My Indian contract says my pay is free of Indian tax and the Indian company pays the tax for me. Is that tax itself taxable in my hands?
Yes. The Supreme Court held that tax paid by an Indian company on an expatriate's salary, under an obligation to pay him free of Indian tax, is itself income of the expatriate. The definition in section 2(24) is inclusive and does not rob income of its natural meaning; anything properly described as income is taxable unless exempted. The payment was made for and on behalf of the assessee, was not gratuitous, and had an integral connection with the salary he received. Since he was not an employee of the company that paid, it fell under section 56 as income from other sources. The appeals were dismissed.
Decided by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J)) on 1993-02-19, reported as AIR 1993 SC 1466; (1993) 2 SCC 453; (1993) 200 ITR 483; (1993) 67 Taxman 532; 1993 AIR SCW 1341. It bears on section 2(24), section 56, section 17, section 14, section 195 of the Income Tax Act 1961, in Salary & Perquisites and TDS Defaults matters.
This is the Supreme Court authority for taxing a tax-protected package, and it matters most for secondments where the person is paid by one entity and works for another. Two things come out of it. The first is that the discharge of a person's own liability by someone else is his income even though no money reaches his hands, because but for the payment he could not have received the salary he did. The second is the head. Where the payer is not the employer, section 17 cannot apply, and the residuary head in section 56(1) takes anything not chargeable under the heads in section 14 items A to E. The Court also reaffirms that the head of income is decided by the nature of the income on the practical notions of ordinary people, not by the assessee's treatment of it.
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Ballarpur Paper and Straw Board Mills Limited set up a caustic soda and chlorine plant and contracted with Krebs, a French concern, for machinery and, by a second agreement, for the services of personnel including engineers. Krebs in turn arranged with a Swiss concern for machinery and for personnel. The assessee was one of the persons so provided; he came to India and worked on setting up the plant. Under the agreement between Ballarpur and Krebs, Ballarpur paid salaries and emoluments to such personnel on an agreed formula, and it was stipulated that salaries were understood free of any Indian tax or duty. The assessee was paid Rs 3,82,481 for assessment year 1974-75 and Rs 67,200 for 1975-76, besides daily allowances and other facilities. He filed returns claiming he was not liable to tax; that stand was rejected, and Ballarpur paid tax of Rs 3,23,400 and Rs 35,546 for the two years. The Income-tax Officer treated the tax so paid as a perquisite and added it to the assessee's salary. The Appellate Assistant Commissioner and the Tribunal upheld the addition, and the Bombay High Court answered the reference against him. It was common ground that no employer and employee relationship existed between Ballarpur and the assessee.
The appeals were dismissed with no costs. The tax paid by Ballarpur on the salary received by the assessee is income of the assessee and was rightly included in his total income for both years. The definition of income in section 2(24) is inclusive: it adds artificial categories but the expression does not thereby lose its natural connotation, and anything that can properly be described as income is taxable unless exempted by some provision. The sum in question is nothing but tax upon the salary the assessee received. Ballarpur paid it under an obligation it had undertaken, so the payment was for and on behalf of the assessee and was not gratuitous; but for the agreement and the payment the assessee would have had to pay the tax himself, and he could not have received the salary he did without it. On the head of income, since the assessee was not an employee of Ballarpur the amount could not fall within section 17, and it therefore fell under section 56(1), which charges income of every kind not excluded from total income and not chargeable under the heads in section 14 items A to E.
The Court took the two questions in order: is it income, and under what head. On the first, it refused to let the inclusive definition in section 2(24) narrow the ordinary meaning of income. The definition adds categories; it does not exhaust the concept, and the practical test is whether the receipt can properly be described as income. Applying it, the Court looked past the absence of a payment into the assessee's hands to what the payment did. The sum was the tax on his own salary, payable by him, and it was discharged by another under a contractual obligation, not as a gift. Two consequences followed: the assessee was relieved of a liability that was his, and he could not have received the salary he did on any other footing. The obligation cast on Ballarpur by section 195 pointed the same way. On that reasoning it would be unrealistic to say the payment had no integral connection with the salary. On the second question the Court proceeded by elimination. Section 17 governs salary and perquisites and presupposes an employment; here it was common ground that Ballarpur was not the employer, so the perquisite route the Income-tax Officer had taken was not open. Section 56(1) is residuary and catches income of every kind not chargeable under the other heads, and no exemption was claimed. The three decisions cited for the assessee were distinguished: N.A. Modi turned on the assessee no longer carrying on his profession, and in fact emphasises that heads of income are decided on the nature of the income by practical common notions; T.P. Sidhwa concerned property income in the hands of a non-owner, where no comparable integral connection existed; and Sheela Kaushish concerned annual value under section 23.
