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Zdzizlaw Skakuz Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case Nos. 129 and 194 of 1980
Judge
Reported in(1986)50CTR(AP)39; [1986]158ITR420(AP)
ActsIncome Tax Act, 1961 - Sections 2(24), 10(14), 16, 17, 56 and 154(1)
AppellantZdzizlaw Skakuz;bujniewicx Zenon
RespondentCommissioner of Income-tax;commissioner of Income-tax
Appellant AdvocateB.V. Subrahmanyam, Adv.
Respondent AdvocateM. Suryanarayana Murthy, Adv.
Excerpt:
.....shipyard took responsibility to pay income-tax which was due and payable by assessee on his total income - assessee received salary and allowances from his polish employer - contention before tribunal by assessee that commissioner committed an error in treating taxes paid by hindustan shipyard as tax perquisites chargeable to tax - also contended that entire amount of allowances paid to assessee by foreign company ought to have been allowed exemption under section 10 (14) - tribunal held that tax perquisite received by assessee from hindustan shipyard could be assessed as 'income from other sources' - tribunal did not grant exemption with regard to allowances - appeal before high court - as per section 10 (14) only special allowances specifically granted to meet expenses incurred in..........but, in the earlier orders of assessment, the income-tax officer had merely added that amount of income received from the hindustan shipyard to the salary income and allowances income of the assessee. but the law requires that where an assessee receives tax-free salary, his income should be grossed up in a particular method. the method of grossing up is indicated in tokyo shibaura electric co. ltd. v. clt : [1964]52itr283(kar) . there, an agreement was entered into between a, a non-resident company, and b, a resident company, providing for payment to company a royalty of three per cent. on the net sales of articles manufactured and sold by b company without any deduction for taxes or other charges assessed in india, which shall be assumed by b company. the argument of the income-tax.....
Judgment:

P.A. Choudary, J.

1. One Zdzizlaw Skakuz, a Polish national was assessed in the status of an Indian resident for the assessment years 1970-71, 1971-72, 1972 73 and 1973-74. The assessee was an employee of a Polish firm called Z.P.M. & H.Cegielski, Poznan (Poland). Under two contract of agreements dated December 17, 1965, and November 20, 1970, entered into by the Hindustan Shipyard Ltd., Visakhapatnam, with the above mentioned Polish firm, the assessee was deputed to India to supervise the work of installation and erection of machinery in the new ships of M/s. Hindustan Shipyard Ltd. Visakhapatnam. Under the terms of those contracts, the Hindustan Shipyard took the responsibility to pay income-tax which was due and payable by the assessee on the total income which he had earned during the period of his stay in India during the above-mentioned assessment years. Clause 17 of the agreement dated November 20, 1970, provides as under - 'should the income-tax authorities levy any income-tax on such personnel stationed in India, such income-tax will be paid by the Hindustan Shipyard. The Hindustan Shipyard undertakes to take up and follow up themselves necessary formalities. But the technical personnel stationed in India will file necessary returns and supply necessary information, if required by the income-tax authorities'. Clause 6 of the agreement dated December 17, 1965, is similarly worded as clause 17Of the agreement dated November 20, 1970.

2. Now, the assessee had received his salary from his Polish employer and his allowances were also paid by the Polish firm. The Income-tax Officer assessed the assessee for the assessment year 1970-71 on April 20, 1973, and for the assessment years 1971-72, 1972-73 and 1973-74 on April 19, 1973. In doing so, he treated the taxes which have been borne by the Hindustan Shipyard Limited, Visakhapatnam, under the aforementioned contracts with the Polish firm as the income of the assessee from other sources falling under section 56 of the Income-tax Act. But, subsequently, the Income-tax Officer felt that charging only the first stage of tax as tax perquisites under the head 'Other sources', was incorrect and it should be grossed up. Accordingly, the officer amended the original assessment orders in the purported exercise of his jurisdiction under section 154 of the Income-tax Act, 1961 and brought to tax the perquisites after grossing them up.

3. Both the original orders of assessment made by the Income-tax Officer and the subsequent orders of rectification made by the Income-tax Officer were appealed against by the assessee to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner by his order dated March 14, 1974, directed that 'the appeals relating to original assessment orders are to be modified by deleting the amounts exempt under section 10(14) of the Income-tax Act including the 'tax perquisite', as discussed above, and the appeals relating to orders under section 154 are anulled'.

4. Against those orders of the Appellate Assistant Commissioner, both the assessee and the Department preferred appeals to the Income-tax Appellate Tribunal.

