2007-VIL-322-ITAT-DEL

Equivalent Citation: ITD 109, 141, TTJ 113, 143, [2007] 109 ITD 141 (DELHI) (SB), [2008] 297 ITR (A. T.) 228 (ITAT [Del])

Income Tax Appellate Tribunal DELHI

IT APPEAL NOS. 1810 TO 1815 AND 1837 TO 1839 (DELHI) OF 2006

Date: 30.11.2007

RBF RIG CORPORATION LIC (RBFRC).

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, DEHRADUN.

BENCH

Member(s)  : VIMAL GANDHI., P. N. PARASHAR.

JUDGMENT

Per Vimal Gandhi, President.- The Special Bench has been constituted under section 255(3) of the Income-tax Act, 1961 on the recommendation of regular Bench to dispose of the following issue:

"Whether, on the facts and in the circumstances of the case, tax paid by the employer on the income of the assessee is entitled to exemption under section 10(10CC) of the Income-tax Act?"

The Special Bench constituted vide order dated 7-9-2007 is to dispose of entire appeal/appeals, referred to the Bench.

2. The facts leading to the constitution of Special Bench are that 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. In other words, it is not possible to have double grossing up. However, Delhi Bench of the Tribunal in the case of B.J. Services Co. Middle East Ltd. v. Asstt. CIT [IT Appeal Nos. 4033 to 4053 of 2005, dated 23-3-2007], did not accept this contention of the assessee and held that tax paid by the employer was part of salary and, therefore, tax on tax is not exempt and is liable to be added for computing total income of the assessee employee.

2.1 Again in the case of Western Geo International Ltd. v. Asstt. CIT [2007] 16 SOT 459 decided by the Delhi Benches of the Tribunal, it was held that since the employer has made monetary payment in the shape of payment of employee's taxes, the nature of perquisite should be considered as monetary only. The assessee was held not entitled to exemption under clause (10CC) of section 10 of the Income-tax Act. We shall refer to these decisions in detail hereinafter.

3. The assessee vide application dated 30-6-2007 in the case of REF Rig Corpn. LIC (RBFRC) v. Asstt. CIT [IT Appeal Nos. 1810 to 1815 of 2006, dated 30-11-2007] as agent of Alnasser Rahim and Others (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) of the Income-tax Act 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. The President also felt that the issue of application of section 10(10CC) was involved in large number of cases. Further several applications in support of constitution of Special Bench were received in other cases. In the above circumstances, the Special Bench was constituted to consider the question, referred to above.

3.1 The hearing of the Bench was accordingly fixed on 29-10-2007. Counsel for the parties as also for Interveners and learned Departmental Representatives have been heard. It was agreed by all the parties that question framed for reference is very wide, whereas controversy is whether the tax actually paid by the employer can be termed as "monetary payment" within the meaning of clause (2) of section 17 and, therefore, not covered by section 10(10CC) of the Income-tax Act. We agree and proceed to consider the above controversy.

4. Shri S.K. Tulsiyan, who appeared on behalf of RBF Rig Corpn. LIC (REFRC)case treated as agent of non-resident employee Alnasser Rahim and 8 others, in the main appeals, submitted taking Alnasser Rahim's case as a test case. He stated that facts in all other cases are identical.

4.1 Shri Tulsiyan submitted that the taxpayer appellants are non-resident foreign nationals employed in India in the relevant assessment year 2004-05. They were employees of non-resident REF Rig Corpn. LIC (REFRC) case treated as statutory agent of the assessee. RBFRC itself was engaged in the business of providing services and facilities in the field of exploration and extraction of oil in India. These 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. He pointed out that copy of Expatriate Second Agreement at page 2 of the paper book specifically provides that taxes on salary were to be borne by the employer. 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) of the Income-tax Act. The employer company also paid tax collected in terms of provisions of section 192(1A) of the Income-tax Act (hereinafter referred to as the Act) which did not include tax on tax.

5. The Assessing Officer did not allow claim of the assessee taxpayers. He held that tax borne by the employer was a monetary perquisite, hence further tax thereon should also be added to the salary by multiple stage grossing up process. In other words he wanted tax on tax to be added to salary. It was the contention of the Assessing Officer that since as per terms of employment, tax has to be borne by the employer, all taxes calculated by multiple stage grossing up are to be borne by the employer resulting into further tax perquisite. He referred to provisions of sections 192, 198, 195A to deny claim of the assessee that no tax was payable on the taxes paid by the employer to the Government which was a non-monetary perquisite. The Assessing Officer reproduced provisions of section 10(10CC), sub-section (1A) of sections 192 and 195A of the Income-tax Act to hold that tax liability in respect of expatriate employees borne by the corporate, is required to be grossed up. This way tax perquisite was added in the income of the assessee. On the same line, addition has been made in all other cases.

6. The assessee impugned the action of the Assessing Officer in appeal before CIT (Appeals) but without any success. The learned CIT (Appeals) held that on facts of the case, multiple stages grossing up as done by the Assessing Officer while working out the tax liability was valid with reference to section 10(10CC). He held that tax paid was a monetary perquisite and hence not exempt under section 10(10CC) of the Income-tax Act. For his above view, the learned CIT (Appeals) placed reliance on the following judgments:

(i) Frank Beaton v. CIT [1985] 156 ITR 16 (Delhi),

(ii) CIT v. H.D. Dennis [1982] 135 ITR 1 (Bom.), and

(iii) T.P.S. Scott v. CIT [1998] 232 ITR 475 (Delhi).

6.1 Before the learned CIT (Appeals), appellant had placed reliance on the judgment of Uttaranchal High Court in the case of CIT v. ONGC [2003] 264 ITR 340 to support that multiple grossing for tax calculation was not justified. The learned CIT (Appeals) held that above decision was distinguishable and not applicable to the facts of the case.

6.2 Similar orders have been passed in other cases and exemption claimed by the assessees as a perquisite in the shape of tax paid by the employer to the Government under section 10(10CC) has been denied to all the assessees. Being aggrieved, the assessees are before the Special Bench.

6.3 Shri S.K. Tulsiyan, learned counsel for the assessee submitted that view taken by the learned revenue authorities in these cases and earlier view taken by two Delhi Benches are not legally correct. In the three decisions of High Courts, noted and cited above, the question involved was limited one and the same was whether the taxes of the employees borne by the employer were perquisite. High Courts did not consider the question whether perquisite was a monetary payment or it was a non-monetary perquisite. He further submitted that Hon'ble High Courts did not hold that tax paid by the employer should be subjected to multiple stages grossing. Shri Tulsiyan referred to three decisions as under:

4.2-1 Frank Beaton v. CIT [1985] 156 ITR 16 (Delhi). In this case, Frank Beaton was an employee of M/s. Qantas Airways Ltd., an Australian company. During his employment, he was to be paid tax-free salary and rent-free accommodation. During assessment year 1971-72, his salary was Rs. 73,712 and rent-free accommodation in the form of a house rented as Rs. 2,400 per month. During the assessment year 1972-73, he received salary of Rs. 39,072 and corresponding accommodation for a shorter period. The ITO calculated the tax liability on multiple-stage grossing up process entailing huge liability on the employer. The CIT(A) also confirmed the order of ITO. A writ petition was filed by the employer seeking refund of excess tax paid over single-stage tax by the employer. It is required to be noted that at the relevant time, sections 10(10CC) and 192(1A) had not come into operation and hence, the question of determining whether the 'perquisite' by way of tax payment by the company on behalf of the employee was of 'monetary' or non-monetary nature, was not the subject-matter of decision of the court.

4.2-2 The Hon'ble Court took note of the method of calculation by the ITO and both the Hon'ble Judges passed separate orders and held that whether tax paid by employer is perquisite or not depends on terms of the agreement as to whether the employer has agreed to pay tax-free salary. Thereafter, on the facts of the case, both the judges held that tax paid by the employer is perquisite but disapproved of the method of calculation adopted by the ITO. The orders of lower authorities were quashed and refund was granted. Therefore, if the above proposition is applied to the facts of the present appellants, the theory of multi-stage grossing is liable to be rejected.

4.3 CIT v. H.D. Dennis [1982] 135 ITR 1: In this case, the employee's case was reopened to include tax paid by the employer in salary for determining the value of rent-free accommodation. In this case, it was held that tax paid by the employer is 'perquisite' by virtue of section 17(2)(iv) but reopening proceeding was quashed on a different footing. In this case also, neither it was held that tax paid by the employer is monetary perquisite nor that the tax liability should be determined by multiple-stage grossing up process. Therefore, reliance on this judgment was also misplaced.