It would be unrealistic to say that the said payment had no integral connection with the salary received by the assessee.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that tax paid by an Indian company on an expatriate's salary, under an obligation to pay him free of Indian tax, is itself income of the expatriate. The definition in section 2(24) is inclusive and does not rob income of its natural meaning; anything properly described as income is taxable unless exempted. The payment was made for and on behalf of the assessee, was not gratuitous, and had an integral connection with the salary he received. Since he was not an employee of the company that paid, it fell under section 56 as income from other sources. The appeals were dismissed. This was decided by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J)) and bears on section 2(24), section 56, section 17, section 14, section 195 of the Income Tax Act 1961. It is reported as AIR 1993 SC 1466; (1993) 2 SCC 453; (1993) 200 ITR 483; (1993) 67 Taxman 532; 1993 AIR SCW 1341. This is the Supreme Court authority for taxing a tax-protected package, and it matters most for secondments where the person is paid by one entity and works for another. Two things come out of it. The first is that the discharge of a person's own liability by someone else is his income even though no money reaches his hands, because but for the payment he could not have received the salary he did. The second is the head. Where the payer is not the employer, section 17 cannot apply, and the residuary head in section 56(1) takes anything not chargeable under the heads in section 14 items A to E. The Court also reaffirms that the head of income is decided by the nature of the income on the practical notions of ordinary people, not by the assessee's treatment of it. If it applies to you, the first step is this: Gross up a tax-protected package when computing the expatriate's income - the tax borne by the payer is income of the recipient, not a cost of the payer alone.
Ballarpur Paper and Straw Board Mills Limited set up a caustic soda and chlorine plant and contracted with Krebs, a French concern, for machinery and, by a second agreement, for the services of personnel including engineers. Krebs in turn arranged with a Swiss concern for machinery and for personnel. The assessee was one of the persons so provided; he came to India and worked on setting up the plant. Under the agreement between Ballarpur and Krebs, Ballarpur paid salaries and emoluments to such personnel on an agreed formula, and it was stipulated that salaries were understood free of any Indian tax or duty. The assessee was paid Rs 3,82,481 for assessment year 1974-75 and Rs 67,200 for 1975-76, besides daily allowances and other facilities. He filed returns claiming he was not liable to tax; that stand was rejected, and Ballarpur paid tax of Rs 3,23,400 and Rs 35,546 for the two years. The Income-tax Officer treated the tax so paid as a perquisite and added it to the assessee's salary. The Appellate Assistant Commissioner and the Tribunal upheld the addition, and the Bombay High Court answered the reference against him. It was common ground that no employer and employee relationship existed between Ballarpur and the assessee. The matter was decided on 1993-02-19 by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J)). On those facts the Supreme Court held as follows. The appeals were dismissed with no costs. The tax paid by Ballarpur on the salary received by the assessee is income of the assessee and was rightly included in his total income for both years. The definition of income in section 2(24) is inclusive: it adds artificial categories but the expression does not thereby lose its natural connotation, and anything that can properly be described as income is taxable unless exempted by some provision. The sum in question is nothing but tax upon the salary the assessee received. Ballarpur paid it under an obligation it had undertaken, so the payment was for and on behalf of the assessee and was not gratuitous; but for the agreement and the payment the assessee would have had to pay the tax himself, and he could not have received the salary he did without it. On the head of income, since the assessee was not an employee of Ballarpur the amount could not fall within section 17, and it therefore fell under section 56(1), which charges income of every kind not excluded from total income and not chargeable under the heads in section 14 items A to E.
