Per Bench. - These are the appeals filed by the assessees against the order of CIT(A) for the assessment year 2004-05.

2. At the outset, it was submitted by the learned AR that the first common ground raised by the assessees in the present appeals relating to exemption under section 10(10CC) is covered by the decision of the Special Bench of the Tribunal in the case of RBF Rig Corpn. LIC (RBFRC) v. Asstt. CIT [2007] 109 ITD 141 (Delhi).

3. We have gone through the order of the Special Bench wherein issue with regard to assessee’s claim of exemption under section 10(10CC) was decided in favour of the assessee after having the following observation:—

"11.3 We are of view that from the changes introduced through the Finance Act, 2002, with effect from 1-4-2003, the Legislature has reflected its intention in clear terms to exempt in the hands of the employee, the tax paid by his employer on the perquisite falling under clause (2) of section 17. The said perquisite itself was tax paid by the employer at his option which the employee was obliged to pay. This has been specifically provided in clause 10(10CC) of the Income-tax Act and is further corroborated by changes made in section 40(a)(v ), sections 192(1A) and 195A and other consequential amendments. These changes are to be seen with similar provision existing earlier to appreciate the new scheme. The Notes and Memorandum issued with the Bill has the title "Scheme for taxation of perquisites simplified with employer given option to pay tax on behalf of employees", [reproduced and highlighted in para 6.5 page 19 (above), leave no amount of doubt that tax paid by the employer on behalf of the employee is a perquisite and tax on such income is exempt under clause 10(10CC)]. The same conclusion, as expressed in the Circular and Notes, follows from consideration of the provisions noted below :

"Section 10. Incomes not included in total income.—In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(10CC) in the case of an employee, being an individual deriving income in the nature of a perquisite, not provided for by way of monetary payment, within the meaning of clause (2) of section 17, the tax on such income actually paid by his employer, at the option of the employer, on behalf of such employee, notwithstanding anything contained in section 200 of the Companies Act, 1956 (1 of 1956).

11.4 It is clear from above that the clause is applicable, if the following circumstances conjectively exist :

(1)The assessee is an employee (individual) deriving income in the nature of a perquisite; and

(2)The said perquisite is not provided by way of monetary payment within the meaning of clause (2) of section 17; and

(3)Taxes actually paid by employer at his option on behalf of employee on above perquisite is exempt and would not form part of the total income of the employee.

This would be notwithstanding anything contained in section 200 of the Companies Act.

11.5 Taking the last sentence of the clause, we have already noted provision of section 200 of the Companies Act prohibiting a company from paying tax free salary to its officers or employees. If the clause did not have anything to do with payment of remuneration free of tax, one would wonder why overriding effect was given to the clause by stating that clause would apply ‘notwithstanding anything contained in section 200 of the Companies Act’. Therefore, reference to section 200 of the Companies Act only support the view that clause was intended to exempt payment of taxes by the employer on the remuneration paid to the employee.

11.6 As far as other circumstances mentioned above are concerned, there is some controversy as to what is the meaning of ‘at the option of the employer on behalf of the employee’. In our opinion, the words ‘at the option of the employer’ only imply that the employer now has an option to pay the taxes on behalf of the employees. It is for the employer to decide whether taxes are to be paid by the employee or the employer. The clause is not applicable in cases taxes are paid by the employee who is otherwise obliged to pay it. When so paid, no perquisite, as far as employee is concerned, would be involved. This is more than clear from provisions of section 192(1A) and sections 195, and 195A and from other consequent changes made through Finance Act, 2002 with effect from 1-4-2003 noted above. Sub-section (1A) to section 192 introduced through the same Finance Act, quoted above provides that the employer, "may pay at his option, tax on the whole or part of such income without making any deduction therefrom".

12. The learned Departmental Representative had contended that it is very essential to see agreements between the employer and employee in all the cases and particularly the term relating to payment of taxes. We find that in most of the cases, the agreement providing terms and conditions of employment including that relating to the payment of taxes is on record. As per said agreements, the employer has agreed to pay salary to the employee ‘free of taxes’. In other words, taxes have been paid by the employer on behalf of the employee. In some cases, where such agreements are not available, there also the Assessing Officer, in the assessment order has clearly observed that employer had paid taxes on behalf of the employees and, therefore, double or multiple grossing up were carried on. From above, it can safely be inferred that in all cases, the employer was obliged to pay taxes, on behalf of the employees. The assessments having been made on above terms, it is too late for the revenue to contend that we should again concentrate on whether the employer had an obligation to pay taxes on behalf of the employee.

12.1 The learned DR further contended that taxes paid by the employer on behalf of the employee was part of the salary and liable to be taxed as such. There is no dispute that this tax paid is a perquisite, to which clause (iv) of section 17(2) is applicable. We will elaborate on this. Some courts, without a doubt have held that taxes paid by employer is part of the salary and is liable to be taxed as such. For the purpose of resolving the controversy before us, this distinction does not make any difference as now it is in-built in clause 10(10CC) that taxes actually paid is a perquisite within the meaning of section 17(2) of the Income-tax Act. The controversy is whether it is a monetary payment.

