1986-VIL-80-ITAT-

Equivalent Citation: ITD 020, 512,

Income Tax Appellate Tribunal BOMBAY

Date: 08.10.1986

EARL. W. TALLENT.

Vs

SECOND INCOME-TAX OFFICER.

BENCH

Member(s)  : K. S. VISHWANATHAN., R. L. SANGANI.

JUDGMENT

Per Shri K.S. Viswanathan, Accountant Member --- In this appeal by the assessee the question is whether the salary receivable by a non-resident in United States is taxable in India because for that period the assessee was in India.

2. The assessee is a resident of United States. On 24-11-1981 he entered into the services of an American company by name Fish International Engineers Inc. His employment was to start from 1-12-1981. He was recruited specially for a project in India in which Fish International Engineers Inc. was interested. The project in India is called ' Deepak Fertilisers '. The assessee was to proceed to India as an employee of the American company for work in the Indian project. He came to India on 1-12-1981. We are concerned with the financial year 1981-82 corresponding to the assessment year 1982-83. He was in India up to the end of the financial year. During this period, he was receiving the salary as per agreement with the American company in America only. In India, he was given accommodation in a hotel in Bombay from 2-12-1981 to 14-1-1982 and the expenses for the stay in the hotel amounted to Rs. 56,310. This amount was reimbursed by the Indian company Deepak Fertilisers and Petrochemicals Corpn. Ltd. which was referred to earlier as ' Deepak Fertilisers '. We may mention here that this company had entered into technical agreement with the American company and the assessee had been sent to India as part of that collaboration agreement. The hotel expenses of Rs. 56,310 was reimbursed by the Indian company to him as part of this collaboration agreement.

3. From 14-1-1981, the assessee was provided accommodation by the Indian company in its guest house and he was allowed a living allowance of Rs. 210 per day. The total living allowance paid to him amounted to Rs. 15,960.

4. Apart from these payments, he had also received from the Indian company Rs. 5,230 by way of reimbursement of various types of expenditure incurred by him like medical expenses, food, provision, conveyance and other miscellaneous expenses.

5. We may also mention here that as per the collaboration agreement between the Indian and the American companies, any tax liability in respect of the technicians sent by the American company was to be borne by the Indian company.

6. For the assessment year 1982-83, the assessee filed a nil return. However, the ITO brought to tax the entire salary received by him in America as well as the living expenses including the hotel bills and reimbursements and he also brought to tax a notional value of the entire free accommodation given to him in the Indian company's guest house. These totalled to Rs. 2,84,254. He also added the tax payable by the Indian company as per the collaboration agreement as it amounted to Rs. 1,64,725. Thus, he was assessed on a total income of Rs. 4,48,979. We may mention a word in explanation about the tax payable amounting to Rs. 1,64,724. It appears that after the contract period was over, the assessee had to leave India. In order to get the certificates which will enable him to do so the ITO suggested that the tax payable thereon may be deposited. The tax payable on a rough working made at the suggestion of the ITO was Rs. 1,64,725. This was paid by the Indian company. This has been taken by the ITO as part of the income.

7. Against the assessment, the assessee appealed to the Commissioner (Appeals). Before him, the assessee had relied on the decision of the Gujarat High Court in the case of CIT v. S.G. Pgnatak [1980] 124 ITR 391. The Commissioner pointed out that by the Finance Act, 1983 a retrospective amendment has been made and an Explanation has been inserted which states that if the salary income is payable for services rendered in India, it will be regarded as income earned in India. Therefore, the decision of the Gujarat High Court no longer was applicable. He upheld the inclusion of the salary paid abroad.

8. He next considered whether the payment of living expenses could be taxed. Here also reliance had been placed on the Gujarat High Court's decision. He pointed out that the reimbursement can be treated as profit in lieu of salary within the meaning of section 17(3) of the Income-tax Act, 1961 (' the Act '). This definition is very wide and it would cover all payments received by the assessee from his employer. He also relied on the decision of the Madras High Court in the case of CIT v. Jenkin Thomas [1975] 101 ITR 511. He further held that the living allowance is not exempt under section 10(14) of the Act. For this purpose, he relied on the Explanation to that section which effectively, according to him, denies the exemption for such allowances. The value of the notional income by way of rent-free accommodation was also found to be validly included.

9. Finally he considered whether the tax payable by the Indian company was income liable to tax in the hands of the assessee. Reliance had been placed on the fact that the tax was paid by the Indian company and that company was not the employer. However, the Commissioner relying on the Bombay High Court's decision in the case of Emil Webber v. CIT [1978] 114 ITR 515 held that such payment of taxes is also an income. In the result, he rejected the assessee's appeal.

