the assessee held
employment as director of the company and in terms of the
compensation package, he was entitled to receive commission as a
percentage of the net profits in terms prescribed under the Companies
Act subject to a maximum ceiling. Subsequently, the terms of the
appointment of the assessee were varied and the company instead of
paying commission decided to purchase deferred policies from the
Life Insurance Corporation on the life of assessee. An terms of the
ITA 441/2003 and connected cases Page 41
annuity plan, the annuity payment would commence from the date of
retirement. The assessing officer had held that the arrangement was
merely a change in the mode of payment of the commission to the
assessee. The High Court observed that the amount contributed
towards annuity plan had already accrued to the assessee in the year
under consideration. It was merely that instead of paying the amount
as commission, the same was contributed by the company for
acquiring the annuity plan for the employee. The High Court,
apparently was influenced by the fact that the sum contributed by the
company towards annuity plan was due to the employee concerned
and merely, a changed method of payment was being introduced
through the annuity. It was a colourable device adopted at the instance
of the assessee, who is deemed to have derived a vested interest in the
amount so contributed by the company.
41. As far as the submission with regard to change in the
phraseology of the provision is concerned, the argument seems
facially persuasive. However, like in the case of the present provision,
which removes from the inclusive sweep of the term perquisite
certain kinds of payments into approved annuity funds, or schemes
under the Employees Provident Fund Act, the previous provision
(Section 7 (1) (v)) too excluded from the sweep of the definition of
perquisite, amounts paid into schemes described under Schedules IXA
and IXB. Contextually, the setting for the decision in L.W. Russel was
no different from the provision in the present Act. The Supreme Court
spelt out a wider and fundamental principle, i.e. when the amount
ITA 441/2003 and connected cases Page 42
does not result in a direct present benefit to the employee, who does
not enjoy it, but assures him a future benefit, in the event of
contingency, the payment made by the employer, does not vest in the
employee. This Court is of the opinion that the new Act does not
make any significant departure from this aspect.
42. In view of the above discussion, it is held that the revenue`s
appeals have to fail; amounts paid by employers to pension, or social
security funds, or for medical benefits, are not perquisites within the
meaning of the expression, under Section 17 (1) (v) and therefore, the
amounts paid by the employer in that regard are not taxable in the
hands of the employee-assessee.
Point No. 3: Whether taxes are to be excluded while computing the
perquisite value of rent free accommodation provided to an employee,
in view of Rule 3 of the Income Tax Rules, 1962
43. It was submitted on behalf of the assessees during the hearing
and not disputed by the revenue, that this issue was decided and
covered by the decision in Commissioner of Income Tax v Telsuo
Mitera, decided on 17-5-2012, in ITA 323/2010. In that decision, the
following question arose for consideration:
"2. The question/issue raised in the present appeal is
whether the tax paid by the employer (Japan Airlines
International Company Limited) is a "perquisite" within
the meaning of Section 17(2) and, therefore, in terms of
Rule 3 of the Income Tax Rules, 1962 (for short, Rules)
cannot be taken into consideration for computing value
of the perquisite "rent free accommodation".
ITA 441/2003 and connected cases Page 43
The court recollected a previous decision in Commissioner of Income
Tax v H.D. & Co 135 ITR 1, where it was held that Section 17 (2) and
Rule 3 had to be considered co-extensively and that the purpose of
having a separate definition was to exclude certain types of payment
which are otherwise covered by the expression salary. It was
accordingly ruled that in view of the definition of salary in Rule 3,
especially Rule 3 (vi) and the exclusions, the question had to be
answered against the revenue. In view of the judgment of this court, -
in Telsuo Mitera, the question is answered against the revenue and in
favour of the assessee.
Question No. 4: Hypothetical Tax
44. This question arises in ITA Nos. 387/2008, 15/2010, 699/2010
and 1912/2010. In these cases the total salary received by the
assessee in India included tax payable at the applicable rates. In terms
of the employer`s equalization policy the assessees were entitled to
reimbursement of the tax payable. Consequently, the assessees
computed the salary income at the total amount, i.e the salary payable,
as well as the tax component included in the salary which coincided
with the income declared. The assessees had paid tax on the total
amount (i.e the salary admissible and the tax component received),
and entitled to reimbursement of tax of a portion of the excess
amount; the balance was borne out of the salary income received by
the assessees in India. The findings of the authorities below is that the
assessee, in the computation had added a larger amount as income and
deducted a portion of it from the income, when in fact the said smaller
ITA 441/2003 and connected cases Page 44
amount was not received from the employer but paid out of the salary
amount received in India. Though the assessee had paid larger
amount, as tax, yet they were entitled to reimbursement from the
assesses, as the salary income had to be enhanced by a part of the
amount (not the whole) paid as tax.
