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installment Supply P. Ltd. Vs. Commissioner of Income-tax, New Delhi - Court Judgment

LegalCrystal Citation
Subject Direct Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax References Nos. 192 and 193 of 1974
Judge
Reported inILR1984Delhi189; [1984]149ITR457(Delhi)
Acts Income Tax Act, 1961 - Sections 10(5), 10(6), 17, 17(1), 17(2), 17(3), 30, 31, 32, 33, 34, 35, 36, 36(1), 37, 38, 39, 40, 40A(5), 253(4) and 256(1)
Appellantinstallment Supply P. Ltd.
RespondentCommissioner of Income-tax, New Delhi
Excerpt:
.....and the appeal ate disposed of by one common order?; for the assessment year 1968-69, the assessed company reimbursed to its managing director medical expenses, which comprised payments to the nursing home, doctors, nurses and purchase of medicines and claimed this expenditure as business expenses. this claim of the assessed was rejected by the income-tax officer on the ground that it was nit by the provisions of section 40(c)(iii) of the income-tax act, as it stood at the relevant time. the appellate commissioner restricted the allowance but the tribunal allowed the claim in its entirely holding that the payments were made to fulfill the legitimate need of the business of the company and they were neither excessive nor unreasonable.; in the assessment years 1969-70 and 1970-71,..........nurse who was attending on him day and night. in august, 1967, the board of directors of the assessed-company decided to reimburse such medical expenses of the managing director as may be incurred by him. for the assessment year 1968-69 (year ending on march 31, 1968), the assessed-company reimbursed medical expenses of rs. 33,941, which comprised payments to the nursing home, doctors, nurses and purchase of medicines. the ito had rejected the claim of the assessed-company as he was of the view that such payment was hit by the provisions of s. 40(c)(iii) of the act, but on appeal, the aac restricted the allowance to rs. 9,408. on further appeal, the tribunal allowed the claim of the assessed-company in its entirety holding that the payments were made to fulfilll the legitimate.....
Judgment:

Wadhwa, J.

1. The Income-tax Appellate Tribunal, Delhi Bench 'B', has referred to this court, under s. 256(1) of the I.T. ACT, 1961 (hereinafter referred to as 'the Act'), the following question of law is respect the assessment years 1969-70 and 1970-71 :

'Whether, on the facts and in the circumstances and on a true interpretation of section 40(a)(v) of the Income-tax Act, 1961, reimbursement of the medical expenses to the managing director has been correctly restricted by the Tribunal to Rs. 12,000 for each of the assessment years 1969-70 and 1970-71 ?'

2. The facts of the case may be stated briefly. Mr. Raj Bans Bahadur, managing director of the assesee-company, was taken ill in July, 1967. He suffered partial paralysis and was admitted to a nursing home. He remained in the nursing home for some time, but even after his discharge he required medical treatment which included the services of a qualified nurse who was attending on him day and night. In August, 1967, the board of directors of the assessed-company decided to reimburse such medical expenses of the managing director as may be incurred by him. For the assessment year 1968-69 (year ending on March 31, 1968), the assessed-company reimbursed medical expenses of Rs. 33,941, which comprised payments to the nursing home, doctors, nurses and purchase of medicines. The ITO had rejected the claim of the assessed-company as he was of the view that such payment was hit by the provisions of s. 40(c)(iii) of the Act, but on appeal, the AAC restricted the allowance to Rs. 9,408. On further appeal, the Tribunal allowed the claim of the assessed-company in its entirety holding that the payments were made to fulfilll the legitimate needs of the business of the company and they were neither excessive nor unreasonable.

3. For the assessment year 1969-70 and 1970-71, the assessed-company had claimed deductions of Rs. 40,319 and Rs. 41,197, towards the medical expenses reimbursed to its managing director. It may be noted that s. 40(c)(iii) was omitted by the Finance Act of 1965 with effect from April 1, 1969, but its provisions were re-enacted with certain modifications under clause (a)(v) of s. 40 which were inserted with effect from April 1, 1969, and this clause (a)(v) of s. 40 was omitted by the Finance (No. 2) Act, 1971, with effect from April 1, 1972, and its provisions were re-enacted with modifications in s. 40A(5), which section was inserted by the same Act with effect from the same date. The relevant provisions of these clauses which place a limit on allowance in respect of perquisites, etc., may be reproduced here at this stage.

4. Assessment year 1968-69 :

'40. Notwithstanding anything to the contrary in section 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,'...

(c) in the case of any company - ...

(iii) any expenditure incurred after the 29th day of February, 1964, 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 company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the afore-said date...'

5. Assessment years 1969-70 and 1970-71 with effect from 1-4-1969 :

'(a) in the case of any assessed - .......

(v) any expenditure which results directly or indirectly in the provisions of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessed 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 assessed used by such employee either wholly or partly for his own purpose 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 years, whichever is less :

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 refereed to in clause (5) of section 10;

(c) passage moneys or the values 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 subsection (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 result 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.

Explanationn 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.

