2009 (12) TMI 811 - HC - Income Tax

Deduction of hypothetical tax - Held that - Insofar as the assessee is concerned, he had received only ₹ 90/- (that is ₹ 75/- ₹ 15/-; ₹ 10/- was not received at all in view of the nature of arrangement between the employer and the employee). Therefore, there was no question of addition of this hypothetical tax to the income of the assessee and asking the assessee to pay tax thereupon. There is no dispute that the assessee has paid tax on the actual salary received by him in India. Thus, even on the application of first principle and adopting commonsense approach, it is clear that the addition made by the AO on account of so-called hypothetical tax was unsustainable and the ITAT rightly deleted the said addition. No question of law, therefore, arises. We accordingly dismiss all these appeals.

Summary

Issues:
1. Dispute over 'hypothetical tax' treatment in the income of foreign nationals working in India.
2. Claim of deduction for 'hypothetical tax' by the assessee.
3. Rejection of the deduction by the Assessing Officer (AO) and allowance by the ITAT.
4. Interpretation of tax equalization policy in compensating tax liability for foreign assignments.
5. Justifiability of removing the element of 'hypothetical tax' from the total income.
6. Dismissal of appeals based on the above analysis.

The judgment deals with a series of appeals involving foreign nationals working in India for specific purposes under arrangements with their foreign employers. The primary issue revolves around the treatment of 'hypothetical tax' in the income of these foreign employees. The employer, in fixing the salary of the assessee during their stay in India, assured that the net amount of salary after tax deductions would be the same as received in their home country. This 'hypothetical tax' was the difference between the tax payable in India and the tax already deducted by the employer in the home country to maintain the net salary level. The assessee claimed a deduction for this 'hypothetical tax,' which was initially rejected by the Assessing Officer (AO) but later allowed by the ITAT.

The ITAT justified the deduction by explaining the tax equalization policy of the company, which limited the employer's liability to the additional tax liability arising from the foreign assignment compared to what would have been incurred in the home country. The total emoluments of the assessee were considered as the actual salary plus the tax burden reimbursed by the company, excluding the 'hypothetical tax' amount. The ITAT emphasized that the 'hypothetical tax' never accrued to the assessee, making it justifiable to remove this element from the total income for tax purposes.

The judgment concludes that no question of law arises from the appeals as the ITAT's decision to allow the deduction of 'hypothetical tax' was based on a reasonable interpretation of the tax equalization policy and the actual income accruing to the assessee during the Indian assignment. Therefore, all appeals were dismissed based on the analysis that the addition of 'hypothetical tax' to the income of the assessee was unsustainable, and the ITAT's decision to delete this addition was upheld.