10. The assessee is on further appeal before us. Shri Khare for the assessee first submitted that the salary receivable in United States as per service contract entered in United States does not accrue or arise in India under section 5(2) of the Act. It cannot be deemed to accrue or arise in India under section 9(1)(ii) of the Act either. He submitted that the decision of the Gujarat High Court in the case of S. G. Pgnatale was still good law. No doubt, the Finance Act, 1983 has introduced with retrospective effect an Explanation but he submitted that even if the Explanation is applicable, this amount cannot be brought to tax. Merely because the assessee rendered services in India, that income cannot be said to be earned in India. The Explanation, he submitted it might perhaps apply if he was specifically assigned to India. He submitted that his assignment was with the American company and it was part of his job that he came down to India. He submitted that the general law regarding the accrual of income by way of salary is the situs of the contract for services. That being in America, it cannot be said to have arisen in India.

11. With reference to the living allowance, he submitted that these were not income at all. The reimbursement has not come to his pocket. There was no contract at all between him and the Indian company. Therefore, it cannot be considered as income accruing to him. Assuming that it is income, he submitted that the provisions of section 10(14) would clearly be applicable. The Explanation to section 10(14) also will not be applicable because that Explanation can be invoiced only if the place where he ordinarily performed his duties, since he was employed by an American company, it cannot be said the India the place he ordinarily performed his duties. He further submitted that the Commissioner finding that section 17(3) would apply was not correct. Since there was no employer and employee relationship between him and the Indian company. With regard to the notional perquisite of free house, he relied on the same arguments as the living allowances.

12. Finally, with regard to the tax paid by the Indian company, he pointed out that this tax payment was after the accounting year was over. Therefore, it cannot be treated as income of this accounting year at least.

13. Shri Kamat, the senior departmental representative took us through the budgetary provisions explanations for the introduction of the Explanation to section 9(1)(ii). He submitted that the Gujarat High Court's decision had not laid down the correct law and in any case, it will no longer hold good after the amendment. He further submitted that the situs of the contract was not relevant at all because this was a case of deemed income. Situs of contract will be relevant only where there is no deeming provisions. With regard to the submission of Shri Khare that even if the assessee had not worked in India, he will be entitled to the salary, Shri Kamat referred to the employment agreement by which the assessee was specifically recruited for the purpose of serving in India. He further pointed out that the American company itself regarded the payment as foreign salary.

14. We have considered the submissions. The first issue will be decided is whether the salary payable by the American company and credited to the assessee's account in America is taxable in India. Shri Khare had placed a great reliance on the decision of the Gujarat High Court in the case of S. G. Pgnatale. There are no other High Courts' decisions on this point. Normally, we should have adopted the ratio laid down in that decision. However, as the Commissioner (Appeals) has pointed out the section has been amended by the Finance Act, 1983 with retrospective effect from 1-4-1979 and Explanation has been added. This Explanation reads as follows :

" Explanation : For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India ; "

In view of this amendment, it is necessary for us to see how far the decision of the Gujarat High Court is neutralised. Shri Khare had contended that the retrospective amendment and the insertion of the Explanation has misfired and has not, according to him, made any change in law. In order to appreciate his argument, we have to go in detail to the Gujarat High Court's decision. Their Lordships were trying to discover the meaning of expression ' earned in India ' used in section 9(1)(ii). They found that this expression has two meanings and this is brought out clearly in the Supreme Court's decision in E. D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27. One meaning is the narrower meaning in the sense of rendering services, etc., and the wider meaning in the sense of equating it with accrued and treating only that income as earned by the assessee to which the assessee has contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. After pointing out that there are two meanings, their Lordships proceeded to observe as follows :

" . . . Thus, the wider meaning of the word ' earned ' as indicating something which is due owning and entitlement to the sum of money consideration for which services have been rendered by an assessee, is a clear concept indicated by Corpus Juris Secundum. We may also indicate that the contract between the language used in clause (ii) and in clause (iii) of section 9(1) supports the distinction between the two meanings which the Supreme Court has pointed out. In clause (ii) the Legislature has referred to income which falls under the head ' Salaries ' if it is earned in India. In clause (iii) income chargeable under the head ' Salaries ' payable by the Government to a citizen of India for service outside India has been referred to. Therefore, if the Legislature wanted to indicate that the word ' earned ' in the context of salaries was to have the narrower meaning then it would have specifically said so by referring in clause (ii) to the rendering of services at a particular situs and in clause (iii) it is specifically said that the salaries covered by clause (iii) would be salaries payable by the Government to a citizen of India for services outside India. If the Legislature wanted that the word ' earned ' in clause (ii) of section 9(1) should have a narrower meaning, nothing would have been easier than to use the words. ' services in India ' or ' services rendered in India ', thus clearly indicating that out of the two meanings of the word ' earned ' it wanted the narrower meaning to be adopted . . . ."

On a perusal of this extract it would be seen that in the opinion of the High Court, the salary paid abroad to a non-resident would be taxable in India if they had used the words ' services in India ' or ' services rendered in India '. How we find it was the absence of such expressions in section 9(1)(ii) that led the High Court to hold that the salary was not taxable in India. Now this lacuna pointed out by the High Court has been made good ; by the insertion of the Explanation in the section. This Explanation extracted earlier uses the expression ' services rendered in India '. Thus, the lacuna having been made good the decision of the Gujarat High Court will no longer be applicable for the assessment year we are concerned with. We, therefore, hold that even applying the ratio laid down by the Gujarat High Court in the light of the subsequent amendment, the salary credited to the assessee in America would be taxable in India.