45. This court notices that the issue stands covered by a decision of
the Bombay High Court Commissioner of Income Tax v Jaydev H.
Raja [2012]211TAXMAN188(Bom). In Commissioner of Income Tax
v Dr. Percy Batlivala (ITA 1308/2008, decided on 16th December,
2009) a Division Bench of the Court noted the concept of hypothetical
tax as one where the employee of a multinational company, seconded
to serve in India, is assured a net salary amount equivalent to what is
earned by him abroad. The assessee paid a certain amount of tax in
US dollars upon the salary earned in the United states. The employer
after deducting tax, calculated the net amount receivable by the
assessee; it then considered how much tax would be payable by the
assessee on the income earned in India. As the amount payable as tax
in India was lower, it (also called hypothetical tax) was not given to
the assessee, thus assuring that the net amount received by him was in
accordance with the prior agreement. In other words, hypothetical tax
denotes the sum of money withheld by the employer to fulfill a
commitment of paying a particular net salary. The Court, after
considering the materials, concluded that so long as the assessee paid
tax on actual salary received, could not be saddled with the
hypothetical tax amount.
ITA 441/2003 and connected cases Page 45
46. In the present cases too, the employers had assured a certain net
salary; the assessees were paid that; they suffered tax on that salary.
The question of their paying more, therefore, would not arise. The
ratio in Dr. Percy Batlivala applies to the fact situation in these cases.
The Court, while following the decision, holds this question of law, in
favour of the assessee.
Question No. 5: Grossing up under Section 195-A
47. The Finance Act 2002 sought to simplify the scheme for
taxation of perquisites and gave the employer the option to pay taxes
on the whole or part value of perquisites (excluding those provided for
by way of monetary payment) without any deduction from the income
of the employee. Simultaneously, the tax paid on such non-monetary
perquisites was exempted in the hands of the employee by virtue of
the newly introduced Section 10 (10CC). The question is whether
such tax is to be subject to multiple stage grossing-up process under
Section 195A of the Act, which provides that in case under an
agreement or arrangement the tax on income is to be borne by the
person by whom income is payable, the income would need to be
increased to such amount as would after deduction of tax be equal to
the net amount payable.
48. The controversy which the court has to resolve (in ITA Nos.
1556/2010, 1557/2010; 494/2010; 508/2010; 631/2010; 699/2010;
351/2010; 1354/2010 & 1912/2010) is whether the tax liability on
salary borne by the employer is a monetary perquisite or a non-
monetary perquisite. Whether it needs to go through the multiple stage
ITA 441/2003 and connected cases Page 46
grossing up process under Section 195A or is it eligible for exemption
under Section 10 (10CC) of the Act applicable to non-monetary
perquisites. The tax authorities were of the opinion that tax borne by
the employer is a monetary perquisite and therefore further tax
thereon should be added to the salary by a multiple stage grossing up
process. Additionally, the tax on other perquisites are also sought to
be grossed up. The relevant provisions are extracted below.
"Salary.
192. (1) Any person responsible for paying any income
chargeable under the head "Salaries" shall, at the time of
payment, deduct income-tax 61[***] on the amount
payable at the average rate of income-tax 62[***]
computed on the basis of the rates in force for the
financial year in which the payment is made, on the
estimated income of the assessee under this head for that
financial year
(1A) Without prejudice to the provisions contained in
sub-section (1), the person responsible for paying any
income in the nature of a perquisite which is not
provided for by way of monetary payment, referred to in
clause (2) of Section 17, may pay, at his option, tax on
the whole or part of such income without making any
deduction therefrom at the time when such tax was
otherwise deductible under the provisions of sub-section
(1).
*******************
***********
Income payable "net of tax"
195A. In a case other than that referred to in sub-section
(1A) of Section 192, where under an agreement] or other
arrangement, the tax chargeable on any income referred
ITA 441/2003 and connected cases Page 47
to in the foregoing provisions of this Chapter is to be
borne by the person by whom the income is payable,
then, for the purposes of deduction of tax under those
provisions such income shall be increased to such
amount as would, after deduction of tax thereon at the
rates in force for the financial year in which such income
is payable, be equal to the net amount payable under
such agreement or arrangement."
