Case Study: Is tax paid by employer on behalf of employee - exempt u/s. 10(10CC)?

A detailed analysis of Exemption under Section 10(10CC) alongwith the provisions of Section 17(2), 40(a)(v), 192(1A), 195A, 198, 199, 200 and 203 of the Income Tax Act, 1961. Highlighting the ruling under Sedco Forex International Drilling Inc. (2012) 

INTRODUCTION :

The Ruling given by the Uttarakhand High Court in the case of DIT v. Sedco Forex International Drilling Inc. (2012) clearly states that “If tax on salary is paid by the employer on behalf of the employee, It will be considered as a perquisite provided for by way of non-monetary payment and therefore the provisions of section 10(10CC) would be applicable on it. Let us observe the consequences of this judgment through facts and Figures.

BACKGROUND: Extracts of Sections from Income Tax Act, 1961 in simplified language-

Section 2(24)(iii)  " income" includes the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;

Section 15 - Salaries - The following income shall be chargeable to income-tax under the head “Salaries”—
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

Section 17(1)(iv)  “salary”  includes any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;.

Section 17(2)(iv) “perquisite” includes any sum paid by the employer in respect of any obligation of the employee, which otherwise would have been discharged by the employee;.

Perquisite can be provided either by way of monetary payment or Non monetary mode. Agreement may be entered between the employer and the employees, providing that the income-tax on salary of the employees will be paid by the employer (ie Tax-Free Salary). Accordingly, in addition to the salary paid to the employees, the employer also pays tax on such salary to the Revenue Authorities.

When tax is paid by an employer on behalf of an employee, it is not considered a monetary payment to the employee, but a perquisite being in the nature of an obligation which, but for such payment, would have been payable by the employee. Such payment of tax will be considered as a non-monetary perquisite in the hands of employee, within the meaning of Section 17(2)(iv) and is liable to be taxed under the head “salary”

Section 10(10CC) – Tax on Non-monetary Perquisites, paid by Employer - Tax may be paid by the employer, on a Perquisite provided to the employee (other than by way of monetary payment), within the meaning of section 17(2). Such tax actually paid by the employer, at the option of the employer, on behalf of such employee, (notwithstanding anything contained in section 200 of the Companies Act, 1956), shall be exempt in the hands of employee.

The Companies Act, 1956 defined remuneration under section 198 by way of an explanation and provided for the certain specific inclusions that would be construed as remuneration. Section 200 of the 1956 Act specifically prohibited “tax free payments”. 

The High court clearly distinguished payment of “tax free remuneration” by an employer which is prohibited under the companies act, 1956 vis-s-vis the “payment of specified benefits free of tax” which is specifically permitted by the tax law providing an overriding effect on the provisions of companies act.

Also to be noted that, as per the New Companies Act, 2013, Definition of remuneration has undergone few changes. Section 2(78) of the 2013 Act, defines “Remuneration” as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the income tax Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes to managerial personnel.

Section 40(a)(v) - Amounts not deductible.- While calculating the income of the employer, any tax actually paid by the employer, which is exempt under section 10(10CC), shall not be treated as an allowable expenditure in the hands of employer, in computing the income chargeable under the head “Profits and gains of business or profession”.

Section 192 - TDS on Salary - (1) Any person responsible for paying any income chargeable under the head “Salaries” is required to deduct income-tax on the amount payable.  Tax is to be deducted, at the time of payment, at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

(1A) Without prejudice to the provisions contained in section 192(1), the person (ie Employer) responsible for paying any income in the nature of a Non-monetary perquisite, referred to in section 17(2), may at his option pay tax on the whole (or part of such income) without making any deduction therefrom.  

The payment will have to be made when such tax was otherwise deductible under the provisions of section 192(1), i.e. at the time of payment of income chargeable under the head salaries, to the employee.  

(1B) For the purpose of paying tax under sub-section (1A), tax shall be determined at the average of income-tax computed on the basis of the rates in force for the financial year, on the income chargeable under the head “Salaries” including the income referred to in sub-section (1A).  Further, the tax so paid shall be deemed to be the TDS made from the salary of the employee, as per the provisions of sub-section (1), and shall be subject to the provisions of this Chapter. However, as per proviso to section 198, this tax paid will not be deemed to be income of the employee.

Under the Erstwhile provisions of Section 192 of the Income-tax Act, 1961, an employer was required to deduct tax at source on income under the head “salaries”, inclusive of the value of perquisites. In case, such tax is paid by an employer on behalf of an employee, the same being in the nature of an obligation which, but for such payment, would have been payable by the employee, is considered a perquisite, and is chargeable to tax.  The Finance Act, 2002 provided for a new scheme of taxation of perquisites, wherein an employer has been given an option to pay tax on the whole or part-value of perquisite (not provided for by way of monetary payments), on behalf of an employee, without making any deduction from the income of the employee. To bring into effect this new scheme, a new Clause (10CC) was inserted in Section 10, to exempt the amount of tax actually paid by an employer, at his option, on the income in the nature of a non-monetary perquisite on behalf of an employee. However, the employer shall, also continue to have the option to deduct the tax on whole or part of such income.  Necessary changes were made in Sections 192, 195A, 198, 199, 200 and 203.

195A. Income payable “net of tax”.- In a case other than that referred to in section 192(1A), where under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.

ie no grossing up will be required in case of “tax paid by the employer on the non-monetary perquisites” provided to the employee. This is due to the fact that same is also exempt undr section 10(10CC).

198. Tax deducted is income received -Any tax deducted in accordance with the provisions of Chapter XVIIB shall be deemed to be income received, for the purpose of computing the income of an assessee. ie the amount actually received plus the amount of tax deducted at source will be considered as Total Income.

