TMI Blog1978 (6) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... .20 ...... Ansaldo would make available at the plant site competent technicians and manufacturers' specialist erectors for supervision of site fabrication and erection and commissioning of certain major equipment/ machinery. ............ Ansaldo would tentatively make available the following personnel : Engineer 1 Technical Assistant 1 Foreman/Chief Erector 11 ----- 13 ----- 5.1. All prices and fees mentioned ...... and fees mutually agreed upon would be free of any taxes and/or levies of any kind that might be levied by any Indian authority in respect of Ansaldo's activity and/or profits arising or accruing in or out of India as a result of the performance of Ansaldo's supplies and services under the contract, including any such taxes and/or levies of the kind that might be levied on the income of the foreign personnel assigned to the project in India. Should any of the aforementioned taxes and/or levies be assessed upon Ansaldo or its foreign personnel by any Indian authority under any existing or future Indian laws or regulations, the total cost of all such levies would be paid by the Corporation. Provided, however, that such liability of the Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the provisions of Income-tax Act, the taxes would be to the account of the Corporation. 2.6. For the services of the personnel referred to in 3.20 which would include both the personnel of Ansaldo and their sub-contractors and of any third party who would be entrusted by Ansaldo with performance of any of their obligations under the contract, the Corporation would comply with the above terms and conditions." Pursuant to the aforesaid, Ansaldo deputed N. Sciandra, the assessee, an Italian technician, to work on the said project. The assessee reached India for the assignment on the 4th March, 1969. His engagement was approved by the Government of India under s.10(6)(vii) of the I.T. Act, 1961, initially for a period of 15 months. Such approval was later extended by another 10 months. In the assessment year 1971-72, the relevant previous year ending on 31st March, 1971, the assessee was assessed to income-tax. Two certificates, respectively, dated the 25th September and the 14th November, 1970, issued by the Corporation certifying that the assessee had been engaged by the Corporation in connection with the Durgapur Fertilizer Project and also certifying his remuneration w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the employee within the meaning of the said s.17(2)(iv). The AAC, however, upheld the computation of the ITO, inter alia, on the ground that under s. 15(a) of the Act the expression " salary " included any salary due from an employer or a former employer in the previous year, whether paid or not and, therefore, a perquisite due would also be part of the taxable salary. The assessee preferred a further appeal to the Tribunal. It was, inter alia, contended on behalf of the assessee in the appeal that the Corporation had not agreed to pay salary to the assessee free of tax. What was liable to be added to the salary was the tax on the amount which was to be borne by the Corporation on account of tax. Construing the agreement, the Tribunal held that the Corporation had agreed to pay and bear the tax on salary of all foreign personnel deputed in the project if exemption from tax could not be obtained. The Corporation, therefore, in effect agreed to pay all such foreign personnel a tax-free salary. Following a decision of the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283, the Tribunal held that grossing up of the salary of the assessee was ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of India on his income in India is treated as perquisite, the value of such perquisite should in law be limited to the amount of tax actually paid during the relevant previous year ? 5. Whether, on the facts and in the circumstances, the assessee was not at all liable to be taxed in India ? " Dr. Debi Pal, learned counsel for the assessee, pressed for answers to questions Nos. 3 and 4 only and his submissions rested on the said two questions. He contended that there could be no grossing up of the assessee's income on a tax-on-tax basis inasmuch as the amount which was agreed to be reimbursed by the Corporation to Ansaldo on account of tax payable by the asesssee was not a perquisite within the meaning of s. 17 of the I.T. Act, 1961. He submitted further that a perquisite within the meaning of the said section would be an amount paid by an employer in respect of obligations of the employee resulting in a monetary liability of the employee. In the instant case, the relationship between the assessee and the Corporation was not that of employer and employee. He contended further that, in any event, in the year in question no payment at all had been made by the Corporation on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax purposes? " Mr. Pal relied on the observations of Lord Dunedin and Lord Atkinson in their respective judgments as follows : " A test case was taken. The Special Commissioners assessed the Income Tax by taking, first, the sum of the agreed salary of the official and adding thereto the amount of Income Tax which had been paid by the Company on behalf of the official in the previous year, and then calculating the Income Tax on the aggregate of those two sums. This they claim to do each year in succession. " " The sums paid by the company to satisfy the debts which those officers respectively owed to the revenue remain part of the profits and gains those officers derive from the offices they respectively hold, and are liable to be assessed to Income Tax just as the amount of the Income Tax deducted by a railway company from the dividends it pays its shareholders is part of the income of those shareholders. " (b) Hartland v. Diggines (1926] 10 T.C. 247 (HL). This is also another decision of the House of Lords. The facts were that in accordance with the practice of the employer, an employee was paid the income-tax in respect of his salary and this amount was allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case were, inter alia, that a