S. TAKENAKA VS COMMISSIONER OF INCOME-TAX, 2000 PTD-KARNATAKA-HIGH-COURT-INDIA 2741 (1998)

Income-tax---

----Salary---Perquisites---Income-tax on salary paid by employer constitutes perquisites---Such income-tax must be grossed up for purposes of taxation-- Indian Income Tax Act, 1961, S.17.

Tax paid by the employer is a perquisite given to the employee which has to be added to the salary of the employee like other perquisites and then calculate the tax subject to any admissible deductions in law.

Tokyo Shibaura Electric Co. Ltd. v. CIT (1964) 52 ITR 283 (Mys.) applied.

Hartland v. Diggines (1926) AC 289 (HL) and North British Rail Co. v. Scott (1923) AC 37 (HL) ref.

G. Sarangan for S. Parthasarathi for the Assessee.

E. R. Indra Kumar for the Commissioner.

JUDGMENT

ASHOK BRAN, J.---The Income-tax Appellate Tribunal, Bangalore (thereinafter referred to as the Tribunal), has referred the following question of law alongwith the statement of the case to this Court for its opinion:

"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the income-tax paid by the employer on salary of the applicant has to be grossed up on 'tax on tax basis' and not on simple tax basis as envisaged under section 17(2) of tote Income-tax Act, 1961?"

The reference has been made at the instance of the assessee relating to the assessment year 1984-85. Shortly stated the fact are:

The assessee in this case is a foreigner who worked as a technical advisor to Yuken India, Ltd., Bangalore. As per the terms of his employment, he was to be paid a fixed amount of net salary and the tax component was to be borne by his employer. The employer paid income-tax of Rs.34,306 on behalf of the assessee. The Income-tax Officer framed the assessment and determined the taxable income at Rs.83,554. The Income-tax Officer made the calculations as under while determining the taxable income of the assessee:

Assessment Year 1984-85:

The Commissioner of Income-tax being of the opinion that the amount of Rs.34,306 paid by the employer of the assessee as income-tax on the salary paid to him should have been treated as perquisite and grossed up for the purpose of taxation. He proposed to revise the assessment order in exercise of his revisional power under section 263 of the Income-tax Act, 1961 (for short, "the Act"). In response to the notice issued, the assessee put in appearance and objected to the proposed order. The Commissioner, of Income-tax, overruling the objections raised by the assessee, held that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue on account of the omission on the part of the Income-tax Officer to treat the amount of tax paid by the -employer of the assessee as income-tax as a perquisite and his failure to gross up the salary for the purpose of taxation. He directed the Income-tax Officer to modify the assessment order made by him and to arrive at the correct income by taking into consideration the principle of grossing up the salary.

The assessee filed an appeal before the Tribunal. The Tribunal, after taking into consideration the submissions of the parties and relying upon the decision of the Mysore High Court to which this Court is the successor reported as Tokyo Shibaura Electric Co. Ltd. (by agents Radio and Electrical Mfg. Co. Ltd. Mysore) v. CIT (1964) 52 ITR 283, dismissed the appeal. The assessee thereafter filed an application under section 256(1) of the Act requesting the Tribunal or refer the questions of law arising from its order to this Court for its opinion. Acceding to the request of the assessee, the Tribunal referred the question of law reproduced in the earlier part of this judgment to this Court for its opinion.

It was conceded before the Tribunal as well as before us by the assessee that the amount of Rs.34,306 constituted perquisite received by the assessee. It is contended by counsel for the assessee that the amount of tax alone should be added to the amount of net salary received by the assessee. The assessee objected to the procedure of computing the gross salary on the basis of the principle of tax on tax. According to him, the assessee could not to made to pay tax on the net income arrived at after adding the amount of tax to the net income already arrived at by the Income-tax Officer, because, it would amount to levy of tax on the tax already paid by him.

We are unable to agree with ' the contentions raised by counsel for the assessee. We are concerned with determining the actual income of the assessee. As per agreement, the assessee received a sum of Rs.76,546 as his net salary to which the perquisites were to be added. His tax liability was to be determined after adding the value of the perquisites to the salary paid to him. As is clear from the order of the Income-tax Officer, the salary paid to the assessee from October 9, 1983, to March 31, 1984, was Rs.76,546 to which the value of perquisites such as house, furniture, profession tax, gas, water, electricity and servant allowances were added to arrive at the gross salary of Rs.89,554. After giving the benefit of standard deduction of Rs.6,000 under section 16 of the Act, the taxable income was arrived at Rs.83,554. It has been conceded before us that the amount of Rs.34,306 constituted the perquisite received by the assessee. In that case, the perquisite of tax has to be added to the gross salary of the assessee and then calculate the tax subject to any deductions admissible in law. The Income-tax Officer failed to add the perquisite of the tax borne by the employer in the salary of the assessee like other perquisites before arriving at the taxable income of the assessee.

The contention of counsel for the assessee that if the net taxable income is arrived at after adding the perquisite of the tax paid by the employer for the purpose of the taxation then, it would amount to tax on tax is fallacious. It is a fallacy to call it tax on tax. In fact and substance, tax paid by the employer is the perquisite given to the employee which has to be added to the salary of the employee like other, perquisites and then calculate the tax subject to any admissible deductions in law. In Tokyo Shibaura Electric Co. Ltd.'s case (1964) 52 ITR 283 the Mysore High Court to which this Court is a successor Court arrived at the same conclusion at which we have arrived but on different fact. In the said case, the judges have extracted with approval the following passage from Simon's Income -Tax, Second edition, volume II, at page 710 (page 289):

"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 (HL) where the company had contracted to bear the income-tax in question and Hartland v. Diggines (1926) AC 289 (HL), where there was no such contract, the arrangement being simply customary."

Respectfully following the view expressed in Tokyo Shibaura Electic Co. Ltd.'s case (1964) 52 ITR 283 (Mys) and the opinion expressed in Simon's Income Tax, we answer the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. The question is answered accordingly. No order as to costs.

M.B.A./4/FCQuestion answered.