Section 15, read with sections 10(10CC) and 17(2) of the Income-tax Act, 1961

Held In case, income-tax, which is the obligation of the employee, is paid by the employer, it would be a perquisite within the meaning of section 17(2)(iv). [Para 2] In cases where employees are paid tax free salaries, the taxable salary is to be determined after grossing up of salary and taxes paid, but whether grossing up has to be a single stage grossing up or multi-stage grossing up would depend upon terms and conditions of the employment. In case, terms of employment simply provide that the employee would be paid a particular salary and tax payable on that salary, then the actual salary would be the salary paid plus the tax paid by the employer on that salary, which would have to be added as perquisite. This would be a case of single stage grossing up. The same, however, would not be true when the terms of employment provide that employer would pay ‘net of tax’ salary. In such a case, the employer would be responsible for paying all taxes payable under the provisions of the Act and all taxes payable have to be added and not just the tax on the salary paid. For this purpose, first the tax on the salary paid would be computed. Since this tax has to be paid by the employer, it would be a perquisite in the hands of the assessee to be added to the salary on which tax would have to be paid by the employer in terms of the employment. As tax on tax has been paid by the employer, this would again be a perquisite on which further tax would have to be computed and added to the salary and so on. The process would go on indefinitely. This would be a case of multi-stage grossing up. Ultimately, the taxable salary would be the amount, which after deduction of tax payable therefrom would be reduced to the net salary paid by the employer. Thus, for the purpose of determining the taxable salary income, in such cases, the salary paid by the employer would have to be increased to such an amount so that after deducting tax payable on this amount, the resultant sum would be equal to the net salary payable by the employer. This has been recognized by section 195A, which provides for computation of tax for the purpose of TDS in cases where salary has been paid ‘net of tax’. Thus, where ‘net of tax salary’ is payable by the employer, the taxable salary has to be determined after multistage grossing up. [Para 2.1] There was no dispute about the fact that as per the terms of employment, the employer had to pay ‘net of tax salary’ to the assessee and, therefore, it was the responsibility of the employer to pay all taxes payable under the provisions of Act. It was the case of the assessee that tax perquisite in the instant case had been paid by the employer to the Government and not to the employee and, therefore, it could not be considered as a perquisite provided for by way of monetary payment and, therefore, multi-stage grossing up was not required to be made in the instant case and provisions of sub-section (10CC) of section 10, were applicable in the assessee’s case. His argument was that the phrase ‘not provided for by way of monetary payment’ was only in relation to employee and it applied only when the payment was made to the employee directly. Any indirect monetary payment made to others, would not be a case of perquisite provided for by way of monetary payment. [Para 4] Therefore, the question for consideration in the instant case arose as to whether the taxes paid by the employer to the Government on behalf of the assessee could be considered as a perquisite not provided for by way of monetary payment. The argument of the assessee was that this was not a monetary payment, as the same had not been made directly to the assessee but to the third party, i.e., the Government. A careful perusal of the provisions of section 10(10CC) 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; and (iii) it should have been paid by the employer. There was no dispute that tax paid by the employer on behalf of the assessee was a perquisite. Further, there was no dispute that the tax paid by the employer to the Government was 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 assessee directly or to some other party in discharge of the obligation of the assessee. The emphasis is on monetary payment. [Para 4.1] Therefore, the tax paid by the employer on behalf of the assessee was definitely a perquisite provided for by way of monetary payment and, therefore, the provisions of section 10(10CC) would not be applicable. Therefore, the assessee’s salary had rightly been determined after multistage grossing up. [Para 4.2]