Holding

The tax amount paid by the employer on behalf of the employee is taxable as the employee’s income and must be charged under the head ‘income from other sources’ (Section 56(1)).

Summary

Ballarpur Paper and Straw Board Mills Ltd. hired foreign personnel, including Emil Webber, to set up a plant in India. Under the contract, the salaries were to be paid free of Indian tax, and Ballarpur paid the tax on Webber’s salary to the tax authorities. The Income Tax Officer treated the tax amount paid by Ballarpur as a perquisite and added it to Webber’s salary, which Webber contested. The issue before the Supreme Court was whether the tax paid by the employer on behalf of the employee constitutes the employee’s income and, if so, under which head of income it should be taxed. The Court held that the tax amount is indeed income of the employee because it is a tax on his salary paid on his behalf, and it must be taxed under the head “income from other sources” under Section 56(1). Consequently, the Court dismissed the appeals, upholding the addition of the tax amount to the assessee’s total income.

Issues considered

Whether the amount of tax paid by Ballarpur on behalf of the assessee is taxable as the assessee’s income under the Income Tax Act, 1961.
If the amount is taxable, under which head of income – salary (Section 17) or other sources (Section 56) – should it be charged.

Legislation cited

Income Tax Act, 1961s. 14, s. 17, s. 195, s. 2(24), s. 56

Subjects

Income TaxTaxable incomeEmployer‑paid taxDefinition of incomeSection 56(1)Section 195PerquisiteSalaryOther sources

Judgment

EMIL WEBBER A
v.
COMMISSIONER OF INCOME TAX, V AND M, NAGPUR

FEBRUARY 19, 1993

[B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.] B
Income Tox Act, 1961 : Sections 2(24), 14, 17, 56, 195-'fl!come'-
Meaning of-Amount paid by way of tox on the salary amount of assessee
on his behalf-Whether assessee's Income-Whether taxable under the head-

- ing "other sources".

Ballarpur, a public limited company undertook to set up a caustic
soda/chlorine manufacturing plant. It entered into an agreement with a
c

French concern for purchase of certain machinery and equipment.

In another agreement with Ballarpur, the French concern agreed to D
provide services of certain personnel and Ballarpur agreed to pay salaries
and other emoluments free of any Indian tax or duty to the personnel.

The French concern entered into an arrangement with a Swiss
concern for supply of certain machinery and to make available services of
certain personnel.
E
The assessee-appellant was one such person. He came to India and
started working in connection with the setting up of the plant.

In addition to daily allowances and other facilities, the assessee-ap-

- pellant was paid Rs. 3,82, 481 and Rs. 67,200 for the assessment years,
1974-75 and 1975-76, respectively.
F

Before the Income Tax OOicer, the assessee contended that he was
not liable to pay tax. The J.T.O. did not agree. Ballarpur paid the tax
amount of Rs. 3,23,400 and Rs. 35,546 for the assessment years respective-
~ G
The Income Tax OOicer treated the tax amount paid by Ballarpur
as a p·-rquisite and added the same to the salary .amount of the assessee.

The assessee questioned the action of the I.T.O. in appeal before the
A.A.C., which was dismissed. H
27
28 SUPREME COURT REPORTS [1993) 2 S.C.R.

A The appeal filed before the Tribunal was also dismissed, whereupon V
the assessee obtained a reference to be answered by the High Court.

The High Court answered the reference, "whether on the facts and
in the circumstances of the case the amount of tax paid by Ballarpur on
behalf of the assessee in assessment years 1974· 75 and 1975-76 is income
B taxable under the heading 'other sources'," against the assess.,e.

Hence these appeals by the assessee contending that the amount paid

C
by way of tax could not be treated as 'Income' of assessee; that as the
assessee did not receive. the said amount from Ballarpur, i,t could not
constitute his income.
--
Dismissing the appeals, this Court,

HELD: 1.01. The definition of 'Income' in clause (24) of Section 2 of
the Act is an inclusive definition. It adds several artificial categories to the
D concepl. of income but on that account the expression 'income' does not
lose its natural connotation. It is repeatedly said that it is difficult to define
the ~xpression 'income' in precise terms. Anything which can properly be
described as income is taxable under the Act unless, of course, it is
exempted under one or the other provision of the Act. [310)
E 1.02. The amount paid by Ballarpur by way of tax on the salary
amount received by the assessee can be treated as the income of the
assessee. The said amount is. nothing but a tax upon the salary received
by the assessee. By virtue of the obligation undertaken by Ballarpnr to pay
tax on the salary received by the assessee among others, it paid the said
. F tax. The said payment'is, therefore, for and on behalf of the assessee. It is
-
not a gratuitous payment. But for the said agreement and but for the said
payment, the said tax amount would have been liable to be paid by the
assessee himself. He could not have received the salary which he did but
for the said payment of tax. The obligation placed upon Ballarpur by virtue
G of Section 195 of the Income Tax Act cannot also be ignored in this context.
It would be unrealistic to say that the said payment had no integral
\connection with the salary received by the assessee. [31E·G]