49. This court has discussed and concluded, in its answer to Point
No. 1 that what is not exempt under Section 10 (10CC) is perquisite in
the shape of monetary payment to the employee. If it is a payment to a
third party like payment of taxes to the government, it would be
exempt under Section 10 (10CC). Likewise, the phraseology of that
provision, to the extent it alludes to Section 17 (2) is wide. If any
perquisite other than a monetary benefit is granted, that provision
(Section 10 (10CC) operates. If this scheme is understood in its proper
perspective, it is evident, from Section 192 (1A) that a person
(employer) responsible for making payment of a non-monetary
perquisite, "may pay, at his option, tax on the whole or part of such
income without making any deduction therefrom at the time when
such tax was otherwise deductible under the provisions of sub-section
(1)." This, like Section 10 (10CC) was inserted in 2002; so also was
Section 195A.
50. The Tribunal has in the present cases, held that tax paid by the
employer on behalf of the employee is a non-monetary perquisite. In
other words, taxes paid by the employer can be added only once in the
salary of the employee. Thereafter, tax on such perquisites is not to be
added again. The problem can be explained illustratively. If the salary
ITA 441/2003 and connected cases Page 48
of an employee is Rs 100 and the tax liability thereon at the rate of
30% is Rs. 30, in case the employer agrees to bear the tax liability, the
total tax to be paid by the employer would be Rs 39 (30% of Rs 130).
This Court is of the opinion that whenever tax is deposited in respect
of a non-monetary perquisite, the provision of Section 10 (10CC)
applies, thus excluding multiple stage grossing up. The purpose and
intent of introducing the amendment to Section 10 (10CC) was to
exclude the element of income which would have arisen otherwise,
as a perquisite, and as part of salary. Once that stood excluded, and
option was given to the employer under Section 192 (1A) to honour
the agreement with the employee, Parliament could not have intended
its inclusion in any other form, even for the purpose of deduction at
source. Doing so would defeat the intent behind Section 10 (10CC).
This court, therefore, answers the question in favour of the assessee
and against the revenue.
Question No. 6: Assessability of TDS refunds received by the
employee
51. This question arises in the revenue`s appeals, ITA 1912/2010
and ITA 731/2010. The assesses, non-residents, were, during the
relevant period employed by foreign Companies and paid salary in
foreign currency. They were also deputed to work in India for some
time, during which they received various perquisites, including rent,
household utilities, payment of domestic staff, driver etc. The assesses
received salary in foreign exchange. They claimed that tax paid on his
salary were non-monetary perquisites which could not be brought to
ITA 441/2003 and connected cases Page 49
tax, under Section 10 (10CC) of the Act. Certain refunds were
payable in respect of the TDS amounts deposited with the income tax
authorities, by the assessee`s employers. These excess amount,
according to the Assessing Officer, were not exempt under Section
10(5B) but were taxable income of the assessee, as disguised
perquisites. The assessees contended that refund issued in their name
could not be treated as a perquisite, as neither any benefit accrued to
him nor was any amenity was provided to him. The amount of tax was
deposited by the employer and, therefore, refund issued in this case
belonged to the employer. It was urged that the assessee had written to
the Income tax department to issue the refund directly to the
employer. However, refund was issued in the name of the employees.
The AO`s rejected this and added back the said refund amoun ts; the
appeal against this order succeeded. The matter was ultimately
decided in favour of the assessee by the Tribunal.
52. The revenue urges that that the exemption under Section 10(5B)
could be availed by the assessee only to the extent of amount actually
chargeable on the income. Thus, amounts which was paid over and
above the amount due were not exempt under Section 10(5B) and
were taxable under Section 17(2)(iv) of the Income-tax Act as a
perquisite. Therefore, refund granted to the assessee was taxable
income of the assessee. Once amount had gone to the coffers of the
assessee and thereafter what the assessee did with the amount, was
irrelevant for taxation purposes. That was only application of income
and could not be the character of the receipt. The refund allowed was
ITA 441/2003 and connected cases Page 50
accordingly charged to tax in the re-assessments. The assessee, on the
other hand, argues that the benefit of the amounts paid cannot be
availed of by the assessee, whose terms of contract do not envision
such payments. The amounts are the property of the employer, who
can claim and recover them, by way of adjustment or any other
method, during the subsistence, or even after the employer employee
relationship.
