2013 (8) TMI 248 - HC - Income Tax

Exclusion u/s 10(10CC) - non-monetary perquisites - where income tax paid to discharge tax obligation of employee on his behalf is a monetary perquisite or not - Held that - only change is in introduction of Section 10 (10CC) which states that tax actually paid by employer to discharge an employee s obligation not amounting to a monetary benefit would not be included as employees income. If seen from context of Section 17 (2) and previous history to that provision as well as pre existing provision of Section 10 (5B) and interpretation placed on Section 17 (2) read with or provisions which disallow payments made on behalf of employee by employer so long as benefit is not expressed in monetary terms in hands of employee in sense that it is not funded as part of salary but paid in discharge of obligation of any sort eir contractual or legal (tax) directly by employer it should not be treated as a monetary benefit. reason for this is that Section 10 (10CC) is neutral about kind of benefit availed by employee - words in section contemplate a situation where assessee makes a payment (in cash) in respect of an obligation -obligation of employee - which would have been payable by employee if it is not paid by assessee. payment by assessee contemplated by these words is not evidently a payment to employee but to a third party no doubt on account of employee - Following decision of CIT v. Mysore Commercial Union Ltd. 1980 (7) TMI 86 - KARNATAKA High Court and CIT v. Shriram Refrigeraiton industries Ltd. 1992 (5) TMI 15 - DELHI High Court - Decided favour of assessee. Social security pension and medical insurance contributions - Held that - assessee does not in any appeal get a vested right at time of contribution to fund by employer. - amount standing to credit of pension fund account social security or medical or health insurance would continue to remain invested till assessee becomes entitled to receive it. In case of medical benefit revenue could not support its contentions by citing any provision in any policy or scheme which is subject matter of se appeals which entitle vesting right to receive amount under scheme or plan did not occur - one cannot be said to allow a perquisite to an employee if employee has no right to same. It cannot apply to contingent payments to which employee has no right till contingency occurs. employee must have a vested right in amount - contribution made by employee towards a fund established for welfare of employees would not be deemed to be a perquisite in hands of employees concerned as y do not acquire a vested right in sum contributed by employer - amounts paid by employers to pension or social security funds or for medical benefits are not perquisites within meaning of expression under Section 17 (1) (v) and refore amounts paid by employer in that regard are not taxable in hands of employee-assessee - Following decision of CIT v. Mehar Singh Sampuran Singh Chawla 1972 (5) TMI 6 - DELHI High Court - Decided in favour of assessee. Hypothetical Tax - Held that - hypothetical tax as one where employee of a multinational company seconded to serve in India is assured a net salary amount equivalent to what is earned by him abroad. assessee paid a certain amount of tax in US dollars upon salary earned in United states. employer after deducting tax calculated net amount receivable by assessee; it n considered how much tax would be payable by assessee on income earned in India. As amount payable as tax in India was lower it (also called hypothetical tax) was not given to assessee thus assuring that net amount received by him was in accordance with prior agreement. In or words hypothetical tax denotes sum of money withheld by employer to fulfill a commitment of paying a particular net salary. Court after considering materials concluded that so long as assessee paid tax on actual salary received could not be saddled with hypothetical tax amount - employers had assured a certain net salary; assessees were paid that; they suffered tax on that salary. question of ir paying more refore would not arise - Following decision of Commissioner of Income Tax v Dr. Percy Batlivala 2009 (12) TMI 811 - ITAT DELHI - Decided in favour of assessee. Grossing up under Section 195-A - Tribunal held that taxes paid by employer can be added only once in salary of employee - Held that - whenever tax is deposited in respect of a non-monetary perquisite provision of Section 10 (10CC) applies thus excluding multiple stage grossing up. purpose and intent of introducing amendment to Section 10 (10CC) was to exclude 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 employer under Section 192 (1A) to honour agreement with employee Parliament could not have intended its inclusion in any or form even for purpose of deduction at source. Doing so would defeat intent behind Section 10 (10CC) - Decided in favour of assessee. Assessability of TDS refunds received by employee - Held that - employer in terms of its arrangement with employee had to pay income-tax due on latter s income for services rendered. employer could not have paid to State any amount in excess of what was due as tax on salary. But employer mistakenly paid to State excess amounts which were refunded but instead to assessee - amount was not paid to employee or due to him from employer according to terms of contract governing relationship. It was paid to Government over and above tax due on salary. It was not for benefit of assessee. It never therefore bore characteristic of salary or perquisite. Till assessment was made amount could not be refunded to assessee. revenue s position overlooks that all receipts are not taxable receipts. Before a receipt is brought to tax nature and character of receipt in hands of recipient has to be considered. Every receipt or monetary advantage or benefit in hands of its recipient is not taxable unless it is established to be due to him. If amount is not due recipient- in this case employee is obliged to pay back sum to person to whom it belongs. A perquisite or such amount to be taxed should be received under a legal or equitable claim even contingent. receipt of money or property which one is obliged to return or repay to rightful owner as in case of a loan or credit cannot be taken as a benefit or a perquisite. amounts paid in excess by employer and refunded to employee never belonged to latter; he cannot be refore taxed - Decided in favour of assessee. Legal expenses incurred - Held that - primary liability to pay tax in this case was borne by employer; it clearly fell within definition of a non-monetary advantage. That company as part of its policy sought advice from a consultancy firm which was paid for its services. That benefit of these ultimately enured to assessee cannot mean that it formed part of his income as perquisite - assessee was beneficiary to his employer s policy of consulting tax experts for filing income tax returns as appears to have been prevailing practice of his employer in respect of or employees as well would not transform expense borne by employer into income in assessee s hands - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 10(10CC) of the Income Tax Act to amounts paid towards income tax by the employer on behalf of the assessee.
2. Taxability of mandatory social security, pension, and medical insurance contributions paid by the employer.
3. Exclusion of taxes while computing the perquisite value of rent-free accommodation provided to an employee.
4. Treatment of hypothetical tax in salary computations.
5. Grossing up of tax liability under Section 195A.
6. Assessability of TDS refunds received by the employee.
7. Taxability of legal expenses incurred by the employer for tax-related consultancy.

