“Hypothetical Tax” of expatriate employee is not assessable as income

CIT vs. Jaydev H. Raja (Bombay High Court)

The assessee, a resident but not ordinarily resident individual, was an employee of Coca-Cola Inc USA and had income under the head “Salaries”. Under the Tax Equalization Policy framed by the said company, the assessee was guaranteed net of tax salary and the company was to bear all actual taxes imposed on the employee’s assignment income. The employee had to reimburse the company that part of his total tax liability which he would have paid had he worked in Atlanta. This was known as the “Theoretical Tax Liability”. The assessee claimed that as the company was liable for the amount in excess of the theoretical tax liability, it was proper to net the company’s tax reimbursement with the employee’s contribution towards that reimbursement. It was claimed that the hypothetical tax had to be reduced and that only the actual tax borne by the employer should be treated as a perquisite. In AY 1994-95, the assessee received Rs. 77 lakhs on which the tax liability was Rs. 35 lakhs which was to be reimbursed by the employer. The total salary income was consequently Rs. 112 lakhs on which the actual salary paid was Rs. 50 lakhs. The assessee added Rs. 50 lakhs to its income and deducted Rs. 15 lakhs (Rs. 50 – 35 lakhs) on the ground that it was the “hypothetical tax” that he was liable to reimburse to the company. The AO & CIT(A) rejected the claim though the Tribunal (order attached) upheld it on the ground that as, out of the total tax liability of Rs.50 lakhs, the company would reimburse Rs.35.00 lakhs and Rs.15.00 lakhs would be borne by the assessee out of his salary of Rs.77.00 lakhs, the assessee’s taxable Income could not be more than Rs.112.00 Lakhs (77 + 35) on which the assessee had paid full tax of Rs.50.00 lakhs. On appeal by the department to the High Court, HELD dismissing the appeal: