TMI Blog1985 (5) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... 71-72 at Rs. 8,33,486 and the tax demand for this period was for Rs. 7,37,508. For 1972-73, the salary was computed at Rs. 3,04,311 and the tax demand was for Rs. 2,53,764. It may be mentioned that the assessment was based only on salary income, so that the " tax-free " salary of Rs. 73,712 plus perquisites was grossed up to Rs. 8,33,486 for the assessment year 1971-72 and the " tax-free " salary of Rs. 39,072 for 1972-73 with perquisites was grossed up to Rs. 3,04,311. The tax demands were collected from petitioner No. 2, which paid them up, perhaps because petitioner No. I found himself unable to leave the country unless they were paid. When the assessments were made, the first petitioner had already left the country; so no appeals could be filed by him but, eventually, revision petitions were filed before the CIT under section 264 of the I.T. Act, 1961. An order was passed by the Commissioner on September 8, 1982, holding that the calculation made by the ITO was correct. Against that order, the present writ petition was moved. On consideration of the petition, a show-cause notice was issued to the respondents. It was represented to us that this was a point of some importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to merits, the actual method of calculation is not very clear from the order, but it is clear from the affidavit filed as a return to the writ petition. It is, therefore, better to deal with the method of calculation set out in the return or counter-affidavit to the petition. Here, the calculation for 1971-72 is explained in some detail. It is pointed out that a salary of Rs. 73,712 was paid by way of tax-free salary for the assessment year 1971-72. This is stated in the certificate of the Area Manager, M/s. Qantas Airways Ltd., Schedule-I to this affidavit. In addition, free furnished quarters for which rent amounting to Rs. 22,266 was paid, was provided to Mr. Beaton. Income-tax amounting to Rs. 5,46,530 was deposited by the second petitioner, M/s. Qantas Airways Ltd. According to the affidavit, the perquisite value of the furnished accommodation had to be worked out under rule 3 of the I.T. Rules. The perquisite value would be either 121 per cent. of the salary or the actual rent paid, whichever was lower. The Commissioner has taken the salary at Rs. 73,712 and stated that a tax-free salary of this amount at the rates prevalent in 1971-72 would only be earned if the sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent. on this amount, the tax could not be more than Rs. 95,978. Under the provision of section 192, a person responsible for paying the salary had to deduct the tax amount from the salary. If the tax was 100 per cent. he would have deducted the whole of the amount and paid it to the Reserve Bank giving Mr. Beaton nothing. We have deliberately not worked out the actual tax on Rs. 95,978 for the purposes of this argument, but it will be clear that in actual fact, the tax on Rs. 95,978 will be considerably less than the full 100 per cent. as we have computed. Similarly, for 1972-73, the maximum amount at 100 per cent. would be Rs. 50,547. Instead of paying this amount to the I.T. Department, M/s. Qantas Airways paid the additional amount to its employee, Mr. Beaton. The addition to his salary would be Rs. 95,978 plus the extra amount which was not deducted under section 192. The total salary would, therefore, be less than twice Rs. 95,978. It is the fact that a different amount is arrived at by a different method of computation makes one believe that perhaps the Department has not used the correct method of computing the tax, or at least not the only possible method. A complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons is necessary by this method, it is not reasonably possible to calculate the amount of tax by this method. So, we have either to say that the tax on further tax has to be paid by Mr. Beaton or, we have to say that the entire tax has to be paid by M/s. Qantas Airways, so that an infinite number of calculations has to be made which may eventually lead to the same conclusion as arrived at by the Department. It is this intriguing feature of the case which had made an answer to the point extremely difficult. A number of cases have been cited before us at the Bar, and they are of very great help. There is a judgment in favour of the Department in Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283, wherein the Mysore High Court held that the real income by way of royalty received under an agreement was not the royalty plus the tax, but such an amount as would be the result of grossing up by a method similar to that adopted by the Department in the present case. In a decision by the Orissa High Court, CIT v. American Consulting Corporation [1980] 123 ITR 513, the answer seems favourable to the assessee. The conclusion was that what the arrangement provided for was paying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n tax. Any additional sum has to be paid by Mr. Beaton. In other words, the agreement in this case means that M/s. Qantas Airways has to pay Mr. Beaton a salary and has to pay a tax on that salary. There is no obligation on M/s. Qantas Airways to pay the tax on tax paid on behalf of Mr. Beaton to the Department. That additional tax has to be paid by Mr. Beaton himself. On this reasoning, we would allow the petition as follows. A writ will be granted in favour of the petitioners to the effect that the tax on the salary has to be paid by M/s. Qantas Airways as if it is a taxable salary. Any further tax resulting from that payment has to be paid by Mr. Beaton. The further difficulty we find is that Mr. Beaton has left this country in 1971 and not now available. We have, therefore, to see how Mr. Beaton's portion of the tax is to be paid. We had listed the case for re-hearing to see what possible directions could be given in this behalf and we were assured by learned counsel for the petitioners that the tax would be paid by Mr. Beaton on the full amount. If this tax is paid, then the additional amount paid by M/s. Qantas Airways Ltd. would be refunded to it. In case the Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he means really is that he will go on paying whatever income-tax the employee will be called upon to pay in respect of his salary, then the real salary of the employee is not the amount be is actually paid but an amount calculated in such manner that the assessee will be left with a net salary income of Rs. 50,547 in his hands and with no liability whatsoever to pay income-tax thereon. This apparently simple proportion will involve the payment out of stupendous sums by the employer to the employee partly and to the Income-tax Department partly as will be seen from the following steps illustratively and roughly worked out with reference to a " tax-free " salary of Rs. 50,547 on the basis of the rates prevalent for the assessment year 1983-84. -------------------------------------------------------------------------------------------------------------------------------------------------- Amount Tax Tax on Amount of salary thereon previous item perquisite --------------------------------------------------------------------------------------------------------------------------------------------------- 50547 14273 -- 14,273 14273 ------------ 22254 14273 7,981 6482 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Indian income-tax on the above salary and allowance will be a company responsibility." On the above language, I think it is clear that what all the employer intended and agreed to do was to pay income-tax that would be payable by the employee on his cash salary and allowances as mentioned above. The letter of appointment proceeds, afterwards, to talk of accommodation and other perquisites but by no stretch of the language can the latter be construed as an agreement by the employer to assure the employee that he would not be liable to pay any income-tax at all in this country. Even though the employer is a foreign company, it cannot be presumed that it entered into the contract without some awareness of the tax laws in India. A construction of the contract on the lines suggested by the ITO (and upheld by the CIT) would mean that the employer had agreed to pay the employee a salary of Rs. 95,978 and Rs. 50,547, respectively, for the two assessment years 1971-72 and 1972-73 and to pay the Indian exchequer sums of Rs. 7,37,508 and Rs. 2,53,764 respectively. No businessmen would enter into such an unremunerative bargain, which benefits neither party to the contract and merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employer as tax deducted at source. But it is obvious that, in the present case, these taxes cannot be directed to be refunded to the employee, petitioner No. 1, for two reasons. The first is that this was not an amount of tax deducted at source from his salary, the second, the petitioner company never acknowledged or admitted that it was liable to pay the employee salary of several lakhs and that the tax appropriate thereto was being deducted at source and paid into the treasury. That was merely an amount paid by the company under compulsion. In view of our conclusion above, that the employee's taxable " salaries " consisted only of the salary and allowances agreed upon plus the tax thereon, the huge sums in question could also not represent taxes deducted at source. Secondly, if the employee is directed to be paid the entire amount (and he does not pass it on to the employer), that would raise difficult questions regarding the nature and assessability of such refund in his hands and, if the company acquiesces in such action, it may really mean that they had agreed to pay him a tax-free salary and, therefore, have no concern with the amounts which the employee has, on our interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claims, or the second petitioner agrees, that such extra sum should also be paid by the company, then obviously their interpretation of the contract is different from the stand taken before us by them and there is no reason why we should grant the discretionary relief of a writ granting the refund, if that be the case. We are, of Course, conscious that even if the first petitioner purportedly pays off such liability, there is no way in which the Department can verify whether the liability has been ultimately borne by the company or the employee. However, since we have proceeded only on the basis of the legal rights of the parties, as per the agreement, we would like to make it clear that the Department will be at liberty, in case it comes across any material to show that any part of the tax liability of the petitioner has been borne by the company, to initiate such action as may be permissible in law against the company or the employee, on the basis of the factual position that may emerge and become known to it. In the light of the foregoing discussions, I agree that a writ should issue-(a) quashing the assessments made on the petitioner for 1971-72 and 1972-73; (b) directing t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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