The Delhi High Court in the case of CIT vs. Dr. Percy Batlivala [ITA No. 13 08 of 2008] has held that for the employees sent on deputation to India, the amount of hypothetical tax should not be added to the salary income of such employees in India.
Brief facts of the case:
Dr. Percy Batlivala was a foreign national who was employed in the United States of America and was paid salary by his employer in USA. He was deputed by his employer to India for his job purpose.
During the deputation, the employee was assured by his employer that his net salary which was supposed to be received by him after paying all taxes would be the same as that he received in the USA.
The difference between the tax amount in the USA and that in India was treated as hypothetical tax by his employer. The hypothetical tax was not paid to him but he was assured that he was supposed to receive the net amount in the USA after coming from deputation.
In the return filed by the employee in India, the employee claimed a deduction for the hypothetical tax from his salary which was offered to tax in India. The Assessing Officer did not allow the deduction claimed by the employee for the hypothetical tax.
The employee preferred an appeal before the ITAT. The Income Tax Appellate Tribunal (ITAT) held that the hypothetical tax was not received by the employee and it never accrued to the employee. The Tribunal held that hypo tax should not be added to the income of the employee.
The Revenue preferred an appeal to the Delhi High Court against the decision of the ITAT.
Issue appearing before the Delhi High court:
The issue that came up before the Delhi High Court was that whether hypothetical tax can be allowed as deduction from the salary which was taxable in India.
The judgment passed by the Delhi High Court:
The Delhi High court confirmed the decision passed by the ITAT and allowed the deduction of the hypothetical tax from the salary of the employee taxable in India.
Highlights of the judgment:
This decision of the Delhi high Court highlighted the principle that hypothetical tax calculated under the tax equalization policy framed by the foreign employers to protect the employees coming to India on deputation from the adverse tax effects arising due to the overseas assignment cannot be treated as an income earned by such employees.
It was further held that the Tax equalization policy provides that the companies shall bear the tax liability of the assessees but it is restricted only to the extent of additional liability over that might arise if such employee resides in USA.
The Mumbai High Court reaffirmed that hypothetical tax is not income:
In a recent judgment the Mumbai High Court in the case of Mr. Jayadev H. Raja reaffirmed the decision of the Delhi High Court on hypothetical taxes stating that it cannot form a part of the taxable salary of an employee.
Brief facts of the case:
Jayadev H. Raja was an employee of Coca cola Inc USA who was sent on assignment from the USA to India. He became a resident but not an ordinarily resident of India in the relevant assessment year.
According to the tax equalization policy, the company was bound to settle the tax payable on the total salary of the employee. The employee’s total salary was decreased by his native tax liability. This was his hypothetical tax.
The Assessing Officer and the Commissioner of Income Tax (Appeals) disallowed the claim of deduction of the hypothetical tax from the tax liability to calculate the taxable salary.
But the Income Tax Appellate Tribunal upheld the employee’s claim that the hypothetical tax was not a part of the income accruing or arising in India and should not be treated as a part of his taxable salary.
The Revenue preferred an appeal to the Mumbai High Court against the decision of the ITAT.
Issue before the Mumbai High Court:
The issue that came up before the Mumbai High Court was that whether on the facts of the case and as per law, the ITAT was justified in holding that the hypothetical tax should be allowed as deduction from the employee’s salary for computing income tax.
The judgment passed by the High Court decision:
The Mumbai High Court confirmed the view taken by the ITAT that the taxes paid by the employee from the salary income should not be added to the income of the employee. It was held that the tax liability of the employees is their own responsibility according to the TEQ policy and the company shall be liable for only the employee’s additional tax liability arising out of his off- shore assignment.
This judgment has reaffirmed the previous rulings on hypothetical taxes and is a precedent for the employees of multinational companies working on deputation in India under tax equalization policy.