Understanding Taxation of Salary Income with latest case laws: Part- II.

In the part – I, instances were provided what kind of income is being taxed under the head salary. The link for part- I is given below at the end of the article.  In respect of continue to obtain more information  in respect of taxation of salary, given below more recent judgments.

·         Tax borne by employer : Amounts paid directly by employer to discharge employees' income-tax liability, falls within included category of monetary benefits exempt under section 10(10CC). Social security, pension and medical insurance contributions by employer are not taxable as perquisites, as assessee does not get a vested right at the time of contribution to fund by employer, which continues to remain invested till assessee becomes entitled to receive it. Where tax is deposited in respect of non-monetary perquisite, it is exempt under section 10(10CC) and multiple stage grossing up is not applicable. Where employees' tax liability was borne by employer, tax refunds in respect of same could not be taxed in hands of employee, as such amount never belonged to employee. Refer, Yoshio Kubo .v. CIT, 218 Taxman 164.

·         Taxable Perquisite : Carrying of official work from residence and maintaining office were two different aspects. Sincethere as no office in residence of assessee, perquisite value pertaining to sweeper, gardner, watchman, rent free accommodation, etc. received by assessee from company in which he was director could not be considered to be used for official purposes. Therefore, the same was taxable in hands of the assessee as perquisite. Refer, CIT .v. Subrata Roy, 219 Taxman 133.

·         Rent free Accommodation: The Tribunal held that assessee was not drawing any salary and other directors of company were paid salary of Rs. 10,000 per month. The Tribunal thus took notional salary payable to assessee at Rs.  15,000 per month and value of perquisites was determined at Rs. 18,000 per year. Since there was nothing on record to show that annual letting value of house in neighborhood was higher than what had been fixed for house provided by company to assessee, in such a situation, valuation of rent free accommodation determined by Tribunal was to be confirmed. Refer, CIT .v. Balwant Rai Dewan, 219 Taxman 159.  

In the case of CIT v . Shankar Krishnan, 349 ITR 685, it was held that valuation of rent free accommodation should be as per rule 3 and no notional rent should be computed in this regard. 

Similar decision also provided in the case of Scott R. Bayman v. CIT, 76 DTR 113 (Delhi)(High Court), where the expenditure on repair of the house occupied by employee should be computed as per rule 3.

In an appeal before the High Court the revenue raised the question whether the tax paid by the employer (Japan Airlines International Company Ltd ) is a “Perquisite” within the meaning of section 17(2) and, therefore , in terms of rule 3 of the Income‐Tax Rules 1962 , cannot be taken in to consideration for computing the value of the perquisite “rent free accommodation”. While dismissing the appeal of revenue the court held that payment of income‐tax by the employer is payment of employee who has taxable income as an assessee is liable to pay tax. His income is chargeable to tax. It is the obligation of the employee as an assessee to pay tax . Its this obligation which is being discharged and paid by the employer .Therefore , it would fall within the ambit of section 17(2) (iv). Thus the tax component paid by the employer towards and as income‐tax , when an employee is entitled to tax free salary , is a perquisite within the meaning of section 17 (2) and the monetary value of such tax free salary , that is tax component could not be included in computing the perquisite value of rent free accommodation provided by the employer to the employees. Refer, CIT v. Telsuo Mitera, 345 ITR 256.

·         Business expenditure : from LIC. He claimed a deduction of 40% of the said bonus, on the basis that he had incurred expenditure to the extent of 40% for canvassing business. The High Court held that the claim could  not be allowed. On appeal, held, dismissing the appeal:

Incentive bonus received by Development Officer of LIC prior to 1.4.1989 is to be treated as ‘salary’. Compartmentalization of income under various heads and computation thereof has to be done strictly in accordance with the statutory scheme. Accordingly, the assessee is only entitled to the deductions

specified under s. 16, and the general claim regarding business expenses was correctly disallowed by  the High Court.   Refer, T.K. Ginarajan v. CIT, 217 Taxman 323 (SC)

·         Travelling & Conveyance: In the case of CIT (TDS) v. Oil and Natural Gas Corporation (India) Ltd, 358 ITR 131, it was held that reimbursement to employee towards travelling & conveyance expenses towards business is not salary income for the employee.

·         Hypothetical Tax:  Mumbai HC in the case of CIT v. Jaydev H. Raja, held that Hypo tax should not be assessable for tax.

·         Keyman Policy: In the case of CIT v . Rajan Nanda (Delhi), 349 ITR 8, the keyman policy converted into normal policy and nothinh was being taxed in the hands of employee. However,  the stand will now change due to amendment made in Budget 2013.

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