4.4 Shri Tulsiyan also referred to the case of T.P.S. Scott v. CIT [1998] 232 ITR 475 (Delhi). We shall consider the said case at the appropriate stage hereinafter.

6.4 In the background of above decisions, Shri Tulsiyan drew our attention to provision of clause (10CC) of section 10 introduced in the Statute by Finance Act, 2002 with effect from 1-4-2003:

"10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-

(10CC) in the case of an employee being an individual deriving income in the nature of a perquisite, not provided for by way of monetary payment, within the meaning of clause (2) of section 17, the tax on such income actually paid by his employer, at the option of the employer, on behalf of such employee, notwithstanding anything contained in section 200 of the Companies Act, 1956 (1 of 1956)."

He, thereafter, drew our attention to provision of section 17(2) defining 'perquisite' in an inclusive definition, setting out different types of benefits which are treated as perquisites and added to salary income of the assessee. He specifically drew our attention to clause (iv), which according to him is most important and would clinch the issue. The said clause is as under:

"(iv) any sum paid by the employer in respect of any obligation which but for such payment, would have been payable by the assessee."

6.5 Shri Tulsiyan further pointed out that neither monetary nor non-monetary perquisites are defined in the Act. Therefore, we are to understand the meaning, purpose and intention of clause (10CC) of section 10 through phraseology it has used and the intention with which it was introduced. Shri Tulsiyan thereafter drew our attention to Memorandum explaining provisions introduced in Finance Bill, 2002 with reference to new clause 10(10CC). The heading and other relevant provisions are as under:

"Scheme for taxation of perquisites simplified with employer given option to pay tax on behalf of employees"

"64.1 Under the existing provisions of section 192 of the Income-tax Act, 1961, an employer is required to deduct tax at source on income under the head "salaries", inclusive of the value of perquisites. In case, such tax is paid by an employer on behalf of an employee, the same being in the nature of an obligation which, but for such payment, would have been payable by the employee, is considered a perquisite, and is chargeable to tax.

64.2 The Finance Act, 2002 provides for a new scheme of taxation of perquisites, wherein an employer has been given an option to pay tax on the whole or part-value of perquisite (not provided for by way of monetary payments), on behalf of an employee, without making any deduction from the income of the employee.

64.3 To bring into effect this new scheme, a new clause (10CC) has been inserted in section 10, to exempt the amount of tax actually paid by an employer, at his option, on the income in the nature of a perquisite (not provided for by way of monetary payment) on behalf of an employee, from being included in perquisites.

64.4 Such tax paid by the employer shall not be treated as an allowable expenditure in the hands of the employer under section 40 of the Income-tax Act, 1961.

64.5 The amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years.

64.6 Necessary changes in various provisions of Chapter XVII relating to collection and recovery of taxes have been made to give effect to the new scheme. Amendment in section 192 has also been made, so as to provide that an employer shall have an option to pay tax on behalf of an employee, without making any deduction from his income, on the income in the nature of perquisites (not provided for by way of monetary payment). The employer shall also continue to have the option to deduct the tax on whole or part of such income."

6.6 Shri Tulsiyan emphasized that consequent changes were made in sections 195A, 198, 199, 200 and 203 which are highlighted in the above Memorandum. All the above amendments will take effect from 1-6-2002.

6.7 Shri Tulsiyan again drew our attention to provisions of section 10(10CC) and emphasized that important words and expression used and required consideration by the Special Bench are as to what is the interpretation of expression "a perquisite, not provided for by way of monetary payment". Further words required to be understood are "provided for by way of". In his view payment of tax by employer on behalf of the employee is a perquisite. The controversy is whether it is in the shape of monetary payment to the employee. According to Shri Tulsiyan the expression "provided for" means to make something ready or to do something necessary for a benefit. Shri Tulsiyan gave examples that you make provision for family or your staff or children and so on and, therefore, it will be stated that family or staff is provided for. Likewise under section 10(10CC) the monetary payment should be provided for the employees. It should be employee who is provided for by way of monetary payment within the meaning of clause (2) of section 17. It should be actual money payment to the employee and not money's worth. In other words if some monetary benefit is directly or indirectly received by the assessee which has money's worth, the same is not a monetary payment. It was further submitted that the distinction between a provision by way of monetary payment and other provision not by way of monetary payment has to be seen and kept in view. The provision under consideration only excludes from exemption "perquisites" involving payment of money directly to the employees for a specific amenity or benefit. The Legislature wanted to exempt non-monetary perquisites allowed to the employee by the employer under the provision.

6.8 Shri Tulsiyan further submitted that provision of section 10(10CC) when read with related provision in which simultaneous amendment was made by the Legislature, it would be clear that stand taken by the Revenue in the present appeal is incongruous. He pointed out that there is no loss to the Revenue if there is a single grossing. He further drew our attention to the following observations of Justice Ranganathan (as His Lordship then was), in the case of Frank Beaton, disapproving the multi-stage grossing up:

"No businessman would enter into such an un-remunerative bargain, which benefits neither party to the contract and merely results in the purposeless payment of astronomical sums. No employee may be worth being retained at such heavy cost to the employer. Such an absurd construction of a contract of employment should be avoided."

6.9 Shri Tulsiyan drew our attention to the decision of Uttranchal High Court in the case of CIT v. ONGC [2003] 264 ITR 340 wherein the Court held as under:

"The main point which we are required to decide is whether the concept of multiple stage grossing up of income is applicable to the deemed profits derived by the NRC under section 44BB of the Act whether concept can be applied by the department to compute income falling under section 44BB of the Income-tax Act. It was argued by the department in case of tax protected contracts, section 195A was attracted and therefore, department was entitled to compute the deemed profits derived by the NRC by applying the method of multiple stage grossing up of the income. We do not find any merit in this argument of the department. Firstly, as stated above, section 44B is a complete code by itself. It is charging section as far as income of the NRC is concerned from oil exploration. It deals with computation of deemed profits. Secondly, section 195A comes under Chapter XVII which deals with collection and recovery of tax whereas section 44BB comes under Chapter IV which deals with computation of business income. Therefore, section 195A shall not assist department in applying the concept of multiple stage grossing up of the income to the profits derived by the NRC from oil exploration falling under section 44BB of the Act. In this case, assessee has computed its income by taking into account benefit which it has received on account of ONGC paying tax on its behalf Dispute is with regard to value of benefit. Whether one takes contract to be protected contract or not protected contract, in both cases, value of benefit remains constant. Lastly, we may point out that section 195A has no application. It is not a charging section. It provides for recovery of tax. It provides for tax deduction at source. The fact that tax at source is deductible under section 195A from the sum payable does not mean that the contractor is assessable for that receipt, for example, in cases where contractor has carried forward losses or in case where the contractor suffers losses from other contracts, which are liable to be set off. Therefore, mechanism for recovery of tax mentioned under section 195A will not make the receipt chargeable to tax."

Shri Tulsiyan submitted that the decision clearly in favour of the assessee, has been wrongly held to be distinguishable by the revenue authorities.

6.10 Shri Tulsiyan then drew our attention to the following expression in section 10(10CC), "notwithstanding anything contained in section 200 of the Companies Act, 1956." He argued that sub-section (1) of section 200 of the Companies Act prohibits the company from payment of tax free remuneration to its employee and is as under:

"Prohibition of tax-free payments.

200(1) No company shall pay to any officer or employee thereof, whether in his capacity as such or otherwise, remuneration free of any tax, or otherwise calculated by reference to, or varying with, any tax payable by him, or the rate or standard rate of any such tax, or the amount thereof.

Explanation.- In this sub-section, the expression "tax" comprises any kind of income-tax including super-tax."

The aforesaid section prohibits the company from making tax-free payment of remuneration to its employees but provision of section 10(10CC) overrides this section. It is, therefore, clear that the two sections have close link and that provision of section 10(10CC) is intended to permit payment of remuneration free of taxes to the employees, the liability being borne by the employer. Other amendment introduced in the Act also clearly indicate that Legislature intended to exempt tax on tax paid by the employer on the remuneration of the employees. The Hon'ble Finance Minister in his Budget Speech delivered on 28-2-2002 specifically stated that he intended to exempt from taxation perquisites upto value of Rs. 1 lakh in assessment year 2002-03. In subsequent years, he wanted to give option to the employer to pay tax on perquisites on behalf of the employees. Hon'ble Finance Minister had stated as under:

"I propose to provide that no perquisites will be assessed for the assessment year 2002-03 in the case of employees whose taxable salary, excluding perquisites is up to Rs. 1,00,000. For subsequent years, I propose to give an option to the employer to pay the tax on perquisites on behalf of the employees."

