Hypothetical tax – Not taxable as salary income

Background :-The Delhi High Court (CIT Vs. Dr. Percy Batlivala [ITA No. 13 08/2008]) has held that in respect of the expatriate employee sent on deputation to India, the amount of hypothetical tax representing the difference between the tax liability in the home country of the expatriate and in India should not be added to the salary income of such expatriate taxable in India.

Facts of the case

• Dr. Percy Batlivala (‘the employee’), a foreign national, was employed in the United States of America (USA). He was paid salary by his employer in the USA.
• The employee was deputed by his employer to India for a particular period.
• During the period of deputation, the employee was assured by his employer that the net amount of salary to be received by him after payment of taxes would be the same which he would have received in the USA.
• The difference between the tax amount (which the employee was paying in the USA) and the tax amount (which would have been payable in India) was treated as hypothetical tax (‘hypo tax’) by his employer.
• The hypo tax was not paid to the employee, thereby assuring him the net amount that he was to receive in the USA before sent on deputation to India.
• In the return of income filed in India, the employee claimed a deduction in respect of hypo tax from his salary offered to tax in India.

Issue before the High court :- Whether hypo tax can be allowed as deduction from the salary taxable in India?

Assessing officer’s decision :- The Assessing Officer disallowed the deduction claimed by the employee in respect of the hypo tax.

The Income-Tax Appellate Tribunal (ITAT’s) decision