1986 (8) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Eligibility for income-tax exemption under Section 10(6)(vii) of the Income-tax Act, 1961.
2. Determination of employment relationship between the assessee and the West Bengal State Electricity Board.
3. Treatment of tax paid by the Board as a perquisite and grossing up of the salary.
4. Interpretation of the agreement between Fuji Electric Co. Ltd. and the Board.

Detailed Analysis:

1. Eligibility for Income-Tax Exemption:
The primary issue was whether the assessee, a Japanese national employed by Fuji Electric Co. Ltd., was eligible for income-tax exemption under Section 10(6)(vii) of the Income-tax Act, 1961. The Income-tax Officer denied the exemption, stating that the assessee had been a resident in India in one of the four financial years immediately preceding the financial year in question. This was upheld by the Appellate Assistant Commissioner, who found that the assessee did not qualify for the exemption due to his previous residency in India.

2. Employment Relationship:
The core contention was whether the assessee was an employee of the West Bengal State Electricity Board or Fuji Electric Co. Ltd. The Tribunal reviewed the agreement between the Board and Fuji Electric Co. Ltd., which indicated that the assessee was deputed by the Japanese company to work on a project in India. The Tribunal found no direct or indirect employment relationship between the assessee and the Board. Payments made by the Board were to the Japanese company, not directly to the assessee, reinforcing that the assessee remained an employee of Fuji Electric Co. Ltd.

3. Treatment of Tax as Perquisite and Grossing Up:
The Income-tax Officer treated the tax paid by the Board as a perquisite under Section 17(2)(iv) of the Income-tax Act, 1961, and grossed up the salary. The Appellate Assistant Commissioner upheld this view, stating that the remuneration received by the assessee was for services rendered to the Board. However, the Tribunal disagreed, holding that the Board was not the employer and the tax paid by the Board should not be grossed up. The Tribunal concluded that the tax paid by the Board constituted a benefit to the assessee, but it should be treated as income from other sources, not as salary or a perquisite.

4. Interpretation of the Agreement:
The Tribunal analyzed the agreement between Fuji Electric Co. Ltd. and the Board, which stipulated that the Board would pay supervision charges to the Japanese company, part of which would be paid in rupees to the engineers' bank accounts. The agreement also mentioned that taxes and duties imposed would be borne by the Board. The Tribunal concluded that the agreement did not establish an employment relationship between the assessee and the Board. The Tribunal's decision was based on the finding that the assessee had no right to enforce the agreement's terms against the Board, which could only be enforced by Fuji Electric Co. Ltd.

Conclusion:
The High Court agreed with the Tribunal's findings and held that the assessee remained an employee of Fuji Electric Co. Ltd. and did not become an employee of the West Bengal State Electricity Board during the relevant assessment year. The court found no reason to disagree with the Tribunal's conclusion and answered the referred question in the affirmative, in favor of the assessee. The court also noted that the issue of taxability and grossing up of income was not within the scope of the reference. There was no order as to costs.