It is, therefore, clear from above that option to the employer to pay tax on the perquisites received by the employee was to be treated as exempt. Otherwise, there was no need to make above statement about changes.

6.11 Shri Tulsiyan also drew our attention to para 64.1 in the Memorandum Explaining Provisions in the Finance Bill, 2002:

"64.1 Under the existing provisions of section 192 of the Income-tax Act, 1961, an employer is required to deduct tax at source on income under the head 'Salaries', inclusive of the value of perquisites. In case, such tax is paid by an employer on behalf of an employee, the same being in the nature of an obligation which, but for such payment, would have been payable by the employee, is considered a perquisite, and is chargeable to tax."

6.12 It was submitted by Shri Tulsiyan that aforesaid statement in the Memorandum clinches the issue. When tax is paid by an employer on behalf of an employee, it is not considered a monetary payment to the employee but a perquisite being in the nature of an obligation which but for such payment would have been payable by the employee. Hence it is a non-monetary perquisite. Shri Tulsiyan further drew our attention to provision of section 40(a)(v) which prohibits deduction of any tax actually paid by an employer referred to in clause (10CC) of section 10. Shri Tulsiyan then made a detailed reference to the decisions of Tribunal in the cases of B.J. Services Co. Middle East Ltd. and Western Geo International Ltd. and explained that aforesaid decisions were wrongly decided by the Benches.

6.13 Shri Tulsiyan ultimately submitted as under in support of his arguments that perquisite in the shape of payment of taxes by the employer was exempt in the hands of the employee under section 10(10CC) of the Income-tax Act. Shri Tulsiyan further submitted as under:

"8.4 It is submitted in humility and with respect that the above view of the Hon'ble ITAT, Delhi Bench requires to be reviewed by the Special Bench. If the above view of the Hon'ble Tribunal is accepted then there would virtually be no case of non-monetary perquisite. Even when house is taken on rent by an employer and provided to his employee free of cost or at a concessional rent that would also be a case of monetary perquisite. Even in respect of a residential quarter belonging to the employer and provided to the employee for his residence, since the employer had made cash payments sometime or the other that would also be treated as a case of monetary perquisite. Such an interpretation would virtually make the provisions of section 10(10CC) otiose, which cannot be the intention of the legislature. As discussed earlier, since for any benefit being obtained by the employee from the employer, there has got to be some monetary expense involved on the part of the employer, there would hardly be any case of "perquisite, not provided for by way of monetary payment", and the clause (10CC) would become redundant Interpretation of any provision of law is required to be made ut res magis valeat quam pereat i.e. the interpretation should be so done to make it effective rather than making it redundant."

7. Shri M.S. Syali, the learned senior advocate, appearing in ITA Nos. 4154 and 4155/Delhi/07 and in cases detailed above, adopted arguments of Shri S.K. Tulsiyan and stated that there was no use in repeating all of them. He, however, read out two decisions of the Appellate Tribunal in the case of B.J. Services Co. Middle East Ltd. and in the case of Western Geo International Ltd. With reference to the first, he pointed out that the question raised was whether multiple grossing up adopted by the revenue in that case was reasonable. The Bench, after considering decision of Uttaranchal High Court in the case of ONGC, Bombay High Court in the case of H.D. Dennis and of Delhi High Court in the case of Frank Beaton held that as employer company was to bear Income-tax relating to work in India, the tax paid was nothing but salary and it was a mandatory payment. There is very brief reference in para 7.5 of the order to section 10(10CC) of Income-tax Act. There is no discussion of the provision, its object and intention and the language of the section has nowhere been considered. Shri Syali accordingly submitted that it was a decision given sub silentio and, therefore, not a binding precedent. In this connection, Shri Syali drew our attention to decision of Supreme Court in the case of Municipal Corporation of Delhi v. Gurnam Kaur [1989] 1 SCC 101 where their Lordships of Supreme Court quoted Prof. P.J. Fitzgerald, editor of the Salmond on Jurisprudence, 12th edn. Explaining the concept of sub silentio as under:

"A decision passes sub silentio, in the technical sense that has come to be attached to that phrase, when the particular point of law involved in the decision is not perceived by the court or present to its mind. The court may consciously decide in favour of one party because of point A, which it considers and pronounces upon. It may be shown, however, that logically the court should not have decided in favour of the particular party unless it also decided B in his favour; but point B was not argued or considered by the court. In such circumstances, although point B was logically involved in the facts and although the case had a specific outcome, the decision is not an authority on point B. Point B is said to pass sub silentio."

7.1 Thereafter their Lordships laid down the principle as under:

"41. Does this principle extend and apply to a conclusion of law, which was neither raised nor preceded by any consideration. In other words can such conclusions be considered as declaration of law? Here again the English courts and jurists have carved out an exception to the rule of precedents. It has been explained as rule of sub-silentio. "A decision passes sub-silentio, in the technical sense that has come to be attached to that phrase, when the particular point of law involved in the decision is not perceived by the court or present to its mind." In Lancaster Motor Company (London) Ltd. v. Bremith Ltd. 13 the Court did not feel bound by earlier decision as it was rendered 'without any argument, without reference to the crucial words of the rule and without any citation of the authority'. It was approved by this Court in Municipal Corporation of Delhi v. Gurnam Kaur 14. The Bench held that, 'precedents sub-silentio and without argument are of no moment'. The courts thus have taken recourse to this principle for relieving from injustice perpetrated by unjust precedents. A decision which is not express and is not founded on reasons nor it proceeds on consideration of issue cannot be deemed to be a law declared to have a binding effect as is contemplated by Article 141. Uniformity and consistency are core of judicial discipline. But that which escapes in the judgment without any occasion is not ratio decidendi. In B. Shama Rao v. Union Territory of Pondicherry 15 it was observed, 'it is trite to say that a decision is binding not because of its conclusions but in regard to its ratio and the principles, laid down therein'. Any declaration or conclusion arrived without application of mind or preceded without any reason cannot be deemed to be declaration of law or authority of a general nature binding as a precedent. Restraint in dissenting or overruling is for sake of stability and uniformity but rigidity beyond reasonable limits is inimical to the growth of law."

7.2 Referring to the other case of Western Geo International Ltd. decided by ITAT 'C' Bench, New Delhi Shri Syali admitted that in that case, provisions of section 10(10CC) were referred to by the Bench which also considered provisions of section 192(1A) but the Court was influenced by the decision in the case of B.J. Services Co. Middle East Ltd., referred to above and treated tax liability of assessee as nothing but salary. The Bench in para 4 framed the issue for their consideration as under:

"The issue raised before us relates to computation of taxable salary in case of employees who have been provided with net of tax salary by the employer."

The Bench further recorded as under:

"It is also not in dispute that in cases where 'net of tax salary' is payable by the employer, the taxable salary has to be determined after multi-stage grossing up as explained in para 2.1 of this order."

The Bench rejected the contention of the assessee that tax on tax is exempt in the hands of employee by observing, "there is no case for multi-stage grossing up and taxable salary in these cases will be net salary paid by the employer plus the tax payable on that salary which has already been declared by the assessees." The Hon'ble Bench rejected the contention of the assessee with the following observations:

"A careful perusal of the provisions of section 10(10CC) reproduced in para 2.2 of this order earlier shows that there are three basic ingredients which are required to be satisfied in order to make the section applicable. These ingredients are: (i) the payment should be a perquisite within the meaning of section 17(2); (ii) it should not have been provided for by way of monetary payment; (iii) it should have been paid by the employer. There is no dispute that tax paid by the employer on behalf of the employees is a perquisite. It is also not in dispute that tax is payable and has been paid by the employer. The third ingredient is that it should not have been provided for by way of monetary payment. There is no doubt the tax paid by the employer to the Government is in monetary terms. The provision nowhere states that the perquisite should be paid to the employees directly. It only says that it should not have been provided for by way of monetary payment. Such monetary payments could be made to the employee directly or to some other party in discharge of the obligation of the assessee. The emphasis is on monetary payment. Therefore, in our opinion, the tax paid by the employer on behalf of the employees is definitely a perquisite provided for by way of monetary payment and, therefore, the provisions of section 10(10CC) will not be applicable. The same view has been taken by another bench of the Tribunal in case of B.J. Services Co. Middle East Ltd. though for different reasons."

