2011 (9) TMI 188 - HC - Income Tax

Non deduction of TDS on salary u/s 192 - salary to employees working at Bagdad - The Assessing Officer treated the said amount which was deposited in NRE accounts of the employees as salary paid to NRE in India and as no tax was deducted at source on this payment u/s 192 - Held that - As the alleged amounts were paid in Baghdad and the alleged salary had also been earned in Baghdad it was subject to payment of income-tax according to the Income-tax Laws applicable in Iraq - Once the alleged salary had been subjected to Iraqi income-tax it cannot be taxed again in India - Hence, the alleged disallowance u/s 40(1)(iii) has been made by completely going on a wrong premise or law and without taking into consideration the basic ingredients that the alleged amount of salary was not chageable to tax in India - Decided in favour of assessee.

Summary

Issues:
Interpretation of Section 40(a)(iii) of the Income Tax Act in the context of salary payments to non-resident employees working abroad.

Analysis:
The case involved a dispute regarding the disallowance of a specific amount under Section 40(a)(iii) of the Income Tax Act, 1961, concerning salary payments made by a public limited company to its employees working in Iraq during the Assessment Year 1987-88. The Assessing Officer disallowed the amount as a deductible expense since no tax was deducted at the source on the payment. The issue revolved around whether the income earned by non-resident employees in Iraq, deposited in NRE accounts in India, was chargeable to tax in India and thus subject to TDS requirements.

The Commissioner (Appeals) considered a communication from the EXIM Bank, which stated that amounts credited directly into NRE accounts would be deemed as foreign exchange repatriated into India. However, the Commissioner's view was that this arrangement did not affect the specific provisions of the Income Tax Act, emphasizing that the income should be chargeable to tax for disallowance under Section 40(a)(iii).

The department argued that the salary earned in Iraq by the employees, deposited in NRE accounts in India, should be taxable, and the lack of TDS made the expenses non-deductible under the Act. Citing relevant case laws, the department contended that the income should be taxed in India due to the NRE account deposits.

On the other hand, the assessee's counsel argued that the employees were non-resident Indians, and their income earned in Iraq was not taxable in India under Sections 4, 9(2), and 15 of the Act. The counsel highlighted that the salary earned in Iraq was subject to Iraqi income tax and repatriated to India under a special arrangement, which did not make it taxable in India.

The High Court upheld the Tribunal's decision, stating that the salary needed to be subjected to tax in India for TDS requirements to apply under Section 40(a)(iii). The Court emphasized that if the income was already taxed in Iraq, it could not be taxed again in India to avoid double taxation. Therefore, the disallowance under Section 40(a)(iii) was deemed unjustified, and the appeal of the assessee-company was allowed.

In conclusion, the Court dismissed the Income Tax Reference, ruling in favor of the assessee-company, as the disallowance under Section 40(a)(iii) was not justified due to the non-taxability of the income earned by non-resident employees in Iraq.