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Commissioner of Income-tax Vs. Hind Lamps Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 34 of 1976
Judge
Reported in[1980]122ITR451(All)
ActsIncome Tax Act, 1961 - Sections 17(3), 40, 80J and 217(1A)
AppellantCommissioner of Income-tax
RespondentHind Lamps Ltd.
Appellant AdvocateJ. Swarup and ;S.N. Verma, Advs.
Respondent AdvocateR.K. Gulati and ;A. Gupta, Advs.
Excerpt:
- - the ito was clearly in error in taking the fair annual rent calculated by him on a notional basis as an expenditure or an allowance contemplated by section 40(a)(v). in view of the above, the fair annual rent calculated on a notional basis cannot be treated as an expenditure or allowance for purposes of section 40(a)(v). 13. we, accordingly, answer the first two questions in the affirmative, in favour of the assessee and against the department......not be acted upon '2. the facts relevant for answering the questions referred are these. 3. the assessee-company was floated in the year 1951 for manufacturing electric lamps and its parts by the following companies : 1. philips of netherland. 2. b.t.h. of london. 3. crompton of york. 4. g.e.c. of london. 5. siemens of westminster. 6. radio lamp works (now bajaj electricals of bombay). 7. kaycee company of bombay. 4. an agreement was entered into between these seven concerns and the assessee-company for the production of lamps and their sale. the company used to import lamp-caps for the purpose of manufacturing the electric lamps. during the previous year relevant to the assessment year 1967-68, it was felt that having regard to the assessee's requirements it would be desirable to.....
Judgment:

C.S.P. Singh, J.

1. This reference, which relates to two assessment years, viz., 1967-68 and 1970-71, invites our answers to three questions, viz:

'1. Whether, on the facts and' in the circumstances of the case, the assessee is entitled to relief in respect of its new unit for manufacturing lamp caps under section 80J of the Income-tax Act, 1961, for assessment years 1967-68 and 1970-71

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in its opinion that the benefits in the shape of rent-free quarters and the bonus paid to employees could not be taken into account for the purpose of working out disallowance under section 40(a)(v) of the Income-tax Act, 1961

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the levy of interest under section 217(1A) was not appealable and, therefore, the directions given by the Appellate Assistant Commissioner to the Income-tax Officer to allow certain reliefs as per his order were not proper and could not be acted upon '

2. The facts relevant for answering the questions referred are these.

3. The assessee-company was floated in the year 1951 for manufacturing electric lamps and its parts by the following companies :

1. Philips of Netherland.

2. B.T.H. of London.

3. Crompton of York.

4. G.E.C. of London.

5. Siemens of Westminster.

6. Radio Lamp Works (now Bajaj Electricals of Bombay).

7. Kaycee Company of Bombay.

4. An agreement was entered into between these seven concerns and the assessee-company for the production of lamps and their sale. The company used to import lamp-caps for the purpose of manufacturing the electric lamps. During the previous year relevant to the assessment year 1967-68, it was felt that having regard to the assessee's requirements it would be desirable to obtain a separate licence to start a new unit for manufacturing lamp-caps instead of importing. In pursuance of this decision, the assessee took steps to establish a new unit for manufacturing lamp-caps during the previous years relevant to the assessment year 1967-68. The assessee claimed relief under section 80J 'before the AAC. The AAC allowed the assessee to make the claim, although it is not clear whether such relief was sought for before the ITO. However, on the view that benefit under section 80J could be granted only in case the assessee had maintained separate accounts for the unit and placed them before the ITO for scrutiny he remanded the matter to the ITO for consideration on the necessary data being supplied by the assessee. In the assessment year 1970-71, the assessee claimed relief under section 80J before the ITO, but that was rejected on the ground that the manufacturing of lamp-caps was part and parcel of the, assessee's existing business of manufacturing lamps and Section 80J was inapplicable. An appeal was filed before the AAC for the assessment year 1970-71, who held that the new unit was nothing but a part and parcel of the assessee's existing business, and, as such, no relief could be granted under section 80J. The assessee appealed against this order to the Appellate Tribunal while the department filed an appeal against the appellate order for the assessment year 1967-68. The Tribunal found that the assessee had established a new undertaking and was entitled to relief under section 80J. So far as the assessment year 1970-71 is concerned, an additional point arose for consideration before the Tribunal, and that was whether the profit bonus and the value of the rent-free accommodation provided to the employees were to be taken into account for computing the income of the assessee. The AAC had held that bonus was a part of the salary of the employees, and further that, as respects rent-free accommodation, only such amount as was spent by the assessee for the repair of the accommodation and its depreciation could be included provided that they did not exceed twenty per cent, of the salary of the employees.

