Taxability of Pocket Money Received by Employee

By | November 19, 2016
(Last Updated On: November 19, 2016)

Held

The allowance given to the assessee at the rate of Rs. 140 per day for pocket money cannot also be regarded as reim­bursement of expenses incurred in the performance of duties by the appellant.In view of these newly inserted provisions of section 2(24)(iiia ) and (iiib) and in view of the above referred Explanation added with retrospective effect in section 10(14) the amount of Rs. 48,860 received by the assessee by way of pocket money is clearly liable to tax.

[ An Explanation was added to section 10(14) by the Finance Act, 1975 with retro­spective effect from 1st April, 1962 providing that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded, for the purposes of section 10(14) as a special allowances granted to meet the expenses fully, necessarily and exclusively incurred in the performance of such duties.]

[1992] 42 TTJ 565 (AHD.)

ITAT AHMEDABAD ‘A’ BENCH

C.W. SMITH

v.

INCOME-TAX OFFICER

R.L. SANGANI, J.M. & B.M. KOTHARI, A.M.

ITA NO. 951/AHD/1988;

ASSESSMENT YEAR 1984-85

AUGUST 9, 1991

 

J.P. Shah for the Appellant.

K.K. Boliya for the Respondent.

ORDER

B.M. Kothari, A.M. – The appellant is an employee of C.E. Power System (USA). He was deputed to render technical assistance in the erection of 500 M.W. Thermal Power Station for M/s Tata Electric Companies at Trombay, Bombay as per contract dated 5-2-1979 between BHEL India and C.E. Power System, USA and further, agreement dated 28-2-1981 between Tata Hydro Electric Power Supply Co. Ltd. and Bharat Heavy Electricals Ltd. A return of income declaring total income at Rs. 3,03,364 was originally filed on 13-11-1984, which was subsequently revised on 12-12-1985 declaring total income of Rs. 2,96,107. The ITO completed the assessment at an income of Rs. 13,71,673. On further appeal, the CIT(A) partly allowed the assessee’s appeal.

  1. In the present appeal the assessee has raised the following grounds :

(1)The learned CIT(A) has erred in confirming the following additions made by the ITO as perquisites even though the same were claimed as not taxable.

(a)Value of Rent-free accommodation7,257

(b)Pocket Money48,860

(c)Free conveyance1,200

(2)The learned CIT(A) has also erred in confirming the action of the ITO relating to the addition by way of grossing up of tax perquisite of Rs. 9,02,946.

(3)The CIT(A) has erred in not deleting the interest charged by ITO under section 217.

