Facts of the Case

The present appeal was filed by the Revenue against the order passed by the Commissioner of Income Tax (Appeals), NFAC, for Assessment Year 2020-21 in the case of the assessee, Sheetal Arora.

During the assessment proceedings under Section 143(3) read with Section 144B of the Income Tax Act, 1961, the Assessing Officer observed that the employer of the assessee, M/s Mankind Pharma Ltd., had paid income tax on behalf of the assessee relating to salary income.

Out of the total tax paid by the employer amounting to ₹3,08,54,634, a portion of ₹2,16,15,363 was treated as perquisite. However, the remaining amount of ₹92,39,271 representing tax paid on non-monetary perquisites was not treated as perquisite by the employer.

The Assessing Officer held that the payment of tax on behalf of the assessee constituted a perquisite under Section 17(2) of the Income Tax Act and therefore added ₹92,39,271 to the income of the assessee.

The CIT(A), however, deleted the addition. Aggrieved by the decision, the Revenue preferred an appeal before the Income Tax Appellate Tribunal.

 

Issues Involved

  1. Whether the tax paid by the employer on non-monetary perquisites (tax on tax) is taxable as a perquisite in the hands of the employee.
  2. Whether notional interest should be charged on loans and advances given by the assessee.
  3. Whether the deletion of addition relating to cash deposits of ₹2,00,000 by the CIT(A) was justified.

 

Petitioner’s (Revenue’s) Arguments

  • The CIT(A) erred in interpreting the provisions relating to perquisites and failed to consider that the assessee was also a shareholder and director in the employer company.
  • The assessee failed to establish that the perquisites received were not related to deemed dividend.
  • The assessee had advanced funds to entities in which she had substantial interest as director, shareholder or partner.
  • The advances should attract notional interest income if they were genuine financial transactions.
  • The assessee failed to establish with documentary evidence that the cash deposits were made out of earlier cash withdrawals.

Accordingly, the Revenue argued that the order of the CIT(A) deleting the additions was erroneous both in law and on facts.

 

Respondent’s (Assessee’s) Arguments

  • She had received total salary of ₹7,28,81,313 from Mankind Pharma Ltd., out of which ₹5,03,53,200 was salary and ₹2,25,28,113 was perquisite.
  • The entire income had been duly disclosed in the return of income.
  • As per the board resolution of the employer company, the liability to pay tax on the salary of the assessee was borne by the company.
  • Form 12BA forming part of Form 16 clearly disclosed the value of perquisites including tax on salary borne by the employer.
  • The tax of ₹92,39,271 represented tax paid on non-monetary perquisites (“tax on tax”), which is specifically exempt under Section 10(10CC) of the Income Tax Act.
  • The employer had already disallowed the amount in its computation under Section 40(a)(v).
  • Reliance was placed on the judgment of the Delhi High Court in the case of Yoshio Kubo vs CIT, which held that tax paid on non-monetary perquisites is not taxable again in the hands of the employee.

 

Court Findings

  • The CIT(A) had correctly recorded that the disputed amount represented tax paid on non-monetary perquisites in the nature of “tax on tax”.
  • Such tax paid by the employer is exempt under Section 10(10CC) of the Income Tax Act.
  • The employer had already made a disallowance of the said amount under Section 40(a)(v).
  • The issue was squarely covered by the decision of the jurisdictional High Court.

Accordingly, the Tribunal held that the addition made by the Assessing Officer was not sustainable.

Regarding the issue of notional interest, the Tribunal noted that:

  • The assessee had received almost 99.77% of the outstanding liabilities from her mother, whose creditworthiness was established by substantial declared income.
  • The Revenue sought to impose notional interest instead of making a specific disallowance under Section 36(1)(iii), which applies when interest-bearing funds are diverted for non-business purposes.

Therefore, the Tribunal declined to interfere with the findings of the CIT(A).

On the issue of cash deposits, the Tribunal observed that:

  • The assessee had sufficient cash withdrawals available which constituted the source of the deposits.
  • Hence, the deletion of the addition of ₹2,00,000 by the CIT(A) was justified.

 

Court Order

The Income Tax Appellate Tribunal dismissed the Revenue’s appeal and upheld the order of the CIT(A) deleting the additions made by the Assessing Officer.

 

Important Clarification

The Tribunal clarified that tax paid by an employer on non-monetary perquisites of an employee, commonly referred to as “tax on tax”, is exempt under Section 10(10CC) of the Income Tax Act and cannot be taxed again in the hands of the employee.

Link to download the order -  https://itat.gov.in/public/files/upload/1735624016-AMswRr-1-TO.pdf 


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