5. The factual position relevant for answering the third question is this. It appears that the ITO in the assessment year 1970-71 had levied interest under section 217(1A). An appeal was filed by the assessee before the AAC, who took the view that the appeal was not maintainable but nevertheless issued certain directions in the matter. The Tribunal, following a decision of this court in the case of Vidyapat Singhania v. CJT : [1977]107ITR533(All) , held that no appeal lay against the order levying interest under section 217(1A).

6. It will be convenient to dispose of the third question at the outset. In ITR No. 41 of 1976--CIT v. Geeta Ram Kali Ram, Bazpur, decided on August 23, 1979 (since reported in : [1980]121ITR708(All) ), a Full Bench of this court has held that no appeal lies against the levy of interest under section 217(1A). This being so, the directions issued by the AAC while disposing of the appeal relating to the levy of interest was not proper as the directions could have been issued only in case the order was appealable. Turning now to the remaining questions in seriatim. It has been seen that the Tribunal has found that the assessee had obtained a new licence for manufacturing caps not only for meeting its own needs but for sale to other customers. Fresh capital had been employed by the assessee in setting up this unit. It was as such held by the Tribunal that it was not a mere extension or expansion of old business. The view of the Tribunal appears to be justified in view of the pronouncement of the Supreme Court in the case of Textile Machinery Corporation Ltd. v. CIT : [1977]107ITR195(SC) .

7. That takes us to the second question. In order to answer this question a few further facts may now be stated. The ITO had added an amount of Rs. 91,381 by resort to Section 40(a)(v). This amount according to the calculation made by the ITO represented the benefits accruing to employees drawing a salary of over Rs. 7,500 per annum, in respect of profit bonus, medical expenses, rent-free quarters, car allowance and depreciation on air-conditioners provided to two top executives. The amount was added as according to his calculation the benefits exceeded twenty per cent, of the salary of the employees. In the present reference, we are concerned only with two of these items, viz., profit bonus and rent-free quarters provided by the company to its employees. As these amounts have been disallowed by resort to Section 40{a)(v) it is necessary to extract this provision:

' 40. Amounts not deductible.--Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession ',--.........

(v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of salary payable to the employee, or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year, whichever is less :

8. Provided that in computing the aforesaid expenditure or allowance, the following shall not be taken into account, namely:--

(a) any payment by way of gratuity ;

(b) the value of any travel concession or assistance referred to in clause (5) of Section 10 ;

(c) passage moneys or the value of any free or concessional passage referred to in Sub-clause (i) of clause (6) of Section 10;

(d) any payment of tax referred to in Sub-clause (vii) of clause (6) of Section 10 ;

(e) any sum referred to in Sub-clause (vii) of clause (1) of Section 17;

(f) any sum referred to in Sub-clause (v) of clause (2) of Section 17 ;

(g) the amount of any compensation referred to in Sub-clause (i) or any payment referred to in Sub-clause (ii) of clause (3) of Section 17;

(h) any payment referred to in clause (iv) or clause (v) of Sub-section (1) of Section 36 ; and

(i) any expenditure referred to in clause (ix) of Sub-section (1) of Section 36:

Provided further that nothing in this Sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head 'Salaries' is seven thousand five hundred rupees or less.