7.3 The learned senior advocate further submitted that no reason has been given why taxes are being treated as a monetary payment. It is further not considered that to exclude from application of provisions of section 10(10CC) of the Act, the monetary payment should have actually been made to the assessee and not to a third party. Shri Syali placed before us copy of Synopsis which according to him were filed but not considered by the Bench, in arriving at an erroneous view. Shri Syali drew our attention to Circular No. 8 of 2002 issued by the Central Board of Direct Taxes where reference has been made to para 64 already reproduced above. He once again read out and analysed section 10(10CC) and submitted that section envisages as under:

(a) A perquisite provided by way of a non-monetary payment; and

(b) Falling with the meaning of section 17(2); and

(c) And on which tax has actually been paid by employer.

Shri Syali stated that core question is whether payment of tax is a perquisite, "not provided by way of monetary payment". The above expression is not defined in the Act and, therefore, it will be opposite to look to dictionary meaning and how it is understood in common parlance. The word, "monetary" has its genesis in the word 'money' and, therefore, Shri Syali brought to our notice definition of "money" in Webster Illustrated Contemporary Dictionary. With reference to meaning of word 'monetary' and expression 'provided by way of' in clause 10(10CC), Shri Syali submitted as under:

"'Of or pertaining to currency or coinage or of pertaining to money'. To appreciate the amplitude of the provisions of section 10(10CC) it is apposite to also take note of the words 'provided' and 'by way of' preceding the word monetary and payment following kit. The word provide means to supply; furnish; to afford; stipulate to make ready for future use. The expression 'by way of' is defined in Words and Phrases Permanent edition at page 844 as under:

"phrase "by way of" is idiomatic, and perhaps may be difficult of rendition into exact phraseology, but may be taken to mean "as for the purpose of", "in character of", "as being", and was so intended to be construed in an act providing that certain companies should pay an amount tax, for the use of the state, "by way of" a license for their corporate franchise. Jersey City Gas light Co. v. United Cas Imp. Co. C.C.N.J., 46 F. 264, 206"

The word 'payment' means as per Chambers Dictionary:-

"The act of paying; something that is paid."

In Law Lexicon by PR Aiyar the word payment is explained thus.

"A payment is defined to be the performance of an obligation for the delivery of money."

"Payment is defined to be the act of paying, or that is paid."

"In regal contemplation, payment is the discharge of an obligation by the delivery of money."

7.4 Having regard to above meaning of expression and word in section 10(10CC), Shri Syali submitted that only perquisite excluded is where actual payment of money is made by the employer as per terms of agreement to the employees. This is the clear intention of the Legislature. Shri Syali stated that distinction between monetary and non- monetary benefit was explained by Gujarat High Court in CIT v. Alchemic (P.) Ltd. [1981] 130 ITR 168. The Court has held that if benefit is not in cash or in money, it is a non-monetary benefit. That question of including value of such benefit would not arise under the scheme of section 10(10CC); the exemption is available in respect of non-monetary benefits.

7.5 In the end Shri Syali submitted that several illustrations are provided in Rule 3 of Income-tax Rules prior to amendment with effect from 1-4-2001 providing for valuation of perquisites defined under section 17(2). The title to the Rule specifically uses the word, "not provided for by way of monetary payment to the assessee". In the perquisites detailed in above Rule, payment of money is involved on the part of the employer but there is no monetary payment flowing from the employer to the employee. Therefore, from the above, it is clear that payment of taxes by the employer on behalf of employees is a non-monetary perquisite which is exempt under section 10(10CC) of the Income-tax Act.

8. Smt. Anitha Sumanth, Advocate, appeared on behalf of asses sees listed above in this order. She adopted arguments of Shri S.K. Tulsiyan and Shri M.S. Syali. She further cited decision of Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 to the effect that the beneficial provisions should be liberally construed.

9. Shri Durga Charan Dash, CIT (DR), Shri Davendra Shankar, CIT (DR) and Ms. Y.S. Kakkar, D.R. were heard on behalf of revenue. The sum and substance of argument of Departmental Representatives was that the entire scheme of the Act is to be considered and when provisions of section 10(10CC) are considered along with sections 17(2), 40(a)(v), sections 192(1A), 195, 195(1A) and 198, no doubt is left in the mind that taxes paid by the employer is nothing but a monetary payment to which provisions of section 10(10CC) cannot apply. The learned Departmental Representatives fully supported the decision of Benches in the case of B.J. Services Co. Middle East Ltd. and Western Geo International Ltd. It was argued that clause (iv) to section 17(2) makes it amply clear that any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee, is a perquisite. The value of the perquisite is to be assessed. It was an income which had accrued to the assessee employee. For this proposition, reliance was placed on decision of Madras High Court in the case of Boeing v. CIT [2001] 250 ITR 667 as in the case of CIT v. Tara Singh [1998] 233 ITR 669 (Delhi). The Departmental Representatives also submitted that it is a condition that payment of tax to be covered under sec6on 10(10CC) should be made at the option of the employer. It is, therefore, necessary to see the agreement of employment in each of the cases. The assessees have not filed agreement in all cases and, therefore, it is not clear whether the above condition of optional payment is satisfied in this case or not. The payment of tax was a mandatory perquisite, not covered by provisions under reference. The ld. D.Rs also referred to provisions of sections 40(a), 192(1A), 192(1B), 195, 195A and 198 to contend that provisions of above sections do not cover section 10(10CC). All the above sections are unworkable unless double grossing up of taxes is carried out. The learned D.R. also argued that whatever is stated by the assessee is not available in the Memorandum accompanying Finance Bill, 2002. The D.R. also submitted that liberal interpretation as advocated by the learned representatives of the assessees cannot possibly be adopted to defeat the purpose of the Legislature. In this connection, learned D.R. drew our attention to the case of Boeing v. CIT [2001] 250 ITR 667 (Mad.). So when employer exercises the option and make payment of taxes on the perquisites allowed to the employee, it is akin to monetary payment and, therefore, outside provisions of section 10(10CC) of Income-tax Act.

9.1 The learned D.Rs. further submitted that intention of the Legislature in introducing provisions of section 10(10CC) was to compensate the employees who could not pay heavy amount on non-monetary perquisites allowed to them. Payment of tax of employee was a monetary perquisite. The learned D.Rs further pointed out that tax paid on behalf of the employees was income received by the employee under section 198 of the Income-tax Act. It was argued that commercial angle has to be examined with reference to entries made in the books of account. The learned D.R. also added that if the plea raised on behalf of the assessees are accepted, then clause (iv) of section 17(2) would be rendered otiose.

9.2 In the written reply filed on behalf of revenue it has been elaborated as to what is salary, perquisites, how value of perquisites is taxable as part of salary. It is explained that perquisites can be put in two classes, (a) that which has monetary value, (b) perquisites that are not provided by way of monetary payment. Where an employee is paid 'tax free salary', the taxes paid on behalf of employees are perquisites and are liable to be taxed under the head "salary". The learned D.R. placed great reliance on the decision of Emil Webber v. CIT [1993] 200 ITR 483 (SC). Reliance was also placed on decision of Mysore High Court in the case of Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283 and several cases where the view was taken that income-tax paid by employer on behalf of employee is part of salary of the assessee and is liable to be taxed as such. Some decisions as to how value of perquisites is to be computed are also cited in the written submissions like CIT v. K.S. Sundaram [1999] 239 ITR 851 (Mad.). The sum and substance of submission of the revenue is that tax paid by the employer is a monetary payment and, therefore, not covered by provisions of section 10(10CC). It is a perquisite liable to be taxed as salary.

9.3 The learned D.R. accordingly supported the view that tax paid by the employer was a monetary payment in the shape of a perquisite to which provisions of section 10(10CC) are not applicable.

10. In rebuttal, the learned counsel for the assessee and for the Interveners met the arguments of the learned Departmental Representative.

11. We have given careful thought to the rival submissions of the parties. Before we consider and discuss provisions of section 10(10CC) of the Act, it is necessary to refer to the other relevant provisions to which our attention was drawn. We further agree with the submissions of the parties that question referred to the Special Bench is very wide and should be restricted as under:

"Whether, on the facts and in the circumstances of the case, tax actually paid by an employer at his option in case of an employee (individual) deriving income in the nature of a perquisite not provided for by way of monetary payment within the meaning of clause (2) of section 17 of the Act is not liable to be included in the total income of the employee?"

11.1 The provisions to which we deem it appropriate to make reference are:

Section 17: 'Salary', 'perquisite' and 'profits in lieu of salary' defined.

