[2007]

109 ITD 141 (DELHI) (SB)

IN THE ITAT DELHI BENCH ‘F’ (SPECIAL BENCH)
RBF Rig Corpn. LIC (RBFRC)
v.
Assistant Commissioner of Income-tax, Circle-1, Dehradun *
VIMAL GANDHI, PRESIDENT P. N. PARASHAR, JUDICIAL MEMBER AND R. C. SHARMA,
ACCOUNTANT MEMBER
IT APPEAL NOS. 1810 TO 1815 AND 1837 TO 1839 (DELHI) OF 2006 [ASSESSMENT
YEAR 2004-05]
NOVEMBER 30, 2007

Section 10(10CC) of the Income-tax Act, 1961 - Perquisite, not provided by

monetary payment - Assessment year 2004-05 - Whether payment of tax on
behalf of employee at option of employer is a non-monetary perquisite
fully covered by sub-clause (iv) of clause (2) of section 17 and, thus,
exempt under section 10(10CC) and is not liable to be included in total
income of employee - Held, yes - Whether taxes paid by employer can be
added only once in salary of employee and thereafter, tax on such
perquisite is not to be added again - Held, yes
FACTS
After the introduction of clause (10CC) in section 10 with effect from 1-4-2003 by
the Finance Act, 2002, it was claimed by the assessee as an employee that where
the employer has paid tax on the salary of the employee, the tax on such tax as
perquisite is exempt under the above provision. However, Delhi Bench of the
Tribunal in the case of B.J. Services Co. Middle East Ltd. did not accept the
contention of the assessee and held that tax paid by the employer was part of
salary and, therefore, tax on tax was not exempt and was liable to be added for
computing total income of the assessee-employee.
Again in the case of Western Geo International Ltd. (ITA Nos. 3120 to
3195/Del./2006) decided by the Delhi Bench of the Tribunal vide order dated 5-1-
2007, it was held that since the employer had made monetary payment in the
shape of payment of employee’s taxes, the nature of perquisite should be
considered as monetary only and, therefore, the assessee was not entitled to
exemption under clause (10CC) of section 10.
In the circumstances, the assessee in the case of RBF Rig Corpn. (RBFRC) as
agent of Alnasser Rahim (8 cases) approached the President of the Income-tax
Appellate Tribunal (Appellate Tribunal) with request that the question of operation
of provision of section 10(10CC) be referred to and considered by a larger Bench.
The President referred the matter to a Regular Bench for considering and advising
the President on the issue. The Regular Bench vide order dated 6-9-2007
recommended that Special Bench be constituted to consider the question and also
to review the decisions of Delhi Benches in the cases of B.J. Services Co. Middle
East Ltd. and Western Geo International Ltd. (supra). In the above circumstances,
the Special Bench was constituted to consider the relevant question. Before the
Special Bench, it was contended that the assessees were non-resident foreign
nationals employed in India in the relevant assessment year 2004-05. They were
employees of non-resident company treated as statutory agent of the assessees.
Those employees, as per terms of their employment, were to be paid salary ‘net of
taxes’ and taxes were to be borne by the employer company. Accordingly, in the
returns of the employees filed by employer company in the representative
capacity, tax borne by the employer on the salary paid was added as a perquisite
and tax was calculated on the resultant figure. However, no further tax on tax was
claimed to be payable in the light of provision of section 10(10CC). The Assessing
Officer did not allow claim of the assessees. He held that tax borne by the
employer was a monetary perquisite and, hence, further tax thereon should also
be added to the salary by multiple stage grossing up process. The assessee
impugned the action of the Assessing Officer in appeal before Commissioner
(Appeals) but without any success.
HELD (PER SPECIAL BENCH)