Explanation 1.--The provisions of this Sub-clause shall apply notwithstanding that any amount not to be allowed under this Sub-clause is included in the total income of the employee.

Explanation 2.--In this sub-clause, the word 'salary' shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule.'

8. Before we consider the applicability of Section 40(a)(v), we might state the findings recorded by the AAC on these two items, which have been upheld by the Tribunal. The AAC excluded bonus from the purview of Section 40(a){v) on the view that profit bonus could not be treated as a perquisite.

9. So far as rent-free quarters are concerned, although the company was not charging any rent from its officers the ITO had worked out the rent of these quarters on the basis of cost of constructing these quarters, and treated this as a part of the salary of the employees. The AAC found that the company had made no cash reimbursement or granted. any subsidy in respect of rent, and no amounts were charged in respect of these quarters. There was, as such, no notional income to the company. He, however, remanded this issue to the ITO for calculating the depreciation on the quarters, and the repair expenses of the quarters as charged in the accounts of the company, and to treat them as a part of the perquisite of the employees for purposes of computing the benefit under section 40(a)(v). It appears that the assessee had not appealed against this part of the AAC's order to the Tribunal.

10. Turning now to Section 40(a)(v), we will consider the question of profit bonus first. We will assume for the purposes of this case that profit bonus paid to an employee falls within the first part of Section 40(a)(v), but there is a proviso which excludes certain expenditure while computing the expenditure under the first part of Section 40(a)(v). The clause which attracts attention so far as profit bonus is concerned is Clause (g). This clause excludes payments referred to in sub-cl. (b) of Clause (3) of Section 17. This clause, therefore, refers us ' to Section 17(3)(ii). Before we read Section 17(3)(ii) we may refer to Section 17(1)(iv) Section 17(1) gives an inclusive definition of the word ' salary '. Apart from other items included in salary, Section 17(1)(iv) includes any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. The word 'profits in lieu of salary' has been defined in Section 17(3). In the present case, we are concerned with Section 17(3)(ii), which is in the following terms:

' 17. (3)(ii) Any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12) or clause (13A) of Section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund), to the extent to which it does not consist of contributions by the assessee or interest on such contributions.'

11. It will be seen that the words ' profits in lieu of salary ' have been given a very wide meaning by Section 17(3)(ii). It includes any payment received by an employee from his employer. Profit bonus is a payment made by an employer to its employees where a company earns profit in a particular year. But whatever be the reasons or motive for making the payment it comes within the ambit of Section 17(3)(ii), for it is an amount paid by the employer to its employees. Now, such a payment is expressly excluded by Clause (g) of the proviso, for computing the expenditure for purposes of Section 40(a)(v). Once profit bonus is excluded for computing the expenditure for purposes of Section 40(a)(v), the question of its disallowability does not arise.

12. Turning now to the rent-free quarters, it has been seen that the AAC has remanded this matter to the ITO for purposes of calculating the expenditure incurred by the company on the repairs of these quarters and the depreciation. Before Section 40(a)(v) is attracted the company should have incurred an expenditure or should have granted an allowance in respect of any of its assets for use by its employees. In the present case, the company allowed its employees free residence in the' quarters, and in doing so incurred no expenditure at all. The position of the employees while residing in these quarters was that of a licensee of the company. The ITO was clearly in error in taking the fair annual rent calculated by him on a notional basis as an expenditure or an allowance contemplated by Section 40(a)(v). In view of the above, the fair annual rent calculated on a notional basis cannot be treated as an expenditure or allowance for purposes of Section 40(a)(v).

13. We, accordingly, answer the first two questions in the affirmative, in favour of the assessee and against the department. The third question is also answered in the affirmative, but in favour of the department and against the assessee. As the reference has been answered substantially against the department, the assessee is entitled to its costs, which are assessed at Rs. 200. Counsel's fee is assessed at the same figure.


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