"(1) 'salary' includes-

(i) to (iii) **

(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

(2) 'perquisite' includes-

(i) to (iii) **

(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;"

"Section 192. Salary.- (1) Any person responsible for paying any income chargeable under the head 'Salaries' shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

(1A) Without prejudice to the provisions contained in sub-section (1), the person responsible for paying any income in the nature of a perquisite which is not provided for by way of monetary payment, referred to in clause (2) of section 17, may pay, at his option, tax on the whole or part of such income without making any deduction therefrom at the time when such tax was otherwise deductible under the provisions of sub-section (1)."

Section 195A. Income payable 'net of tax'- In a case other than that referred to in sub-section (1A) of section. 192, where under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement."

11.2 The learned representative also drew our attention to provisions of section 40(a)(v) providing that any tax actually paid by an employer is not a permissible deduction. They have also referred to provisions of section 198 to the effect that sums deducted at source for purposes of computing the income of an assessee be deemed to be income received. Proviso to the section providing that tax paid under sub-section (1A) of section 192 shall not be deemed to be income received. Section 199 providing for credit of tax deducted at source and section 200 fixing an obligation on the person to deposit the tax deducted at source are also referred to during the course of hearing. We do not feel that any detailed reference to above section will be of any use for our purpose. It is no doubt true and rightly pointed out by Shri Tulsiyan that through Finance Bill, 2000, under which new clause 10(10CC) was introduced, was intended to change the Scheme for taxation of perquisites. An employer was given an option to pay tax on behalf of the employee. In line with above purpose, sections referred to above were amended. This is also evident from para 64 quoted at page 24 above.

11.3 We are of view that 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 10(10CC) of the Income-tax Act 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 clause 10(10CC). The same conclusion, as expressed in the Circular and Notes, follows from consideration of the provisions noted below:

"Section 10. Incomes not included in total income.- In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-

(10CC) in the case of an employee, being an individual deriving income in the nature of a perquisite, not provided for by way of monetary payment, within the meaning of clause (2) of section 17, the tax on such income actually paid by his employer, at the option of the employer, on behalf of such employee, notwithstanding anything contained in section 200 of the Companies Act, 1956 (1 of 1956)."

11.4 It is clear from above that the clause 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.

11.5 Taking the last sentence of the clause, we have already noted provision of section 200 of the Companies Act prohibiting a company from paying tax free salary to its officers or employees. If the clause 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 support the view that clause was intended to exempt payment of taxes by the employer on the remuneration paid to the employee.

11.6 As far as other circumstances mentioned above are concerned, there is some controversy as to what is the meaning of 'at the option of the employer on behalf of the employee'. In our opinion, 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 provisions of section 192(1A) and sections 195, and 195A and from other consequent changes made through Finance Act, 2002 with effect from 1-4-2003 noted above. Sub-section (1A) to section 192 introduced through the same Finance Act, quoted above provides that the employer, "may pay at his option, tax on the whole or part of such income without making any deduction therefrom."

12. The learned Departmental Representative had contended that it is very essential to see agreements between the employer and employee in all the cases and particularly the term relating to payment of taxes. We find that in most of the cases, the agreement providing terms and conditions of employment including that relating to the payment of taxes is on record. As per said agreements, the employer has agreed to pay salary to the employee 'free of taxes'. In other words, taxes have been paid by the employer on behalf of the employee. In some cases, where such agreements are not available, there also the Assessing Officer, in the assessment order has clearly observed that employer had paid taxes on behalf of the employees and, therefore, double or multiple grossing up were carried on. From above, it can safely be inferred that in all cases, the employer was obliged to pay taxes, on behalf of the employees. The assessments having been made on above terms, it is too late for the revenue to contend that we should again concentrate on whether the employer had an obligation to pay taxes on behalf of the employee.

12.1 The learned DR further contended that taxes paid by the employer on behalf of the employee was part of the salary and liable to be taxed as such. There is no dispute that this tax paid is a perquisite, to which clause (iv) of section 17(2) is applicable. We will elaborate on this. Some courts, without a doubt have held that taxes paid by employer is part of the salary and is liable to be taxed as such. For the purpose of resolving the controversy before us, this distinction does not make any difference as now it is in-built in clause 10(10CC) that taxes actually paid is a perquisite within the meaning of section 17(2) of the Income-tax Act. The controversy is whether it is a monetary payment.

13. In order to solve above controversy, we may now refer to decisions to which our attention was drawn and which are relevant to the issue involved.

In the case of Tokyo Shibaura Electric Co. Ltd v. CIT [1964] 52 ITR 283, the Hon'ble Mysore High Court held as under:

Head Note:

"An agreement between A, a non-resident company, and B, a resident company, provided that in consideration of the licence granted by A to B to manufacture certain articles, and services to be rendered by A, B shall pay to A royalty at three per cent on the net sales of articles manufactured and sold by B and further that 'all payments to be made shall be made without deductions for taxes or other charges assessed in India, which shall be assumed by B' (the resident company). The department contended that the real income of A under the agreement upon which B could be assessed as the agent of A was not the amount of royalty payable in fact to A plus the tax payable in India in respect of the said sum as claimed by the assessee, but such an amount as would, if the tax payable in India thereon was deducted, leave to A the stipulated three per cent of the sale proceeds. The net royalty payable to A under the agreement for the years 1953-54 to 1957-58 was Rs. 10,702, Rs. 43,963, Rs. 77,001, Rs. 96,353 and Rs. 1,15,077 respectively. The Tribunal upheld the contention of the department and assessed the royalties received by A for the years 1953-54 to 1957-58, at the grossed up sum of Rs. 21,271, Rs. 83,379, Rs. 1,63,180, Rs. 2,54,827 and Rs. 2,98,901 respectively.

Held (agreeing with the Tribunal), that the real income by way of royalty received by A under the agreement was such amount as would, if the tax thereon had been deducted, have left a royalty of 3 per cent of the proceeds to A, and not the net royalty payable plus the tax thereon and accordingly the assessment made by the Tribunal was valid."

13.1 In the case of Instalment Supply (P.) Ltd v. CIT [1984] 149 ITR 457 (Delhi), the question involved was whether cash reimbursement paid to the Managing Director as an employee by the assessee-company was a perquisite liable to be disallowed under section 40(a)(v) of the Income-tax Act. Relevant portion of section 40(a)(v) provided as under:-

"(v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or:"

The court held that cash payment by the employer was not a perquisite. In coming to above conclusion, their Lordships of Delhi High Court not only considered in detail the relevant provisions but also considered various decisions on the issue. The discussion is as under:

"The counsel also drew our attention to the relevant provision as contained in section 40A(5) which limits the allowance and is in two parts, where expenditure incurred by the company results directly or indirectly in the payment of any salary to its employee and, where the company incurs any expenditure which results, directly or indirectly, in the provision of any perquisite, 'whether convertible into money or not' to an employee. This, according to the counsel, is a clear pointer to the fact that the earlier provisions, as contained in clause (c)(iii) and clause (a)(v) of section 40 of the Act, did not include any cash payment made by the company to the employee within the meaning of the words 'any benefit, amenity or perquisite'.

In support of his contentions, Mr. Ved Vyas referred to various decisions which may be noticed.

In CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431, the Calcutta High Court held that any cash payment directly made to the employee cannot be considered to be a perquisite within the meaning of section 40(c)(iii) of the Act, which provision corresponds to section 40A(5). The question before the court was whether the overseas allowance, managing allowance, devaluation allowance and transport allowance did not fall within the expression 'benefit, amenity or perquisite' within the meaning of section 40(c)(iii) of the Act. The court observed as follows:

'In our view, in their ordinary meaning, the words "which results directly or indirectly in the provision of any benefit or amenity or perquisite whether convertible into money or not" in clause (c)(iii) of section 40 excludes cash paid directly to an employee as there is no question of convertibility to money where cash would be paid. This interpretation is reinforced by the fact that originally the said sub-section contained the expression "remuneration" which was specifically excluded by the amendment introduced in 1964 which also introduced the clause 'whether convertible into money or not'."

In sub-clause (i) of the said clause (c), the expression "remuneration" was retained along with the other expressions "benefit" and "amenity" even after the amendment. This would show that the Legislature had in view the distinction between the said expressions and yet chose to delete the expression "remuneration" from the said clause (iii).

The phrase "whether convertible into money or not" in our opinion does not govern only the expression "perquisite". The words in the section are "any benefit or amenity or perquisite". The words in the section are "any benefit or amenity or perquisite". If the phrase "whether convertible into money or not" was intended to govern only the word "perquisite" then the correct grammatical form would have been any benefit or amenity or 'any perquisite whether convertible into money or not'.