5. The contention before the Tribunal on behalf of the assessee was that the Appellate Assistant Commissioner committed an error in treating the taxes paid by the Hindustan Shipyard as tax perquisites chargeable to tax and it was also contended that the entire amount of allowances paid to the assessee by the foreign company during his sojourn in India ought to have been allowed exemption under section 10(14) of the Income-tax Act. The Income-tax Appellate Tribunal held that the Polish firm was the employer of the assessee and that the assessee was not an employee of the Hindustan Shipyard Limited. Having held so, the Tribunal ruled that the tax perquisites received by the assessee from the Hindustan Shipyard Limited could be assessed as 'Income from other sources'. The Tribunal also held that the outstation allowance and the hotel charges received by the assessee in India from the Polish firm were not exempted from being brought to tax under section 10(14) of the Income-tax Act. The Tribunal also negatived the claim of the assessee under section 16(v) of the Income-tax Act. It held that 'there is no evidence on the point whether the outstation allowances paid to the assessee by the foreign company are much less than what the assessee spends by reason of his posting in India. In order to merit exemption under section 16(v) of the Act, it must be established that the assessee is required by the conditions of his service to incur expenses out of his salary also. The tests laid down in section 16(v) of the Act are not satisfied in the instant case. The invocation of the applicability of section 16(v) is, in our opinion, not appropriate.'

6. The Tribunal also held that the Income-tax Officer had jurisdiction to rectify the original orders of assessment made by him under section 154 of the Act, because the original order of assessment passed by the Income-tax Officer did not properly determine the tax perquisites received by the assessee and the method adopted by the Income-tax Officer for grossing up of the income of the assessee was contrary to the judgment of the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT : [1964]52ITR283(KAR) . In view of the above findings, the Income-tax Appellate Tribunal had referred the following four questions at the instance of the assessee for the opinion of this court :

'1. Are the amounts payable by M/s. Hindustan Shipyard Limited, under the agreement dated November 20, 1970, tax perquisites in the hands of the assessee If so, are these liable to be taxed as income from other sources for the relevant assessment years

2. Are the amounts received by the assessee from his employer as allowances not entitled for exemption under section 10(14) of the Income-tax Act for the relevant assessment years

3. Is not the assessee entitled to relief under section 16(v) of the Act for the relevant assessment years

4. Are the rectifications of the assessment orders carried out under section 154 of the Income-tax Act within the jurisdiction of the Income-tax Officer for the relevant assessment years ?'

7. Mr. B. V. Subrahmanyam, the learned counsel appearing for the assessee, had advanced no arguments under question No. 3. We may, therefore, omit that question from our consideration.

8. In considering question No. 1, we may note in brief the facts found by Tribunal. Those facts go to show that the assessee was deputed by a Polish firm in the terms of the aforementioned contracts entered into by the Polish firm with the Hindustan Shipyard Limited. While the assessee was staying in India in pursuance of those contracts, the assessee received in Polish currency his salary as well as his allowances. There can be no doubt that those amounts which the assessee had so received as salary and allowances are liable to be brought to tax. Firstly, it is beyond dispute that the salary which the assessee had received from his Polish employer during the stay of the assessee in India is liable to be taxed under the Income-tax Act. However, the assessee claims exemption from the Income-tax Act of the amounts of allowances which he had received from the Polish employer during the period of his stay in India. That claim to succeed must be found to be in harmony with the language of section 10(14) of the Act. The relevant part of section 10(14) of the Act grants exemption only to special allowances or benefits specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose. Now, by the Finance Act of 1975, an Explanation was added to the above sub-clause with effect from April 1, 1962. That Explanation reads -

'For the removal of doubts, it is hereby declared that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded, for the purposes of this clause, as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties.'

9. The nature of the allowance which the assessee had received from his Polish master does not qualify those allowances to be called 'special allowances' which are specifically granted by his Polish master to meet the expenses in the performance of the duties of the assessee's office. The outstation allowances are paid by the Polish master to the employee not for the purpose of meeting the expenses incurred in the performance of his duties, but for his stay, food, etc. Therefore, these allowances received by the assessee cannot be called 'special allowances' falling under section 10(14) of the Income-tax Act. The Explanation added by the above-mentioned Finance Act of 1975 which was for the purpose of removing doubts clearly shows that these allowances are not the allowances which qualify to be called 'special allowances'. These allowances are merely allowances granted to the assessee to meet his personal expenses at the place where the duties of his office are ordinarily performed by him.