  1. The learned counsel for the assessee did not press the ground relating to inclusion of Rs. 7,257 being value of rent-free accommodation and Rs. 1,200 on account of free conveyance. The ground relating to these two items is, therefore, rejected, as not pressed.
  2. The next addition relates to an addition of Rs. 48,860 being pocket money paid to the assessee by the Indian Company as pocket money at the rate of Rs. 140 per day. The ITO observed that such allowance given by the Indian Company to the appellant for meet­ing his living expenses/personal expenses clearly amount to perquisite which is liable to tax.
  3. The CIT(A) has discussed this point in para 6 and 6.1 of his order. It was observed that the appellant was paid pocket money of Rs. 46,860 at the rate of Rs. 140 per day in addition to food expenses paid to him separately at the rate of Rs. 30 per day amounting to Rs. 10,470. Besides this the assessee was also granted conveyance allowance of Rs. 100 per month and was also reimbursed the actual transport expenses incurred during the period of his stay in India. The CIT(A) held that the road trans­port expenses/allowance of Rs. 1,200 and food expenses of Rs. 10,470 should be considered as reimbursement of the actual ex­penses and he regarded the same as exempt under section 10(14) of the IT Act. However, reimbursement of pocket moneyof Rs. 48,860 cannot be considered as reimbursement of the expenses actually incurred wholly and exclusively for the purposes of the appel­lant. He, therefore, held that the fixed amount of pocket money given at the rate of Rs. 140 per day amounting to Rs. 48,860 was meant for personal expenses and was rightly added by the ITO as assessee’s income.
  4. The learned counsel for the assessee contended that this point is clearly covered in favour of the assessee by the decision of ITAT, Ahmedabad Bench in the case of E. Battelli v. ITO [1986] 16 ITD 652 (Ahd.) in which certain living expenses paid to the foreign technician under similar facts was held to be not liable to tax. The Tribunal relied upon the decision of Gujarat High Court in the case of CIT v. S.G. Pgnatale [1980] 16 CTR (Guj.) 337/ 124 ITR 391. He also invited our attention towards the Commentary by Shri Palkhivala 8th Edn. at p. 416. In foot note No. 5 it has been mentioned that compensatory allowance paid to High Court Judges on transfer and living allowance to foreign employees were held to be not liable to tax by the Hon’­ble Madhya Pradesh High Court in the case of Bishambar Dayal v. CIT [1975] CTR (MP) 74/ 103 ITR 813 (MP) and by the Guja­rat High Court in the case of Pgnatale (supra). He, therefore, urged that the addition confirmed by the CIT(A) should be delet­ed. The learned Departmental Representative supported the order of the CIT(A).
  5. We have carefully considered the submissions made by the learned representatives. In our view of the findings given by the CIT(A) and by the ITO in relation to the aforesaid addition of Rs. 48,860 does not require any interference. The ratio of judgment of Hon’ble Gujarat High Court in the case ofPgnatale (supra) and the decision of the ITAT, Ahmedabad Bench relied upon by the learned counsel for the assessee has been superseded by introduc­tion of section 2(24)(iiia) and (iiib) inserted by the Direct Tax Laws (Amendment) Act, 1989 with retrospective effect from the year 1962. This is clearly mentioned in the Commentary by Palkhi­vala at the same page 416 where the learned authors have clearly commented that such allowances, which have been held to be not liable to tax by the Hon’ble Gujarat and Madhya Pradesh High Court is now deemed to be income by section 2(24)(iiia) and (iiib). These newly inserted provisions with retrospective effect create additional categories of income liable to tax by virtue of the expanded definition of income contained in these new provi­sions. The allowances or any other benefit granted to the asses­see to meet expenses wholly, necessarily and exclusively for the performance of the duties of an employment or profit as well as the allowances granted to meet his personal expenses at the place where the duties of his office or employment of profit are ordi­narily performed by him or at a place he ordinarily resides or to compensate him for the increased cost of living have been includ­ed in the definition of income liable to tax under the provisions of IT Act except to the extent and subject to the conditions provided in section 10(14) of the IT Act, 1961. An Explanation was added to section 10(14) by the Finance Act, 1975 with retro­spective effect from 1st April, 1962 providing that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded, for the purposes of section 10(14) as a special allowances granted to meet the expenses fully, necessarily and exclusively incurred in the performance of such duties. The allowance given to the assessee at the rate of Rs. 140 per day for pocket money cannot also be regarded as reim­bursement of expenses incurred in the performance of duties by the appellant. In view of these newly inserted provisions of section 2(24)(iiia ) and (iiib) and in view of the above referred Explanation added with retrospective effect in section 10(14) the amount of Rs. 48,860 received by the assessee by way of pocket money is clearly liable to tax. The finding given by the CIT(A) in relation to this amount is, therefore, confirmed.
  6. The next ground relates to the findings given by the CIT(A) confirming the action of the ITO relating to an addition by way of grossing up of tax perquisite of Rs. 9,02,946 paid by the Indian Company. The CIT(A) has confirmed this addition by holding that the ratio of judgments of Calcutta High Court reported in N. Sciandra v. CIT [1979] 118 ITR 675 (Cal.) and CIT v. West Bengal State Electricity Board [1986] 56 CTR (Cal.) 29/ 166 ITR 507 do not help the assessee after the insertion of Expla­nation to clause (ii) of sub-section (1) of section 9 of the IT Act.
  7. The learned counsel for the assessee did not address any arguments relating to the findings given by the CIT(A) about the applicability of the aforesaidExplanation supporting the addi­tion of the said amount relating to grossing up the tax payable by the Indian company in relation to the income of the appellant, which was treated by the ITO as perquisite liable to tax under section 17(2) of the Act. He, however, contended that the asses­see is a foreign technician whose contract of service has been approved by the Ministry of Industry, Government of India for the purpose of granting exemption under section 10(6)( viia) of the IT Act, 1961 vide their approval letter dated 11-8-1983. It was further pointed out that the applicability of section 10(6)(viia)has been admitted by the ITO himself and he has allowed deduction under that section calculated at the rate of Rs. 4,000 per month (30 days) for 349 days. It is thus an admitted fact that the assessee is entitled to grant of exemption under section 10(6)(viia ). The said provision apart from providing for grant of exemption at the rate of Rs. 4,000 per month further provides that where the tax on the remuneration on the excess amount paid beyond by the rate of Rs. 4,000 per month is paid by the employ­er, the tax so paid by the employer on behalf of the said employ­ee will also be exempt under section 10(6)(viia)(1)(A). He also invited our attention towards clause J of agreement dated 5-2-1979 executed between BHEL and the foreign company to show that taxes in respect of income of foreign technician were to be paid and borne by the employers. In view of this it was contended that the said addition confirmed by the CIT(A) should be cancelled. He also relied upon the decision of ITAT, Delhi in the case of ONGC v. CIT [1989] 31 ITD 329 (Delhi) to support this contention.
  8. The ld. Sr. Deptl. Representative contended that such conten­tion has not been considered by the CIT(A). In fact the provisions of section 10(6)(viia) are not at all applicable in the case of assessee, as on a correct interpretation of the agreement execut­ed between the Indian companies and between BHEL and the foreign company, the assessee is not entitled to exemption provided under section 10(6)(viia ). In fact the provisions in case of such foreign technicians would be governed by provisions of section 10(6)(vi ). In the case of the assessee the stay in India exceed a period of 90 days,. Hence, the assessee is not at all entitled to grant of any exemption even under sub-clause (vi). The CIT(A) has confirmed the addition on entirely different reasons, which has not been challenged by the learned counsel for the assessee. Even on this ground the findings of the CIT(A) deserve to be con­firmed.
  9. We have carefully considered the rival submissions made by the learned representatives and have examined the relevant provi­sions of law. In the grounds of appeal submitted before the CIT(A) the assessee submitted the following ground relating to the aforesaid item :

