1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax. The question of law referred is :
'Whether the tax. borne by the assessee's employer was includible in the total amount of salary for the purpose of computing the value of the rent-free accommodation given to the assessee under Rule 24A of the Indian Income-tax Rules, 1922 ?'
2. The assessee is an employee of the National & Grindlays Bank Ltd. He was given rent-free quarters, as also allowances, such as car allowance, servants' allowance and fuel and electricity allowance. The employers had paid the income-tax of the assessee to the extent of Rs. 10,220. The assessee was in India during the period January 1, 1960, to December 12, 1960. The salary and allowance during this period came to Rs. 21,535. The assessee calculated the value of the rent-free quarters at 12 1/2% of Rs. 21,535 which came to Rs. 2,691.87. The Income-tax Officer held that, in arriving at the value of the rent-free quarters, the income-tax paid by the assessee's employer of Rs. 10,220 should also be taken into account. According to the Income-tax Officer, the payment of income-tax by the employer did not fall under any of the exemptions mentioned in Explanation 2 to Rule 3 of the Rules under the Income-tax Act, 1961, and, therefore, must be taken into account in computing the value of rent-free quarters. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner referred to Section 17(1) of the Income-tax Act, 1961, and said that 'salary' included wages, annuity, any gratuity, any fees, commission, perquisite or profits in lieu of or in addition to any salary ; and the income-tax paid by the employer being a perquisite should be included for the purpose of calculating the value of the rent-free quarters. The assessee appealed to the Appellate Tribunal. The Appellate Tribunal reversed the decision of the Appellate Assistant Commissioner. It said that 'salary', as defined in Rule 24A of the Indian Income-tax Rules, 1922 (the relevant rule governing the matter), would not include perquisites such as income-tax paid by the employer and should not be taken into account in determining the value of the rent-free quarters. It, therefore, allowed the appeal.
3. The question for consideration is whether 'salary' of the assessee would include the income-tax paid by the employer. The method of computing the value of rent-free quarters is laid down in Rule 24A(1)(a) of the Indian Income-tax Rules, 1922, which reads :
'24A. (1) For the purpose of computing the income chargeableunder the head 'salaries' the value of the perquisites (not provided forby way of monetary payment to the assessee) mentioned below shall bedetermined in accordance with the following clauses, namely :
(a) The value of rent-free residential accommodation shall ordinarily be estimated at a sum equal to,
where the accommodation is not furnished, 10 per cent.,where the accommodation is furnished, 12.5 per cent.,of the salary due to the assessee in respect of the period of his occupation of the said accommodation during the relevant previous year, but .....'
4. The second clause of the Explanation to Rule 24A(1)(b) of the above Rules defines 'salary' as follows :
''salary ' includes the pay, allowances, bonus or commission payable monthly or otherwise, but does not include the following, namely:--
(i) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned ;
(ii) employer's contributions to the provident fund account of the assessee;
(iii) allowances which are exempted from payment of tax.'
5. Section 7 of the Indian Income-tax Act, 1922; provides that tax shall be payable by an assessee under the head 'salaries' in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are due to him from, whether paid or not, or are paid by or on behalf of, the Government, a local authority, a company or any other public body or association, or any private employer.
6. Explanation 1 (iv) to Section 7 reads :
'1. For the purpose of this section 'perquisite' includes--. . . .
(iv) any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee; and . ...'
7. Section 18(2) provides that any person responsible for paying any income chargeable under the head 'salaries' shall, at the time of payment, deduct income-tax and super-tax on the amount payable. Section 18(4) states that all sums deducted in accordance with the provisions of this section shall, for the purpose of computing the income of an assessee, be deemed to be income received. Section 18(7) provides that, if any person does not deduct or after deducting fails to pay the tax as required by or under this section, he shall, without prejudice to any other consequences, which he may incur, be deemed to be an assessee in default in respect of the tax.
8. The income-tax paid by the employer was really the income of the assessee. The assessee received his salary free of income-tax. The amount of his salary was really increased by the amount of the tax. A contract to pay salary without deduction of tax is neither more nor less than a contract to pay the amount of the salary plus the amount of tax ;and in such a case the profit of the office or employment is measured by the sum of the two figures. If the assessee were asked what profit he gets from employment he would say that he gets so much amount in money and so much amount by way of income-tax in respect of the salary paid by the employer. It will be on the aggregate of these two sums that income-tax will have to be calculated. In North British Railway Company v. Scott, a railway officer had, by contract, a salary which was to be paid free of tax, and it was held that the effect was that the real salary was the sum which after deduction of the tax from it would leave the sum which was expressed to be payable to him as salary free of tax. In other words, the House of Lords held that the fact that the sums paid by the railway company were not deducted from the salary increased the salaries of the officers of the railway company ; and the salaries received by the officers must be deemed to be not only the salaries paid into their hands, but also the sums paid on their behalf to the revenue. Here, the assessee received not only the salary paid to him in cash but also money's worth to the extent of the sum which has been paid as income-tax in respect of the salary to the revenue. 'Salary' is defined in Shorter Oxford Dictionary as follows :
'Fixed payment made periodically to a person as compensation for regular work ; now usu. for non-manual or non-mechanical work (as opp. to wages). 2. Remuneration for services rendered ; fee, honorarium, reward, recompense.'
9. In Webster's International Dictionary, the meaning of 'salary' is given as follows :
'1. To pay (as a person) for something done: Recompense, Reward. 2a. To pay a salary to (a person): b. To attach a salary to (a position).'
10. In Black's Law Dictionary, 'salary' is defined as follows :
'A reward or recompense for services performed. In a more limited sense a fixed periodical compensation paid for services rendered ; . . . .'
11. The definition of 'salary' in Explanation 2 to Rule 3 is an inclusive definitions It includes pay. If the income-tax paid by the employer is not salary as ordinarily understood, we think, it is part of the pay of the assessee.
12. It was contended on behalf of the assessee that there was no definition of the word 'salary' in the Income-tax Act, 1922, that in defining salaries salary is separately mentioned from perquisites in Section 7, and that income-tax paid was only a perquisite as denned in Explanation 1(iv) to Section 7, and, therefore, it cannot be included within the definition of the word 'salary'. We are not, here, really concerned with the definition of 'perquisites' for the purpose of Section 7. Rule 24-A defines the word 'salary', and that is an inclusive definition. There it includes pay. We, therefore, think that the income-tax paid by the employer is really part of the salary of the assessee within the meaning of the definition of the term in Rule 24-A and that it must be included in the income of the assessee for the purpose of finding out the value of the rent-free accommodation.
13. We, therefore, answer the question referred in the affirmative and against the assessee. We make no order as to costs.
14. A copy of this judgment will be sent to the Appellate Tribunal under the seal of the High Court and signature of the Registrar.