Horace Dansereau v. Assistant Commissioner of Income Tax, Circle I(1), Trivandrum

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT:** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON** **TUESDAY, THE 12TH DAY OF DECEMBER 2017/21ST AGRAHAYANA, 1939** **ITA.No. 7 of 2007 ( ) ----------------------** **AGAINST THE COMMON ORDER DATED 28-04-2006 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.811/COC/2004 (1996-97)** ## **APPELLANT/APPELLANT/RESPONDENT IN ITA:** **----------------------------------------** **HORACE DANSEREAU, REPRESENTED BY AGENT KSEB, PATTOM, TRIVANDRUM.** **BY ADVS.** **SRI.E.K.NANDAKUMAR** **RESPONDENT/RESPONDENT/APPELLANT IN ITA: --------------------------------------** **ASST.COMMISSIONER OF INCOME TAX, CIRCLE I(1), TRIVANDRUM.** **BY ADV.SRI.JOSE JOSEPH** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12-12-2017, ALONG WITH ITA. 9/2007 AND CONNECTED MATTERS, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ## **ITA.No. 7 of 2007 ( )** ## **APPENDIX** ## **PETITIONER'S ANNEXURES** **A: TRUE COPY OF THE CONTRACT DATED 02.04.1993 ENTERED INTO BETWEEN KSEB AND SNC-SHAWINIGAN INC. CANADA (WITHOUT ITS ENCLOSURES (APPENDICES)** **B: TRUE COPY OF THE ASSESSMENT ORDER DATED 14.02.2003 PASSED BY THE RESPONDENT FOR THE A.Y. 1996-97** **C: TRUE COPY OF THE ORDER IN ITA NO.9-T/2003-04 DATED 25.03.2004 OF THE COMMR. OF IT (APPEALS)-1, TRIVANDRUM FOR THE A.Y.1996-97** **D: TRUE COPY OF THE COMMON ORDER DATED 28.04.2006 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH** **E: TRUE COPY OF THE DEMAND NOTICE DATED 17.07.2006 ALONG WITH THE ENCLOSED CHALLAN FOR EFFECTING PAYMENT OF THE BALANCE DEMAND** **F: LATEST AUDITED PROFIT AND LOSS ANNUAL STATEMENT OF ACCOUNT OF THE PETITIONER FOR THE YEAR 2004-2005** **//TRUE COPY//** **P.A. TO JUDGE** **JJJ** “C.R.” ## **K. VINOD CHANDRAN & ASHOK MENON, JJ.** ------------------------------------------ I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007 ------------------------------------------ Dated: 12[th] December, 2017 ## **J U D G M E N T** ## K.Vinod Chandran.J, Common questions arise in all these appeals filed by foreign nationals, represented by the Kerala State Electricity Board (KSEB), who acts as their agent. The KSEB entered into a contract of consultancy with SNC - Shawinigan Inc. Canada (for brevity 'the Consultant') for carrying out a project in the site of KSEB, as per the terms of an agreement, entered into between the KSEB and the Consultant. The liability to pay the salary, of the employees deputed by the Consultant to the project site, is of the Consultant itself. However, the income tax component had to be satisfied by the KSEB. ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **==> picture [17 x 9] intentionally omitted <==** 2. The petitioners, who were employees deputed by the Consultant, returned their income received in India and showed the tax component paid by the KSEB as “income from other sources”. The Assessing Officer added on the tax paid by KSEB, returned as “income from other sources”, to the salary paid and computed the total salary paid as provided in Section 195A of the Income Tax Act, 1961 ('Act' for short). Tax was determined for the said component of salary and deductions were made with respect to the tax paid by the KSEB. The balance was demanded from the assesses, the foreign nationals, who were in India by virtue of the contract. 3. The assesses filed appeals before the first Appellate Authority, who, based on **Emil Webber v. Commissioner of Income Tax - 200 ITR 483** , ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **-3-** reversed the order of the Assessing Authority and directed the tax paid by the KSEB, returned as other income, to be taxed as “income from other sources”. An appeal was taken by the Department to the Tribunal and cross objections were filed by the assesses. The cross objections were later withdrawn. The Tribunal allowed the appeal of the Department upholding the order of the Assessing Authority. 