The Court took the two questions in order: is it income, and under what head. On the first, it refused to let the inclusive definition in section 2(24) narrow the ordinary meaning of income. The definition adds categories; it does not exhaust the concept, and the practical test is whether the receipt can properly be described as income. Applying it, the Court looked past the absence of a payment into the assessee's hands to what the payment did. The sum was the tax on his own salary, payable by him, and it was discharged by another under a contractual obligation, not as a gift. Two consequences followed: the assessee was relieved of a liability that was his, and he could not have received the salary he did on any other footing. The obligation cast on Ballarpur by section 195 pointed the same way. On that reasoning it would be unrealistic to say the payment had no integral connection with the salary. On the second question the Court proceeded by elimination. Section 17 governs salary and perquisites and presupposes an employment; here it was common ground that Ballarpur was not the employer, so the perquisite route the Income-tax Officer had taken was not open. Section 56(1) is residuary and catches income of every kind not chargeable under the other heads, and no exemption was claimed. The three decisions cited for the assessee were distinguished: N.A. Modi turned on the assessee no longer carrying on his profession, and in fact emphasises that heads of income are decided on the nature of the income by practical common notions; T.P. Sidhwa concerned property income in the hands of a non-owner, where no comparable integral connection existed; and Sheela Kaushish concerned annual value under section 23. In the words reproduced by the source cited on this page: "It would be unrealistic to say that the said payment had no integral connection with the salary received by the assessee."
It was decided by the Supreme Court on 1993-02-19 and is reported as AIR 1993 SC 1466; (1993) 2 SCC 453; (1993) 200 ITR 483; (1993) 67 Taxman 532; 1993 AIR SCW 1341. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(24), section 56, section 17, section 14, section 195, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed with no costs. The tax paid by Ballarpur on the salary received by the assessee is income of the assessee and was rightly included in his total income for both years. The definition of income in section 2(24) is inclusive: it adds artificial categories but the expression does not thereby lose its natural connotation, and anything that can properly be described as income is taxable unless exempted by some provision. The sum in question is nothing but tax upon the salary the assessee received. Ballarpur paid it under an obligation it had undertaken, so the payment was for and on behalf of the assessee and was not gratuitous; but for the agreement and the payment the assessee would have had to pay the tax himself, and he could not have received the salary he did without it. On the head of income, since the assessee was not an employee of Ballarpur the amount could not fall within section 17, and it therefore fell under section 56(1), which charges income of every kind not excluded from total income and not chargeable under the heads in section 14 items A to E. It arises in Salary & Perquisites and TDS Defaults matters, on section 2(24), section 56, section 17, section 14, section 195 of the Income Tax Act 1961, and was decided by Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Identify the employer before choosing the head: where the person is not employed by the entity discharging the tax, the amount goes under section 56 rather than as a perquisite under section 17. Read the underlying contracts, since the obligation to pay salaries free of Indian tax is what makes the payment non-gratuitous and connects it to the salary. Do not argue that nothing was received; the Court treats the discharge of the assessee's own liability as receipt in substance.
Still good law. I read the whole judgment to its dismissal of the appeals. It rests on the ordinary meaning of income and on the residuary head, both of which are unchanged in structure. I checked no later authority or amendment in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line listed sections 17(2)(iv) and 195A; the judgment mentions section 195 but not section 195A, and it holds that section 17 could not apply at all because there was no employment, so I have taken the sections from the judgment. A reader dealing with a present-day tax-protected package must also consider the grossing-up provision, on which this judgment says nothing. The harvested page carries a reporter's headnote above the judgment, which I have not used, and the assessee's name is spelt both Webber and Webler in it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with no costs. The tax paid by Ballarpur on the salary received by the assessee is income of the assessee and was rightly included in his total income for both years. The definition of income in section 2(24) is inclusive: it adds artificial categories but the expression does not thereby lose its natural connotation, and anything that can properly be described as income is taxable unless exempted by some provision. The sum in question is nothing but tax upon the salary the assessee received. Ballarpur paid it under an obligation it had undertaken, so the payment was for and on behalf of the assessee and was not gratuitous; but for the agreement and the payment the assessee would have had to pay the tax himself, and he could not have received the salary he did without it. On the head of income, since the assessee was not an employee of Ballarpur the amount could not fall within section 17, and it therefore fell under section 56(1), which charges income of every kind not excluded from total income and not chargeable under the heads in section 14 items A to E.
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