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TMI Blog2010 (6) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... has reflected its intention in clear terms to exempt in the hands of the employee, the tax paid by his employer on the perquisite falling under clause ( 2 ) of section 17. The said perquisite itself was tax paid by the employer at his option which the employee was obliged to pay. This has been specifically provided in clause 10( 10CC ) of the Income-tax Act and is further corroborated by changes made in section 40( a )( v ), sections 192(1A) and 195A and other consequential amendments. These changes are to be seen with similar provision existing earlier to appreciate the new scheme. The Notes and Memorandum issued with the Bill has the title "Scheme for taxation of perquisites simplified with employer given option to pay tax on behalf of employees", [reproduced and highlighted in para 6.5 page 19 (above), leave no amount of doubt that tax paid by the employer on behalf of the employee is a perquisite and tax on such income is exempt under clause 10( 10CC )]. The same conclusion, as expressed in the Circular and Notes, follows from consideration of the provisions noted below : "Section 10. Incomes not included in total income. In computing the total income of a previous year o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 195, and 195A and from other consequent changes made through Finance Act, 2002 with effect from 1-4-2003 noted above. Sub-section (1A) to section 192 introduced through the same Finance Act, quoted above provides that the employer, "may pay at his option, tax on the whole or part of such income without making any deduction therefrom". 12. The learned Departmental Representative had contended that it is very essential to see agreements between the employer and employee in all the cases and particularly the term relating to payment of taxes. We find that in most of the cases, the agreement providing terms and conditions of employment including that relating to the payment of taxes is on record. As per said agreements, the employer has agreed to pay salary to the employee free of taxes . In other words, taxes have been paid by the employer on behalf of the employee. In some cases, where such agreements are not available, there also the Assessing Officer, in the assessment order has clearly observed that employer had paid taxes on behalf of the employees and, therefore, double or multiple grossing up were carried on. From above, it can safely be inferred that in all cases, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by A for the years 1953-54 to 1957-58, at the grossed up sum of Rs. 21,271, Rs. 83,379, Rs. 1,63,180, Rs. 2,54,827 and Rs. 2,98,901 respectively. Held (agreeing with the Tribunal), that the real income by way of royalty received by A under the agreement was such amount as would, if the tax thereon had been deducted, have left a royalty of 3 per cent of the proceeds to A, and not the net royalty payable plus the tax thereon and accordingly the assessment made by the Tribunal was valid." 13.1 In the case of Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 457 (Delhi), the question involved was whether cash reimbursement paid to the Managing Director as an employee by the assessee-company was a perquisite liable to be disallowed under section 40( a )( v ) of the Income-tax Act. Relevant portion of section 40( a )( v ) provided as under : "( v )any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or;" The court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " was retained along with the other expressions "benefit" and "amenity" even after the amendment. This would show that the Legislature had in view the distinction between the said expressions and yet chose to delete the expression "remuneration" from the said clause ( iii ). The phrase "whether convertible into money or not" in our opinion does not govern only the expression "perquisite". If the phrase "whether convertible into money or not" was intended to govern only the word "perquisite" then the correct grammatical form would have been any benefit or amenity or any perquisite whether convertible into money or not . In Indian Leaf Tobacco Dev. Co. Ltd. v. CIT [1982] 137 ITR 827 (Cal.), the court was concerned with the question as to whether monetary payment made by the company to its employees for reimbursement of medical expenses incurred by the employees represented expenditure resulting directly or indirectly in the provision of any benefit or amenity or perquisite to the said employee within the meaning of section 40A(5) of the Act. The court following its earlier decision in CIT v. Kanan Devan Hills [1979] 119 ITR 431 (Cal.), held that a direct payment to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment as perquisite, it had to be a payment other than a cash payment in pursuance of a contract of service. In CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP) the question was as to whether the fees and medical bills should be taken into account as perquisite for the purpose of disallowance under section 40A(5) of the Act. Relying on the decision of the Calcutta and Madras High Courts, it was held that payments made directly to an employee do not fall within the meaning of the expression perquisite . In CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340, the Karnataka High Court was of the view that the expression whether convertible into money or not , occurring in section 40( a )( v ), is something apart from money such as something in kind, which may be convertible into money or not and that this expression would not be appropriate when one considers a payment in cash. It, therefore, held that payment of bonus to its employees in cash was not a perquisite and could not be disallowed under section 40( a )( v )." [Emphasis supplied] Their Lordships dissented from the view taken by Full Bench of Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amenity or perquisite . The statute itself lays down the permissible limit of deduction in respect of salary and that would be incomplete unless a permissible limit of deduction is laid down in respect of other benefits that are extended to an employee. Though the words whether convertible into money or not may at first sight appear to indicate that whatever are not convertible into money stand excluded from the scope of the term benefit, amenity or perquisite , that need not necessarily be so. The term benefit, amenity or perquisite may take in any benefits in kind and in service and may take in also cash. Whether convertible into money or not need not qualify the whole range. It only means that it is immaterial whether the benefit, perquisite or amenity may or may not be convertible into money. That would be immaterial. According to us, this would be the proper reading of the section." 