Grossed-up salary taxation upheld where employer bore tax under a tax-free arrangement, with no credit for net salary difference.

Salary paid under a tax-free arrangement with an employer is assessable on its grossed-up value, because income-tax law looks to the income as earned and received rather than to any illegality alleged in the payment arrangement. On that basis, the tax element borne by the employer is added to determine the assessable salary, and the employee is not entitled to a further credit merely because the amount actually received was net of tax. The tax treatment remains unchanged even if the underlying arrangement is said to offend company law. The assessment on the grossed-up salary basis was therefore sustained.

---

---

Issues: (i) Whether salary received under a tax-free arrangement with the employer was rightly grossed up for assessment. (ii) Whether the assessee was entitled to credit for the difference between the salary assessed on a gross basis and the net tax-free salary actually received.

Issue (i): Whether salary received under a tax-free arrangement with the employer was rightly grossed up for assessment.

Analysis: The assessment concerned salary income for the assessment years 1963-64 and 1964-65. The employer had issued certificates showing the salary as tax-free, and the taxing authority added the tax element to determine the assessable salary. The contention that the arrangement was unlawful under section 200 of the Companies Act, 1956 did not affect the income-tax treatment, because the tax law is concerned with income as earned and received, not with any illegality attached to the manner in which it was contracted to be paid.

Conclusion: The salary was rightly grossed up. The answer was in favour of the Revenue.

Issue (ii): Whether the assessee was entitled to credit for the difference between the salary assessed on a gross basis and the net tax-free salary actually received.

Analysis: Once the salary was treated as tax-free and grossed up to include the tax borne by the employer, the assessee could not claim credit merely because the amount actually received was net of tax. The assessed income was the gross salary for income-tax purposes, and no further credit was available for the difference between the grossed-up figure and the net amount received.

Conclusion: No credit was admissible for the difference. The answer was in favour of the Revenue.

Final Conclusion: Both referred questions were answered against the assessee and in favour of the Revenue, leaving the assessment on the grossed-up salary basis undisturbed.

Ratio Decidendi: For income-tax purposes, salary is assessable on its true gross value notwithstanding any tax-free payment arrangement with the employer, and any alleged illegality in the underlying employment agreement does not alter the tax treatment of the income.

---