10. In view of the above, we hold that the allowances which the assessee had received would also constitute part of the assessee's total income liable to be taxed. Now, the income so earned by the assessee during his stay in India thus become liable to be taxed. But, by reason of the aforesaid clauses in the agreements entered into by the Hindustan Shipyard Limited with the Polish firm, the assessee has received his salary and allowances, without those amounts suffering any tax deductions. This is made possible by reason of the fact that the Hindustan Shipyard Limited has paid the amount of tax assessed in the hands of the assessee and payable by him out of his income. The payment made by the Hindustan Shipyard Limited is a regular payment and is one provided for at the inception of the contract to be so paid by the Hindustan Shipyard Limited. In those circumstances, it cannot be doubted that the income which the assessee had received from the Hindustan Shipyard Limited towards the payment of taxes due and payable by him is an income from other sources falling under section 56 of the Income-tax Act. It is no doubt true that the assessee is not an employee of the Hindustan Shipyard Limited and that there is no agreement existing or subsisting at any time between him and the Hindustan Shipyard Limited. But the significance of that fact would only be to show that the perquisites which the assessee had received from the Hindustan Shipyard are not tax perquisites. From that premise one cannot say that whatever is not a perquisite within the meaning of section 17 of the Act should also not be regarded as an income falling under the other sections of the Act. Section 56 of the Act speaks of that 'income of every kind which is not be excluded from the total income under this Act'. Now, the question is, whether these amounts which the assessee had received from the Hindustan Shipyard Limited, periodically and under a settlement entered into and arranged by means of the aforesaid two contracts, can be called 'income from other sources'. The inclusive definition of 'income' contained in section 2(24) of the Income-tax Act may not be greatly helpful to decide this question. But, the decided cases have held that the word 'income' should be understood according to its ordinary dictionary meaning. The ordinary dictionary meaning of the word 'income' is that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. Similarly, in CIT v. Shaw Wallace & Co., it was observed that 'the word income connotes a periodical monetary return coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field'. In Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 (at p. 242), the Privy Council observed that 'anything which can properly be described as income, is taxable under the Act unless expressly exempted.'

11. So long as the payments are received regularly and not fortuitously and under a settled scheme of business transactions carried on by two or more business organisations of which the assessee is an employee, it cannot be denied that the payments received by the assessee under those contracts to ward off the effects of taxation is income. The case reported in Emil Webber v. CIT : [1978]114ITR515(Bom) clearly holds that the definition of income in section 2(24) of the Income-tax Act, 1961, is an inclusive definition and not an exhaustive one and that where the agreement provided that a French concern should make available services of certain personnel for setting up the plant and the Indian company was placed under an obligation to pay to the French concern certain amounts of salaries free of any Indian tax or surcharge, the income-tax and the surcharge borne by the Indian company on behalf of the French concern was income in the hands of the French employee falling under section 56 of the Act. We, therefore, hold that the amounts received by the assessee from the Hindustan Shipyard Limited as per the two agreements entered into between his Polish master and the Hindustan Shipyard Limited are income in the hands of the assessee from other sources. If so, there could be no doubt that those amounts are liable to be taxed as income from other sources in the hands of the assessee during the relevant assessment years. We accordingly answer question No. 1 in favour of the Revenue and against the assessee.

12. We have already held on question No. 2 that the assessee is not entitled to claim exemption of his allowance under section 10(14) of the Act. Accordingly, we answer question No. 2 also in favour of the Revenue and against the assessee.

13. Now what remains is the fourth question. We have noted that the assessments which had given rise to this reference are the assessments by way of rectification made by the Income-tax Officer. The Income-tax Officer by his earlier orders of assessment merely added up the income-tax paid by the Hindustan Shipyard Limited to the total income. Even the earlier orders of assessment passed by the Income-tax Officer had thus treated the amounts of money received from the Hindustan Shipyard to ward off taxes as falling under the head 'Other sources'. But, in the earlier orders of assessment, the Income-tax Officer had merely added that amount of income received from the Hindustan Shipyard to the salary income and allowances income of the assessee. But the law requires that where an assessee receives tax-free salary, his income should be grossed up in a particular method. The method of grossing up is indicated in Tokyo Shibaura Electric Co. Ltd. v. ClT : [1964]52ITR283(KAR) . There, an agreement was entered into between A, a non-resident company, and B, a resident company, providing for payment to company A royalty of three per cent. on the net sales of articles manufactured and sold by B company without any deduction for taxes or other charges assessed in India, which shall be assumed by B company. The argument of the Income-tax Department in that case which was accepted by the court was that the real income of A under the agreement upon which B could be assessed as the agent of A was not the amount of royalty payable, in fact, to A plus the tax payable in India in respect of the said sum as claimed by the assessee, but such an amount as would, if the tax payable in India thereon was deducted, leave to A the stipulated three per cent. of the sale proceeds. The learned judges there had referred to Jaworski v. Institution of Polish Engineering in Great Britain Ltd. [195] 1 KB 768; [1950] 2 A11 ER 1191 among others for that proposition. In Jaworski's case, the facts were that a Polish subject entered into service of the defendants which was itself an official body under the Polish Government in London. The agreement of service provided that the employee's remuneration should be without any deductions and taxes, which will be borne by the defendant-association. The Court of Appeal understood that the agreement has provided for payment of the agreed salary to the Polish employee, plus whatever sum is necessary to leave that figure available to the employee after the employer had borne the taxes. Now, the method adopted by the Income-tax Officer in making his earlier orders of assessment were contrary to the one indicated in Tokyo Shibaura Electric Co.'s case : [1964]52ITR283(KAR) . Therefore, in purported exercise of his powers under section 154 of the Act, the Income-tax Officer rectified the assessments already made by grossing up the income of the assessee. It is on the basis of that grossing up of the income of the assessee, the present orders of assessment had been made.

