Facts of the Case

The assessee, Mr. Tadashi Murakami, was an employee of Hongo India Pvt. Ltd. He received salary in both Indian currency and foreign currency. Apart from salary, tax amounting to Rs. 1,68,104/- was paid by the employer on his behalf.

During assessment proceedings, the Assessing Officer treated the employer-paid tax of Rs. 1,68,104/- as a monetary perquisite and added the same to the assessee’s income. After computing the total income and tax liability, the Assessing Officer further applied Section 195A and grossed up the tax liability to Rs. 22,61,276/-. However, no basis or reasons for such grossing up were recorded in the assessment order.

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals), contending that the grossing up was wrongly made on the assumption that advance tax had been paid by the employer, whereas the advance tax was actually paid by the assessee himself.

The CIT(A) accepted the contention and deleted both the grossing up addition and the addition of Rs. 1,68,104/-. The Revenue challenged the order before the Income Tax Appellate Tribunal, which upheld the relief granted to the assessee. Aggrieved by the Tribunal’s decision, the Revenue filed an appeal before the Delhi High Court.

Issues Involved

1.      Whether grossing up under Section 195A could be applied when advance tax was paid by the employee and not by the employer.

2.      Whether tax paid by the employer on behalf of the employee amounting to Rs. 1,68,104/- constituted a non-monetary perquisite.

3.      Whether the Assessing Officer was justified in grossing up the tax liability without recording reasons or identifying the tax allegedly borne by the employer.

Petitioner’s Arguments (Revenue)

• The Tribunal should have remanded the matter to the Assessing Officer for examining the reasons behind the grossing up exercise.

• The deletion of grossing up by the CIT(A) and ITAT was not justified.

• The Revenue sought restoration of the addition made under Section 195A.

Respondent’s Arguments (Assessee)

• The advance tax considered for grossing up had actually been paid by the assessee himself and not by the employer.

• Section 195A becomes applicable only when tax on income is borne by the employer or payer.

• The Assessing Officer failed to provide any basis, reasoning, or factual finding for applying grossing up.

• The employer-paid tax of Rs. 1,68,104/- was a non-monetary perquisite and therefore not liable to treatment adopted by the Assessing Officer.

Court Findings

The Delhi High Court observed that Section 195A permits grossing up only when the tax chargeable on income is borne by the employer or payer.

The Court noted that although the Assessing Officer grossed up the tax liability, he failed to explain the basis of such computation. No finding was recorded identifying any tax liability borne by the employer apart from the amount already considered.

The assessee had specifically demonstrated before the appellate authorities that the advance tax had been paid by him personally. This factual assertion was never disputed by the Department.

The Court held that the only possible inference was that the grossing up had been done on the assumption that advance tax was paid by the employer. Since the advance tax was actually paid by the employee, the very foundation of grossing up disappeared.

The Court further observed that the Tribunal had correctly upheld the deletion of grossing up because the statutory condition prescribed under Section 195A was not satisfied.

With regard to the addition of Rs. 1,68,104/-, the Court noted that the tax effect involved was below Rs. 4 lakh and therefore declined to entertain the appeal on that issue.

Important Clarification

• Grossing up under Section 195A can be undertaken only where the tax liability is borne by the employer or payer.

• If advance tax is paid by the employee himself, such payment cannot be used as a basis for grossing up under Section 195A.

• The Assessing Officer must record clear reasons and factual findings before invoking Section 195A.

• Unsupported grossing up calculations without identifying tax borne by the employer are unsustainable in law.

• Where the Department does not dispute the factual finding that tax was paid by the employee, grossing up cannot survive.

Court Order

The Delhi High Court dismissed the Revenue’s appeal.

The Court held that no substantial question of law arose regarding the deletion of grossing up under Section 195A because the advance tax had been paid by the employee and not by the employer.

The challenge relating to the addition of Rs. 1,68,104/- was also not entertained due to the low tax effect involved.

Relevant Sections Involved

• Section 195A of the Income Tax Act, 1961 – Grossing up of income where tax is borne by payer
• Section 17 of the Income Tax Act, 1961 – Perquisites
• Provisions relating to salary taxation and employer-paid taxes

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:4408-DB/SID22102009ITA9202009.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.