In Indian Leaf Tobacco Dev. Co. Ltd. v. CIT [1982] 137 ITR 827 (Cal.), the court was concerned with the question as to whether monetary payment made by the company to its employees for reimbursement of medical expenses incurred by the employees represented expenditure resulting directly or indirectly in the provision of any benefit or amenity or perquisite to the said employee within the meaning of section 40A(5) of the Act. The court following its earlier decision in CIT v. Kanan Devan Hills [1979] 119 ITR 431 (Cal.), held that a direct payment to the employee did not come within the scope of expenditure resulting directly or indirectly in the provision of any perquisite to an employee whether convertible into money or not for the purpose of working out disallowance under section 40A(5).

The court, therefore, held that the expenditure incurred by the company for reimbursement of medical expenses incurred by the employee could not be treated as a perquisite of the employee for the purpose of making disallowance under section 40A(5).

In another case of the Calcutta High Court in CIT v. National and Grindlays Bank Ltd. [1984] 145 ITR 457, the question was whether the cash payments on account of reimbursement of medical expenses of the employees of the company could not be included in the value of benefits, amenities or perquisites for the purpose of disallowance in excess of the limits laid down under section 40(c)(iii) or section 40(a)(v) of the Act. The court answered the question in favour of the assessee following its decision in Indian Leaf Tobacco Dev. Co. (1982) 137 ITR 827 (Cal.).

In CIT v. Venkataraman [1978] 111 ITR 444, the Madras High Court had occasion to consider a similar provision as contained in section 2(6C)(iii) of the Indian I.T. Act, 1922, which defined income as including 'the value of any benefit or perquisite, whether convertible into money or not obtained from a company'. It was held that "from this language it is clear that the benefit or perquisite" contemplated cannot be money itself. If it is money, the question of its value being taken into account or the benefit or perquisite being converted into money will not arise. It was also observed that the same section made a distinction between 'benefit or perquisite' on the one hand and 'any sum paid' on the other indicating that the benefit or perquisite contemplated by the section was other than money. In CIT v. Manjushree Plantations Ltd [1980] 125 ITR 150 (Mad.), the question was whether the leave allowance was not a perquisite and, therefore, the allowance of the same would not fall to be restricted in terms of section 40(a)(v) of the Act. The court referred to the decision of the Calcutta High Court in Kanan Devan's case (1979) 119 ITR 431 (Delhi), and also to an earlier decision of the Madras High Court in CIT v. Venkataraman [1978] 111 ITR 444, and held that in order to term a payment as perquisite, it had to be a payment other than a cash payment in pursuance of a contract of service. In CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP) the question was as to whether the fees and medical bills should be taken into account as perquisite for the purpose of disallowance under section 40A(5) of the Act. Relying on the decision of the Calcutta and Madras High Courts, it was held that payments made directly to an employee do not fall within the meaning of the expression 'perquisite'. In CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340, the Karnataka High Court was of the view that the expression 'whether convertible into money or not', occurring in section 40(a)(v), is something apart from money such as something in kind, which may be convertible into money or not and that this expression would not be appropriate when one considers a payment in cash. It, therefore, held that payment of bonus to its employees in cash was not a perquisite and could not be disallowed under section 40(a)(v)."

Their Lordships dissented from the view taken by Full Bench of Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19. In the Kerala High Court, their Lordship had held as under:

"The only question before us is whether despite the very clear indication by reason of the context of the provision in section 40(a)(v) that the term 'benefit, amenity or perquisite' must exhaust all advantages that an employee gets other than his salary, should a different meaning be given to this term because of the words 'whether convertible into money or not' following it. It is seen to have been argued, and successfully, in some cases that the words 'whether convertible into money or not' reflect on the nature of 'benefit, amenity or perquisite'. Such a qualification is said to be inappropriate in the case of a cash benefit. In other words, cash cannot be qualified by the term 'whether convertible into money or not' and, therefore, whatever may be the natural meaning of the term 'benefit, amenity or perquisite', any advantage in terms of money which may fall normally within anyone of the these three must stand excluded. We notice that this argument succeeded before the Karnataka High Court in CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340, before the Calcutta High Court in CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 and before the Madras High Court in CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150. Though reference is made by the counsel for the assessee to the decision of the Madras High Court in CIT v. G. Venkataraman [1978] 111 ITR 444 that could easily be explained because the language of the section which the court considered in that case was materially different from what we are dealing with here. We don't see any reason to give undue emphasis to the words 'whether convertible into money or not' so as to give a very restricted meaning to the term 'benefit, amenity or perquisite', a meaning which would not serve the evident purpose of the section. We say so because that would mean that any cash allowance paid by the employer to an employee of any sum whatsoever will be entitled to deduction despite section 40(a)(v) because restriction is limited only to non-cash advantage given to the employee. Such a construction appears to us to be quite irrational defeating the very purpose of prescribing the limit under section 40(a)(v) so as to dissuade an employer from paying unduly large sums by way of 'benefit, amenity or perquisite'. The statute itself lays down the permissible limit of deduction in respect of salary and that would be incomplete unless a permissible limit of deduction is laid down in respect of other benefits that are extended to an employee. Though the words 'whether convertible into money or not' may at first sight appear to indicate that whatever are not convertible into money stand excluded from the scope of the term 'benefit, amenity or perquisite', that need not necessarily be so. The term 'benefit, amenity or perquisite' may take in any benefits in kind and in service and may take in also cash. 'Whether convertible into money or not' need not qualify the whole range. It only means that it is immaterial whether the benefit, perquisite or amenity mayor may not be convertible into money. That would be immaterial. According to us, this would be the proper reading of the section."

13.2 In the case of CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431 (Delhi), the question was whether reimbursement of medical expenses and computation of perquisite value of residential accommodation and cash allowance in the shape of car allowance and house rent allowance could be treated as part of salary for purposes of calculation under section 40A(5) of the Income-tax Act. Their Lordships held as under:

"There has been a catena of authorities which have taken the view that payment of cash allowance to an employee by way of reimbursement of medical expenses or house rent is not a perquisite."

Their Lordships reviewed entire case law and observed as under:

