The current month period marks the return-filing season for salaried taxpayers as well as the time for employers to consolidate their quarterly tax statements to facilitate smooth filing of income-tax returns for Financial Year 2025–26. For income-tax purposes, the term “salary” includes not only basic salary and allowances but also perquisites. Importantly, the definition of “perquisite” under Section 17(2) of the Income-tax Act, 1961 is inclusive and illustrative in nature. Consequently, it is broad enough to encompass lump-sum payments made by an employer to its employees. Employers should take careful note of this position.
Under the Income-tax Department’s recent nudge campaign on compliance and awareness, both employers and employees have been reminded to appropriately consider lump-sum payments while computing taxable income and deducting tax at source. Failure to do so may have adverse tax consequences for both parties.
Employer’s Case Scenario
In Sun Outsourcing Solutions (P.) Ltd. v. Commissioner of Income-tax (Appeals-V), Hyderabad [2018] 92 taxmann.com 339 (AP), the employer made lump-sum payments to employees deputed to its branch office in the United Kingdom but failed to deduct tax at source on such payments. The matter ultimately reached the Andhra Pradesh High Court.
The High Court observed that Section 15 brings salaries to tax under the head “Income from Salaries”, while Section 17 expands the meaning of salary to include, inter alia, perquisites. Section 17(2) contains an inclusive definition of perquisites and covers any sum paid by an employer in respect of an obligation which, but for such payment, would have been payable by the employee.
The Court further noted that it is of no any doubt that the lump-sum payments were intended to provide employees with an additional financial benefit or advantage to meet the higher costs of accommodation and other personal expenses while stationed abroad. Such expenditure could not be regarded as having been incurred wholly in connection with the discharge of official duties within the meaning of Section 10(14). Accordingly, the payments constituted taxable perquisites under Section 17(2) and did not qualify for exemption under Section 10(14).
The employer was also held liable for the consequences of failure to deduct tax at source. Under Section 201 of the Act, a person who fails to deduct or pay tax as required is deemed to be an assessee in default. Further, Section 201(1A) mandates payment of interest on such default. The liability to pay interest is automatic and is not dependent upon factors such as good faith, bona fide belief, or wilful default. Therefore, mens rea is irrelevant for the purpose of levying interest under the provision.
Employee’s Case Scenario
In CIT v. Bellien Michael Andresmant [1999] 102 Taxman 334/237 ITR 479 (AP), the High Court considered whether a living allowance paid to foreign technicians was exempt under Section 10(14).
The assessees were employed by L’Air Liquide, France, under a collaboration agreement with Bharat Heavy Plate and Vessels Ltd., Visakhapatnam. Pursuant to the agreement, the technicians were deputed to erection and commissioning sites in India and were paid a lump-sum living allowance.
The Court found that there was no evidence to establish that the allowance was paid in connection with the discharge of official duties. In the absence of such evidence, the exemption under Section 10(14) could not be granted. Consequently, the allowance was held to be taxable.
Conclusion
The above decisions clearly establish that lump-sum payments made by employers to employees cannot automatically escape taxation merely because they are described as allowances or reimbursements. Where such payments confer a personal benefit or are intended to meet personal expenses, they are likely to fall within the ambit of “perquisites” under Section 17(2) and become taxable in the hands of employees.
Employers should therefore carefully evaluate the taxability of all lump-sum payments and ensure appropriate deduction of tax at source. Likewise, employees should disclose such receipts while computing their taxable income to avoid future scrutiny disputes and compliance issues.