1971 (8) TMI 68 - HC - Income Tax

Whether the tax borne by the assessee s employer was includible in the total amount of salary for the purpose of computing the value of the rent-free accommodation given to the assessee under rule 24A of the Indian Income-tax Rules 1922 - whether salary of the assessee would include the income-tax paid by the employer held that ncome-tax paid by the employer is really part of the salary of the assessee within the meaning of the definition of the term in rule 24-A and that it must be included in the income of the assessee for the purpose of finding out the value of the rent-free accommodation

Summary

Issues:
Whether the tax borne by the assessee's employer should be included in the total amount of salary for computing the value of rent-free accommodation under rule 24A of the Indian Income-tax Rules, 1922.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the inclusion of the income-tax paid by the employer in the total amount of salary for calculating the value of rent-free accommodation provided to the assessee. The employer had paid income-tax of Rs. 10,220 on behalf of the assessee, who was an employee of a bank and received various allowances along with a salary during a specific period. The Income-tax Officer contended that the employer's income-tax payment should be considered in determining the value of the rent-free quarters. The Appellate Assistant Commissioner agreed, citing section 17(1) of the Income-tax Act, which defines "salary" to include perquisites like income-tax paid by the employer. However, the Appellate Tribunal overturned this decision, stating that salary, as per rule 24A of the Indian Income-tax Rules, does not encompass perquisites such as employer-paid income tax.

The primary question revolved around whether the income-tax paid by the employer should be considered part of the assessee's salary for calculating the value of rent-free accommodation. Rule 24A(1)(a) of the Indian Income-tax Rules outlines the method for determining the value of perquisites, including rent-free accommodation, based on a percentage of the salary. The Explanation to rule 24A(1)(b) defines "salary" to include various components but does not explicitly mention income-tax paid by the employer. Section 7 of the Indian Income-tax Act, 1922, mandates the payment of tax by the assessee on salary, perquisites, and other earnings due from the employer. Explanation 1(iv) to section 7 broadens the definition of "perquisite" to include amounts paid by the employer that would have been payable by the assessee.

The court analyzed the nature of salary and income-tax in the context of employment contracts. Referring to legal precedents, the court emphasized that income-tax paid by the employer effectively increases the salary received by the employee, as the employee ultimately benefits from receiving a tax-free salary. The definitions of "salary" from various dictionaries were cited to highlight the concept of fixed compensation for services rendered. The court concluded that the income-tax paid by the employer should be considered part of the assessee's salary as per the inclusive definition in rule 24A, thereby necessitating its inclusion in the calculation of the value of rent-free accommodation.

In summary, the court answered the question in the affirmative, ruling against the assessee and affirming that the income-tax borne by the employer forms part of the assessee's salary for the purpose of determining the value of rent-free accommodation. The judgment underscores the legal interpretation of salary, perquisites, and the inclusion of income-tax paid by the employer in assessing the total compensation received by an employee.