"The leading case on this point is CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.). That decision of the Calcutta High Court was based on the interpretation of section 40(c)(iii) of the Act and it came to the conclusion that the words 'whether convertible into money or not' occurring in the said sub-clause clearly indicated that cash payment was not contemplated by the said provision. This decision of the Calcutta High Court was followed by the same court in (1982) 137 ITR 827 (Cal.), Indian Leaf Tobacco Development Co. Ltd. v. CIT [1983] 139 ITR 763 (Cal.), CIT v. Oriental Bank Ltd. [1984] 145 ITR 457 (Cal.), CIT v. National & Grindlays Bank Ltd. [1986] 161 ITR 820 (Cal.), Alkali & Chemical Corporation of India Ltd. v. CIT [1986] Tax LR 483 (Cal.), CIT v. Darjeeling Co. Ltd. [1989] 176 ITR 331 (Cal.), CIT v. Indian Press Exchange Ltd. [1989] 180 ITR 275 (Cal.), National & Grindlays Bank Ltd. v. CIT [1991] 192 ITR 144 (Cal.), CIT v. Indian Explosives Ltd. [1990] 184 ITR 339 (Cal.) and CIT v. Indian Oxygen Ltd. The Bombay High Court followed the aforesaid decision in Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.) in CIT v. Indokem (P.) Ltd. [1981] 132 ITR 125. This view was reiterated by the Bombay High Court in [1988] 169 ITR 44 CIT v. Mercantile Bank Ltd. [1989] 177 ITR 96 (Bom.), CIT v. Boehringer Knoll Ltd. [1987] 163 ITR 528 (Bom.), CIT v. J. Govindram (P.) Ltd. [1989] 177 ITR 204, CIT v. Mansants Chemicals (P.) Ltd. [1991] 191 ITR 75 (Bom.), Ruston and Hornsby (India) Ltd. v. CIT [1991] 191 ITR 367 (Bom.), CIT v. Greaves Cotton & Co. Ltd. [1991] 191 ITR 58 (Bom.), CIT v. Alembic Distributors Ltd. [1986] 162 ITR 565 (Bom.), CIT v. Yorkshire Insurance Co. Ltd. [1991] 192 ITR 169 (Bom.), CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. 192 ITR 89 (Bom.), Asbestos Cement Ltd. v. CIT [1991] 192 ITR 245 (Bom.), CIT v. Empire Dyeing & Mfg. Co. Ltd. The Andhra Pradesh High Court has taken the same view and the first judgment is reported as CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP) was followed by the Andhra Pradesh High Court in three other cases, reported as [1986] 160 ITR 217 CIT v. Warner Hindusthan Ltd. [1989] 175 ITR 87, CIT v. Singareni Collieries Co. Ltd., the Madras High Court has also taken the same view in [1980] 125 ITR 150 CIT v. Manjushree Plantations Ltd. [1992] 196 ITR 802, CIT v. Jayanthi Films (Madurai) P. Ltd. The Karnataka High Court has also come to the same conclusion in CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 and this was followed by it in [1988] 173 ITR 374 (Kar.), CIT v. Motor Industries Co. Ltd. Two decisions of the Kerala High Court in favour of the aforesaid view of the Calcutta High Court are [1984] 145 ITR 563 CIT v. Toshiba Anand Lamps Ltd. [1985] 153 ITR 444 and Travancore Tea Estates Co. Ltd. v. CIT.  As far as this court is concerned, the view of the Calcutta High Court in Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 has found favour. In the case Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 457 (Delhi), it was held by this court that reimbursement of medical expenses by paying cash to the employee was not a perquisite. This view was reiterated by this court in CIT v. Escorts Ltd. [1987] 59 CTR 284 and CIT v. Jay Engineering Works Ltd. [1990] 182 ITR 181. Apart from the aforesaid authorities including three decisions of this court, it is clear to us that payment of the type which was made is not a perquisite. The Explanation 2(b) to section 40A(5) is exhaustive. The payment in cash made by the employer to an employee by way of reimbursement does not fall under sub-clauses (1) to (v) of clause (b) of Explanation 2. This being so, the payment in question cannot be regarded as a perquisite at all. It was sought to be contended by Mr. Rajendra that section 40A(5)(a)(ii) of the Act uses the expression 'incurs directly or indirectly any expenditure' and he submits that the payment which has been made by the employer to the employee would fall in this category. We are unable to agree with this submission. Sub-clause (ii) of section 40A(5)(a) deals with two types of cases. Firstly, it deals with the expenditure incurred directly or indirectly by an assessee in respect of any assets of the assessee used by an employee either wholly or partly for his own purpose or benefit. Reading the words 'incurs directly or indirectly any expenditure', in isolation, would give no meaning to the said subsection. The nature of the expenditure is clearly indicated in the latter part of this sub-section, and that is expenditure in respect of any assets of the company which are used by an employee for his own purposes of benefit. The cash payment or reimbursement is not included in this sub-clause at all. Therefore, while agreeing with the aforesaid decision, Question No. 1 has to be answered in the affirmative and in favour of the assessee."

13.3 In the case of CIT v. Mafatlal Gangabhai & Co. (P.) Ltd [1996] 219 ITR 644, their Lordships of Supreme Court have considered the question whether cash payment made by an assessee to its employee fall within the mischief of section 40(a)(v) and section 40A(5). Their Lordships noted, "On appeal, the CIT(A) upheld the assessee's contention that cash payments cannot be treated as 'perquisites' for the purpose of and within the meaning of section 40A(5). Revenue s appeal to the Tribunal was dismissed. An application under section 256(1) was also dismissed by the Tribunal whereupon it approached the High Court which too rejected its application under section 256(2), as stated above." After elaborate consideration of relevant provisions including definition of 'perquisite' under section 17 and case law, they agreed with the view expressed by majority of High Courts including Delhi, Karnataka, Kerala and Madras disagreed with the view taken by Kerala High Court in Commonwealth Trust Ltd's case. Their Lordships held as under:

"6. On a consideration of both the points of view, we are inclined to agree with the submission of the learned counsel for the assessees. The language employed in the sub-clause is not capable of taking within its ambit cash payments made to the employees by the assessee. These cash payments will, of course, be treated as salary paid to the employees and will be subject to the limits/ceiling, if any, in that behalf. But they cannot be brought within the purview of the words 'any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite' - more so because of the following words 'whether convertible into money or not'.

7. Now, coming to section 40A(5), the position is no different. It would, however, be appropriate to point out the distinction between section 40(a)(v) and section 40A(5). We shall refer to the former provision as 'sub-clause' and the latter provision as 'sub-section'. The sub-section is wider in its scope and application than the sub-clause. Sub-clause (i) of clause (a) of sub-section (5) deals with 'any expenditure which results directly or indirectly in the payment of any salary to an emmployee or a former employee' Sub-clause (i) of clause (c) of sub-section (5) deals with 'any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee'. Sub-clause (i) of clause (c) of sub-section (5) sets out the limits/ceilings on such expenditure while clause (a) of Explanation 2 appended to the sub-section defines the expression 'salary' for the purposes of this sub-section. These features were absent in sub-clause (v) of section 40(a). Now, coming to sub-clause (ii) of clause (a) of sub-section (5) which corresponds to section 40(a)(v) it uses only one expression 'perquisite' as against section 40(a)(v) which spoke of 'benefit of amenity or perquisite', but this is no real distinction because the definition of 'perquisite': in clause (b) of Explanation (2) to the sub-section takes in both benefits and amenities. The said definition also includes, inter alia, 'payment by the assessee of any sum in respect of any obligation which but for such payment, would have been payable by the employee' - words which are found in the main limb of section 40(a)(v) but which are missing in the main limb of sub-clause (ii) of clause (a) of sub-section (5). Thus, except for certain structural changes, section 40A(5)(a)(ii) and section 40(a)(v) are similar in all material aspects. It, therefore, follows that what we have said with respect to section 40(a)(v) applies equally to section 40A(5)(a)(ii).

8. There still remain the words 'including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee' in section 40(a)(v) and similar words found in section 40A(5)(a)(ii) as well, i.e., in sub-clause (iv) of the definition of 'perquisite' in clause (b) of Explanation 2 to sub-section (5). What do they mean? The said words contemplate a situation where the assessee makes a payment (in cash) in respect of an obligation - 'obligation of the employee - which would have been payable by the employee if it is not paid by the assessee. The payment by the assessee contemplated by these words is not evidently a payment to the employee but to a third party, no doubt, on account of the employee. Sub-clause (v) of the definition of 'perquisite' in clause (b) of Explanation 2 to sub-section (5) also refers to cash payment but that too is not to the employee, though undoubtedly for his benefit.

9. For the above reasons, we hold that cash payments by an assessee to his/its employees do not fall within the ambit of section 40(a)(v) or section 40A(5)(a)(ii), as the case may be. We disagree with the opinion of the Kerala High Court in Common Wealth Trust Ltd. and agree with the other High Courts which have taken a view according with our view, viz., CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 (Kar.), CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431 (Delhi), CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.), CIT v. Indokem Pvt. Ltd. [1981] 132 ITR 125 (Bom.), CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP), Instalment Supply Pvt. Ltd. v. CIT [1984] 149 ITR 457 (Delhi), CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad.) and CIT v. New India Industries Ltd. [1993] 201 ITR 208 (Guj.)

Accordingly, the appeals are dismissed. No costs."

13.4 In the case of Frank Beaton v. CIT [1985] 156 ITR 16 (Delhi), the assessee a non-resident under an agreement with its employer was not to pay tax on his salary and allowances. His employer company was to pay tax on salary and allowances. Their Lordships held that single grossing up of tax and not multiple grossing up was permitted under the Statute, Justice Ranganathan, who wrote separate but concurring judgment made the following relevant observations:

"The assessee is an employee and the income in question is chargeable to tax in his hands under the head 'Salaries'. Section 17(1)(iv) of the Act includes, within the scope of the charge imposed by this section 'perquisites' in lieu of, or in addition to, any salary. Section 17(2) defines 'perquisites' to include, inter alia, '(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee'.

It, therefore, follows that, if the employer pays any income-tax, the obligation to pay which lies on the employees, the amount of any income-tax so paid will be assessable in the hands of the employee-assessee as part of his salary income. The provision may raise a further question regarding the year in which the perquisite income will become assessable, an aspect touched upon in Sciandra v. CIT [1979] 118 ITR 675 (Cal.), but it may not be necessary to deal with that aspect for the purposes of the present case."

