2012 (8) TMI 426 - HC - Income Tax

Exemption u/s 10(10CC) - Whether tax paid by the employer on the salaries of the employees would constitute non-monetary benefits exempt u/s 10(10CC) - Held that - Despite prohibition contemplated in the Section 200 of Companies Act for payment of tax free remuneration to an employee, Section 10(10CC) of the Income Tax Act provides for exemption of amount which is not a monetary payment to employee and is also provided as perquisite u/s 17(2) and thereby has acknowledged that remuneration plus tax payable thereon is permissible. Therefore, the payment of tax on account of salaries of the employees not by way of monetary payment to the employees concerned, but for or on their account to the Department and the same being one of the perquisites included in Section 17(2), such payment was to be excluded from the income of the employees - Decided in favor of assessee.

Summary

Issues:
1. Whether tax paid by the employer on employee salaries constitutes non-monetary benefits exempt under Section 10(10CC) of the Income Tax Act.

Analysis:

Issue 1: Tax Paid by Employer as Non-Monetary Benefit
The primary issue in these appeals was whether the tax paid by the employer on the salaries/remunerations of the employees would be considered as non-monetary benefits and thus exempted under Section 10(10CC) of the Income Tax Act. The dispute arose from the employer paying the tax payable by the employees on their salaries/remunerations to the Income Tax Department. The department argued that the employees were obligated to pay tax on this amount, while the employees contended that it should be exempted as per Section 10(10CC) of the Act. The Tribunal examined relevant sections of the Act, including Section 10(10CC) and Section 17(2), along with a previous Full Bench Judgment. It was noted that the employer had taken on the obligation to pay the income tax of the employees, which would have been payable by the employees themselves if not for this arrangement. The Tribunal held that such payment by the employer, though a monetary payment, was a perquisite under Section 17(2) and should be excluded from the employees' income. The High Court, concurring with the Tribunal's decision, refused to interfere with the judgments and orders of the Tribunal in favor of the assessee.

Additional Point: Prohibition under Companies Act
Furthermore, the Court highlighted that Section 200 of the Companies Act, 1956 prohibits companies from providing remuneration free of income tax to any officer or employee. However, the Court emphasized that there is a distinction between tax-free remuneration and payment of remuneration along with the tax payable. Section 10(10CC) of the Income Tax Act allows for the exclusion of tax paid by the employer on behalf of the employee, despite the prohibition in the Companies Act. This provision acknowledges that remuneration plus tax payable thereon is permissible under certain conditions outlined in the Act.

In conclusion, the High Court upheld the Tribunal's decision, affirming that the tax paid by the employer on the salaries/remunerations of the employees constitutes a non-monetary benefit and is exempted under Section 10(10CC) of the Income Tax Act. The Court's analysis delved into the specific provisions of the Act, the obligations of the employer, and the perquisite status of such payments under Section 17(2), ultimately siding with the assessee in this matter.