“As regards item (h) tax perquisite grossed Rs. 9,02,946, the same is exempt under section 10(6)(viia) in as much as the appellant fulfils all the necessary conditions of that section, namely,

(a)The appellant was not a resident in any of the four years immediately preceding the financial year 1983-84, in which he arrived in India.

(b)The service contract of his employer was approved by the Government of India vide letter No. 13(15)/81 HEM, dated 16-4-1982.

(c)The appellant arrived in India on 5-4-1981.

(d)Total stay of the appellant in financial year 1983-84 was about 5 M & 20 D, i.e., less than 24 M.

The tax payable or paid by the Indian Co. is, therefore, not includible in total income.

The same may, therefore, be deleted from total income.”

In the order of the CIT(A) we do not find any findings relating to assessee’s claim for grant of exemption in respect of this item in view of section 10(6)(viia). Section 10 contains exemp­tion in respect of income which do not form part of total income. The provisions of section 10(6)(viia) applicable in the case of individual who is not a citizen of India and who renders the services as a technician in the employment of the Government or of a local authority or of any corporation or any such institu­tion in India for carrying on scientific research as is approved for the purpose of sub-clause by the prescribed authority or in any business carried on in India subject to the fulfilment of conditions prescribed in the said provisions. In relation to services commencing after 31-3-1971 but before 1-4-1988, which is applicable in present case such remuneration due to or received by the foreign technician during the period of 24 months commenc­ing from the date of his arrival in India, in so far as such remuneration does not exceed an amount calculated at the rate of Rs. 4,000 per month will be exempt. This exemption at the rate of Rs.4,000 per month has been granted to the appellant by the ITO. The said provision further provides that the tax on the excess remu­neration beyond at the rate of Rs. 4,000 per month is paid to the Central Government by the employer, the tax so paid by the em­ployer shall also be exempt under the said provision. The ap­plicability of section 10(6)(viia) has been accepted by the ITO himself in the present case. The contract for employment of the appellant as a foreign technician has also been approved by the Ministry of Industry vide letter dated 11-10-1983. This approval was accorded pursuant to an application dated 17-8-1983 for a period of seven months. In the contract dated 5-2-1979 executed between the foreign company and BHEL there is a clause ‘J’ which deals with the taxes leviable on the representatives of the foreign company. The said clause is reproduced thereunder.