13. In order to solve above controversy, we may now refer to decisions to which our attention was drawn and which are relevant to the issue involved.

In the case of Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283, the Hon’ble Mysore High Court held as under :

Head Note :

"An agreement between A, a non-resident company, and B, a resident company, provided that in consideration of the licence granted by A to B to manufacture certain articles, and services to be rendered by A, B shall pay to A royalty at three per cent on the net sales of articles manufactured and sold by B and further that ‘all payments to be made shall be made without deductions for taxes or other charges assessed in India, which shall be assumed by B’ (the resident company). The department contended that the real income of A under the agreement upon which B could be assessed as the agent of A was not the amount of royalty payable in fact to A plus the tax payable in India in respect of the said sum as claimed by the assessee, but such an amount as would, if the tax payable in India thereon was deducted, leave to A the stipulated three per cent of the sale proceeds. The net royalty payable to A under the agreement for the years 1953-54 to 1957-58 was Rs. 10,702, Rs. 43,963, Rs. 77,001, Rs. 96,353 and Rs. 1,15,077 respectively. The Tribunal upheld the contention of the department and assessed the royalties received by A for the years 1953-54 to 1957-58, at the grossed up sum of Rs. 21,271, Rs. 83,379, Rs. 1,63,180, Rs. 2,54,827 and Rs. 2,98,901 respectively.

13.1 In the case of Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 457 (Delhi), the question involved was whether cash reimbursement paid to the Managing Director as an employee by the assessee-company was a perquisite liable to be disallowed under section 40(a)( v) of the Income-tax Act. Relevant portion of section 40(a)(v ) provided as under :—

"(v )any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or;"

The court held that cash payment by the employer was not a perquisite. In coming to above conclusion, Their Lordships of Delhi High Court not only considered in detail the relevant provisions but also considered various decisions on the issue. The discussion is as under :

"The counsel also drew our attention to the relevant provision as contained in section 40A(5) which limits the allowance and is in two parts, where expenditure incurred by the company results directly or indirectly in the payment of any salary to its employee and, where the company incurs any expenditure which results, directly or indirectly, in the provision of any perquisite, ‘whether convertible into money or not’ to an employee. This, according to the counsel, is a clear pointer to the fact that the earlier provisions, as contained in clause (c)( iii) and clause (a)( v) of section 40 of the Act, did not include any cash payment made by the company to the employee within the meaning of the words ‘any benefit, amenity or perquisite’.

In support of his contentions, Mr. Ved Vyas referred to various decisions which may be noticed.

In CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431, the Calcutta High Court held that any cash payment directly made to the employee cannot be considered to be a perquisite within the meaning of section 40(c)( iii) of the Act, which provision corresponds to section 40A(5). The question before the court was whether the overseas allowance, managing allowance, devaluation allowance and transport allowance did not fall within the expression ‘benefit, amenity or perquisite’ within the meaning of section 40(c)( iii) of the Act. The court observed as follows (p. 437):

‘In our view, in their ordinary meaning, the words "which results directly or indirectly in the provision of any benefit or amenity or perquisite whether convertible into money or not" in clause (c)( iii) of section 40 excludes cash paid directly to an employee as there is no question of convertibility to money where cash would be paid. This interpretation is reinforced by the fact that originally the said sub-section contained the expression "remuneration" which was specifically excluded by the amendment introduced in 1964 which also introduced the clause ‘whether convertible into money or not’."

In sub-clause (i) of the said clause (c), the expression "remuneration" was retained along with the other expressions "benefit" and "amenity" even after the amendment. This would show that the Legislature had in view the distinction between the said expressions and yet chose to delete the expression "remuneration" from the said clause (iii).

The phrase "whether convertible into money or not" in our opinion does not govern only the expression "perquisite". If the phrase "whether convertible into money or not" was intended to govern only the word "perquisite" then the correct grammatical form would have been any benefit or amenity or ‘any perquisite whether convertible into money or not’.

In Indian Leaf Tobacco Dev. Co. Ltd. v. CIT [1982] 137 ITR 827 (Cal.), the court was concerned with the question as to whether monetary payment made by the company to its employees for reimbursement of medical expenses incurred by the employees represented expenditure resulting directly or indirectly in the provision of any benefit or amenity or perquisite to the said employee within the meaning of section 40A(5) of the Act. The court following its earlier decision in CIT v. Kanan Devan Hills [1979] 119 ITR 431 (Cal.), held that a direct payment to the employee did not come within the scope of expenditure resulting directly or indirectly in the provision of any perquisite to an employee whether convertible into money or not for the purpose of working out disallowance under section 40A(5).

The court, therefore, held that the expenditure incurred by the company for reimbursement of medical expenses incurred by the employee could not be treated as a perquisite of the employee for the purpose of making disallowance under section 40A(5).

