| A Special Bench of the Delhi Income Tax Appellate Tribunal has ruled that the income tax that an employer pays on behalf of its employee is a non-monetary benefit in kind and, therefore, exempt from tax. |
| |
| The Tribunals ruling will benefit multinational companies operating through liaison and sales offices and unregistered Indian companies, some of which are known to bear the tax costs for their employees. |
| |
| However, registered companies are barred under law from bearing tax costs on behalf of their employees. |
| |
| The ruling came on a petition of a company called RBF Rig, which paid salaries to some employees net of tax as the employer had borne the taxes. |
| |
| In the tax returns filed by the employees, tax borne by the employer on the salary paid was considered a non-monetary benefit in kind and as such, exemption from tax was claimed under the Income Tax Act, 1961. |
| |
| The tax officer and subsequently the Commissioner of Income Tax (Appeals) did not allow the exemption on grounds that the tax payment was a monetary benefit in kind. So employees were asked to pay tax on this perk at the applicable rate. The company appealed to the Tribunal against the order. |
| |
| The Special Bench overruled two earlier decisions of the Delhi Tribunal, which had held that tax paid by the employer is a monetary payment and did not qualify for exemption. The bench said since the tax was paid to a third party (the government) and not the employee, it could not be considered a monetary benefit. |
| |
| "There was some ambiguity in the law as to what could be regarded as a non-monetary benefit in kind. The Tribunal ruling will go a long way in bringing certainty into tax payments," said Gaurav Taneja, national tax director, Ernst & Young. |
| |
| The Special Bench decision is a binding precedent for tax tribunals. However, a challenge to this ruling by the Income Tax department cannot be ruled out in a high court. |
