By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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3) (2007) 109 ITD 141 (Delhi) (SB)
RBF Rig Corpn. LIC (RBFRC) v. ACIT
A.Y. 2004-05. Dated : 30-11-2007
Payment of tax by employer on behalf of employee is a
non-monetary perquisite and hence tax on such tax is not liable to be again
included in the total income of the employee by virtue of clause 10CC of S. 10.
For A.Y. 2004-05, the returns of income of non-resident
foreign national employees employed in India were filed by the employer as their
statutory agents. These employees were paid salary ‘net of taxes’ and the taxes
were borne by the employer company. Accordingly, the taxes borne by the employer
were added to the income of the employees and tax was calculated on the
grossed-up salary. However, the Assessing Officer held that the tax borne by the
employer was also a monetary perquisite and hence further tax on such tax should
also be added to the salary by multiple-stage grossing up process. The assessee
appealed to CIT(A), but without success.
In the following two cases, the Delhi Bench of the Tribunal
held that tax on tax borne by the employer was a monetary perquisite and hence
not exempt u/s.10(10CC) :
(1) B.J. Services Co. Middle East Ltd. v. ACIT, (IT
Appeal No. 4033 to 4053 of 2005)
(2) Western Geo International Ltd. v. ACIT, (2007)
16 SOT 459
In the circumstances, a Special Bench was constituted at the
request of the assessee and recommended by the Regular Bench to consider the
operation of S. 10(10CC) and to review the above decisions.
The Special Bench observed that :
(1) The Finance Act 2002 has inserted Clause 10CC in S. 10
to exempt tax on non-monetary perquisites paid by the employer on behalf of
the employees.
(2) The above clause overrides S. 200 of the Companies Act,
1956, which prohibits payment of tax-free salary by a Company.
(3) Combined reading of S. 10(10CC) along with other
consequential amendments by the Finance Act, 2002 like insertion of S.
192(1A), S. 40(a)(v), amendment of S. 195A, etc. suggests that the employer
has an option to pay the taxes on behalf of the employee. Once this option is
exercised by the employer, it is nothing but discharge of an obligation by the
employer, which but for such payment by the employer would have been payable
by the employee. Thus it is a perquisite fully covered by sub-clause (iv) of
clause (2) of S. 17.
(4) A payment by the employer to a third party on behalf of
the employee cannot be considered as a monetary payment to the employee. It
may be a monetary gain or monetary benefit or monetary allowance for the
employee, but it is definitely not a monetary payment to the employee.
(5) S. 10(10CC) excludes from its operation tax on direct
monetary payments to the employees. Tax paid to the Government is a payment to
a third party and hence cannot be excluded from the operation of S. 10(10CC).
Thus, taxes paid by employer on behalf of employees is a
non-monetary perquisite within the meaning of S. 17(2)(iv) and hence tax on such
tax is exempt u/s.10(10CC). Such taxes can be added in the salary of the
employees for the purpose of grossing up, but the tax on such tax can not be
again added for multiple-stage grossing up.
Case relied upon :
CIT v. Mafatlal Gangabhai & Co. (P) Ltd., (1966) 219 ITR 644 (SC)
