RBF Rig Corpn. LIC (RBFRC) v. ACIT (ITAT Delhi)
Section 10(10CC) of the Income-tax Act, 1961 – Perquisite, not provided by monetary payment – Assessment year 2004-05 – Whether payment of tax on behalf of employee at option of employer is a non-monetary perquisite fully covered by sub-clause (iv) of clause (2) of section 17 and, thus, exempt under section 10(10CC) and is not liable to be included in total income of employee – Held, yes – Whether taxes paid by employer can be added only once in salary of employee and thereafter, tax on such perquisite is not to be added again – Held, yes
After the introduction of clause (10CC) in section 10 with effect from 1-4-2003 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. However, Delhi Bench of the Tribunal in the case of B.J. Services Co. Middle East Ltd. did not accept the contention of the assessee and held that tax paid by the employer was part of salary and, therefore, tax on tax was not exempt and was liable to be added for computing total income of the assessee-employee.
Again in the case of Western Geo International Ltd.  16 SOT 459 decided by the Delhi Bench of the Tribunal vide order dated 5-1-2007, it was held that since the employer had made monetary payment in the shape of payment of employee’s taxes, the nature of perquisite should be considered as monetary only and, therefore, the assessee was not entitled to exemption under clause (10CC) of section 10.
In the circumstances, the assessee in the case of RBF Rig Corpn. (RBFRC) as agent of Alnasser Rahim (8 cases) approached the President of the Income-tax Appellate Tribunal (Appellate Tribunal) with request that the question of operation of provision of section 10(10CC) be referred to and considered by a larger Bench. The President referred the matter to a Regular Bench for considering and advising the President on the issue. The Regular Bench vide order dated 6-9-2007 recommended that Special Bench be constituted to consider the question and also to review the decisions of Delhi Benches in the cases of B.J. Services Co. Middle East Ltd. and Western Geo International Ltd. (supra). In the above circumstances, the Special Bench was constituted to consider the relevant question. Before the Special Bench, it was contended that the assessees were non-resident foreign nationals employed in India in the relevant assessment year 2004-05. They were employees of non-resident company treated as statutory agent of the assessees. Those employees, as per terms of their employment, were to be paid salary ‘net of taxes’ and taxes were to be borne by the employer company. Accordingly, in the returns of the employees filed by employer company in the representative capacity, tax borne by the employer on the salary paid was added as a perquisite and tax was calculated on the resultant figure. However, no further tax on tax was claimed to be payable in the light of provision of section 10(10CC). The Assessing Officer did not allow claim of the assessees. He held that tax borne by the employer was a monetary perquisite and, hence, further tax thereon should also be added to the salary by multiple stage grossing up process. The assessee impugned the action of the Assessing Officer in appeal before Commissioner (Appeals) but without any success.
HELD (PER SPECIAL BENCH)
From the changes introduced through the Finance Act, 2002, with effect from 1-4-2003, the Legislature 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 (10CC) 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’, 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 section 10(10CC). [Para 11.3]
Section 10(10CC) is applicable, if the following circumstances conjectively exist:
(1) The assessee is an employee (individual) deriving income in the nature of a perquisite; and
(2) The said perquisite is not provided by way of monetary payment within the meaning of clause (2) of section 17; and
(3) Taxes actually paid by employer at his option on behalf of employee on above perquisite is exempt and would not form part of the total income of the employee.
This would be notwithstanding anything contained in section 200 of the Companies Act. [Para 11.4]
Provision of section 200 of the Companies Act prohibits a company from paying tax-free salary to its officers or employees. If clause (10CC) of section 10 did not have anything to do with payment of remuneration free of tax, one would wonder why overriding effect was given to the clause by stating that clause would apply ‘notwithstanding anything contained in section 200 of the Companies Act’. Therefore, reference to section 200 of the Companies Act only supports the view that the clause was intended to exempt payment of taxes by the employer on the remuneration paid to the employee. [Para 11.5]
There is some controversy as to what is the meaning of ‘at the option of the employer on behalf of the employee’. The words ‘at the option of the employer’ only imply that the employer now has an option to pay the taxes on behalf of the employees. It is for the employer to decide whether taxes are to be paid by the employee or the employer. The clause is not applicable in cases taxes are paid by the employee who is otherwise obliged to pay it. When so paid, no perquisite, as far as employee is concerned, would be involved. This is more than clear from provision of section 192(1A) and section 195, and section 195A and from other consequent changes made through Finance Act, 2002 with effect from 1-4-2003. Sub-section (1A) to section 192 introduced through the same Finance Act, provides that the employer, ‘may pay at his option, tax on the whole or part of such income without making any deduction therefrom’. [Para 11.6]
In the case of CIT v. Mafatlal Gangabhai & Co. (P.) Ltd.  219 ITR 644/85 Taxman 381, the Supreme Court 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, it could not be treated as a monetary payment to the assessee. Clause (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 employee at the option of the employer can only be treated as discharge of an obligation of the employee which but for such payment would have been payable by the employee himself. It is a perquisite fully covered by sub-clause (iv) of clause (2) of section 17 and nothing else. [Para 14.2]
It is, therefore, reasonable to conclude that payment of taxes by the employer, on behalf of the employee, is a perquisite within the meaning of clause (2) of section 17. It cannot be a monetary payment to the assessee within the meaning of above clause which is intended to be excluded from application of clause 10(10CC). [Para 14.4]
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 which 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 cannot be excluded under section 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. Thus, the taxes paid by the employer on behalf of the employee is a perquisite within the meaning of section 17(2), 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. [Para 17.1]