2013 (9) TMI 305 - AT - Income Tax

Tribunal rules in favor of assessee on tax treatment of medical reimbursements

The Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee regarding the treatment of medical reimbursements for tax deduction purposes. ... TDS u/s 192 - obligation of the assessee to deduct tax at source on 'medical reimbursement' - Default in deducting TDS - Assessee in default u/s 201 - Held that:- exemption in respect of medical expenditure is considered after collecting and verifying the details and evidence furnished by the employees. Policies and controls are in force to ensure that the requirements of the provision are fulfilled. The details filed before the TDS officer explains the policies adopted to fulfill the process adopted in considering the exemption proviso to section 17(2). The assessee is a law abiding Company. Internal controls are in place to discharge the statutory obligation under section 192. Honest and bona fide estimate of taxable salary is made in the process of deducting tax at source under section 192. Every effort is made by the assessee to comply with the requirements of section 192. The assessee is not benefited by allowing employees to claim exemption. The order passed by the AO under section 201(1) & 201(1A) is therefore bad in law and rightly quashed by the CIT(A) - there are grievances regarding lack of opportunity to the AO before CIT(A) and grounds challenging the finding that there is no dispute that the Assessee has satisfied itself that the employees were entitled to exemption under proviso (v) to Sec.17(2) of the Act. As far as lack of opportunity is concerned, we find that the CIT(A) has only called for break up of the figures regarding medical reimbursement which was actually paid to employees and that which was considered not forming part of salary by the employee on production of evidence by the employee. In fact, the figures so given are the same figures on the basis of which the AO has passed order u/s.201(1) and 201(1A) of the Act - Decided against Revenue. Issues Involved:1. Obligation of the assessee to deduct tax at source on medical reimbursements.2. Treatment of medical reimbursements as perquisites under Section 17(2) of the Act.3. Validity of the Assessing Officer's order treating the assessee as in default under Section 201(1) and imposing interest under Section 201(1A).Detailed Analysis:1. Obligation of the Assessee to Deduct Tax at Source on Medical Reimbursements:The primary issue revolves around whether the assessee was justified in not deducting tax at source on medical reimbursements up to Rs. 15,000 paid to its employees. Section 192(1) of the Act mandates that any person responsible for paying income chargeable under the head 'salaries' must deduct income tax at the time of payment. The assessee argued that medical reimbursements up to Rs. 15,000 are exempt under proviso (v) to Section 17(2) of the Act and, therefore, should not be included in taxable salary for TDS purposes.2. Treatment of Medical Reimbursements as Perquisites under Section 17(2) of the Act:Section 17(2) defines 'perquisite' and includes any sum paid by the employer for any obligation that would have been payable by the employee, with an exemption for medical reimbursements up to Rs. 15,000. The Assessing Officer (AO) contended that the medical reimbursements paid monthly and later claimed as non-perquisite up to Rs. 15,000 should be considered part of the salary and not exempt perquisite. The AO argued that the payment should occur after the actual incurrence of expenses, not as an advance.3. Validity of the Assessing Officer's Order Treating the Assessee as in Default under Section 201(1) and Imposing Interest under Section 201(1A):The AO treated the assessee as an 'assessee in default' for not deducting tax on the exempt portion of medical reimbursements and levied interest under Section 201(1A). The CIT(A) overturned this order, stating that the assessee's practice of excluding medical reimbursements from taxable salary, upon submission of proof by employees, aligns with the provisions of Section 17(2). The CIT(A) relied on CBDT Circular No. 603, which clarifies that medical reimbursements up to Rs. 15,000 should not be included in taxable salary if supported by bills.Tribunal's Findings:The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee made a bona fide estimate of taxable salary, considering the exemption for medical reimbursements up to Rs. 15,000. The Tribunal noted that the AO's interpretation of 'actually incurred' expenses was too narrow and technical. The Tribunal also referenced several judicial precedents supporting the view that no tax can be recovered from the employer if a bona fide estimate of taxable salary is made.Conclusion:The Tribunal dismissed the Revenue's appeals, affirming that the assessee's method of handling medical reimbursements complied with the statutory provisions. The Tribunal concluded that the AO's order was unsustainable, and the CIT(A) rightly quashed it. The appeals by the Revenue were dismissed, and the assessee was not considered in default under Section 201(1) or liable for interest under Section 201(1A).