1991 (7) TMI 36 - HC - Income Tax

Court rules on tax exemption eligibility under section 10(6)(vii) and income classification under section 17

The court ruled against the assessees in their eligibility for tax exemption under section 10(6)(vii), finding they did not meet the necessary conditions. ... Assessing Perquisite, Master And Servant Relationship Issues Involved:1. Eligibility for tax exemption under section 10(6)(vii) of the Income-tax Act, 1961.2. Method of grossing up adopted by the Income-tax Officer.3. Inclusion of amounts receivable in Italy in the grossing up.4. Classification of income as salary under section 17 of the Income-tax Act, 1961.Detailed Analysis:1. Eligibility for Tax Exemption under Section 10(6)(vii)The primary issue was whether the assessees fulfilled the requirements of section 10(6)(vii) and if it was necessary for them to be continuously in service in India during the 60 months immediately following the expiry of the first 36 months of their first arrival in India to be eligible for exemption.The Tribunal found that the assessees were not employees of FACT but continued to be employees of SII. The Tribunal also noted that FACT paid the tax as per the terms of the collaboration agreement, to which the assessees were strangers. As these findings were unchallenged, the court concluded that the assessees did not meet the conditions required for the exemption under section 10(6)(vii). Therefore, the question was answered in the negative and in favor of the Department.2. Method of Grossing Up Adopted by the Income-tax OfficerThe Tribunal agreed with the method of grossing up adopted by the Income-tax Officer. The Tribunal referenced the case of Lord Michelham's Trustees v. C.I.R. [1930] 15 TC 737 (CA) but noted that the method used there was not applicable to India. Ultimately, the Tribunal found that the method used by the Income-tax Officer was correct.However, since the court answered the fourth question in the negative, indicating that the income was not assessable under section 17 as salary income, the issues concerning the method of grossing up became moot. Therefore, the court declined to answer this question.3. Inclusion of Amounts Receivable in Italy in the Grossing UpThe Tribunal held that the grossing up should include the amounts receivable in Italy. This was part of their broader finding that the salary payable in Italy and India, as well as the perquisite of getting it tax-free in India, constituted salary income.Again, as the court found that the income was not assessable under section 17 as salary income, this question was deemed irrelevant. Therefore, the court declined to answer it.4. Classification of Income as Salary under Section 17The Tribunal had determined that the salary payable in Italy and India, as well as the perquisite of getting it tax-free in India, was salary income under section 17. The Tribunal found that FACT was liable to pay tax on the tax paid by it because it formed part of the salary income.The court, however, noted that no payment could be taxed under section 15 unless there existed an employer-employee relationship between the payer and the payee. Since the assessees were not employees of FACT but of SII, the tax paid by FACT could not be charged under the head 'Salaries' within the meaning of section 15. The court suggested that this income might be charged under section 14F read with section 56, 'income from other sources.' Therefore, the court answered this question in the negative and in favor of the assessees.Conclusion:- The question regarding the eligibility for tax exemption under section 10(6)(vii) was answered in the negative and in favor of the Department.- The question regarding the classification of income as salary under section 17 was answered in the negative and in favor of the assessees.- The questions regarding the method of grossing up and the inclusion of amounts receivable in Italy were deemed moot and not answered.