|(Date of pronouncement)
|October 9, 2012 (Date of publication)
|Click here to download the judgement (jaydev_raja_hypothetical_tax_salary_income.pdf)
“Hypothetical Tax” of expatriate employee is not assessable as income
The assessee, a resident but not ordinarily resident individual, was an employee of Coca-Cola Inc USA and had income under the head “Salaries”. Under the Tax Equalization Policy framed by the said company, the assessee was guaranteed net of tax salary and the company was to bear all actual taxes imposed on the employee’s assignment income. The employee had to reimburse the company that part of his total tax liability which he would have paid had he worked in Atlanta. This was known as the “Theoretical Tax Liability”. The assessee claimed that as the company was liable for the amount in excess of the theoretical tax liability, it was proper to net the company’s tax reimbursement with the employee’s contribution towards that reimbursement. It was claimed that the hypothetical tax had to be reduced and that only the actual tax borne by the employer should be treated as a perquisite. In AY 1994-95, the assessee received Rs. 77 lakhs on which the tax liability was Rs. 35 lakhs which was to be reimbursed by the employer. The total salary income was consequently Rs. 112 lakhs on which the actual salary paid was Rs. 50 lakhs. The assessee added Rs. 50 lakhs to its income and deducted Rs. 15 lakhs (Rs. 50 – 35 lakhs) on the ground that it was the “hypothetical tax” that he was liable to reimburse to the company. The AO & CIT(A) rejected the claim though the Tribunal (order attached) upheld it on the ground that as, out of the total tax liability of Rs.50 lakhs, the company would reimburse Rs.35.00 lakhs and Rs.15.00 lakhs would be borne by the assessee out of his salary of Rs.77.00 lakhs, the assessee’s taxable Income could not be more than Rs.112.00 Lakhs (77 + 35) on which the assessee had paid full tax of Rs.50.00 lakhs. On appeal by the department to the High Court, HELD dismissing the appeal:
The total salary received by the assessee in India was Rs.77.00 lakhs on which the tax payable at the maximum rate of 44.8% comes to Rs.35.00 lakhs. Since the assessee under the Tax Equalization Policy was entitled to get reimbursement of the tax payable on the amount of Rs.77.00 lakhs, his salary income was Rs.113.00 lakhs (Rs.77.00 lacs plus Rs.35.00 lacs). Though the assessee paid tax of Rs.50.00 lakhs, he was entitled to reimbursement of tax amounting to Rs.35.00 lakhs and the balance Rs.15.00 lakhs was borne out of the salary income received by the assessee in India. The confusion had arisen because the assessee in his computation had added Rs.50.00 lakhs as income and deducted Rs.15.00 lakhs from the income, when in fact the said amount of Rs.15.00 lakhs was not received from the company but paid out of the salary amount received in India. In other words, though the assessee had paid tax of Rs.50.00 lakhs, since the assessee was entitled to reimbursement of Rs.35.00 lakhs from the Company, the salary income (Rs.77.00 lakhs) received by the assessee had to be enhanced by Rs.35.00 lakhs only and not by the balance Rs.15.00 lakhs which is paid by the assesses from the salary income. Accordingly, the tax of Rs.15.00 lakhs paid by the assessee from the salary income (not reimbursed by the company) could not be added to the assessee’s income.