4. The learned Counsel appearing for the petitioners in all these appeals would contend that Section 195A of the Act could be applied only when, both the salary and the tax is paid by the employer, going by the specific words employed in the provision. Reference is made to Annexure A, the agreement between the KSEB and the Consultant. Clause 1.2 makes it clear that there is no relationship of master and servant between the KSEB and the Consultant and ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **==> picture [17 x 9] intentionally omitted <==** the Consultant would have complete charge of personnel performing the services at the project site of the KSEB. Clause 1.9.1 deals with taxes, duties and statutory levies and makes liable the KSEB to the amount inter alia of all taxes to be paid in the country, especially the income tax payable for the salary income of the employees of the Consultants deputed to serve in India. Clause 1.9.2, which is a non obstante clause, refers to any other taxes, duties, levies etc payable by the Consultant or its personnel, in India or outside India, to be the sole liability of the Consultant, absolving the KSEB from such liability. 5. We find from the order of the Tribunal that the Tribunal has relied on the non obstante clause 1.9.2 to hold that the KSEB is not paying the salary or the tax, but, gets it reimbursed from the Consultant. It is the finding of the Tribunal that tax liability being not ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **==> picture [17 x 9] intentionally omitted <==** the liability of the KSEB, both the salary and the tax is paid by the very same person. Hence, the argument of the assesses that Section 195A of the Act would be applicable only if both salary and tax is paid by the employer; cannot be sustained. We are unable to countenance the finding of the Tribunal in that respect. The agreement is clear insofar as the salary of the employees, deputed by the Consultant, being paid by Consultant and the tax being paid by the KSEB. 6. However, on the question of whether Section 195A of the Act has to be employed, we have to look at the judgments referred to by the Tribunal. **Commissioner of Income Tax v. C.W. Steel – 1972 (86) ITR 817** was a case in which the question arose as to whether in computing the total salary for determining the value of the rent free accommodation, the tax paid by the employer is also includable. The ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **-6-** assessee who was an employee of the National & Grindlays Bank Ltd. was given rent free quarters and the income tax of the assessee was also paid by the employer directly to the Department. The question raised was whether such income tax paid by the employer was includable in the total computation of salary for determining the value of the rent free accommodation, which also had to be added on to the income from salary. The Court held in favour of the Revenue on the following reasoning: “The income-tax paid by the employer was really the income of the assessee. The assessee received his salary free of income-tax. The amount of his salary was really increased by the amount of the tax. A contract to pay salary without deduction of tax is neither more nor less than a contract to pay the amount of the salary plus the amount of tax; and in such a case **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **-7-** the profit of the office or employment is measured by the sum of the two figures. If the assessee were asked what profit he gets from employment he would say that he gets so much amount in money and so much amount by way of income-tax in respect of the salary paid by the employer. It will be on the aggregate of these two sums that income-tax will have to be calculated. In North British Railway Company v. Scott [1922] 8 TC 332 (HL), a railway officer had, by contract, a salary which was to be paid free of tax, and it was held that the effect was that the real salary was the sum which after deduction of the tax from it would leave the sum which was expressed to be payable to him as salary free of tax. In other words, the House of Lords held that the fact that the sums paid by the railway company were not deducted from the salary increased the salaries of the officers of the railway company; and the salaries received by the ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **-8-** officers must be deemed to be not only the salaries paid into their hands, but also the sums paid on their behalf to the revenue. Here, the assessee received not only the salary paid to him in cash but also money's worth to the extent of the sum which has been paid as income-tax in respect of the salary to the revenue. “Salary” is defined in Shorter Oxford Dictionary as follows: “Fixed payment made periodically to a person as compensation for regular work; now usu. for non-manual or nonmechanical work (as opp. to wages). 