IN THE ITAT
Mitsubishi Corpn.
v.
Deputy Commissioner of Income-tax, TDS Circle
50(1),
I.P. BANSAL, JUDICIAL Member
AND K.G. BANSAL,
ACCOUNTANT MEMBER
IT APPEAL NOS. 5074, 5075 AND 5076 (
[FINANCIAL YEARS 1995-96 TO 1997-98]
NOVEMBER 2, 2007
Section 17(2), read with rule 3 of the
Income-tax Rules, 1962 - Salaries - Perquisites - Assessment years 1996-97 to
1998-99 - Whether tax paid by employer in respect of salaries paid to employees
is salary in terms of rule 3 - Held, yes - Whether tax so paid by employer in
respect of salary of employee is ‘salary’ for working out perquisites in
respect of rent-free accommodation - Held, yes
Facts
The assessee, an expatriate employee, was provided rent-free
accomodation by its employer. The Assessing Officer while computing value of
perquisite for the employee in respect of rent-free accomodation did not
include tax paid by the employer on behalf of the employee in respect of said
rent-free accomodation. Subsequently, the Assessing Officer passed an order
under section 154, and included such tax in the salary for working perquisite
in respect of the rent-free accommodation and, accordingly, worked out the
liability under section 201(1) and section 201(1A).
In holding so, the Assessing Officer had relied on the decision of Delhi
High Court in the case of T.P.S. Scott v. CIT [1998] 232 ITR
475/[1999] 103 Taxman 19 in which, it was pointed out that tax perquisite is a
part of the gross salary. On appeal, the Commissioner (Appeals), held, that the
tax paid by the employer in respect of salaries paid to the employees is
“salary” under rule 3, for the purpose of computing the value of perquisites in
respect of rent-free accommodation provided to the expatriate employees. He,
therefore, upheld the order of the Assessing Officer.
On second appeal :
Held
The definition of the term “salary” is given in
the Explanation to rule 3. For
the purpose of this rule, the term is defined in an inclusive manner to include
within its ambit the pay, allowances, bonus or commission payable monthly or otherwise,
but does not include—(i)
dearness allowance or dearness pay unless it enters into computation of
superannuation or retirement benefits of the employee concerned; (ii) employer’s contribution to the provident
fund account of the employee; (iii)
allowances which are exempt from payment of tax; and (iv) any allowance in the nature of
entertainment allowance to the extent such allowance is deductible under clause
(ii) of section 16. It was
further pointed out that this definition was amended with effect from 1-4-2001
to include within the ambit of the term “salary” the pay, allowances, bonus or
commission payable monthly or otherwise or any monetary payment, by whatever
name called by one or more employers, as the case may be, but does not include—(a) dearness allowance or dearness pay
unless it enters into computation of superannuation or retirement benefits of
the employee concerned; (b)
employer’s contribution to the provident fund account of the employee; (c) allowances which are exempt from payment
of tax; (d)
the value of perquisites specified in sub-section (2) of section 17 and (e) any payment or expenditure specifically
excluded under proviso to sub-clause (iii)
of clause (2)
or proviso to clause (2) of section 17. Material change took place by the
inclusion of item (d)
from 1-4-2001, namely, the value of perquisites specified in clause (2) of section 17. Thus, for assessment year
2001-02 and onwards, perquisites specified in clause (2) of section 17 are included in the
definition of salary for the purpose of rule 3. However, the case of the
assessee was that this amendment did not materially alter the definition in
view of Board circular No. 15, dated 12-12-2001. It was mentioned in the said
circular that the definition of “salary” for calculating the perquisite value
is the same as per earlier rule. The only change is that medical allowance and
reimbursement for treatment of serious illness, as prescribed in the proviso
below section 17(2)(vi),
has now been,excluded from the definition of salary for this purpose. For
furnished accommodation, the provision of valuation of perquisite of
furnishing, fittings and furniture at 10 per cent of the original cost per
annum or actual hire charges is continued. On the basis of said circular, it
was argued that the definition of the term “salary” remained the same before
and after 1-4-2001 and, therefore, clause (d)
regarding the value of perquisites specified to in clause (2) of section 17
would have to be read in the earlier definition of the term. In view thereof,
no perquisite would enter in the definition of the term. In other words, the
case of the assessee was that the term “salary” would not include within its
ambit the value of such perquisites even in relation to assessment years prior
to assessment year 2001-02. [
Further, the assessee had also contended that
the decision of the High Court in the case of T.P.S.
