TMI Blog2006 (6) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) in rather strong terms, is that the assessee was compelled to pay the taxes in respect of the salaries of the employees received by them outside India from the Japanese company, which the Japanese company ought to have deducted and paid to the Indian Government under section 192 of the Act. Since it failed to do so and since it was a non-resident company, and since the assessee was its 100 per cent subsidiary, there was pressure brought upon the assessee-company to settle the matter with the Income-tax Department by paying the tax component referable to the salaries paid to the employees by the Japanese company outside India. We are not merely referring to the difficulty in ascertaining the amount of the incentive. Even the very question whether the assessee was liable to pay the taxes as incentive was not clear, according to the assessee. The statement that the employees were eligible for some bonus and incentive for working inIndia in the letter is quite ambiguous and non-committal. Nothing can be inferred therefrom in favour of the assessee. Thus, we hold that the Income-tax authorities were right in saying that there was no ascertained liability for payment of the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid employees by way of incentives the taxes which they have to pay in India in respect of the salary and perquisites received by them from the Japanese company outside India. The taxes amounted to Rs. 4,21,87,756/- for the assessment year 1997-98 and Rs. 2,78,28,161/- for the assessment year 1998-99. The amounts were claimed as deduction in computing the income for income tax purposes. It would appear that for both the years, the deductions were not claimed in the original returns but were claimed in the revised returns. It further appears that the amounts were claimed as deduction in the profit and loss account relating to assessment year 1999-2000 (year ended 31-3-1999) on payment basis but the tax auditors of the assessee while preparing their report had disallowed the same on the ground that the payments related to assessment years 1997-98 and 1998-99 and on this basis, revised returns would appear to have been filed for the assessment years under consideration. The Assessing Officer did not make an issue out of this but held that the amounts cannot be allowed as a deduction. His reasons are contained in the assessment order for the assessment year 1997-98. They are as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the expatriate employees but submitted that there was an oral arrangement with them that whatever taxes they were liable to pay in respect of the salaries and perquisites received by them from the Japanese company outside India would be paid by the assessee-company by way of an incentive. He submits that the salary paid by the assessee to these employees was not much compared with what they were getting from the Japanese company which was their other employer, but since they had the expertise in international trading which was very necessary for the efficient functioning of the assessee-company, they had to be retained by the assessee by offering them attractive incentives which, in the present case, took the form of the tax payments which they were bound to make to the Indian Government in respect of the salaries and perquisites received by them from the other employer (Japanese company) outside India. This, according to Mr. Kapila, was the arrangement under which the services of the employees were seconded by the Japanese company to the assessee-company and it was in the assessee's own interest to pay the incentive and retain the services of the employees. He pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imposing penalty. The submission was that if the perquisites are part of the salary and if the salary relates to assessment years 1997-98. and 1998-99, the perquisites are also allowable as deduction in those years as it would be incongruous to say that while the salary is allowable as a deduction in those years, the perquisites cannot be so allowed. 6. The alternative prayer of Mr. Kapila was that in case the amounts are not found in law allowable for the years under appeal, a direction should issue that they should be allowed in the year of payment namely assessment year 1999-2000. 7. Mr. Sudhir Chandra, the learned CIT-DR besides strongly relying on the orders of the Income Tax authorities, posed the question as to why the assessee did not pay the taxes in the relevant years if it was really under a contractual liability with the employees to pay the same, but waited till those years went by and chose to pay the same only in the previous year ended 31-3-1999. He also pointed out that it is significant, in the above background, that the claim was not put forth in the original return of income, nor within any reasonable period thereafter, but was made only after the tax auditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Rupees 5,50,892 compared to the salary of Rs. 38,67,789/- paid by the Japanese company outside India. The taxes payable on the salary paid by the Japanese company would, therefore, amount to a substantial amount which the employees would not like to delay. Further, if the employees were so important to the assessee because of their expertise in international trading, it stands to reason and probabilities that the assessee would employ them under clear terms and conditions reduced to writing. We have not been informed 3 as to whether even the salary paid by the assessee-company to the expatriates was only under oral arrangement or whether there was a contract in writing. Considering the fact that we are dealing with people involved in business and professionals who come from Japan all the way to India, it is difficult to believe that the entire arrangement was not formalized or reduced into writing and was merely oral. The inference is that there was no such arrangement either in writing or oral. The assessee merely agreed to pay the salary to the employees when their services were seconded by the Japanese company. If there is no contractual liability, then the amounts cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were paid not under any contract with the employees, but in order to settle some controversy arising out of non-deduction of tax under section 192 of the Act in respect of the salaries paid by the Japanese company to the expatriate employees outside India. It seems to us that the amount that was to be deducted and paid by the Japanese company as taxes on the salaries was paid by the assessee-company under an arrangement or settlement with the Income-tax authorities. We are unable to accept the assessee's claim that they are paid under a contractual liability. It appears to us that there was no liability at all in the first place. 9. In the above view taken by us, it is not necessary for us to consider whether the Income-tax authorities were right in saying that the liability was contingent. It is also not necessary for us to consider the question whether the taxes allegedly paid as incentives formed part of the salary of the employees for the assessment years 1997-98 and 1998-99 and consequently constituted deduction for those years. 10. The learned counsel for the assessee took us through the letter dated 18-1-2000 written by the assessee to the Assessing Officer giving justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily on grounds of commercial expediency and indirectly to facilitate the carrying on of the business. The argument based on the principle of commercial expediency is in any cost available to the assessee only in the year of payment i.e., assessment year 1999-2000. It is only in that year that the amount was actually paid without any pre-existing liability and therefore, this argument is open to the assessee to be raised only in that year. We, therefore, do not see how the amounts can be allowed as a deduction on the principle of commercial expediency for the years under consideration. Actually Mr. Kapila, perhaps realizing this difficulty, prayed only for a direction to be issued that the amounts should be allowed as a deduction in the assessment year 1999-2000. That year is not before us and therefore, we are unable to accede to the prayer. 13. For the aforesaid reasons, we are unable to allow the amount of taxes paid by the assessee as incentive, as a deduction in the assessment years 1997-98 and 1998-99. 14. In respect of the assessment year 1998-99, there are two other grounds. The first is against the disallowance of the employer's contribution of Rs. 1,77,477/- to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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