Medical reimbursement paid to employees is not part of salary and no TDS can be charged upon it

The Income Tax Appellate Tribunal in the Assistant Commissioner of Income Tax (TDS) vs. M/s. SAP Labs India Pvt. Ltd. being ITA Nos.1414 to 1416/Bang/2012 for the Assessment years 2008-09 to 2010-11 by order dated 15.07.2013 held that medical reimbursement paid to employees is not part of salary and no TDS can be charged upon it. It was also held that employees are entitled to exemption under Sec.17 (2) of the Income Tax Act.

Brief facts of the case:

These were appeals by the Revenue against the impugned order dated 23.8.2012 passed by the Ld. CIT(A)-II, Bangalore, in connection with the Assessment years 2008-09 to 2010-11. The assessee was a company having export oriented unit under the scheme of STPI and was running the business of providing software development. Question was raised whether the appellant herein being an employer was justified in not deducting TDS for medical reimbursements paid to its employees.

The exemption for medical expenditure was considered after verifying documents and evidences furnished by the employees. Policies ensured that the requirements of the provision were duly fulfilled. The details filed before the officer were all considered for the purpose of the exemption under section 17(2). The AO considered the Assessee to be “in default” under section 201(1) of the Act.

The order passed by the AO under section 201(1) & 201 (1A) was challenged. The question was raised whether the he AO can deny the exemption under Sec.17 (2) of the Act. The order passed by the AO under section 201(1) & 201 (1A) was quashed by the CIT (A).

In the said appeals, the revenue challenged the order passed by the CIT (Appeals) wherein the CIT (Appeals) cancelled the order of the Assessing Officer considering the appellant to be a defaulter assessee for not deducting TDS under section 201 of the Act and also imposing interest on tax under section 201(1A) of the Act.

The judgment:

It was held that in case of Medical reimbursement, if the amount paid by an employer to the employee for medical treatment of himself or his family is up to Rs.15, 000/- per year, it will not be considered as part of “salary” for deducting TDS while paying salary by the employer to the employee. In other words, expenditure incurred for medical treatment up to Rs.15, 000/- is tax exempt and the rest portion is taxable.

In the appeals raised by the revenue, it was held that there were no grounds to interfere with the order of the CIT (A). The judgment of Hon’ble Karnataka High Court in CIT vs. Tata Elsi being ITA No.82 of 2003, dated 23.1.2008 was relied upon.  Accordingly, the appeals filed by the Revenue are dismissed.