2. Remuneration for services rendered; fee, honorarium, reward, recompense.” We have to notice that the said issue was decided even before Section 195A of the Act was available in the Statute. 7. The assesses, however, rely on **Emil Webber** (supra). Almost identical issue was dealt with there, with only the difference that the party in India ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **-9-** was responsible for payment of salary. One Ballarpur Paper and Strawboard Mills Ltd entered into a consultancy agreement based on which the assessee was sent to India to work on a project. The agreement between Ballarpur and the Consultant required the assessee to be paid salary free of income tax. The assessee received salary for the years 1974-1975 and 1975-1976, for which no tax was paid. When a demand was raised, Ballarpur paid the tax demanded from the assessee. The question was whether the income tax paid by Ballarpur was assessable as income in the hands of the employee. Section 195A of the Act was not available at that point of time and even then the finding of the Tribunal that the tax paid is liable to be assessed as “income from other sources”, was upheld. Hence, the tax paid directly to the revenue would be income of the employee; but, the direction to assess it as “income ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **==> picture [24 x 9] intentionally omitted <==** from other sources” was in the context of there being no analogous provision as Section 195A in the Act at that point, being the assessment years 1974-75 and 1975-76. 8. Section 195A of the Act refers to an agreement or arrangement under which the tax chargeable on any income is to be borne by the person by whom the income is paid and for the purposes of deduction of tax, such income (that paid as tax separately) shall be increased to such amount as would, after deduction of tax thereon, be equal to the net amount payable under such agreement or arrangement. Hence, the amount paid as tax would also be included as salary, at least after Section 195A came into the Statute book. The decision of the Hon'ble Supreme Court in **Emil Webber** (supra) would not be applicable insofar as it was not concerned with the effect of ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **==> picture [24 x 9] intentionally omitted <==** Section 195A and hence, directed the income to be treated as “income from other sources”. 9. The argument raised on behalf of the assessee that Section 195A would be applicable only if the salary and tax is paid by the same person, i.e: the employer, cannot be countenanced. Income has to be assessed at the hands of the person who received the income. In the present case the assesses were in India for employment in a project, as deputed by the Consultant. The assesses were, hence, in the employment of the KSEB and as per the consultancy agreement the salary was payable by the Consultant and the income-tax by the KSEB. Obviously, the salary was of the employees deputed by the Consultant included in the consultancy charges and the salary and income-tax were both from the KSEB, in whose project the assesses were employed. **C.W. Steel** (supra) is ## **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **-12-** more on point, in interpreting the definition of 'salary' in the Act, then, which inter alia included perquisites; which, by an Explanation, included any payment made by the employer in satisfaction of an obligation of the employee; which, but for the payment, would have been payable by the employee. Section 195A brings in the same effect, the absence of which prompted the Hon'ble Supreme Court in **Emil Webber** to direct treatment of the tax payment as “income from other sources”. 10. We are of the opinion that the question of law raised has to be answered in favour of the revenue and against the assessee on a different reasoning than that given by the Tribunal. We are told that in many of the assessment orders the computation has not been properly made. The Assessing Officer would, hence, employ Section 195A and compute the amounts properly within a period of two months from the date of **I.T.A Nos. 7, 9, 11, 12, 13, 14, 15, 16, 19 and 20 of 2007** **==> picture [24 x 9] intentionally omitted <==** receipt of the certified copy of this judgment. The assessees are said to have paid up the amounts already. Only if there is a balance due, the same would have to be satisfied by the assessee or its agent. The Income Tax Appeals are ordered accordingly. No Costs. Sd/K.VINOD CHANDRAN, JUDGE Sd/ASHOK MENON, JUDGE jjj 13/12/17