“J. Taxes

Any taxes (including taxes on income), duties, fees, charges, or assessments of any nature levied by a Government authority other than the United States of America upon this agreement or in connection with any work performed hereunder whether levied against Purchaser, Company or its Representatives shall be for the Purchaser’s account and shall be paid directly by the pur­chaser to the governmental authority concerned. In the event that the company or its Representatives are required by law to make payment of any such levy in the first instance, the amount there­of shall be reimbursed by Purchaser upon presentation of invoices from the company”.

However, in the agreement between Tata Hydro Electric Power Supply Co. Ltd. and BHEL the clause relating to taxes is con­tained in clause No. 8.3 of agreement dated 28-2-1981 which is also reproduced hereunder.

“8.3 Income-tax, at the rate prevailing on the effective date of contract, applicable on the remittance to CE for the utilisation of services of CE’s advisory personnel, shall be deemed to have been included in the monthly rate. All liabilities arising out of changes in rate of income-tax or incidence of any other taxes payable for the utilization of services of CE’s advisory person­nel shall be to the owner’s account”.

The approval granted by the Ministry of Industry, Government of India, vide letter dated 11-10-1983 was for a period of 7 months while the salary received by the appellant pertained to the period from 18-4-1983 to 31-3-1984, i.e., for a period of 349 days. The CIT(A) has not considered the question relating to grant of exemption to the appellant under the provisions of section 10(6)(viia). We, therefore, consider it just and proper to restore this matter back to the CIT(A), who will decide this issue afresh in the light of aforesaid provisions after giving reasonable opportunity to both the parties. The CIT(A) will also examine the various terms and conditions of the two arrangements executed between the Indian companies and the other between BHEL and foreign company and will also examine, if considered neces­sary by him, the relevant application and other documents submit­ted for grant of approval by the Ministry of Industry in respect of contract service of the appellant as a foreign technician under section 10(6)(viia) with a view to find out whether (sic) the entire period of the service rendered by him in India. The CIT(A) may also ascertain the factual position as to form whom the assessee had received the salary and as to whether the tax was paid and borne in fact by the employer company so as to grant the desired exemption under section 10(6)(viia ). The CIT(A) may also consider Circular No. 56, dated 19-3-1971 containing explan­atory notes explaining the various amendments made by the Taxa­tion Laws (Amendment) Act, 1970 published in Taxman’s Direct Taxes Circular, 1988 Edition,, Vol. III at Page 353. At page 376. The provisions of section 10(6)(viia ) have been explained in the said circular, inter alia, saying that if the employer pays tax on such excess remuneration (beyond Rs. 4,000 per month) to the Central Government the perquisite represented by the tax so paid by the employer will also be exempt from further taxation in the hands of the foreign technician. With this observation, this point is set aside and restored back to the CIT(A) for deciding the matter afresh in accordance with the provisions of law.

  1. The next ground relates to levy of interest under section 217 of the IT Act, 1961. The CIT(A) has directed the ITO to grant consequential relief to the assessee in the matter relating to levy of interest depending on the relief granted on the quantum of additions. No further arguments in relation to this ground were addressed by the learned counsel. We do not find any infirm­ity in the order of the learned CIT(A) in relation to the said findings.
  2. In the result the appeal is treated as partly allowed for statistical purpose.

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