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TMI Blog2013 (8) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... n sense that it is not funded as part of salary, but paid in discharge of obligation, of any sort, eir contractual or legal (tax) directly by employer, it should not be treated as a monetary benefit. reason for this is that Section 10 (10CC) is neutral about kind of benefit availed by employee - words in section contemplate a situation where assessee makes a payment (in cash) in respect of an obligation -obligation of employee - which would have been payable by employee if it is not paid by assessee. payment by assessee contemplated by these words is not evidently a payment to employee but to a third party, no doubt, on account of employee - Following decision of CIT v. Mysore Commercial Union Ltd. [1980 (7) TMI 86 - KARNATAKA High Court] and CIT v. Shriram Refrigeraiton industries Ltd. [1992 (5) TMI 15 - DELHI High Court] - Decided favour of assessee. Social security, pension and medical insurance contributions - Held that:- assessee does not, in any appeal, get a vested right at time of contribution to fund by employer. - amount standing to credit of pension fund account, social security or medical or health insurance would continue to remain invested till assessee becomes entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employer can be added only once in salary of employee - Held that:- whenever tax is deposited in respect of a non-monetary perquisite, provision of Section 10 (10CC) applies, thus excluding multiple stage grossing up. purpose and intent of introducing amendment to Section 10 (10CC) was to exclude element of income – which would have arisen otherwise, as a perquisite, and as part of salary. Once that stood excluded, and option was given to employer under Section 192 (1A) to honour agreement with employee, Parliament could not have intended its inclusion in any or form, even for purpose of deduction at source. Doing so would defeat intent behind Section 10 (10CC) - Decided in favour of assessee. Assessability of TDS refunds received by employee - Held that:- employer, in terms of its arrangement with employee, had to pay income-tax due on latter‘s income for services rendered. employer could not have paid to State any amount in excess of what was due as tax on salary. But, employer, mistakenly paid to State, excess amounts which were refunded, but instead, to assessee - amount was not paid to employee or due to him, from employer, according to terms of contract governing relationshi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates ORDER Mr. Justice S. Ravindra Bhat 1. This common judgment disposes a bunch of appeals in which the court had framed several questions of law. The important questions pertain to the applicability of Section 10 (10CC) of the Income Tax Act; others are whether mandatory social security and medical insurance or benefits paid in the country of the assessee, aretaxable. Apart from these, other questions too require consideration and answer. Question No. 1: Are amounts paid towards income tax by the employer on behalf of the assessee non-monetary perquisites, and do they consequently fall within the scope of Section 10 (10CC) of the Act. The present issue arises for consideration in ITA Nos. 1990/2010; 450/2012, 534/2010; 1556/2010; 1557/2010; 494/2010; 508/2010; 577/2010; 631/2010; 1912/2010; 528/2011; 212/2009; 15/2010; 408/2010; 528/2011; 351/2010; 635/2010; 1354/2010; 1561/2010; 1912/2010. Contentions of the revenue 2. This question arises in the above appeals preferred by the Revenue. The assessee in all the cases were recipients or beneficiaries of what can be termed as tax-free or tax paid income , i.e. the tax arising out of the income earned by them from their non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l have amended Section 17(2)(iv). Learned counsel emphasized that the matter could be looked at from yet another angle. Section 10(10CC) operated in an entirely different field in that it could be said to apply in those cases where the employer receives a benefit not through a monetary payment, but by way of reimbursement of the tax body. In other words, if the tax is actually included in the salary, paid to the employee, that would still amount to a monetary payment. Learned counsel highlighted that under the scheme of the Act, Section 17(2) was placed after Section 10(10CC). It has to be construed along with Sections 15 and 16. Section 15 highlights that whether a salary is paid or not, as long as it bear the character of salary due, it is deemed to be such. The only deductions permissible from this class of income are those provided under Section 16(2)(iii). Section 17(4) inclusively brings within the sweep of salary perquisites which is specifically defined under Section 17(2). 6. Learned counsel placed reliance upon the decision reported as Emil Webber v. Commissioner of Income Tax, V&M, Nagpur AIR 1993 SC 1466 (200 ITR 483) and that of Mysore High Court in Tokyo Shibaura Ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same should be paid without deduction for taxes or other charges assessed in India, which shall be assumed by REMCO. To put those words in the language of Somervell L.J. in Jaworski v. Institution of Polish Engineers in Great Britain Ltd. (1951) 1 KB 768, the remuneration is to be "x" plus "whatever sum is necessary to leave that available to me after you have borne the taxes." As under the law, the tax is suffered by deduction, it means such a sum as will after deduction leave "x". 