ITAT deleted addition on account of employer contribution to LIC for purchasing an annuity policy for assessee-payable in future
In a recent judgment, ITAT Ahmedabad held that merely because the employer chose to contribute to LIC to effect an annuity for the future benefit of the employee, the assessee did not acquire any vested or enforceable right over the said amount in the relevant assessment year, and it cannot be taxed as perquisite.
ABCAUS Case Law Citation:
4690 (2025) (08) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) / National Faceless Appeal Centre confirming the addition made by the AO towards employer contribution to LIC for purchasing an annuity policy for assessee employee payable in future.
The issue in this appeal was whether the contribution of Rs. 20,00,000/- made by the employer to LIC for purchasing an annuity policy in the name of the assessee-payable in future-can be taxed as a perquisite in the hands of the assessee in relevant Assessment Year under section 17(2)(v) of the Act. Section 17(2)(v) of the Income Tax Act, 1961 (the Act) includes within the definition of perquisite any sum paid by the employer to effect a contract for an annuity, subject to certain exclusions.
Before the Assessing Officer (AO) the assessee submitted that the sum of ₹ 20,00,000/- paid by the employer to LIC under a Voluntary Retirement Scheme (VRS) to purchase an annuity policy on behalf of the assessee was exempt from tax.
The assessee submitted that the employer made error in computing the taxable salary by including the said payment to LIC and failed to apply applicable exemptions, leading to inflated figures in Form 16. The assessee placed reliance on judicial precedents to support his claim that tax paid by the employer on behalf of the employee is a non-monetary perquisite and hence exempt.
The assessee further submitted that he had already included the annuity instalments (with respect to this policy) received from LIC as income in the return, which were not reflected in Form 16 or 26AS.
To verify the claims, the AO issued notice under Section 133(6) of the Act to the employer, who clarified that the company paid ₹20,00,000/- to LIC on behalf of the assessee and grossed it up with tax which was included as taxable salary in Form 16 issued to the assessee.
Based on the reply of the employer, the AO held that the amount a perquisite in the nature of a contract for an annuity. However, exemption under Section 10(10CC) was allowed only to the extent which was the actual tax borne by the employer.
The Tribunal observed that the case of the assessee was that the sum of Rs. 20 lakhs paid by the employer to LIC to purchase an annuity on his behalf cannot be taxed for this Assessment Year i.e. AY 2018-19, as it does not represent any amount received, due, or vested in him during that year. The annuity was structured to be paid to the assessee only after four years, in the form of monthly instalments from LIC. Since the assessee had no access to, or right over, the amount in AY 2018-19, it cannot be considered part of his salary or perquisite income for that year under section 15 or 17 of the Act.
The Tribunal further noted that before the CIT(A) the assessee had submitted that he had already offered the annuity instalments actually received from LIC to tax under the head “salary” in his return for relevant Assessment Year. Therefore, if the entire Rs. 20 lakhs was also taxed in the same year merely because the employer paid it to LIC, and the same sum is again taxed in the future when the annuity installments are received, it would clearly amount to double taxation of the same income-once at the stage of employer’s contribution and again at the time of actual receipt.
The Tribunal further noted that the assessee had relied on the decision of the Hon’ble Supreme Court wherein it was held that employer contributions towards annuity policies cannot be taxed in the employee’s hands unless a vested right has accrued to the employee. Until such time as the employee has a vested right-i.e., the amount becomes due or receivable-no tax can be levied.
The Tribunal noted that section 17(2)(v) of the Act includes within the definition of perquisite any sum paid by the employer to effect a contract for an annuity, subject to certain exclusions. However, in order for such a payment to be taxed in the hands of the employee, it is essential, as per section 15 of the Act, that the amount is either due, paid, or allowed to the employee. The law is well settled that a contingent benefit or a non-vested future entitlement cannot be brought to tax in the year of payment by the employer unless the employee acquires a vested right in the amount.
The Tribunal noted that Delhi High Court dealt with an identical issue where employer contributions towards a pension fund or annuity were held to be not taxable as perquisites in the year of contribution. The Court held that when the amount does not result in a direct present benefit to the employee and the employee has no vested right over the same, the payment made by the employer does not amount to a perquisite under section 17(2)(v) of the Act.
It was also noted by the Tribunal that in the present case, the assessee acquired no such vested right in relevant Assessment Year and the annuity payments commenced only four years thereafter. Moreover, from the records it is observed that the assessee had in fact offered to tax, on accrual/receipt basis, the annuity income received from LIC in this year under the head “Income from Salary.”
The Tribunal opined that taxing the employer’s payment to LIC in relevant Assessment Year would amount to taxing the same amount twice-once at the stage of employer’s contribution and again at the time of annuity receipts-resulting in double taxation, which in is impermissible in law.
The Tribunal held that the Department’s reliance on Form 16 and Form 26AS was erroneous, as these do not override the substantive legal provisions under the Act. Moreover, the employer’s payment to LIC was not made on behalf of the employee nor credited to his account; hence, it cannot be treated as income due, paid or allowed to him in that year.
The Tribunal also noted that the identical position had been upheld in several cases by Delhi HC where it was held that the employee must acquire a vested right in the employer’s contribution for it to be taxed as a perquisite.
In view of the binding judicial precedents, the Tribunal held that the addition made by the Assessing Officer in the hands of the assessee was not sustainable in law. The assessee did not acquire any vested or enforceable right over the said amount in the relevant assessment year, and it cannot be taxed merely because the employer chose to contribute to LIC to effect an annuity for the future benefit of the employee.
Accordingly, the addition was directed to be deleted.
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