2007 (11) TMI 334 - AT - Income Tax

Tax paid by the employer on the income (i.e. monetary perquisite) of the assessee is entitled to exemption under section 10(10CC) - Perquisite or Not - Whether tax actually paid by an employer at his option in case of an employee (individual) deriving income in the nature of a perquisite not provided for by way of monetary payment within the meaning of clause (2) of section 17 of the Act is not liable to be included in the total income of the employee? - meaning of at the option of the employer on behalf of the employee . HELD THAT - In our opinion the words at the option of the employer only imply that the employer now has an option to pay the taxes on behalf of the employees. It is for the employer to decide whether taxes are to be paid by the employee or the employer. The clause is not applicable in cases taxes are paid by the employee who is otherwise obliged to pay it. When so paid no perquisite as far as employee is concerned would be involved. The cash payment to the employee by the employer might be assessable as salary but it is not a perquisite or amenity or benefit . We have already noted view of Full Bench of Kerala High Court in Common Wealth Trust Ltd. s case 1981 (11) TMI 47 - KERALA HIGH COURT where their Lordships saw no good reason to give restricted meaning to the term benefit amenity or perquisite as the same would not serve the purpose of the section. Their Lordships saw no rationality in the view of the majority High Courts if it is held that cash allowance paid by the employer to an employee would be entitled to deduction despite section 40(a)(v) and restrict the application of above provision to non-cash advantage. Such construction according to their Lordships would be quite irrational defeating the very purpose of the Legislation. The aforesaid view as noted has not been approved by the Apex Court and a distinction has been drawn between cash payment on one hand and benefit amenity or a perquisite on the other. It is therefore reasonable to conclude that payment of taxes by the employer on behalf of the employee is a perquisite within the meaning of clause (2) of section 17 of the Income-tax Act. It is clear that taxes paid by employer on behalf of the employee were treated as a perquisite covered by sub-clause (iv) of clause (2) of section 17 of the Income-tax Act and therefore includible in the salary. There is no dispute that payment of taxes made by the employer on behalf of the employee is a perquisite and part of the income assessable under the head salary if clause 10(10CC) was not brought on the Statute Book. It is also a benefit or amenity enjoyed by the employee but it is not a monetary payment to the employee. It is a payment by the employer which discharges an obligation of the employee which otherwise would have been discharged by the employee. Such payments of taxes therefore are fully covered by above sub-clause (iv). It is not money which is paid to the assessee when taxes are paid on his behalf. It is discharge of his obligation. The payment fully fits in the jacket of sub-clause (iv) of section 17(2) of the Act. It may be a monetary gain or monetary benefit or a monetary allowance but definitely it is not a monetary payment to the assessee. What is excluded in the clause is the perquisite is in the shape of a monetary payment to the assessee. If it is a payment to a third person like payment of taxes to the Government then such payment of taxes cannot be excluded under clause 10(10CC). The circular of the Board and provision of sub-section (1A) of section 192 section 40(a)(v) 195A fully support the claim of the assessee. We therefore hold that the taxes paid by the employer on behalf of the employee is a perquisite within the meaning of section 17(2) of the Income-tax Act which is not provided by way of monetary payment. Therefore there is no reason not to exclude such payment of taxes from the total income of the assessee. In other words taxes paid by the employer can be added only once in the salary of the employee. Thereafter tax on such perquisite is not to be added again. We therefore find substance in the contention advanced on behalf of learned counsel for the assessees and the Interveners. The question referred to us is answered in favour of the assessee. The appeals of the assessees and Interveners are allowed on this issue. All the appeals of the assessees are allowed in terms stated above.

Summary

Issues Involved:
1. Whether tax paid by the employer on the income of the assessee is entitled to exemption under section 10(10CC) of the Income-tax Act, 1961.
2. Whether such tax payment constitutes a monetary or non-monetary perquisite.
3. The applicability of multiple-stage grossing up for tax calculation.
4. Interpretation of section 10(10CC) in light of related provisions and legislative intent.
5. The relevance of previous judicial decisions on similar issues.
6. Consequences of the judgment on penalty proceedings and interest calculations.

Issue-wise Detailed Analysis:

1. Exemption under Section 10(10CC):
The Special Bench was constituted to address whether tax paid by the employer on the salary of the employee qualifies for exemption under section 10(10CC). The introduction of section 10(10CC) by the Finance Act, 2002, effective from 1-4-2003, was aimed at providing such an exemption. The Tribunal concluded that the legislative intent, as reflected in the Finance Bill and accompanying Memorandum, was to exempt the tax paid by the employer on behalf of the employee from being included in the total income of the employee.

2. Monetary vs. Non-Monetary Perquisite:
The core issue was whether the tax paid by the employer constitutes a monetary payment. The Tribunal held that the tax paid by the employer on behalf of the employee is a perquisite under section 17(2)(iv) but not a monetary payment to the employee. The term "monetary payment" implies a direct payment to the employee, which is not the case when the employer pays the tax to the government. Therefore, such tax payments qualify as non-monetary perquisites and are exempt under section 10(10CC).

3. Multiple-Stage Grossing Up:
The Assessing Officer's practice of multiple-stage grossing up was challenged. The Tribunal disapproved of this method, referencing the decision in Frank Beaton v. CIT, which criticized the absurdity of such an approach. The Tribunal agreed that only a single-stage grossing up should be applied, aligning with the legislative intent to simplify the taxation of perquisites.

4. Interpretation of Section 10(10CC):
The Tribunal emphasized the importance of understanding section 10(10CC) in conjunction with other related provisions such as sections 17(2), 192(1A), 195A, and 40(a)(v). The legislative amendments and the Finance Minister's speech clarified that the provision aimed to exempt non-monetary perquisites, including tax payments by employers. The Tribunal interpreted "provided for by way of monetary payment" to exclude tax payments made directly to the government on behalf of the employee.

5. Judicial Precedents:
The Tribunal reviewed several judicial decisions, including those in B.J. Services Co. Middle East Ltd., Western Geo International Ltd., and CIT v. ONGC. It found that previous decisions had not adequately considered the legislative intent and provisions of section 10(10CC). The Tribunal also highlighted the Supreme Court's distinction between cash payments and perquisites in Mafatlal Gangabhai & Co. (P.) Ltd. v. CIT, supporting the view that tax payments by employers are non-monetary perquisites.

6. Penalty Proceedings and Interest Calculations:
The Tribunal noted that the issue of interest under sections 234 and 235 was consequential and directed the Assessing Officer to recalculate taxes accordingly. The ground challenging the initiation of penalty proceedings under section 271(1)(c) was not pressed and thus dismissed.

Conclusion:
The Tribunal concluded that the tax paid by the employer on behalf of the employee is a non-monetary perquisite exempt under section 10(10CC). The appeals of the assessees were allowed, and the Tribunal directed the recalculation of taxes and dismissal of penalty proceedings.