16. Distinction between tax-free income and the "xx" income on which tax should be paid by the employer is well brought out in Simon's Income Tax, second edition, vol. 11, at page 710. This is what is stated therein: "Where remuneration is paid to an employee free of income tax or the employer pays his employee's income tax, the gross emoluments of the employee must be arrived at by adding the amount to the tax paid by the employer to the net payment. This was established by North British Rail Co. v. Scott,[1923] AC 37 where the company had contracted to bear the income tax in question and Hartland v. Diggines,[1926] AC 289 where there was no such contract, the arrangement being simply customary." 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in effect what the employee has received is the money paid into his hands plus the immunity, i.e. the immunity from paying the tax. The substance of the matter was that the salary paid to the employee is not all that he received. He had received, in addition, money's worth to the extent of the sum which was paid in respect of that salary to the revenue. With respect, we are in complete agreement with the view expressed in the said decisions and are of the view that the income-tax paid on behalf of the employee would be a part of the salary of the employee by the mere connotation of the expression "salary". There is also no reason why the tax so paid by the employer would not amount to an allowance even if it is held that it did not form part of his salary, and admittedly the said rule does not exclude from the definition of salary the allowance of the kind paid in the present case. For all these reasons, we are satisfied that Shri Munim is not entitled to succeed in his contention that the definition of the word "salary" contained in r. 3 does not include tax paid by the employer in the present case. We are fortified in the view we are taking by two decisions viz., one of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction from the income of the employee. 64.3 To bring into effect this new scheme, a new Clause (10CC) has been inserted in Section 10, to exempt the amount of tax actually paid by an employer, at his option, on the income in the nature of a perquisite, (not provided for by way of monetary payment) on behalf of an employee, from being included in perquisites. 64.4 Such tax paid by the employer shall not be treated as an allowable expenditure in the hands of the employer under Section 40 of the Income-tax Act, 1961. 64.5 The amendments will take effect from Ist April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. 64.6 Necessary changes in various provisions of Chapter-XVII relating to collection and recovery of taxes have been made to give effect to the new scheme. Amendment in Section 192 has also been made, so as to provide that an employer shall have an option to pay tax on behalf of an employee, without making any deduction from his income, on the income in the nature of perquisites, (not provided for by way of monetary payment). The employer shall, also continue to have the option to deduct the tax on whole or part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employer and provided to the employee -for his residence, - would be treated as a monetary perquisite. This would render Section 10 (10CC) a surplus age. That consequence cannot be adopted by the Court which should strive to give meaning to each provision. 16. It was submitted that the legislative history of Section 17 (2) (iv) read with Section 40A (5) and Section 40 (1) (a) (v) has to be taken into consideration in totality. Counsel submitted that what were excluded from deduction were payments made by the employer, but not the cash actually paid to the employee, which fell within the definition of perquisite and was therefore taxed in his hands, subjects to specified limits. However, such payments did not suffer taxation and were deductible as business expenditure. On the other hand if payments were made directly by the employer-assessee, those were non-deductible and were subject to taxation. This pattern was taken into consideration, by the corresponding change to Section 40 (a) (v) which rendered amounts paid by the employer towards income tax obligation (and covered under Section 10 (10CC)) non-deductible in the hands of the employer. Counsel relied on the decision reporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 40(c) (iii) which was applicable only to companies. That (Section 40(c)(iii)) was introduced by Finance Act, 1973 with effect from 1-4-1963, read as follows: "40. Amounts not deductible.-Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession'- (c) in the case of any company- (iii)any expenditure incurred after the 29th day of February, 1964, 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 company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date: Provided that in computing the aforesaid expenditure any payment by way of gratuity or the value of any travel concession or assistance referred to in clause (5) of Section 10 or passage moneys or the value of any free or concessional passage referred to in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r employee, or (ii)incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of an asset of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction:" The sub-section was amended later in certain respects and was omitted altogether by Direct Tax Laws (Amendment) Act, 1987 with effect from 1-4- 1989. 