2009 (2) TMI 267 - AT - Income Tax

Summary

Issues involved:
The issues involved in this case are the deductibility of social security contribution and hypothetical-tax from the salary income of the assessee under assessment u/s 143(3) of the IT Act, 1961 for the assessment year 2006-07.

Deductibility of Hypothetical Tax:
The AO contended that the CIT(A) erred in allowing deduction on account of hypothetical-tax from the salary income of the assessee chargeable to tax in India. The AO argued that hypothetical-tax is not one of the permissible deductions under section 16 of the Act. The CIT(A), however, held that such a deduction is permissible based on the tax equalization policy followed by the employer, similar to the decision in the case of Jaydev H. Raja. The CIT(A) emphasized that the deduction of hypothetical-tax does not accrue to the appellant and is not taxable. Therefore, the CIT(A) deleted the addition of Rs. 20,21,281 made by the AO. The ITAT Pune-A confirmed the CIT(A)'s decision, stating that the deduction of hypothetical-tax should be made at the stage of computing the tax perquisite and not the basic salary.

Deductibility of Social Security Contribution:
Regarding the deductibility of social security contribution, the AO contended that such deduction is not permissible under section 16 of the IT Act or the tax treaty between India and the assessee's home country. The CIT(A), however, upheld the plea of the assessee, noting that the social security plan in the Czech Republic is compulsory for all citizens, regardless of their work location. The CIT(A) relied on the decision in the case of Gallotti Raoul and Akbar Poonawalla to support the assessee's claim. Consequently, the CIT(A) deleted the addition of Rs. 9,23,498 made by the AO. The ITAT Pune-A agreed with the CIT(A) that the issue is covered in favor of the assessee by the decision in the case of Gallotti Raoul, and confirmed the deletion of the addition.

Conclusion:
In conclusion, the ITAT Pune-A dismissed the appeal filed by the AO, upholding the decisions of the CIT(A) regarding the deductibility of hypothetical-tax and social security contribution from the salary income of the assessee. The tribunal emphasized the importance of understanding the nature of deductions and clarified that hypothetical-tax should be reduced from the tax perquisite to the employees and not from the basic salary.