testatrix directed her trustees, out of the free annual income derived from her heritable properties, to pay an annuity of pound 100 " free of all deductions including income-tax ". The trustees thereafter regularly in every year paid to the annuitant pound 100 out of the income which had been charged to tax, giving her a certificate showing the gross amount of the payment, the amount of the tax deducted thereon and of the net payments made to her. The annuitant who had no other income, then claimed from the revenue authority a repayment in respect of the tax shown by the certificate to have been deducted. On receiving repayment, she handed over the amount received to the trustees. The revenue, who had come to learn that the repayments were being handed over to the trustees, contended alternatively that the pound 100 paid annually to the annuitant was a payment of the annuity in full without deduction of, income-tax (in which case she would not be entitled to any repayment of tax), or that it was a payment of pound 100 under deduction of tax but accompanied by a temporary advance of a sum equal to the tax deducted (in which case she would be entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s necessary to leave that available to me after you have borne the taxes '. As under the law the tax is suffered by deduction, it means such a sum as will after deduction leave pound 20. " (f) Tokyo Shibaura Electric Co. Ltd. v. CIT[1964] 52 ITR 283 (Mys). The facts in this case were that the assessee, a Japanese company, had entered into an agreement with its agent in India whereunder the latter undertook to manufacture in India service meters with the aid of the licence, technical information, data and experience of the assessee. As a consideration for the aforesaid the assessee was entitled under the said agreement to receive 3% of the net sales, billed in rupees by the agent, with an annual minimum royalty of 9,000 U.S. dollars payable in two equal half-yearly instalments of 4,500 U.S. dollars. It was agreed that the payments would be made to the assessee in Tokyo, Japan, in a currency acceptable to the Japanese Government without deduction for taxes or other charges assessed in India, which would be assumed by the agent. In the assessment years 1953-54 to 1957-58, the ITO grossed up the royalties and assessed the Japanese company accordingly. On appeal, the AAC accepted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived the payments. On his return to the U.K. in 1958, the husband became assessable to income-tax. The revenue sought to assess the payments made to the wife from the years 1955-56 to 1961-62. The Commissioner discharged all the assessments and the question which was stated was whether the words " free of income-tax " in the agreement were not hit by the Income-tax Act and whether the said of pound 35 was the net amount after deduction of tax or the gross sum which had to be assessed. The House of Lords upheld the contentions of the assessee and held that the agreement should be construed as creating a liability on the part of the husband to pay the net sum coupled with an undertaking to take steps to ensure that the wife would not incur any liability to pay any tax in respect of the amounts received. The husband was legally bound to deduct tax and account for it. (h) CIT v. C. W. Steel [1972] 86 ITR 817. In this case, the Kerala High Court, following North British Railway Company [1922] 8 TC 332 (HL), held that the definition of salary in the Explanation to r. 24A of the Indian I.T. Rules, 1922, was an inclusive definition. Therefore, the income-tax paid by an employer on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch salary was computed by grossing up and assessment was made accordingly. On these facts, the computation and assessment were upheld by this court. It appears to us that the controversy in this case relates solely to the computation of the salary of the assessee. The contention of the revenue is that such salary has to be computed by grossing up, i.e., by finding out notionally the gross income which would leave after payment of tax the net income as stipulated in the agreement. The contention on behalf of the assessee, on the other hand, has been that the computation of the salary of the assessee should be made by ascertaining first the actual amount paid to him and thereafter the amount which would be the tax payable on the actual amount has to be ascertained and the latter amount would also be a part of the salary. To appreciate the merits of the respective contentions it is necessary to keep in view the following. The agreement between the Corporation and Ansaldo is not the agreement between the assessee and his employer. Under the agreement between the Corporation and Ansaldo, the Corporation was bound to pay to Ansaldo the tax payable by the assessee. Under cl. 7 of Ex. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of salary. In the instant case, the agreement only provides that the Corporation would help the assessee to claim total exemption of all taxes and if such attempt fails then the tax payable would be on the account of the Corporation. This liability of the Corporation for the tax levied would normally arise at a future date and, therefore, any amount paid or to be paid in future on such account cannot be treated as a perquisite paid in the relevant assessment year. Learned counsel, for the revenue has submitted that in the assessment other perquisites like rent-free accommodation, furniture and air-conditioner, though provided for by the Corporation, have been included in the assessment as perquisites. It was also submitted that if the Corporation was held not to be the employer of the assessee then other complications might arise in computation of the income. This contention of the revenue in our opinion cannot stand in the way of the assessee's contentions in respect of the tax which has been assessed as a perquisite. There is no dispute on the other items. It was specifically contended on behalf of the assessee before the Tribunal that the assessee was not a salaried empl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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