20. The real debate here is whether the tax paid - on behalf of the employee, by the employer is a perquisite and if it is not, whether it is to be excluded from the definition of income, by virtue of Section 10 (10CC). The latter provision operates, and applies in the following terms: (a) to an individual deriving income (b) in the nature of a perquisite, not provided for by way of monetary payment, (within the meaning of Clause (2) of Section 17) (c) (in respect of) the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. 22. Section 17 (2) outlines various perquisites, such as:- 1) Value of rent-free or concessional rent accommodation provided by the employer. 2) Value of any benefit/amenity granted free or at concessional rate to specified employees, etc. Specified employees are company directors, employees with substantial interest in the company and any other employee whose salary income exclusive of non-monetary benefits and amenities exceeds Rs. 50,000/-. 3) Any sum paid by employer in respect of an obligation, which was actually payable by the assessee. 4) Any sum payable by the employer, directly or through a fund for assurance on life of the employee or to effect contract for an annuity. However, sums payable to recognised provident funds or approved superannuation funds, and certain other specified funds are exempt. 5) Value of any other fringe benefit as prescribed (excluding fringe benefits subjected to the Fringe Benefit Tax). Besides rent-free or concessional rent accommodation, other perquisites taxable in the hands of the employee include provision of services of domestic employees, supply of amenities, for household consumption, free or concessional educational facilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-section (5) deals with "any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee". Sub-clause. (i) of Clause (c) of Sub-section (5) deals with "any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee". Sub-clause (i) of clause (c) of Sub-section (5) sets out the limits/ceilings on such expenditure while Clause (a) of Expln. 2 appended to the sub-section defines the expression "salary " for the purposes of this sub-section. These features were absent in Sub-clause (v) of Section 40(a). Now, coming to Sub-clause (ii) of Clause (a) of Sub-section (5) which corresponds to Section 40(a)(v) it uses only one expression "perquisite " as against Section 40(a) (v) which spoke of "benefit of amenity or perquisite, but this is no real distinction because the definition of "perquisite: in Clause (b) of Expln. (2) to the sub-section takes in both b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceilings are fixed in the case of such expenditure. The assessee's contention is that it has not incurred any expenditure by giving the loans to its employees at a concessional rate of interest and, therefore, the said provision has no application. On the other hand, learned standing counsel for the Revenue says that if this money had not been lent to the employees at a concessional rate of interest, it would have earned interest at a higher rate had it been put in fixed deposit in a bank. But, this argument involves importing a fiction into Sub-section (5) of Section 40A of the Act. We must assume that this money, if not lent to the employees, would have been put in a fixed deposit or would have been invested in some other profitable manner and then say that the difference amount should be disallowed. We do not think that the language of Sub-section (5) of Section 40A of the Act provides for or permits such a course. Sub-section (5) applies where an assessee claims a certain deduction saying that he has spent that money in providing, directly or indirectly, either as salary to an employee or in the provision of perquisite to an employee. Only then do the ceilings prescribed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ension and medical insurance contributions 26. This issue arises for consideration in ITA Nos. 441/2003; 761/2005; 798/2005; 800/2005; 379/2007; 1215/2008; 450/2010; 680/2007; 681/2007; 577/2010; 528/2011 and 370/2011 . 27. The revenue is in appeal on this score. In all the cases, the foreign employer had made contributions in compliance with legal requirements in the country of its incorporation, towards social security benefits of the employee. These employees were seconded to India to serve in the Indian subsidiary, or assist in the Indian operations of the foreign company. The revenue sought to bring to tax such social security contributions, contending that they were for the benefit of the employee, and vested in the latter. In all the cases before the Court, the revenue had unsuccessfully contended that the amounts paid by the employer to the social security funds- admittedly in accordance with the laws and regulations governing the country of its incorporation fell within the description of "sum payable by the employer, whether directly or through a fund, ….to effect, an assurance on the life of the assessee or to effect a contract for an annuity." It was also argue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey have to be paid. In this context, counsel relied on the meaning of "Annuity" in the Shorter Oxford Dictionary i.e., "an investment of money, entitling the investor to receive a series of equal annual payments, made up of both principal and interest". He contended that the Supreme Court referred to and relied upon the above definition of "annuity" given in the Oxford Dictionary. According to the Supreme Court, "an annuity is a certain sum of money payable yearly either as a personal obligation of the grantor or out of property". The hallmark of an annuity, is (1) it is money; (2) paid annually; and (3) in fixed sum. Counsel referred to a decision of the Supreme Court in CWT v. P.K. Banerjee [1980] 125 ITR 641. 