Scott (supra)
did not support the case of the revenue as in that case tax paid by the
employer was held to be perquisite under section 17(2)(iv) and not pay or salary. [
It was found that the decision in the case of T.P.S. Scott (supra)
was given on totally different set of facts as the assessee in the said case raised
a dispute that he was not the employee of the British High Commission, but he
was employee of British Council and, therefore, the tax paid by the British
High Commission was not salary as employer-employee relationship did not exist.
The High Court pointed out that salary paid by an employer or a former employer
would constitute “salary”. Therefore, the payment amounted to salary. A
reference was also made to section 17(2)(iv)
under which any sum paid by the employer in respect of any obligation which,
but for such payment, would be payable by the assessee amounted to perquisite,
which was included in the definition of salary under section 17(1)(iv). Thus, it is not the ratio of the case
that tax paid is perquisite and not pay or salary under section 17(1). Further
the assessee had merely relied on the Board’s circular No. 15, dated 12-12-2001
to argue that the definition of the word “salary” in rule 3 is the same before
1-4-2001 and thereafter. However the specific inclusion of clause (d) in ‘salary’ after 1-4-2001 was a
conscious decision, which materially altered the definition not only by
excluding perquisites under section 17(2), but also certain other perquisites
mentioned in section 17(2)(iii)
and proviso to section 17(2). In the face of these changes, it would not stand
to reason to accept that the definition of the term ‘salary’ in rule 3 was the
same before and after 1-4-2001. The Kerala High Court in the case of CIT v. CW
Steel (No. 1) [1992] 86 ITR 817, has referred to the
definition of ‘salary’ under Income-tax Rules, 1922, and pointed out that tax
paid by the employer was in the nature of ‘pay’. The Bombay High Court in the
case of CIT v. H.D. Dennis [1982] 135 ITR 1/[1981]
7 Taxman 231 has distinguished the
definition under rule 3 and under section 17 and it has been pointed out that
the definition in rule 3 is for the purpose of valuation of perquisites, mentioned
in the rule, for computing income under the head ‘salary’. The objective of
giving a separate definition in rule 3, was to exclude certain kinds of
payments, which were otherwise covered by the word ‘salary’. It was also
pointed out that the dictionary meaning of the word ‘pay’ includes all
periodical payments for services rendered and, therefore, the words ‘salary’
and ‘pay’ would include tax paid by the employer on behalf of the employee
within their ambit. Thus, in view of above two decisions of the High Courts tax
paid by the employer in respect of salaries paid to employees is ‘salary’ under
rule 3. Thus, the tax payment is ‘pay’ and, therefore, salary under rule 3.
[Para 3.7]
Further, the definition of the term ‘salary’ in
rule 3 before 1-4-2001 makes it amply clear that there was no scope to exclude
the tax from ‘salary’ because it was pay and it was not specifically excluded
by any of the exclusionary clauses mentioned therein. This became more clear
when a conscious decision was taken to amend the rule and a clause (d) was introduced for the purpose of
excluding the value of perquisites specified in clause (2) of section 17. There
is only one interpretation which can be placed on the term and the same is
clear from its definition in rule 3 as it existed for the relevant years.
Therefore, the mistake was apparent from record and flowed from the plain
reading of Explanation I to
rule 3. [Para 4]
Thus, the Commissioner (Appeals) was right in
upholding the order of the Assessing Officer in the matter.
case
review
T.P.S. Scott v. CIT
[1998] 232 ITR 475/[1999] 103 Taxman 19 (Delhi) [Para 3.7] distinguished on
facts.
CIT v. C.W. Steel
(No. 1) [1992] 86 ITR 817 (Ker.) and CIT v. H.D. Dennis
[1982] 135 ITR 1/[1981] 7 Taxman 231 (Bom.) [Para 3.7] followed.
Cases
referred to
T.P.S. Scott v. CIT
[1998] 232 ITR 475/[1999] 103 Taxman 19 (
V.S. Rastogi and Tarandeep Singh for the Appellant. Davendra Shanker for the
Respondent.