INCOME TAX APPELLATE TRIBUNAL
PUNE A BENCH, PUNE
ITA No.1228/PN/08
Assessment year: 2006-07
INCOME TAX OFFICER
WARD 1(1), AURANGABAD
Vs
LUKAS FOLE
C/o SKODA AUTO INDIA PVT LTD
MIDC, AURANGABAD
1. This is an appeal filed by the Assessing Officer and is directed against the order dated 12th June 2008 passed by the CIT(A) Aurangabad, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2006-07.
2. Grievance of the Assessing Officer is two fold - first, that the CIT(A) erred in allowing deduction, from salary income of the assessee chargeable to tax in India, on account of social security contribution paid by the assessee in his home country; and - second, that the CIT(A) erred in allowing deduction on account of hypothetical tax from salary income of the assessee chargeable to tax in India. What are termed as grounds of appeal are infact arguments in support of these grievances of the Assessing Officer. The two issues identified above, in our opinion, are the issues which require our adjudication in these appeals, and, with the consent of the parties, we will address ourselves to these two core issues.
3. The issues requiring our adjudication lie in a narrow compass of undisputed facts. The assessee before us is a Czech national employed with Skoda Auto a.s., a company incorporated in Czechoslovakia, and is currently under deputation to Skoda Auto India Private Limited. On 31st July 2006, the assessee filed an income tax return disclosing taxable income of Rs 70,23,050. In the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deductions of Rs 20,21,281 on account of hypothetical tax and Rs 9,23,498 as social security charges, out of base of salary of Rs 56,13,410 consisting of basic salary of Rs 47,31,650 and bonus of Rs 8,81,760. The net base salary was thus taken at Rs 26,68,631. In addition, Rs 17,74,558 was added for taxable allowances and Rs 25,79,856 added for taxable perquisites. Gross salary income was thus computed at Rs 70,23,045. When assessee was called upon to explain the above working, it was explained that the deduction of Rs 20,21,281 was on account of hypothetical tax under tax equalization policy and, in accordance with Tribunal's decision in the case of Jaidev H Raja Vs DCIT (ITA No. 2021/Mum/98), taxable base salary is to be reduced by the amount of hypothetical tax. As regards the social security contribution, it was explained that Skoda a.s. has made contribution to social security plan for the assessee in the home country. It was also explained that the assessee had no discretion in the matter of such contributions and the assessee does not have any enforceable right over it. It was also explained that no benefits accrued to the assessee, under this social security plan, in the relevant financial year. It was thus submitted that the payment is not taxable as the employee does not have a present enforceable vested right in the contribution. Reliance was also placed on Tribunal's decision in the case of Gallotti Raoul Vs ACIT (61 ITD 453) and it was highlighted that in the said case also only net income was chargeable to tax after adjustment of the French social security charges as was the assessee's case. On the basis of these submissions, the assessee contended that the deductions on account of hypothetical tax and social security contribution were rightly claimed by the assessee. None of these submissions, however, impressed the Assessing Officer. He noticed that in Jaydev Raja's case, the assessee had shown gross income and tax liability on that income had been paid whereas in the present case, the assessee had reduced hypothetical from the base salary itself. The Assessing Officer then referred to the detailed computations on the basis of Jayadev Raja's case and found the same to be at variance with the computations adopted by the assessee. The Assessing Officer also held that hypothetical tax is not one of the three deductions permissible under section 16, and, accordingly, deduction cannot be granted on account of hypothetical tax from the basic salary. He thus rejected the assessee's claim of deduction of hypothetical tax of Rs 20,21,281. As regards the social security contribution also, he observed that neither Section 16 of the Act permits any such deduction, nor does the India Czechoslovakia tax treaty provide for such a deduction. He thus held that a deduction on account of social security contribution is not a permissible deduction from income from salaries. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the CIT(A).
4. As regards the question of deductibility of hypothetical tax, the CIT(A) held that such a deduction is indeed permissible. The CIT(A) observed as follows :
In the case of Jaydev H Raja, it was noted by the Tribunal that as per Tax Equalization Policy framed by the employer company i.e. Coca Cola India Inc., employees were guaranteed net of tax salary and the company was to bear all actual taxes imposed on the employee's assignment income. The employees had to reimburse the company that part of total tax liability which he would have paid had he worked in Atlanta. Admittedly, the facts of the appellant's case are identical. The same policy was followed by Skoda Auto a.s. In view of this, the decision of ITAT Mumbai in the case of Jaydev Raja (supra) is squarely applicable on the facts of this case. In the case of Jayadev H Raja, Hon'ble Tribunal has held that hypothetical tax reduced by the employer in the case of the appellant has been rightly claimed as deduction..................