1.03. Inasmuch as the assessee is not an employee of Ballarpur,
which made the payment, it cannot be brought within the purview of
H Section 17 of the Act. It must necesarily be placed under sub·sectiou (1)
EMIL WEBBER v. CIT, NAGPUR [JEEVAN REDDY, J.] 29

._,- of Section 56, 'income from other sources'. According to the said sub-sec- A
tioa, income of every kind which is not to be excluded from the total income
under the Act shall be chargeable to income tax under the head 'income
from other sources', if it is not chargeable to income tax under any of the
other heads specified in Section 14, Items A to E. [32A-B]

N.A. Modi v. S.A.L. Narayana Rao, 61 ITR 428 SC; C.l.T, Bombay B
v. Smt. T.P. Sidhwa, 133 ITR 840 and Mrs. Sheela Kaushish v. C.l. T. Delhi
131 ITR 435 SC, distinguished.

CIVIL APPELLATE JURIDICT!ON: Civil Appeal Nos. 3115-16 of
1980.
c
From the Judgment and Order dated 15.6.1978 of the Bombay High
>- Court in I.T. Ref. No. 458 of 1976.

.V.U. Eradi and SUli:lan J. Khaitan for Khaitan & Co. for the Appel-
!ant.
D
S. Rajappa for Ms. A. Subhashini for the Respondent.

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. Assessee is the appellant. He is aggrieved E
_ by the decision of the Bombay High Court in Income Tax Reference No.
458 of 1976 answering the following question, which was referred to it at

-
his instance, against him: "whether on the facts and in the circumstances
of the case the amount of tax paid by Ballarpur oit behal' the assessee
in assessment years 1974-75 and 1975-76 is income taA..01e under the
heading 'other sources"'. F
The Ballarpur Paper and Straw Board Mills Limited (Ballarpur) is
a public limited company engaged in the manufacture of paper and straw
board. It undertook to set up a caustic soda/chlorine manufacturing plant
at Ballarpur. For this purpose, it entered into an agreement with Krebs, a
French concern, for purchase of certain machinery and equipment. There G
was a sec Jnd agreement between Ballarpur and Krebs whereunder Krebs
undertook to provide services of certain personnel including engineers for
setting up the plant at Ballarpur. Krebs, in turn, entered into an arrange-
ment with a Swiss concern, Escher Wyas Eurich, for supply of certain
machinery and also to make available services of certain personnel. The H
30 SUPREME COURT REPORTS [1993] 2 S.C.R.

A assessee, Emil Webler, was one such person prmided by the Swiss concern
The assessee came to India and worked here in connection with the setting
up of the plant.

According to the agreement between Ballarpur and Krebs the former
undertook to pay salaries and other emoluments to personnel provided by
B Krebs in accordance with the formula contained in the agreement. Inter
alia, it was provided that "salaries are understood free of any Indian tax or

c
duty". For the assessment year 1974-75, the assessee-appellant was paid a
sum of Rs. 3,82,481 and for the assessment year 1975-76, a sum of Rs.
67,200 in addition to daily allowances and other facilities. -
The assessee contended before the Income Tax Officer that he was
not liable to pay tax. He also filed returns affirming the said stand. The
stand taken by him was negatived, whereupon Ballarpur paid the tax of Rs.
3,23,400 and Rs. 35,546 for the said two assessment years respectively. In
D his assessment orders, the l.T.O. treated the said tax amount as a perquisite
and added the same to the salary amount received by the assessee. The
said addition was questioned by the assessee in appeal, before the A.A.C.
but without success. The matter was then carried to the Tribunal. The
Tribunal too did not agree with the assessee's contention and dismissed his
appeal whereupon he obtained the aforesaid reference which, as stated
E above, has been answered against him by the Bombay High Court.

F
For a proper appreciation of the question arising herein, it is neces-
sary to notice certain factual statements contained in the Statement of the
Case. It is stated therein: "according to this agreement, Ballarpur were
under an obligation to pay by the device of delegation invoices opened with
-
a bank in France certain amount of salaries at agreed rates to Krebs and
Cis. Paris for setting up the plant at the town of Ballapur............. The
Tribunal clarified that there was no dispute between the parties that the
amounts of Rs. 3,82,481 and Rs. 67,200 paid by Ballarpur through Krebs
to the assessee for services rendered by it in the two respective years were
G taxable under the heading 'Salary'. It further clarified that there was no
dispute between the parties, that the relationship of the employer and /~
employee did not exist between Ballarpur and the asscssee. The Tribunal
held as below: (1) Ballarpur was under a legal obligation to pay the tax, if
any, levied on the assessee; (2) Ballarpur paid the tax by virtue of such a
H legal obligation ........."
•
EMIL WEBBER v. CIT, NAGPUR [JEEVAN REDDY, J.] 31