From the changes introduced through the Finance Act, 2002, with effect from 1-4-
2003, the Legislature has reflected its intention in clear terms to exempt in the
hands of the employee, the tax paid by his employer on the perquisite falling
under clause (2) of section 17. The said perquisite itself was tax paid by the
employer at his option which the employee was obliged to pay. This has been
specifically provided in clause (10CC) and is further corroborated by changes
made in section 40(a)(v ), sections 192(1A) and 195A and other consequential
amendments. These changes are to be seen with similar provision existing earlier
to appreciate the new scheme. The Notes and Memorandum issued with the Bill
has the title ‘Scheme for taxation of perquisites simplified with employer given
option to pay tax on behalf of employees’, leave no amount of doubt that tax paid
by the employer on behalf of the employee is a perquisite and tax on such income
is exempt under section 10(10CC). [Para 11.3]
Section 10(10CC) is applicable, if the following circumstances conjectively exist:
(1)The assessee is an employee (individual) deriving income in the nature of a
perquisite; and
(2)The said perquisite is not provided by way of monetary payment within the
meaning of clause (2) of section 17; and
(3)Taxes actually paid by employer at his option on behalf of employee on above
perquisite is exempt and would not form part of the total income of the
employee.
This would be notwithstanding anything contained in section 200 of the
Companies Act. [Para 11.4]
Provision of section 200 of the Companies Act prohibits a company from paying
tax-free salary to its officers or employees. If clause (10CC) of section 10 did not
have anything to do with payment of remuneration free of tax, one would wonder
why overriding effect was given to the clause by stating that clause would apply
‘notwithstanding anything contained in section 200 of the Companies Act’.
Therefore, reference to section 200 of the Companies Act only supports the view
that the clause was intended to exempt payment of taxes by the employer on the
remuneration paid to the employee. [Para 11.5]
There is some controversy as to what is the meaning of ‘at the option of the
employer on behalf of the employee’. The words ‘at the option of the employer’
only imply that the employer now has an option to pay the taxes on behalf of the
employees. It is for the employer to decide whether taxes are to be paid by the
employee or the employer. The clause is not applicable in cases taxes are paid by
the employee who is otherwise obliged to pay it. When so paid, no perquisite, as
far as employee is concerned, would be involved. This is more than clear from
provision of section 192(1A) and section 195, and section 195A and from other
consequent changes made through Finance Act, 2002 with effect from 1-4-2003.
Sub-section (1A) to section 192 introduced through the same Finance Act,
provides that the employer, ‘may pay at his option, tax on the whole or part of such
income without making any deduction therefrom’. [Para 11.6]
In the case of CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. [1996] 219 ITR 644/ 85
Taxman 381, the Supreme Court noted the difference between a payment by
employer to the employee and a payment by the employer to a third party. A
payment to a third party in respect of any obligation, which but for such payment
would have been payable by the employee, would only be a perquisite in the hands
of the employee. When it is a payment to a third party, it could not be treated as a
monetary payment to the assessee. Clause (10CC) emphasizes on direct monetary
payment to the employee to be excluded from the application of the provision. The
payment of tax on behalf of the employee at the option of the employer can only be
treated as discharge of an obligation of the employee which but for such payment
would have been payable by the employee himself. It is a perquisite fully covered
by sub-clause (iv) of clause (2) of section 17 and nothing else. [Para 14.2]
It is, therefore, reasonable to conclude that payment of taxes by the employer, on
behalf of the employee, is a perquisite within the meaning of clause (2) of section
17. It cannot be a monetary payment to the assessee within the meaning of above
clause which is intended to be excluded from application of clause 10(10CC). [Para
14.4]
It is not money, which is paid to the assessee when taxes are paid on his behalf. It
is discharge of his obligation. The payment fully fits in the jacket of sub-clause (iv)
of section 17(2) of the Act. It may be a monetary gain or monetary benefit or a
monetary allowance but definitely it is not a monetary payment to the assessee.
What is excluded in the clause is the perquisite which is in the shape of a
monetary payment to the assessee. If it is a payment to a third person like
payment of taxes to the Government, then such payment of taxes cannot be
excluded under section 10(10CC). The circular of the Board and provision of sub-
section (1A) of section 192, sections 40(a)( v), 195A fully support the claim of the
assessee. Thus, the taxes paid by the employer on behalf of the employee is a
perquisite within the meaning of section 17(2), which is not provided by way of
monetary payment. Therefore, there is no reason not to exclude such payment of
taxes from the total income of the assessee. In other words, taxes paid by the
employer can be added only once in the salary of the employee. Thereafter, tax on
such perquisite is not to be added again. [Para 17.1]
CASES REFERRED TO