In another case of the Calcutta High Court in CIT v. National and Grindlays Bank Ltd. [1984] 145 ITR 457 , the question was whether the cash payments on account of reimbursement of medical expenses of the employees of the company could not be included in the value of benefits, amenities or perquisites for the purpose of disallowance in excess of the limits laid down under section 40(c)( iii) or section 40(a)( v) of the Act. The court answered the question in favour of the assessee following its decision in Indian Leaf Tobacco Dev. Co. [1982] 137 ITR 827 (Cal.).

In CIT v. Venkataraman [1978] 111 ITR 444 , the Madras High Court had occasion to consider a similar provision as contained in section 2(6C)( iii) of the Indian IT Act, 1922, which defined income as including ‘the value of any benefit or perquisite, whether convertible into money or not obtained from a company’. It was held that "from this language it is clear that the benefit or perquisite" contemplated cannot be money itself. If it is money, the question of its value being taken into account or the benefit or perquisite being converted into money will not arise. It was also observed that the same section made a distinction between ‘benefit or perquisite’ on the one hand and ‘any sum paid’ on the other indicating that the benefit or perquisite contemplated by the section was other than money.

In CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad.), the question was whether the leave allowance was not a perquisite and, therefore, the allowance of the same would not fall to be restricted in terms of section 40(a)(v ) of the Act. The court referred to the decision of the Calcutta High Court in Kanan Devan’s case [1979] 119 ITR 431 (Delhi), and also to an earlier decision of the Madras High Court in CIT v. Venkataraman [1978] 111 ITR 444 , and held that in order to term a payment as perquisite, it had to be a payment other than a cash payment in pursuance of a contract of service.

In CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP) the question was as to whether the fees and medical bills should be taken into account as perquisite for the purpose of disallowance under section 40A(5) of the Act. Relying on the decision of the Calcutta and Madras High Courts, it was held that payments made directly to an employee do not fall within the meaning of the expression ‘perquisite’.

In Commissioner Of Income-Tax, Karnataka Ii. v. Mysore Commercial Union Ltd. [1980] 126 ITR 340, the Karnataka High Court was of the view that the expression ‘whether convertible into money or not’, occurring in section 40(a)( v), is something apart from money such as something in kind, which may be convertible into money or not and that this expression would not be appropriate when one considers a payment in cash. It, therefore, held that payment of bonus to its employees in cash was not a perquisite and could not be disallowed under section 40(a)( v)." [Emphasis supplied] Their Lordships dissented from the view taken by Full Bench of Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19. In the Kerala High Court, Their Lordship had held as under :

"The only question before us is whether despite the very clear indication by reason of the context of the provision in section 40(a)( v) that the term ‘benefit, amenity or perquisite’ must exhaust all advantages that an employee gets other than his salary, should a different meaning be given to this term because of the words ‘whether convertible into money or not’ following it. It is seen to have been argued, and successfully, in some cases that the words ‘whether convertible into money or not’ reflect on the nature of ‘benefit, amenity or perquisite’. Such a qualification is said to be inappropriate in the case of a cash benefit. In other words, cash cannot be qualified by the term ‘whether convertible into money or not’ and, therefore, whatever may be the natural meaning of the term ‘benefit, amenity or perquisite’, any advantage in terms of money which may fall normally within any one of the these three must stand excluded. We notice that this argument succeeded before the Karnataka High Court in Commissioner Of Income-Tax, Karnataka Ii. v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 , before the Calcutta High Court in CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 and before the Madras High Court in CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 . Though reference is made by the counsel for the assessee to the decision of the Madras High Court in CIT v. G. Venkataraman [1978] 111 ITR 444 that could easily be explained because the language of the section which the court considered in that case was materially different from what we are dealing with here.

We do not see any reason to give undue emphasis to the words ‘whether convertible into money or not’ so as to give a very restricted meaning to the term ‘benefit, amenity or perquisite’, a meaning which would not serve the evident purpose of the section.

We say so because that would mean that any cash allowance paid by the employer to an employee of any sum whatsoever will be entitled to deduction despite section 40(a)( v) because restriction is limited only to non-cash advantage given to the employee. Such a construction appears to us to be quite irrational defeating the very purpose of prescribing the limit under section 40(a)(v ) so as to dissuade an employer from paying unduly large sums by way of ‘benefit, amenity or perquisite’. The statute itself lays down the permissible limit of deduction in respect of salary and that would be incomplete unless a permissible limit of deduction is laid down in respect of other benefits that are extended to an employee. Though the words ‘whether convertible into money or not’ may at first sight appear to indicate that whatever are not convertible into money stand excluded from the scope of the term ‘benefit, amenity or perquisite’, that need not necessarily be so. The term ‘benefit, amenity or perquisite’ may take in any benefits in kind and in service and may take in also cash. ‘Whether convertible into money or not’ need not qualify the whole range. It only means that it is immaterial whether the benefit, perquisite or amenity may or may not be convertible into money. That would be immaterial. According to us, this would be the proper reading of the section."