14. It is not contended by Mr. B. V. Subrahmanyam, the learned counsel for the assessee, that the method adopted for grossing up was in any way defective. But what was contended by the learned counsel is that the Income-tax Officer had no jurisdiction to exercise his power of rectification, because the matter does not fall within the purview of section 154(1) of the Income-tax Act. Section 154(1) of the Act provides that the Income-tax Officer may amend any order of assessment, etc., passed by him with a view to rectifying any mistake apparent from the record. The argument of the learned counsel for the assessee is that the failure to adopt the correct method of grossing up of the assessee's income in the first instance by the Income-tax Officer cannot be called as a mistake that is apparent from the record. He argued that the mistake in this case, even if it exists at all, can be discovered only after elaborate argument. Such a mistake cannot be called a mistake apparent from the record. Mr. B. V. Subrahmanyam, in elaboration of this submission, read the orders of the Income-tax Officer and the Income-tax Appellate Tribunal to show how uncertain these authorities were in finding whether the payments made by the Hindustan Shipyard Limited are payments made on behalf of the Polish firm or on behalf of the assessee or on their own behalf. He also contended that the grossing up principle cannot apply to a situation where the assessee himself was not a party to the agreement under which the income was received. In this connection, he had referred to the decisions in Devendra Prakash v. ITO : [1969]72ITR151(All) , Maharana Mills (P) Ltd. v. ITO : [1959]36ITR350(SC) and ITO v. Asok Textiles Ltd. : [1961]41ITR732(SC) . He submitted that the mistake must be obvious and self-evident in order the attract the application of section 154(1) of the Act. We are unable to agree with this submission. First of all, there is no rule of law which lays down that the grossing-up principle cannot have application to a situation where the income was received by the assessee from third parties in order to ensure payment of tax-free salary. Secondly, in the facts of this case, the payment made by the Hindustan Shipyard Limited to the assessee are part of a scheme and a contract. In those circumstances, the Income-tax Officer had clearly committed an error in the first instance in not finding out the amount of income, that would, if the tax payable in India on that amount was deducted. leave to the assessee the contracted amount of salary and allowances. Instead, the Income-tax Officer added to the salary and allowances income of the assessee the sums of money which the Hindustan Shipyard had paid towards his taxes. In doing so, the Income-tax Officer had clearly committed an error. It is a self-evident error not only because of the fact that the Income-tax Officer had even originally treated the amounts paid by the Hindustan Shipyard as income of the assessee from other sources, but also because he had not applied the correct method of grossing-up. The language of section 154(1) of the Act which speaks of error from the record is wholly different and much wider than the language, which is used under Order 47, rule 1, C.P.C., or the language of error of law apparent on the face of the record, used in connection with a writ of certiorari. Under sub-section (I) of section 154 of the Act, both a mistake of fact as well as a mistake of law can be rectified. Now, a fundamental mistake of the type which has been committed in this case by the Income-tax Officer in grossing up the assessee's income cannot but be regarded as an error apparent on the face of the record. That an error apparent from the record can be found from the prior or subsequent judgments, is the ruling of the Allahabad High Court in Devendra Prakash v. ITO : [1969]72ITR151(All) . In view of that decision, we hold that the Income-tax Officer had acted within his jurisdiction in rectifying the orders of assessment passed by him earlier and in adopting the correct principles of grossing up as enunciated by the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT : [1964]52ITR283(KAR) .

15. We, accordingly, answer this question also against the assessee and in favour of the Revenue.

16. Referred Case No. 194 of 1980.

17. This case was referred for the opinion of this court at the instance of the assessee and is identical both in fact and law with the facts and the questions of law which we have considered in Referred Case No. 129 of 1980. The only difference is that in this referred case, we are concerned with the assessment years 1971-72, 1972-73 and 1973-74. The questions referred for the opinion of this court in this referred case are also exactly similar as in Referred Case No. 129 of 1980. In fact, no separate arguments are advanced. Following our decision in Referred Case No. 129 of 1980, We answer the first, second and the fourth questions referred to us in this referred Case in favour of the Revenue and against the assessee and we decline to answer question NO. 3 as it was not argued before us by the assessee.

18. The referred cases are answered accordingly.


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