B.J. Services Co. Middle East Ltd. v. Asstt. CIT [IT Appeal Nos. 4033 to 4053 of
2005, dated 23-3-2007] (Delhi) (para 2), Western Geo International Ltd. v. Asstt.
CIT [2007] 16 SOT 459 (Delhi) (para 2.1), RBF Rig Corpn. LIC (RBFRC) v. Asstt.
CIT [IT Appeal Nos. 1810 to 1815 of 2006, dated 30-11-2007] (para 3), Frank
Beaton v. CIT [1985] 156 ITR 16/[1986] 27 Taxman 471 (Delhi) (para 6), CIT
v. H.D. Dennis [1982] 135 ITR 1/[1981] 7 Taxman 231 (Bom.) (para 6), T.P.S.
Scott v. CIT [1998] 232 ITR 475/[1999] 103 Taxman 19 (Delhi) (para 6), CIT
v. ONGC [2003] 264 ITR 340/[2004] 134 Taxman 156 (Uttaranchal) (para 6),
Municipal Corpn. of Delhi v. Gurnam Kaur [1989] 1 SCC 101 (para 7), CIT v.
Alchemic (P.) Ltd. [1981] 130 ITR 168/ 5 Taxman 55 (Guj.) (para 7.4), Bajaj
Tempo Ltd. v. CIT [1992] 196 ITR 188/ 62 Taxman 480 (SC) (para 8), Boeing
v. CIT [2001] 250 ITR 667/[2002] 122 Taxman 49 (Mad.) (para 9), CIT v. Tara
Singh [1998] 233 ITR 669 (Delhi) (para 9), Emil Webber v. CIT [1993] 200 ITR
483/ 67 Taxman 532 (SC) (para 9.2), Tokyo Shibaura Electric Co. Ltd. v. CIT
[1964] 52 ITR 283 (Mys.) (para 9.2), CIT v. K.S. Sundaram [1999] 239 ITR
851/ 105 Taxman 317 (Mad.) (para 9.2), Instalment Supply (P.) Ltd. v. CIT
[1984] 149 ITR 457/[1985] 22 Taxman 466 (Delhi) (para 13.1), CIT v.
Common Wealth Trust Ltd. [1982] 135 ITR 19/10 Taxman 285 (Ker.) (para 13.1),
CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431/ 65 Taxman
397 (Delhi) (para 13.2), CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. [1996] 219
ITR 644/ 85 Taxman 381 (SC) (para 13.3), CIT v. S.S.M. Lingappan [1981]
129 ITR 597/7 Taxman 71 (Mad.) (para 13.7) and CIT v. American Consulting
Corpn. [1980] 123 ITR 513 (Ori.) (para 17).
S.K. Tulsiyan, Rakesh Nangia, Neeraj Sharma, Ms. Anitha Sumanth, Ms.
Preeti Goel, M.S. Syali and Tarandeep Singh for the Appellant.
Durga Charan Dash, Smt. Y.S. Kakkar and Davendra Shankar for the
Respondent.
ORDER

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 RBF 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. (supra) and Western Geo
International Ltd. (supra). 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 (RBFRC)
case (supra) 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 RBF Rig Corpn. LIC (RBFRC) case (supra) 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 perqui- site 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 1 (Delhi),

(ii) CIT v. H.D. Dennis [1982] 135 ITR 1 2 (Bom.), and

(iii) T.P.S. Scott v. CIT [1998] 232 ITR 475 3 (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 4 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 :
4.2-1Frank Beaton v. CIT [1985] 156 ITR 161 (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.
4.2-2The 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.
4.3CIT v. H.D. Dennis [1982] 135 ITR 1 2 : 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.

4.4Shri Tulsiyan also .referred to the case of T.P.S. Scott v. CIT [1998] 232 ITR 4753
(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"
"64.1Under 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.
64.2The 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.
64.3To 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.
64.4Such 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.
64.5The amendments will take effect from 1st April, 2003 and will, accordingly, apply
in relation to the assessment year 2003-04 and subsequent years.
64.6Necessary 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." [Emphasis supplied]
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
(supra), 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 1 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." [Emphasis supplied]
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. (supra) and
Western Geo International Ltd. (supra) 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. (supra) and in the case of Western Geo International Ltd. (supra).
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 consi-dering decision of Uttaranchal High Court in the case of ONGC
(supra), Bombay High Court in the case of H.D. Dennis (supra) and of Delhi High
Court in the case of Frank Beaton (supra) 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." (Salmond on Jurisprudence, 12th
Edn., p. 153). 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. (supra) 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. (supra), 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. (supra) 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 Gaslight Co. v. United Gas 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 (page 957).
"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 1. 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 assessees 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 1 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. (supra) and Western Geo International Ltd.
(supra). 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 6672 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 section 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 1 (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 4832 (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 3
(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",
(reproduced and highlighted in para 6.5 page 19 (above), 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 4571
(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 (p.
437):
‘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 com- pany’. 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 )." [Emphasis supplied]
Their Lordships dissented from the view taken by Full Bench of Kerala High Court
in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 191 . 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 any one 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 may or 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
4311 (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 (i) 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 sub-section. 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
6441 , 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
(supra). 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 employee 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. (supra) 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." [Emphasis supplied]
13.4 In the case of Frank Beaton v. CIT [1985] 156 ITR 16 1 (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. H.D. Dennis [1982] 135 ITR 1 2 (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 1 (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 5972 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 3, 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 (Head Note) :
"Held, affirming the decision of the High Court, (i) 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 (see pp. 486G, H, 487A, B).
(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’ (see p. 487c)."
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. (supra) 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. (supra). 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
(supra) 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 1, 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." [Emphasis supplied]
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
assessees 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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