13.2 In the case of Commissioner Of Income-Tax v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431 (Delhi), the question was whether reimbursement of medical expenses and computation of perquisite value of residential accommodation and cash allowance in the shape of car allowance and house rent allowance could be treated as part of salary for purposes of calculation under section 40A(5) of the Income-tax Act. Their Lordships held as under :

"There has been a catena of authorities which have taken the view that payment of cash allowance to an employee by way of reimbursement of medical expenses or house rent is not a perquisite."

Their Lordships reviewed entire case law and observed as under :

"The leading case on this point is CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.). That decision of the Calcutta High Court was based on the interpretation of section 40(c)( iii) of the Act and it came to the conclusion that the words ‘whether convertible into money or not’ occurring in the said sub-clause clearly indicated that cash payment was not contemplated by the said provision. This decision of the Calcutta High Court was followed by the same court in [1982] 137 ITR 827 (Cal.),Indian Leaf Tobacco Development Co. Ltd. v. CIT [1983] 139 ITR 763 (Cal.), CIT v. Oriental Bank Ltd. [1984] 145 ITR 457 (Cal.), CIT v. National & Grindlays Bank Ltd. [1986] 161 ITR 820 (Cal.), Alkali & Chemical Corporation of India Ltd. v. CIT [1986] Tax LR 483 (Cal.), CIT v. Darjeeling Co. Ltd. [1989] 176 ITR 331 (Cal.), Commissioner Of Income-Tax v. Indian Press Exchange Ltd. [1989] 180 ITR 275 (Cal.), National & Grindlays Bank Ltd. v. CIT [1991] 192 ITR 144 (Cal.), Commissioner Of Income-Tax v. Indian Explosives Ltd. [1990] 184 ITR 339 (Cal.) and CIT v. Indian Oxygen Ltd.

The Bombay High Court followed the aforesaid decision in Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.) in Commissioner Of Income-Tax, Bombay City-Ii v. Indokem Private Ltd. [1981] 132 ITR 125. This view was reiterated by the Bombay High Court in [1988] 169 ITR 44 - CIT v. Mercantile Bank Ltd. [1989] 177 ITR 96 (Bom.), Commissioner Of Income-Tax v. Boehringer-Knoll Ltd. [1987] 163 ITR 528 (Bom.), Commissioner Of Income-Tax v. J. Govindram Pvt. Ltd. [1989] 177 ITR 204, Commissioner Of Income-Tax v. Mansants Chemicals (P.) Ltd. [1991] 191 ITR 75 (Bom.), Ruston and Hornsby (India) Ltd. v. CIT [1991] 191 ITR 367 (Bom.), CIT v. Greaves Cotton & Co. Ltd. [1991] 191 ITR 58 (Bom.), Commissioner Of Income-Tax v. Alembic Distributors Ltd. [1986] 162 ITR 565 (Bom.), Commissioner Of Income-Tax v. Yorkshire Insurance Co. Ltd. [1991] 192 ITR 169 (Bom.), CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. 192 ITR 89 (Bom.), Asbestos Cement Ltd. v. CIT [1991] 192 ITR 245 (Bom.), CIT v. Empire Dyeing & Mfg. Co. Ltd. The Andhra Pradesh High Court has taken the same view and the first judgment is reported as CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP) was followed by the Andhra Pradesh High Court in three other cases, reported as [1986] 160 ITR 217 , Commissioner Of Income-Tax v. Warner Hindusthan Ltd. [1989] 175 ITR 87, CIT v. Singareni Collieries Co. Ltd., the Madras High Court has also taken the same view in [1980] 125 ITR 150 , CIT v. Manjushree Plantations Ltd. [1992] 196 ITR 802, Commissioner Of Income-Tax v. Jayanthi Films (Madurai) Pvt. Ltd. High Court has also come to the same conclusion in Commissioner Of Income-Tax, Karnataka Ii. v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 and this was followed by it in [1988] 173 ITR 374 (Kar.), Commissioner Of Income-Tax v. Motor Industries Co. Ltd. decisions of the Kerala High Court in favour of the aforesaid view of the Calcutta High Court are [1984] 145 ITR 563 - CIT v. Toshiba Anand Lamps Ltd. [1985] 153 ITR 444 and Travancore Tea Estates Co. Ltd. v. CIT.

As far as this court is concerned, the view of the Calcutta High Court in Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 has found favour. In the case Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 457 (Delhi), it was held by this court that reimbursement of medical expenses by paying cash to the employee was not a perquisite. This view was reiterated by this court in CIT v. Escorts Ltd. [1987] 59 CTR 284 and Commissioner Of Income-Tax v. Jay Engineering Works Ltd. [1990] 182 ITR 181.