13.2 In the case of CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431 (Delhi), the question was whether reimbursement of medical expenses and computation of perquisite value of residential accommodation and cash allowance in the shape of car allowance and house rent allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. The Andhra Pradesh High Court has taken the same view and the first judgment is reported as CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP) was followed by the Andhra Pradesh High Court in three other cases, reported as [1986] 160 ITR 217 , CIT v. Warner Hindusthan Ltd. [1989] 175 ITR 87, CIT v. Singareni Collieries Co. Ltd., the Madras High Court has also taken the same view in [1980] 125 ITR 150 , CIT v. Manjushree Plantations Ltd. [1992] 196 ITR 802, CIT v. Jayanthi Films (Madurai) (P.) Ltd. The Karnataka High Court has also come to the same conclusion in CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 and this was followed by it in [1988] 173 ITR 374 (Kar.), CIT v. Motor Industries Co. Ltd. Two decisions of the Kerala High Court in favour of the aforesaid view of the Calcutta High Court are [1984] 145 ITR 563 - CIT v. Toshiba Anand Lamps Ltd. [1985] 153 ITR 444 and Travancore Tea Estates Co. Ltd. v. CIT. As far as this court is concerned, the view of the Calcutta High Court in Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 has found favour. In the case Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 457 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was dismissed. An application under section 256(1) was also dismissed by the Tribunal whereupon it approached the High Court which too rejected its application under section 256(2), as stated above." After elaborate consideration of relevant provisions including definition of perquisite under section 17 and case law, they agreed with the view expressed by majority of High Courts including Delhi, Karnataka, Kerala and Madras disagreed with the view taken by Kerala High Court in Commonwealth Trust Ltd. s case ( supra ). Their Lordships held as under : "6. On a consideration of both the points of view, we are inclined to agree with the submission of the learned counsel for the assessees. The language employed in the sub-clause is not capable of taking within its ambit cash payments made to the employees by the assessee. These cash payments will, of course, be treated as salary paid to the employees and will be subject to the limits/ceiling, if any, in that behalf. But they cannot be brought within the purview of the words any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite - more so because of the following words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause ( b ) of Explanation 2 to sub-section (5). What do they mean ? The said words contemplate a situation where the assessee makes a payment (in cash) in respect of an obligation obligation of the employee which would have been payable by the employee if it is not paid by the assessee. The payment by the assessee contemplated by these words is not evidently a payment to the employee but to a third party, no doubt, on account of the employee. Sub-clause ( v ) of the definition of perquisite in clause ( b ) of Explanation 2 to sub-section (5) also refers to cash payment but that too is not to the employee, though undoubtedly for his benefit. 9. For the above reasons, we hold that cash payments by an assessee to his/its employees do not fall within the ambit of section 40( a )( v ) or section 40A(5)( a )( ii ), as the case may be. We disagree with the opinion of the Kerala High Court in Common Wealth Trust Ltd. ( supra ) and agree with the other High Courts which have taken a view according with our view, viz., CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 (Kar.), CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431 (Delhi), CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of finding out the value of the rent-free accommodation given to the employee. Both the courts have answered the issue in favour of the revenue and against the assessee. The Madras High Court in its judgment has approved of the ratio of the decision of the Kerala High Court. We are respectfully in agreement with the decisions of both the courts on the said point. We are, therefore, satisfied that the revenue is entitled to succeed on the first question and the answer to the first question will have to be given in its favour and against the assessee." 13.6 In the case of Boeing v. CIT [2001] 250 ITR 667 (Mad.), the case relied upon by the learned Departmental Representative, their Lordships of Madras High Court were dealing with a question whether a cloth dealer receiving gift from its manufacturer as "incentive" for additional efforts would constitute profit and gains of business. Their Lordships held that gift was a trading receipt and, therefore, value of gift constituted profits and gains of business of the dealer. In our considered opinion, aforesaid decision has no application to the facts involved us. 13.7 In the case of CIT v. Tara Singh [1998] 233 ITR 669 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This case in our considered view has no application to the facts of the case. 14. It is evident from above cited decisions that when payment is made in cash by employer to the employee, it is not a perquisite. The cash payment to the employee has been held to be different from a "perquisite". It was held to be different from "convertible into money or not". The cash payment was not held to be money payment while considering the question whether such payment was a benefit, amenity or a perquisite, though cash payment by the employer to the employee may be liable to be assessed as "salary". 14.1 We have already noted specific finding to the above effect in the case of Shriram Refrigeration Industries Ltd. ( supra ) although their Lordships was considering different provision of section 40( a )( v ) but that does not make any difference as in the case of Mafatlal Gangabhai Co. (P.) Ltd. ( supra ). Their Lordships of Supreme Court considered meaning of expression "perquisite" as defined in sub-section (2) of section 17 and arrived at the same conclusion. 14.2 Their Lordships of Supreme Court further noted the difference between a payment by employer to the employee and a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit to the assessee under section 10( 10CC ) of the Income-tax Act held that the tax paid by the assessee was nothing but part of the salary and, therefore, it was to be assessed as such. It was also treated as a monetary payment. Shri Syali had rightly pointed out that no reasons were given as to why it is being treated as part of monetary payment. Important provisions and circular etc. were not brought to the notice of the Benches and, therefore, an incorrect view of the matter was taken in those cases. 15.1 The learned Departmental Representative also placed reliance on the decision of Hon ble Delhi High Court in the case of T.P.S. Scott v. CIT [1998] 232 ITR 475, wherein it is held as under on taxes paid by the employer on behalf of the employee : "We may refer to the relevant statutory provisions. Section 15 sets out the income which shall be chargeable to income-tax under the head Salaries . Vide clause ( b ) thereof any salary paid or allowed to an employee in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him is an income chargeable to tax under the head Salaries . For the purpose of section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ape 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, sections 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. 18. That in some of the cases, there is question of levy of interest under sections 234, 235 of the Income-tax Act. Parties a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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