53. This court is of opinion that the assessee`s arguments have
force. The employer, in terms of its arrangement with the employee,
had to pay the income-tax due on the latter`s income for services
rendered. The employer could not have paid to the State any amount
in excess of what was due as tax on salary. But, the employer,
mistakenly paid to the State, excess amounts which were refunded,
but instead, to the assessee.
54. In this case, it is clear that the amount was not paid to the
employee or due to him, from the employer, according to the terms of
the contract governing the relationship. It was paid to the
Government, over and above the tax due on the salary. It was not for
benefit of the assessee. It never, therefore, bore the characteristic of
salary or perquisite. Till assessment was made, the amount could not
be refunded to the assessee. The revenue`s position overlooks that all
receipts are not taxable receipts. Before a receipt is brought to tax, the
nature and character of the receipt in the hands of the recipient has to
be considered. Every receipt or monetary advantage or benefit in the
hands of its recipient is not taxable unless it is established to be due
ITA 441/2003 and connected cases Page 51
to him. If the amount is not due, the recipient- in this case, the
employee is obliged to pay back the sum to the person, to whom it
belongs. A perquisite or such amount, to be taxed, should be received
under a legal or equitable claim, even contingent. The receipt of
money or property which one is obliged to return or repay to the
rightful owner, as in the case of a loan or credit, cannot be taken as a
benefit or a perquisite. The amounts paid in excess by the employer,
and refunded to the employee never belonged to the latter; he cannot
be therefore taxed. The question of law is therefore, answered against
the revenue, and in favour of the assessees.
Question No 7: Legal expenses incurred
55. This question arises in ITA 441/2003. In the said appeal, the
other main issue was regarding taxability of the amount paid towards
income tax liability of the employee, by the employer. That has been
answered in favour of the assessee in respect of Point No.1
56. The surviving question relates to the liability of the assesse in
respect of the sum of Rs. 2,21,000/-. This sum was paid by M/s Sony
India, the assessee`s employer to Price Water House towards
consultancy fees in respect of tax related matters. The AO asked the
assessee why the sum should not be treated as a perquisite; he
resisted, saying that the amount was paid to the accountancy firm
towards various services; Rs. 90,000/- was paid for preparation of
return for three years and the balance was paid towards representation
in appeals, rectification, and seeking interim orders, etc. The AO
rejected the assessee`s claim reasoning that the assessee had the
ITA 441/2003 and connected cases Page 52
primary liability to pay tax. He could not get the benefit of tax
consultancy fee as expenditure. The Appellate Commissioner and
ITAT granted partial relief to the assessee.
57. The assessee`s counsel contends that he was not compelled to
contract with the firm nor get any benefit from it. It was the obligation
of the employer to secure the tax benefits, and ensure that proper
returns were filed. It hired PWC and secured its services for its
comfort. The revenue, on the other hand, contends that the employee
was beneficiary of the services of the accountant firm; even though
the employer hired its services, the party which derived advantage
was the employee. Consequently, the amount paid as fee was to be
brought to tax as a perquisite.
58. The primary liability to pay tax in this case was borne by the
employer; it clearly fell within the definition of a non-monetary
advantage. That the company, as part of its policy, sought advice from
a consultancy firm which was paid for its services. That the benefit of
these ultimately enured to the assessee, cannot mean that it formed
part of his income as perquisite. Here what the revenue seeks to do
is to dictate that though part of the payment to the consultant might be
justified under the particular circumstances, yet, the expense claimed
should be taxed partly as the assessee`s income. The revenue, it is
often said, cannot place itself in the armchair of the assessee and
determine what he should do to conduct his business. That the
assessee was beneficiary to his employer`s policy of consulting tax
experts for filing income tax returns as appears to have been the
ITA 441/2003 and connected cases Page 53
prevailing practice of his employer, in respect of other employees as
well, would not transform the expense borne by the employer into
income in the assessee`s hands. This question is accordingly answered
in favour of the assessee and against the revenue.
59. In the light of the above findings, all references have to be and
are answered against the revenue and in favour of the assessees. The
appeals are disposed of accordingly. No costs.
S. RAVINDRA BHAT
(JUDGE)
R.V. EASWAR
(JUDGE)
JULY 31, 2013
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