In view of the aforesaid legal position, in my opinion, the appellant was fully justified in claiming deduction on account of hypothetical tax because liability of employer will be restricted only to the extent of additional liability over and above what would have arisen had the appellant been in Czech Republic. Therefore, the amount of Rs 20,21,281, which has been reduced as hypothetical tax, is not accrued to the appellant at all and the same is not taxable. In view of this, appellant's claim of deduction on account of hypothetical tax is justified and is in accordance with the decision in the case of Jaydev H Raja. Accordingly, I delete the
addition of Rs 20,21,281.....
5. On the question of deductibility of social security contribution also, the CIT(A) upheld the plea of the assessee. He noticed that "it is admitted position that domestic law of Czech Republic lays down a compulsion whereby all citizens of the Czech Republic are required to contribute to the social security plain, regardless of the fact whether they are working in Czech Republic or any other place". The CIT
(A) observed that "the facts of the case show that in the appellant's case, the amount to the extent of social security plan never reach the assessee as his income, and, therefore, non existence of provision for deduction either under section 16 of the Income Tax Act, or in the tax treaty between India and appellant's home country is immaterial". He held that the issue is covered, in favour of the assessee, by Tribunal's decision in the case of Gallouti Raoul (supra) which was later followed in the case of Akbar Poonawalla (ITA No. 3470/Mum/2005; order dated 13th March 2008). The CIT(A) thus deleted the addition of Rs 9,23,498 on account of social security contribution as well. Thus both the additions made by the Assessing Officer were deleted by the CIT(A). Aggrieved by the relief so given by the CIT(A), the Assessing Officer is in appeal before us.
6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
7. As far as the deduction on account of social security contribution concerned, and bearing in mind undisputed facts of this case, we agree with the learned CIT(A) that this issue is covered in favour of the assessee by Tribunal's decision in the case of Gallouti Raoul (supra). We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. Respectfully following the same, we confirm the conclusion arrived at by the CIT(A) and decline to interfere in the matter.
8. On the issue of deductibility on account of hypothetical tax from basic salary of the assessee, we would like to say a few words. No doubt this issue is covered in favour of the assessee inasmuch as when a deduction is made from the salary on account of hypothetical tax, the same cannot be taken into account in computation of salary to the employee, but is this deduction to be allowed while computing the basic salary or is to be allowed at the stage of computing perquisite of tax on salary being borne by the employer?
9. It is important to understand the nature of deduction on account of hypothetical tax. This deduction on account of hypothetical tax liability is made under tax equalization policy, which, in substance, restricts the tax liability of an employee in India to the tax liability which the employee would have incurred in home country. For example, in case tax rate in the home country works out to 20% of salary income, and the assessee has to pay 30% of salary as tax in India, the assessee will be liable to pay only 20% of salary as tax and the balance 10% will be borne by the employer. This simple example would show that what is deducted on account of hypothetical tax is not a reduction of basic salary, but it is only restricting the tax liability of the employee as borne by the employer. The hypothetical tax liability thus only reduces the tax perquisite of the employee and not his income. This aspect of the matter will be relevant in computation of perquisites when the same are to be computed with reference to the salary of the employee. The deduction, therefore, should be made at the stage of computing the tax perquisite and not the basic salary. Learned counsel does not dispute this but submits that so far as this year is concerned, this aspect of the matter will have no impact on the tax liability on account of section 10 (10CC) being on the statute book. He has also filed his computation of the salary income on the basis of the deducting hypothetical tax, under tax equalization policy, from tax perquisite, with a view to demonstrate correctness of factual element embedded in his contentions.
10. In view of the above discussions, and bearing in mind the fact that there will be no tax impact in case hypothetical tax is reduced from tax perquisite instead of being reduced from basic salary, we see no reasons to disturb the conclusions arrived at by the CIT(A) in this year. In principle, however, we hold that hypothetical tax is to be reduced from the tax perquisite to the employees and not from the basic salary. Subject to these observations, the grievance of the revenue with regard to deduction on account of hypothetical tax is also dismissed.
11. In the result, the appeal is dismissed. It was so pronounced in the open court today on 27.2.2009.
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