Tax paid by employer on income of employee is entitled to exemption

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Tax paid by employer on income of employee is entitled to exemption

AIT News Network

NEW DELHI. Special Bench of ITAT vide a significant ruling AIT-2007-443–ITAT in favour of MNC employees; has ruled that 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.

The Special Bench was constituted u/s 255(3) of the Income-tax Act, 1961 on the recommendation of regular bench to dispose of the following issue:

"Whether, on the facts and in the circumstances of the case, tax paid by the employer on the income of the assessee is entitled to exemption u/s 10(10CC) of the Income-tax Act?"

T H E F A C T S:

After the introduction of clause (10CC) in section 10 w.e.f. 1A.2003 by the Finance Act, 2002, it was claimed by the assessee as an employee that where the employer has paid tax on the salary of the employee, the tax on such tax as perquisite is exempt under the above provision. In other words, it is not possible to have double grossing up. However, Delhi Bench of the Tribunal in the case of M/s B.J. Services Co. Middle East Ltd did not accept this contention of the assessee and held that tax paid by the employer was part of salary and, therefore, tax on tax is not exempt and is liable to be added for computing total income of the assessee employee.
Again in the case of M/s Western Geo International Ltd. & Ors. (ITA Nos 3120 to 3195/DeI/2006) decided by the Delhi Benches of the Tribunal vide order dated 5.1.2007, it was held that since the employer has made monetary payment in the shape of payment of employee's taxes, the nature of perquisite should be considered as monetary only. The assessee was held not entitled to exemption under clause (10CC) of section 10 of the Income-tax Act.

T H E R U L I N G:

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".
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".
taxes paid by employer on behalf of the employee were treated as a perquisite covered by sub-clause (iv) of clause (2) of section 17 of the Income-tax Act and, therefore, includible in the salary. There is no dispute that payment of taxes made by the employer on behalf of the employee is a perquisite and part of the income assessable under the head "salary" if clause 10(10CC) was not brought on the Statute Book. It is also a benefit or amenity enjoyed by the employee but it is not a monetary payment to the employee. It is a payment by the employer which discharges an obligation of the employee, which otherwise would have been discharged by the employee. Such payments of taxes, therefore, are fully covered by above sub clause (iv).
taxes paid on behalf of the assessee is a perquisite or a benefit, but not income from business. It could not be taxed except under clause (iv) of Section 28 which provided that a benefit or perquisite was liable to be charged to tax.
It is not money, which is paid to the assessee when taxes are paid on his behalf. It is discharge of his obligation. The payment fully fits in the jacket of sub-clause (iv) of section 17(2) of the Act. It may be a monetary gain or monetary benefit or a monetary allowance but definitely it is not a monetary payment to the assessee. What is excluded in the clause is the perquisite is in the shape 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 can not be excluded under clause 10(10CC). The circular of the Board and provision of sub-section (1A) of section 192, section 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. The question referred to us is answered in favour of the assessee. The appeals of the assesses and Interveners are allowed on this issue.

(Click here for full text of Ruling AIT-2007-443–ITAT)