13.5 In the case of CIT v. R.D. Dennis [1982] 135 ITR 1 (Bom.), their Lordships held as under:

"We are fortified in the view we are taking by two decisions, viz., one of the Kerala High Court in CIT v. C.W. Steel (No. 1) [1972] 86 ITR 817, and the other of the Madras High Court in CIT v. Mackintosh [1975] 99 ITR 419. In both the cases, the very same question fell for consideration, viz., whether the income-tax paid by the employer was salary for the purposes of finding out the value of the rent-free accommodation given to the employee. Both the courts have answered the issue in favour of the revenue and against the assessee. The Madras High Court in its judgment has approved of the ratio of the decision of the Kerala High Court. We are respectfully in agreement with the decisions of both the courts on the said point. We are, therefore, satisfied that the revenue is entitled to succeed on the first question and the answer to the first question will have to be given in its favour and against the assessee."

13.6 In the case of Boeing v. CIT [2001] 250 ITR 667 (Mad.), the case relied upon by the learned Departmental Representative, their Lordships of Madras High Court were dealing with a question whether a cloth dealer receiving gift from its manufacturer as "incentive" for additional efforts would constitute profit and gains of business. Their Lordships held that gift was a trading receipt and, therefore, value of gift constituted profits and gains of business of the dealer. In our considered opinion, aforesaid decision has no application to the facts involved us.

13.7 In the case of CIT v. Tara Singh [1998] 233 ITR 669 (Delhi), another case relied by the Departmental Representative, the question before the Hon'ble Delhi High Court was whether debit balance in the account of the assessee who was Director of the company could be treated as a benefit liable to be taxed, in view of section 2(24)(iv). The Tribunal had held that value of benefit in the form of a debit balance in the accounts of the company was not a benefit which could be treated as income within the meaning of section 2(24)(iv) of Income-tax Act. On appeal, their Lordships relied upon the decision of Madras High Court in the case of CIT v. S.S.M. Lingappan [1981] 129 ITR 597 and held that benefit could be taxed as a perquisite under section 17(2)(iii) of the Income-tax Act. This case, in our view, is also of no help to the revenue.

13.8 In the case of Emil Webber v. CIT [1993] 200 ITR 483, relied upon by the revenue, the question before the Hon'ble Supreme Court was whether the assessee, one of the foreign personnel whose services were provided for setting up plant in India for an Indian concern (Ballarpur Ltd.). The agreement provided that salary of the foreign personnel were payable free of tax or duty. The taxes paid on employee's income was held to be income from other sources as there was no relationship of employer and employee with M/s. Ballarpur Ltd. This finding of the Tribunal was confirmed on appeal by the Hon'ble High Court. The Supreme Court confirmed the decision of the High Court, by observing as under:

"Held, affirming the decision of the High Court, (1) that the amount paid by Ballarpur was nothing but a tax upon the salary received by the appellant. It was paid by virtue of the obligation undertaken by Ballarpur and, therefore, the payment was not a gratuitous payment but was for and on behalf of the appellant. It would be unrealistic to say that the payment had no integral connection with the salary received by the appellant. Therefore, the tax paid by Ballarpur was liable to be included in the income of the appellant.

(ii) That inasmuch as the appellant was not an employee of Ballarpur, the amount could not be brought under the head 'Salary' within the purview of section 17 of the Income-tax Act, 1961, and had necessarily to be placed under section 56(1), viz., under the head 'Income from other sources'."

This case in our considered view has no application to the facts of the case.

14. It is evident from above cited decisions that when payment is made in cash by employer to the employee, it is not a perquisite. The cash payment to the employee has been held to be different from a "perquisite". It was held to be different from "convertible into money or not". The cash payment was not held to be money payment while considering the question whether such payment was a benefit, amenity or a perquisite, though cash payment by the employer to the employee may be liable to be assessed as "salary".

14.1 We have already noted specific finding to the above effect in the case of Shriram Refrigeration Industries Ltd. although their Lordships was considering different provision of section 40(a)(v) but that does not make any difference as in the case of Mafatlal Gangabhai & Co. (P.) Ltd. Their Lordships of Supreme Court considered meaning of expression "perquisite" as defined in sub-section (2) of section 17 and arrived at the same conclusion.

14.2 Their Lordships of Supreme Court further 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, how can it be treated as a monetary payment to the assessee. Shri M.S. Syali, the learned senior counsel for the assessee Interveners and Shri Tulsiyan, the learned counsel for the main petitioner here, were right in pointing out that clause 10(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 of the Act and nothing else.

14.3 The cash payment to the employee by the employer might be assessable as "salary" but it is not a "perquisite or amenity or benefit". We have already noted view of Full Bench of Kerala High Court in Common Wealth Trust Ltd.'s case where their Lordships saw no good reason to give restricted meaning to the term "benefit, amenity or perquisite" as the same would not serve the purpose of the section. Their Lordships saw no rationality in the view of the majority High Courts, if it is held that cash allowance paid by the employer to an employee would be entitled to deduction, despite section 40(a)(v) and restrict the application of above provision to non-cash advantage. Such construction, according to their Lordships, would be quite irrational, defeating the very purpose of the Legislation. The aforesaid view, as noted above, has not been approved by the Apex Court and a distinction has been drawn between cash payment on one hand and "benefit, amenity or a perquisite" on the other.

14.4 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 of the Income-tax Act. 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) of the Act.

15. In the two earlier decisions, Tribunal, while not granting benefit to the assessee under section 10(10CC) of the Income-tax Act held that the tax paid by the assessee was nothing but part of the salary and, therefore, it was to be assessed as such. It was also treated as a monetary payment. Shri Syali had rightly pointed out that no reasons were given as to why it is being treated as part of monetary payment. Important provisions and circular etc. were not brought to the notice of the benches and, therefore, an incorrect view of the matter was taken in those cases.

15.1 The learned Departmental Representative also placed reliance on the decision of Hon'ble Delhi High Court in the case of T.P.S. Scott v. CIT [1998] 232 ITR 475, wherein it is held as under on taxes paid by the employer on behalf of the employee:

"We may refer to the relevant statutory provisions. Section 15 sets out the income which shall be chargeable to income-tax under the head 'Salaries'. Vide clause (b) thereof any salary paid or allowed to an employee in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him is an income chargeable to tax under the head 'Salaries'. For the purpose of section 15 vide section 17(1)(iv), perquisites are included in salary. Vide sub-clause (iv) of clause (2) of section 17 any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee, is included in 'perquisites'. The interpretation clause i.e., section 2 of the Act, vide sub-clause (iii) of clause (24) thereof, includes the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17, within the meaning of 'income'.

All these statutory provisions make it clear that an amount of tax which would have been payable by an employee-assessee, if paid by the employer on behalf of the assessee, is to be included in the perquisites amounting to salary rendering it liable to tax by being included in income."

16. It is clear from above that taxes paid by employer on behalf of the employee were treated as a perquisite covered by sub-clause (iv) of clause (2) of section 17 of the Income-tax Act and, therefore, includible in the salary. There is no dispute that payment of taxes made by the employer on behalf of the employee is a perquisite and part of the income assessable under the head "salary" if clause 10(10CC) was not brought on the Statute Book. It is also a benefit or amenity enjoyed by the employee but it is not a monetary payment to the employee. It is a payment by the employer which discharges an obligation of the employee, which otherwise would have been discharged by the employee. Such payments of taxes, therefore, are fully covered by above sub-clause (iv).

17. The decision of CIT v. American Consulting Corpn. [1980] 123 ITR 513 (Ori.), noted above also supports the view that taxes paid on behalf of the assessee is a perquisite or a benefit, but not income from business. It could not be taxed except under clause (iv) of section 28 which provided that a benefit or perquisite was liable to be charged to tax.

17.1 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 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 clause 10(10CC). The circular of the Board and provision of sub-section (1A) of section 192, section 40(a)(v), 195A fully support the claim of the assessee. We, therefore, hold that the taxes paid by the employer on behalf of the employee is a perquisite within the meaning of section 17(2) of the Income-tax Act, 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. We, therefore, find substance in the contention advanced on behalf of learned counsel for the assessees and the Interveners. The question referred to us is answered in favour of the assessee. The appeals of the assessees and Interveners are allowed on this issue.

18. That in some of the cases, there is question of levy of interest under sections 234, 235 of the Income-tax Act. Parties appearing before us conceded that this ground was consequential. We, therefore, direct the Assessing Officer to re-calculate taxes, if any, leviable under the above provision.

19. In some cases, there is ground challenging initiation of penalty proceedings under section 271(1)(c). The above ground was not pressed and is accordingly dismissed.

19.1 Before close we wish to thank Shri Syali, learned senior Advocate for the asses sees as Interveners as also Shri Tulsiyan for assisting us. We also thank all the learned Departmental Representatives for their assistance and for their placing full case laws before us.

20. All the appeals of the assessees are allowed in terms stated above.

 

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