Apart from the aforesaid authorities including three decisions of this court, it is clear to us that payment of the type which was made is not a perquisite. The Explanation 2(b ) to section 40A(5) is exhaustive. The payment in cash made by the employer to an employee by way of reimbursement does not fall under sub-clauses (i) to ( v) of clause (b) of Explanation 2. This being so, the payment in question cannot be regarded as a perquisite at all.

It was sought to be contended by Mr. Rajendra that section 40A(5)(a)( ii) of the Act uses the expression ‘incurs directly or indirectly any expenditure’ and he submits that the payment which has been made by the employer to the employee would fall in this category. We are unable to agree with this submission. Sub-clause (ii) of section 40A(5)(a) deals with two types of cases. Firstly, it deals with the expenditure incurred directly or indirectly by an assessee in respect of any assets of the assessee used by an employee either wholly or partly for his own purpose or benefit. Reading the words ‘incurs directly or indirectly any expenditure’, in isolation, would give no meaning to the said sub-section.

The nature of the expenditure is clearly indicated in the latter part of this sub-section, and that is expenditure in respect of any assets of the company which are used by an employee for his own purposes of benefit. The cash payment or reimbursement is not included in this sub-clause at all.

Therefore, while agreeing with the aforesaid decision, Question No. 1 has to be answered in the affirmative and in favour of the assessee."

13.3 In the case of CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. [1996] 219 ITR 644, their Lordships of Supreme Court have considered the question whether cash payment made by an assessee to its employee fall within the mischief of section 40(a)(v ) and section 40A(5). Their Lordships noted, "On appeal, the CIT(A) upheld the assessee’s contention that cash payments cannot be treated as ‘perquisites’ for the purpose of and within the meaning of section 40A(5). Revenue’s appeal to the Tribunal was dismissed. An application under section 256(1) was also dismissed by the Tribunal whereupon it approached the High Court which too rejected its application under section 256(2), as stated above." After elaborate consideration of relevant provisions including definition of ‘perquisite’ under section 17 and case law, they agreed with the view expressed by majority of High Courts including Delhi, Karnataka, Kerala and Madras disagreed with the view taken by Kerala High Court in Commonwealth Trust Ltd.’s case (supra). Their Lordships held as under :

"6. On a consideration of both the points of view, we are inclined to agree with the submission of the learned counsel for the assessees. The language employed in the sub-clause is not capable of taking within its ambit cash payments made to the employees by the assessee. These cash payments will, of course, be treated as salary paid to the employees and will be subject to the limits/ceiling, if any, in that behalf. But they cannot be brought within the purview of the words ‘any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite’ - more so because of the following words ‘whether convertible into money or not’.

7. Now, coming to section 40A(5), the position is no different. It would, however, be appropriate to point out the distinction between section 40(a)( v) and section 40A(5). We shall refer to the former provision as ‘sub-clause’ and the latter provision as ‘sub-section’. The sub-section is wider in its scope and application than the sub-clause. Sub-clause (i) of clause (a) of sub-section (5) deals with ‘any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee’. Sub-clause (i) of clause (c) of sub-section (5) deals with ‘any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee’. Sub-clause (i) of clause (c ) of sub-section (5) sets out the limits/ceilings on such expenditure while clause (a) of Explanation 2 appended to the sub-section defines the expression ‘salary’ for the purposes of this sub-section. These features were absent in sub-clause (v) of section 40(a). Now, coming to sub-clause (ii) of clause (a) of sub-section (5) which corresponds to section 40(a)(v ) it uses only one expression ‘perquisite’ as against section 40(a)(v ) which spoke of ‘benefit of amenity or perquisite’, but this is no real distinction because the definition of ‘perquisite’ : in clause (b) of Explanation (2) to the sub-section takes in both benefits and amenities. The said definition also includes, inter alia, ‘payment by the assessee of any sum in respect of any obligation which but for such payment, would have been payable by the employee’-words which are found in the main limb of section 40(a)( v) but which are missing in the main limb of sub-clause (ii) of clause (a) of sub-section (5). Thus, except for certain structural changes, section 40A(5)(a)( ii) and section 40(a)(v ) are similar in all material aspects. It, therefore, follows that what we have said with respect to section 40(a)( v) applies equally to section 40A(5)(a)( ii).

8. There still remain the words ‘including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee’ in section 40(a)( v) and similar words found in section 40A(5)(a)(ii ) as well, i.e., in sub-clause (iv) of the definition of ‘perquisite’ in clause (b) of Explanation 2 to sub-section (5). What do they mean ? The said words contemplate a situation where the assessee makes a payment (in cash) in respect of an obligation — obligation of the employee — which would have been payable by the employee if it is not paid by the assessee. The payment by the assessee contemplated by these words is not evidently a payment to the employee but to a third party, no doubt, on account of the employee. Sub-clause (v) of the definition of ‘perquisite’ in clause (b) of Explanation 2 to sub-section (5) also refers to cash payment but that too is not to the employee, though undoubtedly for his benefit.

