CIT vs. YUJI HORIKAWA

The revenue has preferred these appeals under Section 260A of the Income Tax Act, 1961 („Act‟, for short) in the case of Telsuo Mitera, Isao Sakai Yoshimi Kamano and Yuji Horikawa. These appeals pertain to the assessment year 2006-07. As a similar issue arises for consideration, we are disposing of these appeals by this common order.

“3. Valuation of perquisites.—For the purpose of computing the income chargeable under the head ―Salaries‖, the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment

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shall be determined in accordance with the following sub-rules, namely:— xxx

xxx

xxx (6) The value of any benefit or amenity resulting from the provision by an employer, who is not liable to pay fringe benefit tax under Chapter XII-H of the Income- tax Act and is engaged in the carriage of passengers or goods to any employee or to any member of his household for personal or private journey free of cost or at concessional fare, in any conveyance owned, leased or made available by any other arrangement by such employer for the purpose of transport of passengers or goods shall be taken to be the value at which such benefit or amenity is offered by such employer to the public as reduced by the amount, if any, paid by or recovered from the employee for such benefit or amenity :

Provided that nothing contained in this sub-rule shall apply to the employees of an airline or the railways. xxx

xxx

xxx (9) This rule shall come into force with effect from the 1st day of April, 2001:

Provided that the employee may, at his option, compute the value of all perquisites made available to him or any member of his household for the period beginning on 1st day of April, 2001 and ending on 30th day of September, 2001 in accordance with the Rules as they stood prior to this amendment:

Provided further that for an employee being an employee of an airline, the provisions of sub-rule (6)

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shall come into force with effect from the 1st day of April, 2002.

Explanation.—For the purposes of this rule— (i) ―accommodation‖ includes a house, flat, farm house or part thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure; (ii) ―entertainment‖ includes hospitality of any kind and also, expenditure on business gifts other than free samples of the employers own product with the aim of advertising to the general public; (iii) ―hotel‖ includes licensed accommodation in the nature of motel, service apartment or guest house; (iv) ―member of household‖ shall include—

(a) spouse(s)

(b) children and their spouses

(c) parents

(d) servants and dependants; (v) ―remote area‖, for purposes of proviso to this sub-rule means an area that is located at least 40 kilometres away from a town having a population not exceeding 20,000 based on latest published all-India census; (vi) ―salary‖ includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called from one or more employers, as the case may be, but does not include the following, namely:—

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(a) dearness allowance or dearness pay unless it enters into the 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 exempted from payment of tax; (d) the value of perquisites specified in clause (2) of section 17 of the Income-tax Act; (e) any payment or expenditure specifically excluded under proviso to sub-clause (iii) of clause (2) or proviso to clause (2) of section 17; (vii) ―maximum outstanding monthly balance‖ means the aggregate outstanding balance for each loan as on the last day of each month.‘ (emphasis supplied)

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or profits in lieu of or in addition to any salary or wages etc. Clause (iv) of Section 17(1) reads as under: -

“17. For the purposes of sections 15 and 16 and of this section,—

(1) “salary” includes —

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees , commissions, perquisites or profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(va) any payment received by an employee in respect of any period of leave not availed of by him;

(vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; and (viii) the contribution made by the Central Government or any other employer in the previous

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year, to the account of an employee under a pension scheme referred to in section 80CCD” (emphasis supplied)

(i) the value of rent-free accommodation provided to the assessee by his employer;

(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;

xxx

xxx

xxx (iiia) [***]

(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;

(v) any sum payable by the employer, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund or a Deposit-linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)], to effect an assurance on the life of the assessee or to effect a contract for an annuity; [***]

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(vi) the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee.

xxx

xxx

xxx (vii) the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and

(viii) the value of any other fringe benefit or amenity as may be prescribed:]

Provided further that for the assessment year beginning on the 1st day of April, 2002, nothing contained in this clause shall apply to any employee whose income under the head “Salaries” (whether due from, or paid or allowed by, one or more employers) exclusive of the value of all perquisites not provided for by way of monetary payment, does not exceed one lakh rupees. (emphasis supplied) 8. A reading of Sub-clause (i) to (vii) would indicate that the term perquisites has been defined in an inclusive and expansive manner in the sub-clauses. Sub-clause (iv), which has been underlined, states that any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee, i.e., the employee, is treated and regarded as a perquisite.

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above his salary. The benefit received by an employee is incidental to employment in excess of or in addition to the salary.‖

―Perquisites – Emoluments, privileges, fringe benefits, or other incidental profits or benefits attaching to an office or employment position in addition to regular salary or wages. Shortened term ―Perks‖ is used with reference to such extraordinary benefits afforded to business executives (e.g. free cars, club memberships, insurance, etc.) See also Fringe benefits.‖

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excluded from “salary” for the purpose of ascertaining the perquisite value of rent free accommodation in view of the specific language of Rule 3, Explanation Clause (vi)(d). Explanation to Rule 3 clause (vi), no doubt includes monitory benefit under the term “salary” for the purpose of Rule 3 but by specific stipulation excludes the value of perquisites specified in Section 17(2) of the Act. What is included and has been treated as perquisites under Section 17(2) of the Act cannot be added and treated as monetary benefit because of specific exclusion.