Provided that tax paid by the employer under section 192(1A) on non-monetary perquisites of the employee shall not be deemed to be income received, for the purpose of computing the income of the assessee.

199. Credit for tax deducted.- (1) Any deduction made in accordance with the provisions of Chapter XVIIB and paid to the Central Government shall be treated as a payment of tax on behalf of the deductee.

(2) Any Tax paid by the employer under section 192(1A), on the Non-monetary Perquisites of the employee, to the Central Government shall be treated as the tax paid on behalf of the  employee and credit shall be given to such employee for the amount so paid on the production of certificate furnished under section 203 for the assessment year.

200. Duty of person deducting tax - (1)  Any person deducting any sum in accordance with the foregoing provisions of this Chapter, shall pay the sum so deducted within the prescribed time, to the credit of the Central Government or as the Board directs.

(2) Any employer, referred to in section 192(1A), who has undertaken to pay tax on Non-monetary perquisites granted to the employee, shall also pay the tax within the prescribed time, to the credit of the Central Government or as the Board directs.

203(2). Certificate for tax deducted - Every person, being an employer, referred to in section 192(1A) shall, within such period, as may be prescribed, furnish to the person in respect of whose income such payment of tax has been made, a certificate to the effect that tax has been paid to the Central Government, and specify the amount so paid, the rate at which the tax has been paid and such other particulars as may be prescribed.

Let us take an example to illustrate the above provisions.

ILLUSTRATION. 1 : Mr.Rahul (30 years) is the employee of BMR & Co. (a firm). The details are as follows –

We have to calculate the following for the assessee-

•Average Rate of Tax
•Taxable income of Employee
• Tax Liability of Employee
• Total Non monetary Perquisite under section 17(2)(iv)
• Amount Exempt under section 10(10CC)
• Amount not deductible under section 40(a)(v)
• TDS under section 192

SOLUTION : Let x+y = 20,000

where ‘y’ is “tax on Non-monetary Perquisite” which is an exempt income under section 10(10CC)

and ‘x’ is the remaining amount ie “tax paid by the employer on remaining income under the head salary” which is chargeable to tax in the hands of employee, as a Non-Monetary Perquisite.

Computation of income

Y = Tax on Non-monetary Perquisite @ Average Rate of Tax

   = (19570 + .103x) * (60000 + x)

         (460000 + x)

Calculation of x & y  -

x + y = 20,000

x + (19570 + .103x) (60000 + x)   = 20,000

         (460000 + x)

Solving the equation, we get-

1.103x2    +  465750 x  -  8025800  = 0

The above equation is in the form of ax2 + bx + c = 0

Where,

a= 1.103
b = 465750
c = 8025800

Solving the equation we get 

x = 16,580
y = 3,420

Hence,

Computation of income

Average Rate of Tax = 21278/476580  =  4.4647%  (a)

Total Non monetary Perquisite under section 17(2)(iv) = 60000 + 20000 = 80000  (d)

“Total Tax Paid by Employer” is a Non-monetary Perquisite for the employee = Rs. 20000

Of this, 3420 tax paid by the employer is exempt u/s 10(10CC)

& Balance Tax paid of Rs.16580 is taxable as non-monetary perquisite u/s 17(2)(iv)

Tax @ 4.4647% on Non-monetary Perquisites of (Rs. 60000 + 16580) = 76580 * 4.4647% =  Rs. 3,420

For Employee : Income Exempt under Section 10(10CC) = 3420  (e)

For Employer: Amount of Expenditure not deductible as business expenditure under section 40(a)(v)  = 3420 (f)

TDS under section 192 = 16580 u/s 192(1)  +  3420  u/s 192(1A)  = 20000 (g)

The impact of the above judgment under section 10(10CC)  is that, instead of applying a multiple gross-up, the employer can pay tax on behalf of employee on the value of “non-monetary perquisites” on a single stage gross-up basis. This can also be illustrated as follows-

Illustration 2 : Suppose employee’s salary is Rs.1000  and Average Rate of Tax is 20%. Employer decides to pay tax on employee’s Salary.

CONCLUSION –

Hence the outcome of the Sedco Forex International Drilling Inc. (2012) judgement is – 

1. “Tax paid by the employer, on the salary of the employee”, is a Perquisite under section 17(2)(iv).

2. The said perquisite is not provided by way of monetary payment within the meaning of Section 17(2); Hence, it is a “Non-monetary perquisite”.

3. Such Non-Monetary Perquisite is taxable in the hands of employee under the head “salaries”.

4. However, “Tax paid by employer on such Non-monetary Perquisite on behalf of employee” which is also a benefit in the hands of employee, is exempt under section 10(10CC) and would not form part of the total income of the employee.

5. “Tax paid by employer on such Non-monetary Perquisite” which is claimed as exempt from tax under section 10(10CC), is not deductible as business expenditure in the hands of employer under section 40(a)(v).

6. Total Tax paid by the employer on behalf of the employee, will be deemed as TDS & Credit shall be available to the employee from his tax payable (Section 192, 195A, 199)

An agreement may be entered, by which, employer has agreed to pay salary to the employee ‘free of taxes’ and he pay taxes on behalf of the employees. Earlier in such case, double or multiple grossing up were carried on. 

But after the above high court ruling in case of Sedco Forex (2012), Tax paid by the employer on behalf of employee, is taxable on a single stage tax gross-up basis. Hence, leading to savings in overall tax costs for the employer & employee.

Originally written by Sukriti Jain
Author can be reached at
Sukriti9225@gmail.com