Computation of salary income of a Czech national employed with Skoda Auto AS, a company incorporated in Czechoslovakia and is currently under deputation to Skoda Auto India (P.) Ltd:
Income tax return filed on : 31-7-2006,
- Hypothetical-tax : 20,21,281
- Social security charges: 9,23,498
|Net Salary:||Rs. 26,68,631|
|Taxable income under the head salary:||Rs. 70,23,050|
The explanation for deduction of social security charges: As regards the social security contribution, it was explained that Skoda a.s. has made a contribution to the social security plan for the assessee in the home country.
It is admitted position that domestic law of the Czech Republic lays down a compulsion whereby all citizens of the Czech Republic are required to contribute to the social security plan, regardless of the fact whether they are working in the Czech Republic or any other place.
There is a thin diving line between diversion of income and application of income as explained below:
Diversion of income: Income is received by a person other than the person who is entitled to it. The recipient, later on, diverts the income under a pre-existing title to the person who is actually entitled to it. It is the diversion of income by overriding title.
In such cases, income is not taxable in the hands of the person who first receives it. The tax is payable by the person to whom income is diverted by overriding title.
Application of income: Income is received by the person who is actually entitled to it. He is made chargeable to tax.
In order to decide whether a particular payment is a diversion of income or application of income, it has to be seen whether the disbursement of income is a result of the fulfillment of an obligation on him or whether income has been applied to discharge an obligation?
In the first case income is not taxable in the hands of the assessee but in the latter case same consequences to law not follow and income is taxable in the hands of the assessee recipient.
Analysis of present case and conclusion:
In the above case, the assessee had no discretion in the matter of social security charges contributions and the assessee does not have any enforceable right over it.
Also, no benefits accrued to the assessee, under this social security plan, in the relevant financial year.
Thus the payment is not taxable as the employee does not have a present enforceable vested right in the contribution.
Also, in the case of Gallotti Raoul v. Asstt. CIT, it was highlighted that only net income was chargeable to tax after adjustment of the French social security charges as was the assessee’s case.
Thus, the facts of this case show that the amount to the extent of the social security plan never reaches the assessee as his income, and, therefore not taxable.
Also, the non-existence of provision for deduction either under section 16 of the Income-tax Act or in the tax treaty between India and the appellant’s home country is immaterial in this case.