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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 ..... 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 of any person, any income falling within a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 employer was obliged to pay taxes, on behalf of the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 held that cash payment by the employer was not a perquisite. In coming to above conclusion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islature 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 employee did not come within the scope of expenditure resulting directly or indirectly in the provision of any perquisite to an employee wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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] 135 ITR 19. In the Kerala High Court, Their Lordship had held as under : "The only question before us is whether despite the very clear indication by reason of the context of the provision in secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended 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 allowance could be treated as part of salary for purposes of calculation under section 40A(5) of the Income-tax Act. Their Lordships held as under : "There has been a catena of authorities which have taken the view that payment of cash allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 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 (Delhi), it was held by this court that reimbursement of medical expenses by paying cash to the employee was not a perquisite. This view was reiterated by this court in CIT v. Escorts Ltd. [1987] 59 CTR 284 and CIT v. Jay Engineering Works Ltd. [1990] 182 ITR 181. Apart from the aforesaid authorities including three decisions of this court, it is clear to us that payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 'whether convertible into money or not'. 7. Now, coming to section 40A(5), the position is no different. It would, however, be appropriate to point out the distinction between section 40(a)( v) and section 40A(5). We shall refer to the former provision as 'sub-clause' and the latter provision as 'sub-section'. The sub-section is wider in its scope and application than the sub-clause. Sub-clause (i) of clause (a) of sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (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 v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.), CIT v. Indokem Pvt. Ltd. [1981] 132 ITR 125 (Bom.), CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP), Instalment Supply Pvt. Ltd. v. CIT [1984] 149 ITR 457 (Delhi), CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad.) and CIT v. New India Industries Ltd. [1993] 201 ITR 208 (Guj.) Accordingly, the appeals are dismissed. No costs." [Emphasis supplied] 13.4 In the case of Frank Beaton v. CIT [1985] 156 ITR 16 (Delhi), the assessee a non-resident under an agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 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 (Delhi), another case relied by the Departmental Representative, the question before the Hon'ble Delhi High Court was whether debit balance in the account of the assessee who was Director of the company could be treated as a benefit liable to be taxed, in view of section 2(24)(iv). The Tribunal had held that value of benefit in the form of a debit balance in the accounts of the company was not a benefit which could be treated as income within the meaning of section 2(24)(iv) of Income-tax Act. On appeal, their Lordships relied upon the decision of Madras High Court in the case of CIT v. S.S.M. Lingappan [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payment by the employer to a Third party. A payment to a third party in respect of any obligation which but for such payment would have been payable by the employee would only be a perquisite in the hands of the employee. When it is a payment to a third party, how can it be treated as a monetary payment to the assessee. Shri M.S. Syali, the learned senior counsel for the assessee Interveners and Shri Tulsiyan, the learned counsel for the main petitioner here, were right in pointing out that clause 10(10CC) emphasizes on direct monetary payment to the employee to be excluded from the application of the provision. The payment of tax on behalf of the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein 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 15 vide section 17(1)(iv), perquisites are included in salary. Vide sub-clause (iv) of clause (2) of section 17 any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee, is included in 'perquisites'. The interpretation clause i.e., section 2 of the Act, vide sub-clause (iii) of clause (24) thereof, includes the value of any perquisite or profit in lieu of salary taxable under clauses (2) and ( 3) of section 17, within the meaning of 'income'. All these statutory provisions make it clear that an amount of tax which would have been payable by an employee-assessee, if paid by the employer on behalf of the assessee, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. 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 appearing before us conceded that this ground was consequential. We, therefore, direct the Assessing Officer to re-calculate taxes, if any, leviable under the above provision. 19. In some cases, there is ground challenging initiation of penalty proceedings under section 271(1)(c). The above ground was not pressed and is accordingly dismissed. 19.1 Before close we wish to thank Shri Syali, learned senior Advocate for the assessees as Interveners as also Shri Tulsiyan for assisting us. We also thank all the learned Departmental Representatives for their assistance and for their placing full case laws before us. 20. All the appeals of the assessees are allowed in terms stated above." 4. In view of the decision of the Special Bench in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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