―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

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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.‖

(iv) of Clause (2) to Section 17 and it was observed as under:

―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-

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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.

In the view taken hereinabove, we are fortified by two English decisions i.e, North British Railway Co. v. Scott [1922] 8 TC 332 (HL) and Hartland v. Diggines [1926] 10 TC 247 (HL). Both these decisions have been followed by two High Courts in India, i.e., the Bombay High Court in CIT v. H. D. Dennis [1982] 135 ITR 1 and the Madras High Court in CIT v. I. G. Mackintosh [1975] 99 ITR 419. Both the High Courts have held that the income-tax paid by the employer on behalf of the employee is a part of the salary of the assessee and the word ‗‗salaries‘‘ would in its natural import comprehend within it tax paid on behalf of the employee.‖

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been observed that payment of tax by an employer should be regarded and treated as a perquisite under Section 17(2)(iv) of the Act.

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Corporation v. Commissioner of Income Tax and Anr. The said decision pertains to assessment years 1996-97, 1997-98 and 1998-99. In the said decision it has been held that perquisites in the form of tax free salary are a part of the gross salary under Section 17(1) of the Act. The Bench held as under:

“15. Next, it is to be examined as to whether in the instant case, the issue involved was debatable requiring interpretation of the relevant provisions? Law on this aspect has been settled by plethora of judgments. Such an issue came up before the Supreme Court in Emit Webber (supra) in the following terms:

―6. The facts found by the Tribunal thus show that the assessee-appellant was paid certain salary free of tax but that the tax payable in that behalf was to be and was in fact- paid by Ballarpur. The assessment was made upon the assessee directly. The question is whether the said tax component paid by Ballarpur can be included within the income of the assessee. The first contention of the learned Counsel for the assessee is that the amount paid by Ballarpur by way of tax cannot be treated as 'income' of assessee at all. His second contention is that the assessee did not receive the said amount and, therefore, it cannot constitute his income. Indeed, the learned Counsel sought to argue that Ballarpur was under no obligation to pay the said tax amount relating to the salary amount received by the assessee. We find it difficult to agree with the learned Counsel.

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expression 'income' does not loss its natural connotation. Indeed, it is repeatedly said that it is difficult to define the expression 'income' in precise terms. Anything which can properly be described as income is taxable under the Act unless, 'of course, it is exempted under one or the other provision of the Act. It is from the said angle that we have to examine whether the amount paid by Ballarpur by way of tax on the salary amount received by the assessee can be treated as the income of the assessee. It cannot be overlooked that the said amount is nothing but a tax upon the salary received by the assessee. By virtue of the obligation undertaken by Ballarpur to pay tax on the salary received by the assessee among others, it paid the said tax. The said payment is, therefore, for and on behalf of the assessee. It is not a gratuitous payment. But for the said agreement and but for the said payment, the said tax amount would have been liable to be paid by the assessee himself. He could not have received the salary which he did but for the said payment of tax. The obligation placed upon Ballarpur by virtue of Section 195 of the Income Tax Act cannot also be ignored in this context. It would be unrealistic to say that the said payment had no integral connection with the salary received by the assessee. We are, therefore, of the opinion that the High Court and the authorities under the Act were right in holding that the said tax amount is liable to be included in the income of the assessee during the said two assessment -years.‖

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―1. Whether, on the facts and in the circumstances of the case, the amount of tax borne by the employer, including tax on tax, on behalf of the employee, constitutes 'salary' as defined in explanation (2) to rule 3 of the I.T. Rules, 1962, for the purpose of determining the value of rent perquisite in terms of section 17 of the I.T. Act, 1961?‖

―Firstly, we have already pointed out that the definition is inclusive and it is a well-settled rule of interpretation of inclusive definition that it is not controlled or confined to the words or expressions which are included in the said definition. On the contrary, it is intended to enlarge the scope of the concept which is sought to be defined. Secondly, the purpose of r. 3 is to lay down the mode of valuation of the perquisite for the purpose of computing the income chargeable under the head "Salaries" under s. 15 of the Act. The definition of the word "salary" given in s. 17, as the section itself shows, is for the purposes of ss. 15 and 16 of the Act. It is, therefore, legitimate to presume that the Legislature did not intend to give a different meaning to the

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word "salary" in r. 3 from that given in s. 17 of the Act. Therefore, the two definitions will have to be construed as co-extensive in their scope except so far as there is an express exclusion of some of the payments which otherwise go with the word "salary". Thirdly, the purpose of giving a separate definition of salary in r. 3 appears to be to exclude certain kinds of payments which are otherwise covered by the word "salary". This is obvious from the fact that the definition of salary given in the said rule excludes from its ambit only certain allowances, viz., dearness allowance or dearness pay, unless it enters into the computation of superannuation or retirement benefits of the employee; employer's contribution to the provident fund account of the assessee and allowances which are exempted from the payment of tax‖

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respect of the salary payment made to these employees during the relevant period.

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the amended Rule, perquisite under Section 17(2) has to be excluded for the purpose of computing perquisite value of “rent free accommodation”. We clarify that we have not examined and interpreted Section 10(10CC) of the Act. We have examined and interpreted Rule 3 after it was amended w.e.f. 1.4.2001.

The appeals stand dismissed.

SANJIV KHANNA, J

R.V.EASWAR, J MAY 17, 2012 sv