30. The revenue thus argues that welfare insurance schemes and social security schemes to which the employers contribute on account of the employee, are nothing but an annuity. It also relies on Section 198 (4) of the Companies Act. Counsel submits that the decision of the Supreme Court in Commissioner Of Income-Tax v L. W. Russel AIR 1965 AIR SC 49 which was relied upon by the ITAT to hold in favour of the assesees in all these cases, cannot be considered binding in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the old Act. In this case, it was not held as an absolute proposition of law that sums payable by the employer to effect an insurance on the life of the assessee or to effect a contract for annuity can never be declared by the Legislature to form part of his income during the year it is spent. The provisions of Section 15 read with Sections 17(1)(iv) and 17(2) (v) of the Act are materially different from Section 7(1) of the old Act. The words and phrases which were the subject-matter of interpretation before the Supreme Court leading to the law laid down by them have not been retained by the Legislature in the relevant provisions of the Act as is clear from Sections 15 and 17 thereof. Section 15 of the Act now clearly provides that any salary which fictionally includes any sum payable by the employer to effect a contract for annuity allowed to the assessee though not due to him, shall also be chargeable to income-tax under the head "Salaries". Therefore, if the employer provided a certain amount to effect a contract for annuity for the benefit of the employee, then irrespective of the fact whether such benefit was due to the employee in the previous year or not, they will form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le by an assessee under the head "salaries" in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, 'or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, or are paid by or on behalf of................ a company..................... Explanation I- For the purpose of this section perquisite includes- (v) any sum payable by the employer, whether directly or through a fund to which the pro. visions of Chapters IX-A and IX-B do notapply, to effect an assurance on the life of the assessee or in respect 'of a contract of annuity on the life of the assessees." In L.W. Russel, the Supreme Court observed that: "Now let us look at the provisions of s. 7(1) of the Act in order to ascertain whether such a contingent right is hit by the said provisions. The material part of the section reads: - "Section 7(1)-The tax shall be payable by an assessee under the head "salaries" in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, 'or in addition to, any salary or wages, which are allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word "allowed" was introduced in the section by the Finance Act of 1955. The said expression in the legal terminology is equivalent to "fixed, taken into account, set apart, granted". It takes in perquisites given in cash or in kind or in money or money's worth and also amenities which are not convertible into money. It implies that a eight is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein. If that be the interpretation of s. 7(1) of the Act, it is. not possible to hold that the amounts paid by the Society to the Trustees to be administered by them in accordance with the rules framed under the Scheme are perquisites allowed to the respondent or due to him. Till he reaches the age of superannuation, the amounts vest in the Trustees and the beneficiary under the trust can be ascertained only on the happening of one or other of the contingencies provided for under the trust deed. On the happening of one contingency, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee himself did not want to take out the insurance. If the company had stopped paying the premium, the assessee would not have continued the same from year-to-year and, therefore, the contribution paid by the company to keep the policy alive could not be considered as a perquisite in the hands of the employee. 38. In the present case, the assessee does not acquire any vested right over the payment at the time of contribution. With regard to the insurance plans, the CIT(A) had held that the contributions are made to benefit the employer and to protect him from loss of employment, sickness, death, accident, etc. of the employee and that the policies themselves are contingent in nature, the benefit under' which would depend on whether the contingency takes place or not. 39. This court is of the opinion that the revenue's contentions are insubstantial and meritless. The assessee does not- in any appeal, get a vested right at the time of contribution to the fund by the employer. The amount standing to the credit of the pension fund account, social security or medical or health insurance would continue to remain invested till the assessee becomes entitled to receive it. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment was being introduced through the annuity. It was a colourable device adopted at the instance of the assessee, who is deemed to have derived a vested interest in the amount so contributed by the company. 