1980 (5) TMI 77 - AT - Income Tax

Summary

Issues:
- Appeal against the order of the AAC of IT, B-Range, Madras confirming assessments under IT Act, 1961 for the years 1974-75 and 1975-76.
- Tax treatment of salary and perquisites received by an American national working in India without a written contract.
- Disputed liability due to grossing up of salary based on tax on tax.
- Interpretation of case law regarding tax-free salary and grossing up on the basis of tax on tax.
- Determination of taxable income based on actual perquisites received.

Analysis:
The judgment involves two appeals filed against the assessments made by the ITO for the years 1974-75 and 1975-76. The appellant, an American national working as a nurse in India, received salary and perquisites from the employer. The tax was calculated based on the salary and perquisites received, which the appellant argued should only be limited to the actual reimbursement amounts. The issue revolved around whether the salary was tax-free and if grossing up based on tax on tax was justified.

The appellant contended that the salary was not tax-free and relied on case law to support the argument that grossing up should only be done if there was a net income guaranteed after tax. The department, on the other hand, argued that the absence of a written contract did not automatically imply a tax-free salary. The tribunal examined the records and arguments presented. It noted the lack of evidence for any implied contract or understanding regarding a tax-free salary.

The tribunal emphasized that without a contract or understanding, it could not conclude that the salary was tax-free. It highlighted that only the actual perquisites received should be considered for taxation. The judgment clarified that if an employee is entitled to a tax-free salary with a guaranteed net income after tax, grossing up based on tax on tax would be appropriate. However, in this case, only a specified amount was given as an income-tax allowance, which did not make the entire salary tax-free.

The tribunal concluded that if an amount is paid or reimbursed towards income tax without securing an agreed net income, grossing up based on tax on tax is not warranted. Therefore, the appeals were allowed, and the perquisites for reimbursement of income tax were limited to the actual amounts received by the appellant for the respective years.