15. We next take the second issue, i.e., whether the amount reimbursed by the Indian company would be income taxable. Here also, the assessee's contention had been that the living allowance represented by the hotel bills would not be taxable on the basis of the Gujarat High Court's decision. In that case, the department attempted to bring such reimbursement as a perquisite. The High Court held that it was not a perquisite. The High Court had held that an allowance which depended upon the circumstances and changes from place to place would amount to a reimbursement rather than a personal advantage. It is because of this reason the High Court held that the expression ' perquisite ' would not cover reimbursement.

16. Now we have already pointed out that the expression ' salary earned in India ' is now enlarged by the insertion of the Explanation. The term ' salary ' found in section 9(1)(ii) is not referable to salary simplicitor. It would embrace salaries, perquisites and any payment in lieu of salaries. The section itself shows that income which falls under the head ' Salaries ' would be comprehended in this term. It would, therefore, unnecessary for us to point out whether reimbursement has to be taxed as salary or perquisite or profit in lieu of salary. It is certainly a receipt for the assessee since he has been reimbursed in cash. He is entitled to it because he has worked in India. Therefore, this is clearly a taxable receipt. Shri Khare had submitted that the reimbursement has not reached the pocket of the assessee and, therefore, it could not be an income. We are unable to accept this submission. Since it is a question of reimbursement, it would show that the assessee had earlier incurred the expenditure and reimbursement goes to fill-up the hole created by the initial expenditure. Neither are we concerned about the question whether the reimbursement is by the Indian company or the American company. So long as it is part of the salary and the assessee is rendering services in India only the Explanation would apply and it would be taxable.

17. This would take us to the question whether the daily allowance would be exempt under section 10(14). The Commissioner (Appeals) had held against the assessee relying on the Explanation to section 10(14). He had pointed out that the assessee was deputed for work in India and he had remained here from 1-12-1981 to 28-2-1983. During this period, the place of his duties or employment will be in India. As per the terms of his deputation, he was to be provided rent-free accommodation. Therefore, the place where he ordinarily resides was in India and the daily allowance granted to meet his personal expenditure at the place where the duties of his office were ordinarily performed. It would not be exempt under section 10(14). Now Explanation to section 10(14) takes away the exemption in respect of the special allowance or benefit which had been specifically granted to meet the expenses wholly, necessarily and exclusively incurred for the performance of duties of office. The Explanation will be effective if such an allowance was granted to meet his personal expenses at the place where the duties of his office are ordinarily performed. In reading section 10(14) together with the Explanation it would be seen that ordinarily the special allowance and benefits which had been granted to meet the expenses incurred while on duty will be exempt provided the duty is at a place other than the place where the assessee ordinarily performs his services. The Commissioner (Appeals) pointed out that the assessee was employed by the American company and deputed to India and, therefore, India was the place of his ordinarily duty place. To this extent, the Commissioner is right. But, the question is which place in India was the place where the assessee ordinarily performs his duties. If he was stationed at Bombay and he has to perform some duties outside Bombay at project site then the daily allowances given while at project site will not be considered as daily allowance given at the place of his duty. The same could be put vice versa also. If the duties were at the project site and he had come to Bombay in the course of his duties then the daily allowance would be eligible for exemption under section 10(14).

18. With this principle in mind we may look into the facts of the case. The assessee on his arrival was put up in a hotel in Bombay from 2-12-1981 to 14-1-1982. Since he was Construction Superintendent employed in the construction of the project, his ordinarily place of duty must be at the construction site. Therefore, when he was in Bombay, he was not in his place of duty. Therefore, he would be entitled to the exemption of the allowance. He had stayed in a hotel showed that he stayed there for a temporary period. This also re-enforces our finding that his place of duty was not Bombay.

19. After 14-1-1982, he seemed to have been accommodated in a guest house. In our opinion the reasoning in the above paragraph would apply to the expenditure in respect of the guest house also. We are unable to sustain the addition of Rs. 11,620 as the value of rent-free accommodation. Since he had been only in a guest house it cannot be equated with providing with rent-free accommodation.

20. This takes us to the last point of dispute, i.e., whether the tax paid by the Indian company could be considered as income. On this point, there could be no two opinions and it is concluded by the decision of the Bombay High Court in the case of Emil Webber. The Bombay High Court has held that the tax paid by the Indian company would be income assessable under the head ' Income from other sources '. We are also unable to accept the contention that since the tax was paid after the accounting year was over, it cannot be treated as the income of this year. What we have to see is the point of time when the right accrues in favour of the assessee. Now it is well settled that the liability to pay income-tax accrues and arises as soon as the income is earned. Therefore, Eo instante the right for reimbursement of the tax payable by the Indian company accrues or arises to the assessee. We would, therefore, uphold this part of the order also.

21. In the result, the appeal is partly allowed.

 

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