....,...' The facts found by the Tribunal thus show that the assessee-appellant A
was paid certain salary free of tax but that the tax payable in that behalf
was to be and was in fact paid by Ballarpur. The assessment was made
upon the assessee directly. The question is whether the said tax component
paid by Ballarpur can be included \\ithin the income of the assessee. The
first contention of the learned counsel for the assessee is that the amount
B
paid by Ballarpur by way of tax cannot be treated as 'income' of assessee
>~
at all. His second contention is that the assessee did not receive the said
amount and, therefore, it cannot constitute his income. Indeed, the learned
counsel sought to argue that Ballarpur was under no obligation to pay the
- said tax amount relating to the salary amount received by the assessee. We
find it difficult to agree mth the learned counsel. c
The definition of 'income' in clause (24) of Section 2 of the Act is
>-- an inclusive definition. It adds several artificial categories to the concept
of income but on that account the expression 'income' does not lose its
natural connotation. Indeed, it is repeatedly said that it is difficult to define
D
the expression 'income' in precise terms. Anything which can properly be
described as income is taxable under the Act unless, of course, it is
exempted under one or the other provision of the Act. It is from the said
angle that we have to examine whether the amount paid by Ballarpur by
way of tax on the salary amount received by the assessee can be treated as
-.....,, the income of the assessee. It cannot be overlooked that the said amount E
is nothing but a tax upon the salary received by the assessec. By virtue of
the obligation undertaken by Ballarpur to pay tax _on the salary received by

-
the assessee among others, it paid the said tax. The said payment is,
therefore, for and on behalf of the assessee. It is not a gratuitous payment.
But for the said agreement and but for the said payment, the said tax F
amount would have been liable to be paid by the assessee himself. He could
__ .....,_ not have received the salary which he did but for the said payment of tax.
'
The obligation placed upon Ballarpur by virtue of Section 195 of the
Income Tax Act cannot also be ignored in this· context. It would be
unrealistic to say that the said payment had no integral connection "1th the
salary received by the assessee. We are, therefore, of the opinion that the G
High Court and the authorities under the Act v.:ere right in holding that
,.,.,..., the said tax amount is liable to be included in the income of the assessee
during the said two assessment years.

The question then arises under which head of income should the said H
•
32 SUPREME COURT REPORTS [1993] 2 S.C.R.

A income be placed. Inasmuch as the assessee is not an employee of Ballar-
pur, which made the payment, it cannot be ·brought within the purview of
Section 17 of the Act. It must necessarily be placed under sub-section (1)
of Section 56, 'income from other sources'. According to the said sub-sec-
tion, income of every kind which is not to be encluded from the total
income under the Act shall be chargeable to income tax under the head
B 'income from other sources', if it is not chargeable to income tax under any
of the other heads specified in Section 14, Items A to E. It is not the case
of the assessee that any provision of the Act exempts the said income from
the liability to tax.

C The learned counsel for the assessee-appellant relied upon certain
decisions in support of his contention. The first is the decision of this court
in N.A. Modi v. S.A.L. Narayana Rao, 61 !TR 428 SC. An advocate was
appointed as a Judge. He received certain income after his appointment
as a Judge in lieu of the professional service rendered by him before his
D appointment. The question was whether the said amount is taxable. It was
held that it was not (in view of the provisions of the Act as it then stood).
The basis for the said decision is that the assessee therein cannot be said
to be carrying on the profession of an advocate at the time he received the
said income. We are unable to see how the said decision helps the assessee
herein. Indeed, in the said decision this court emphasised that the question
E whether an income falls under one head or the other has to be decided
according to the common notion of practical men, inasmuch as the Act
does not provide any guidance in the matter. It was observed that the heads
of income must be decided on the nature of income by applying practical

F
common notions and not by reference to the assessee's treatment of
income. The application of said test does not certainly help the assessee
·-
herein.

The second decision cited is of the Bombay High Court in C.I. T.
Bombay v. Smt. T.P. Sidhwa, 133 !TR 840. The question was whether the
G income from property received by an assessee of which he is not the owner
can be taxed as 'income' from other 'sources'. It was held that it cannot be
so taxed. We do not see any analogy between the facts and principle of
that case and those of this case. Here the integral connection between the )-.•.
salary received by the assessee and the tax payable thereon, paid by
Ballarpur in pursuance of a legal obligation, cannot be overlooked. The
H third case cited is in Mrs. Sheela Kaushish v. C.l. T., Delhi, 131 I.T.R. 435
EMIL WEBBER v. CIT, NAGPUR [JEEVAN REDDY, J.] 33

'"1 S.C. In this case, it was held that determination of annual value under A
Section 23 of the Income Tax Act, 1961 should be done by takiq; the
standard rent as the basis even where the assessee is receiving rent higher
than the standard rent. Again we must say, we see no relevance of the said
principle of this case to the facts of this case.

For the above reasons, the appeals fail and are dismissed. No crn;ts. B
V.P.R. Appeals dismissed.

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