9. For the above reasons, we hold that cash payments by an assessee to his/its employees do not fall within the ambit of section 40(a)( v) or section 40A(5)(a)(ii ), as the case may be. We disagree with the opinion of the Kerala High Court in Common Wealth Trust Ltd. (supra ) and agree with the other High Courts which have taken a view according with our view, viz., Commissioner Of Income-Tax, Karnataka Ii. v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 (Kar.), Commissioner Of Income-Tax v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431 (Delhi), CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.), CIT v. Indokem Pvt. Ltd. [1981] 132 ITR 125 (Bom.), CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP), Instalment Supply Pvt. Ltd. v. CIT [1984] 149 ITR 457 (Delhi), CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad.) and CIT v. New India Industries Ltd. [1993] 201 ITR 208 (Guj.)

Accordingly, the appeals are dismissed. No costs." [Emphasis supplied]

13.4 In the case of Frank Beaton v. CIT [1985] 156 ITR 16 (Delhi), the assessee a non-resident under an agreement with its employer was not to pay tax on his salary and allowances. His employer company was to pay tax on salary and allowances. Their Lordships held that single grossing up of tax and not multiple grossing up was permitted under the Statute, Justice Ranganathan, who wrote separate but concurring judgment made the following relevant observations :

"The assessee is an employee and the income in question is chargeable to tax in his hands under the head ‘Salaries’ . Section 17(1)(iv) of the Act includes, within the scope of the charge imposed by this section ‘perquisites’ in lieu of, or in addition to, any salary. Section 17(2) defines ‘perquisites’ to include, inter alia, ‘(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee’.

It, therefore, follows that, if the employer pays any income-tax, the obligation to pay which lies on the employees, the amount of any income-tax so paid will be assessable in the hands of the employee-assessee as part of his salary income. The provision may raise a further question regarding the year in which the perquisite income will become assessable, an aspect touched upon in Sciandra v. CIT [1979] 118 ITR 675 (Cal.), but it may not be necessary to deal with that aspect for the purposes of the present case."

13.5 In the case of CIT v. H.D. Dennis [1982] 135 ITR 1 (Bom.), their Lordships held as under :

"We are fortified in the view we are taking by two decisions, viz., one of the Kerala High Court in CIT v. C.W. Steel (No. 1) [1972] 86 ITR 817 , and the other of the Madras High Court in CIT v. Mackintosh [1975] 99 ITR 419 . In both the cases, the very same question fell for consideration, viz., whether the income-tax paid by the employer was salary for the purposes of finding out the value of the rent-free accommodation given to the employee. Both the courts have answered the issue in favour of the revenue and against the assessee. The Madras High Court in its judgment has approved of the ratio of the decision of the Kerala High Court. We are respectfully in agreement with the decisions of both the courts on the said point. We are, therefore, satisfied that the revenue is entitled to succeed on the first question and the answer to the first question will have to be given in its favour and against the assessee."

13.6 In the case of Boeing v. CIT [2001] 250 ITR 667 (Mad.), the case relied upon by the learned Departmental Representative, their Lordships of Madras High Court were dealing with a question whether a cloth dealer receiving gift from its manufacturer as "incentive" for additional efforts would constitute profit and gains of business. Their Lordships held that gift was a trading receipt and, therefore, value of gift constituted profits and gains of business of the dealer. In our considered opinion, aforesaid decision has no application to the facts involved us.

13.7 In the case of Commissioner Of Income-Tax v. Tara Singh [1998] 233 ITR 669 (Delhi), another case relied by the Departmental Representative, the question before the Hon’ble Delhi High Court was whether debit balance in the account of the assessee who was Director of the company could be treated as a benefit liable to be taxed, in view of section 2(24)(iv). The Tribunal had held that value of benefit in the form of a debit balance in the accounts of the company was not a benefit which could be treated as income within the meaning of section 2(24)(iv) of Income-tax Act. On appeal, their Lordships relied upon the decision of Madras High Court in the case of CIT v. S.S.M. Lingappan [1981] 129 ITR 597and held that benefit could be taxed as a perquisite under section 17(2)(iii) of the Income-tax Act. This case, in our view, is also of no help to the revenue.

13.8 In the case of Emil Webber v. CIT [1993] 200 ITR 483, relied upon by the revenue, the question before the Hon’ble Supreme Court was whether the assessee, one of the foreign personnel whose services were provided for setting up plant in India for an Indian concern (Ballarpur Ltd.). The agreement provided that salary of the foreign personnel were payable free of tax or duty. The taxes paid on employee’s income was held to be income from other sources as there was no relationship of employer and employee with M/s. Ballarpur Ltd. This finding of the Tribunal was confirmed on appeal by the Hon’ble High Court. The Supreme Court confirmed the decision of the High Court, by observing as under (Head Note) :

"Held, affirming the decision of the High Court, (i) that the amount paid by Ballarpur was nothing but a tax upon the salary received by the appellant. It was paid by virtue of the obligation undertaken by Ballarpur and, therefore, the payment was not a gratuitous payment but was for and on behalf of the appellant. It would be unrealistic to say that the payment had no integral connection with the salary received by the appellant. Therefore, the tax paid by Ballarpur was liable to be included in the income of the appellant (see pp. 486G, H, 487A, B).