Detailed Analysis:

Issue 1: Applicability of Section 10(10CC)
The court examined whether amounts paid towards income tax by the employer on behalf of the assessee are non-monetary perquisites falling under Section 10(10CC). The Revenue argued that these payments are monetary benefits and should be included in the employee's income as perquisites under Section 17(2). The court, however, concluded that such payments are non-monetary perquisites and are exempt under Section 10(10CC). The court emphasized that the tax paid by the employer does not constitute a monetary benefit directly provided to the employee but is a discharge of the employee's obligation, thus falling within the exemption provided by Section 10(10CC).

Issue 2: Social Security, Pension, and Medical Insurance Contributions
The court analyzed whether contributions made by the employer towards social security, pension, and medical insurance are taxable as perquisites under Section 17(2)(v). The Revenue contended that these contributions are for the benefit of the employee and should be taxable. The court, however, held that these contributions do not vest any immediate benefit in the employee and are contingent on future events, such as retirement or illness. Therefore, they do not qualify as taxable perquisites under Section 17(2)(v).

Issue 3: Exclusion of Taxes in Rent-Free Accommodation
The court addressed whether taxes paid by the employer should be excluded while computing the perquisite value of rent-free accommodation under Rule 3 of the Income Tax Rules, 1962. The court referred to its previous decision in Commissioner of Income Tax v Telsuo Mitera, which held that taxes paid by the employer are not to be included in the computation of the perquisite value of rent-free accommodation. Thus, the court ruled in favor of the assessee.

Issue 4: Hypothetical Tax
The court examined the concept of hypothetical tax, which is used to ensure that an employee seconded to India receives a net salary equivalent to what they would earn abroad. The court followed the decision of the Bombay High Court in Commissioner of Income Tax v Jaydev H. Raja, which held that hypothetical tax is not an actual receipt and should not be added to the employee's income. The court ruled that the assessees should not be taxed on hypothetical tax amounts.

Issue 5: Grossing Up Under Section 195A
The court considered whether the tax liability borne by the employer should undergo multiple-stage grossing up under Section 195A. The court concluded that taxes paid by the employer on behalf of the employee are non-monetary perquisites and are exempt under Section 10(10CC). Therefore, such taxes should not be subjected to multiple-stage grossing up. The court ruled in favor of the assessee, stating that the intent of Section 10(10CC) is to exclude these amounts from the definition of income.

Issue 6: Assessability of TDS Refunds
The court addressed whether TDS refunds received by the employee should be treated as taxable income. The court held that the refunds belong to the employer, not the employee, as the excess tax was mistakenly paid by the employer. The refunds do not constitute a benefit or perquisite to the employee and should not be taxed in the employee's hands. The court ruled in favor of the assessee.

Issue 7: Legal Expenses Incurred
The court examined whether legal expenses incurred by the employer for tax-related consultancy should be taxed as a perquisite in the hands of the employee. The court held that the primary liability to pay tax was borne by the employer, and the consultancy services were hired for the employer's benefit. The fact that the employee indirectly benefited from these services does not transform the expense into a taxable perquisite. The court ruled in favor of the assessee.

Conclusion
The court ruled in favor of the assessees on all issues, holding that amounts paid by the employer towards income tax, social security, pension, and medical insurance contributions are non-monetary perquisites and are exempt under Section 10(10CC). Taxes paid by the employer should not be included in the computation of the perquisite value of rent-free accommodation, and hypothetical tax amounts should not be added to the employee's income. TDS refunds received by the employee are not taxable, and legal expenses incurred by the employer for tax-related consultancy are not taxable as perquisites. The appeals were disposed of accordingly, with no costs.