41. As far as the submission with regard to change in the phraseology of the provision is concerned, the argument seems facially persuasive. However, like in the case of the present provision, which removes from the inclusive sweep of the term perquisite certain kinds of payments - into approved annuity funds, or schemes under the Employees Provident Fund Act, the previous provision (Section 7 (1) (v)) too excluded from the sweep of the definition of perquisite, amounts paid into schemes described under Schedules IXA and IXB. Contextually, the setting for the decision in L.W. Russel was no different from the provision in the present Act. The Supreme Court spelt out a wider and fundamental principle, i.e. when the amount does not result in a direct present benefit to the employee, who does not enjoy it, but assures him a future benefit, in the event of contingency, the payment made by the employer, does not vest in the employee. This Court is of the opinion that the new Act d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax component included in the salary which coincided with the income declared. The assessees had paid tax on the total amount (i.e the salary admissible and the tax component received), and entitled to reimbursement of tax of a portion of the excess amount; the balance was borne out of the salary income received by the assessees in India. The findings of the authorities below is that the assessee, in the computation had added a larger amount as income and deducted a portion of it from the income, when in fact the said smaller amount was not received from the employer but paid out of the salary amount received in India. Though the assessee had paid larger amount, as tax, yet they were entitled to reimbursement from the assesses, as the salary income had to be enhanced by a part of the amount (not the whole) paid as tax. 45. This court notices that the issue stands covered by a decision of the Bombay High Court Commissioner of Income Tax v Jaydev H. Raja [2012]211TAXMAN188(Bom). In Commissioner of Income Tax v Dr. Percy Batlivala (ITA 1308/2008, decided on 16th December, 2009) a Division Bench of the Court noted the concept of hypothetical tax as one where the employee of a multinati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monetary perquisite or a non-monetary perquisite. Whether it needs to go through the multiple stage grossing up process under Section 195A or is it eligible for exemption under Section 10 (10CC) of the Act applicable to non-monetary perquisites. The tax authorities were of the opinion that tax borne by the employer is a monetary perquisite and therefore further tax thereon should be added to the salary by a multiple stage grossing up process. Additionally, the tax on other perquisites are also sought to be grossed up. The relevant provisions are extracted below. "Salary. 192. (1) Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax 61[***] on the amount payable at the average rate of income-tax 62[***] computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. (1A) Without prejudice to the provisions contained in sub-section (1), the person responsible for paying any income in the nature of a perquisite which is not provided for by way of monetary payment, referred to in clause (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that whenever tax is deposited in respect of a non-monetary perquisite, the provision of Section 10 (10CC) applies, thus excluding multiple stage grossing up. The purpose and intent of introducing the amendment to Section 10 (10CC) was to exclude the element of income - which would have arisen otherwise, as a perquisite, and as part of salary. Once that stood excluded, and option was given to the employer under Section 192 (1A) to honour the agreement with the employee, Parliament could not have intended its inclusion in any other form, even for the purpose of deduction at source. Doing so would defeat the intent behind Section 10 (10CC). This court, therefore, answers the question in favour of the assessee and against the revenue. Question No. 6: Assessability of TDS refunds received by the employee 51. This question arises in the revenue's appeals, ITA 1912/2010 and ITA 731/2010. The assesses, non-residents, were, during the relevant period employed by foreign Companies and paid salary in foreign currency. They were also deputed to work in India for some time, during which they received various perquisites, including rent, household utilities, payment of domestic staff, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter's income for services rendered. The employer could not have paid to the State any amount in excess of what was due as tax on salary. But, the employer, mistakenly paid to the State, excess amounts which were refunded, but instead, to the assessee. 54. In this case, it is clear that the amount was not paid to the employee or due to him, from the employer, according to the terms of the contract governing the relationship. It was paid to the Government, over and above the tax due on the salary. It was not for benefit of the assessee. It never, therefore, bore the characteristic of salary or perquisite. Till assessment was made, the amount could not be refunded to the assessee. The revenue's position overlooks that all receipts are not taxable receipts. Before a receipt is brought to tax, the nature and character of the receipt in the hands of the recipient has to be considered. Every receipt or monetary advantage or benefit in the hands of its recipient is not taxable unless it is established to be due to him. If the amount is not due, the recipient- in this case, the employee is obliged to pay back the sum to the person, to whom it belongs. A perquisite or such amount, to be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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