(ii)That inasmuch as the appellant was not an employee of Ballarpur, the amount could not be brought under the head ‘Salary’ within the purview of section 17 of the Income-tax Act, 1961, and had necessarily to be placed under section 56(1), viz., under the head ‘Income from other sources’ (see p. 487c)."

This case in our considered view has no application to the facts of the case.

14. It is evident from above cited decisions that when payment is made in cash by employer to the employee, it is not a perquisite. The cash payment to the employee has been held to be different from a "perquisite". It was held to be different from "convertible into money or not". The cash payment was not held to be money payment while considering the question whether such payment was a benefit, amenity or a perquisite, though cash payment by the employer to the employee may be liable to be assessed as "salary".

14.1 We have already noted specific finding to the above effect in the case of Shriram Refrigeration Industries Ltd. (supra) although their Lordships was considering different provision of section 40(a)( v) but that does not make any difference as in the case of Mafatlal Gangabhai & Co. (P.) Ltd. (supra). Their Lordships of Supreme Court considered meaning of expression "perquisite" as defined in sub-section (2) of section 17 and arrived at the same conclusion.

14.2 Their Lordships of Supreme Court further noted the difference between a payment by employer to the employee and a payment by the employer to a Third party. A payment to a third party in respect of any obligation which but for such payment would have been payable by the employee would only be a perquisite in the hands of the employee. When it is a payment to a third party, how can it be treated as a monetary payment to the assessee. Shri M.S. Syali, the learned senior counsel for the assessee Interveners and Shri Tulsiyan, the learned counsel for the main petitioner here, were right in pointing out that clause 10(10CC) emphasizes on direct monetary payment to the employee to be excluded from the application of the provision. The payment of tax on behalf of the employee at the option of the employer can only be treated as discharge of an obligation of the employee which but for such payment would have been payable by the employee himself. It is a perquisite fully covered by sub-clause (iv) of clause (2 ) of section 17 of the Act and nothing else.

14.3 The cash payment to the employee by the employer might be assessable as "salary" but it is not a "perquisite or amenity or benefit". We have already noted view of Full Bench of Kerala High Court in Common Wealth Trust Ltd.’s case (supra) where their Lordships saw no good reason to give restricted meaning to the term "benefit, amenity or perquisite" as the same would not serve the purpose of the section. Their Lordships saw no rationality in the view of the majority High Courts, if it is held that cash allowance paid by the employer to an employee would be entitled to deduction, despite section 40(a)( v) and restrict the application of above provision to non-cash advantage. Such construction, according to their Lordships, would be quite irrational, defeating the very purpose of the Legislation. The aforesaid view, as noted above, has not been approved by the Apex Court and a distinction has been drawn between cash payment on one hand and "benefit, amenity or a perquisite" on the other.

14.4 It is, therefore, reasonable to conclude that payment of taxes by the employer, on behalf of the employee, is a perquisite within the meaning of clause (2) of section 17 of the Income-tax Act. It cannot be a monetary payment to the assessee within the meaning of above clause which is intended to be excluded from application of clause 10(10CC) of the Act.

15. In the two earlier decisions, Tribunal, while not granting benefit to the assessee under section 10(10CC) of the Income-tax Act held that the tax paid by the assessee was nothing but part of the salary and, therefore, it was to be assessed as such. It was also treated as a monetary payment. Shri Syali had rightly pointed out that no reasons were given as to why it is being treated as part of monetary payment. Important provisions and circular etc. were not brought to the notice of the Benches and, therefore, an incorrect view of the matter was taken in those cases.

15.1 The learned Departmental Representative also placed reliance on the decision of Hon’ble Delhi High Court in the case of T.P.S. Scott v. CIT [1998] 232 ITR 475, wherein it is held as under on taxes paid by the employer on behalf of the employee :

"We may refer to the relevant statutory provisions. Section 15 sets out the income which shall be chargeable to income-tax under the head ‘Salaries’. Vide clause (b) thereof any salary paid or allowed to an employee in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him is an income chargeable to tax under the head ‘Salaries’. For the purpose of section 15 vide section 17(1)(iv), perquisites are included in salary. Vide sub-clause (iv) of clause (2) of section 17 any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee, is included in ‘perquisites’. The interpretation clause i.e., section 2 of the Act, vide sub-clause (iii) of clause (24) thereof, includes the value of any perquisite or profit in lieu of salary taxable under clauses (2) and ( 3) of section 17, within the meaning of ‘income’.

All these statutory provisions make it clear that an amount of tax which would have been payable by an employee-assessee, if paid by the employer on behalf of the assessee, is to be included in the perquisites amounting to salary rendering it liable to tax by being included in income." [Emphasis supplied]

16. It is clear from above that taxes paid by employer on behalf of the employee were treated as a perquisite covered by sub-clause (iv) of clause (2) of section 17 of the Income-tax Act and, therefore, includible in the salary. There is no dispute that payment of taxes made by the employer on behalf of the employee is a perquisite and part of the income assessable under the head "Salary" if clause 10(10CC) was not brought on the Statute Book. It is also a benefit or amenity enjoyed by the employee but it is not a monetary payment to the employee. It is a payment by the employer which discharges an obligation of the employee, which otherwise would have been discharged by the employee. Such payments of taxes, therefore, are fully covered by above sub-clause (iv).

17. The decision of Commissioner Of Income-Tax, Orissa… v. American Consulting Corporation, Rourkela…Opp. Party.. [1980] 123 ITR 513 (Ori.). noted above also supports the view that taxes paid on behalf of the assessee is a perquisite or a benefit, but not income from business. It could not be taxed except under clause (iv) of section 28 which provided that a benefit or perquisite was liable to be charged to tax.

17.1 It is not money, which is paid to the assessee when taxes are paid on his behalf. It is discharge of his obligation. The payment fully fits in the jacket of sub-clause (iv) of section 17(2) of the Act. It may be a monetary gain or monetary benefit or a monetary allowance but definitely it is not a monetary payment to the assessee. What is excluded in the clause is the perquisite is in the shape of a monetary payment to the assessee. If it is a payment to a third person like payment of taxes to the Government, then such payment of taxes cannot be excluded under clause 10(10CC). The circular of the Board and provision of sub-section (1A) of section 192, sections 40(a)( v), 195A fully support the claim of the assessee. We, therefore, hold that the taxes paid by the employer on behalf of the employee is a perquisite within the meaning of section 17(2) of the Income-tax Act, which is not provided by way of monetary payment. Therefore, there is no reason not to exclude such payment of taxes from the total income of the assessee. In other words, taxes paid by the employer can be added only once in the salary of the employee. Thereafter, tax on such perquisite is not to be added again. We, therefore, find substance in the contention advanced on behalf of learned counsel for the assessees and the Interveners. The question referred to us is answered in favour of the assessee. The appeals of the assessees and Interveners are allowed on this issue.

18. That in some of the cases, there is question of levy of interest under sections 234, 235 of the Income-tax Act. Parties appearing before us conceded that this ground was consequential. We, therefore, direct the Assessing Officer to re-calculate taxes, if any, leviable under the above provision.

19. In some cases, there is ground challenging initiation of penalty proceedings under section 271(1)(c). The above ground was not pressed and is accordingly dismissed.

19.1 Before close we wish to thank Shri Syali, learned senior Advocate for the assessees as Interveners as also Shri Tulsiyan for assisting us. We also thank all the learned Departmental Representatives for their assistance and for their placing full case laws before us.

20. All the appeals of the assessees are allowed in terms stated above."

4. In view of the decision of the Special Bench in the above referred case, we hold that the tax borne by the employer on perquisites of the employees would constitute non-monetary benefit and as such the same is exempted under section 10(10CC) of the Act. We, therefore, reverse the order of the authorities below on this point and allow the assessee’s claim that the tax paid by the employer in respect of salary paid to the aforesaid assessees would constitute non-monetary perquisite eligible for exemption under section 10(10CC) of the Act. In other words, the assessee’s claim of exemption under section 10(10CC) of the Act in respect of tax paid by the employer in respect of salary paid to its employees, of the Act is directed to be allowed. The Assessing Officer shall modify the assessment orders of all these assessees accordingly.

5. It is pertinent to mention that the Tribunal vide order dated 13-8-2009, in the case of this assessee itself decided the issue in favour of the assessee by following the decision of the Special Bench referred to above. The Assessing Officer is directed to allow assessee’s claim of exemption under section 10(10CC) in terms indicated hereinabove.

6. The assessees in ITA Nos. 1716, 1718 & 1720/Delhi/2006 have also taken ground with regard to charging of interest under section 234B. We found that the issue is decided by the Hon’ble Jurisdictional High Court in the case of CIT v. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320¹ (Uttaranchal) wherein it was held that income which is subject to TDS and bona fide dispute arises at the relevant time when there are conflicting decisions of the Tribunal vis-a-vis the taxability of off-period salary due to non-resident assessees, no interest is leviable under section 234B. It was further held that Income-tax calculated under section 209(1)(b) is to be reduced by the amount of tax deductible at source and when the employer company failed to deduct tax at source for which assessee cannot be faulted, thus charging of interest under section 234B was held to be not justified. Respectfully following the decision of the Hon’ble Jurisdictional High Court, we hold that in the instant appeals, no interest is leviable under section 234B of the Act.

7. In the result, all the appeals of the assessees are allowed, in terms indicated hereinabove.