Explanationn 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.'

With effect from 1-4-1972 :

40A(5)(a) Where the assessed -

(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or

(ii) incurs any expenditure which results directly or indirectly in the provisions of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessed used by an employee either wholly or partly for his own purpose or benefit,

then, subject to the provisions of clause (b) so much such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction :

Provided that where the assessed is a company, so much of the aggregate of -

(a) the expenditure and allowance referred to in sub-clauses (i) and (ii) of this clause; and

(b) the expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c) of section 40,

in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of a seventy-two thousand rupees, shall in no case be allowed as a deduction :.....'

6. As stated above, the assessed-company again claimed deduction of these amounts of Rs. 40,319 and 41,197 on account of medical expenses reimbursed to the managing director, but the ITO disallowed the entire claim as not relevant to the company's business needs. On appeal, the AAC treated the medical expenditure as a perquisite of the managing director and restricted the allowance to 1/5th of the salary and commission paid to him. The Revenue went in appeal before the Tribunal and the assessed-company also filed cross-objections. The Tribunal held, relying on its earlier decision for the assessment year 1968-69, that the assessed-company was justified in reimbursing the medical expenses to the managing director. This position is not in dispute in the reference brought before us. After making a comparative study of both s. 40(a)(v) and s. 40(c)(iii), the Tribunal was of the view that s. 40(c)(iii) did not lay any limit beyond which expenditure was not to be allowed. The Tribunal held that s. 40(a)(v) which came into effect from April 1, 1969, prescribed a limit over and above which any expenditure on providing amenities, benefits or perquisites to an employee had to disallowed. The Tribunal was of the view that what was to be allowed was 1/5th of salary or Rs. 1,000 per month, whichever was less. Accordingly, the Tribunal accepted the submission of the Department that the allowance of reimbursement of medical expenses had to be restricted to Rs. 12,000 for each of the assessment years in question and not 1/5th of the salary and commission paid to the managing director as was held by the AAC. The Tribunal thus partially accepted the appeal of the Revenue and dismissed the cross-objections of the assessed-company. At the instance of the assessed-company this reference was made.

7. The learned counsel for the Revenue raised a preliminary objection that the present reference was not maintainable, as it did not arise out of the cross-objections filed by the assessed-company and was duly against the appeal filed by the Revenue before the Tribunal. We think this objection is merely stated to be rejected. Under s. 256(1) of the Act, reference has to be made to the High Court on any question of law arising out of the order of the Tribunal. Cross-objection are filed in appeal under s. 253(4) of the Act, though memorandum of cross-objection is to be disposed by the Tribunal as if it were an appeal. The appeal of the Revenue as well as cross-objections of the assessed-company have been disposed of by one orders and we fail to appreciate the argument of the counsel for the Revenue as to how the present reference is incompetent.

8. It is not disputed that the expenses in question were incurred by the assessed-company for commercial expediency. As already noticed, the Tribunal in its decision for earlier year did hold that the medical expenses in the present case were incurred on the principle of commercial expediency and, in fact, the Revenue does not contend before us to the contrary.

9. It was contended by Mr. Ved Vyas, learned counsel for the assessed-company, that the provisions of s. 40(a)(v) are inapplicable when the payment is made by the company to its employee in cash and any cash payment cannot be equated to 'any benefit or amenity or perquisite'. According to him, any cash payment made by the company to its employee would be part of the salary and he referred to the provision of s. 17 of the Act in this regard. It was further contended that the words 'any benefit, or amenity or perquisite' if equated with cash payment would make the words 'whether convertible into money or not' redundant and that would be against all principles of interpretation of a statute. All the words in the enactment have to be given full effect. When the legislature uses some words, the interpretation should not be make these words either redundant or a mere surplusage.

10. The counsel also drew our attention to the relevant provision as contained in s. 40A(5) which limits the allowance and is in two parts, where expenditure incurred by the company results directly or indirectly in the payments of any salary to its employee and, where the company incurs any expenditure which results, directly or indirectly, in the provision of any perquisite, 'whether convertible into money or not' to an employee. This, according to the counsel, is a clear pointer to the fact that the earlier provisions, as contained in clause (c)(iii) and clause (a)(v) of s. 40 of the Act, did not include any case payment made by the company to its employee within the meaning of the words 'any benefit, amenity or perquisite.'

11. In support of his contentions, Mr. Ved Vyas referred to various decisions which may be noticed.

12. In CIT v. kanan Devan Hills Produce Co. Ltd. : [1979]119ITR431(Cal) , the Calcutta High Court held that any cash payment directly made to the employee cannot be considered to be a perquisite within the meaning of s. 40(c)(iii) of the Act, which provision corresponds to s. 40A(5). The question before the court was whether the overseas allowance, managing allowance, devaluation allowance and transport allowance did not fall within the expression 'benefit, amenity or perquisite' within the meaning of s. 40(c)(iii) of the Act. The court observed as follows (p. 437) :

'In our view, in their ordinary meaning, the words 'which results directly or indirectly in the provision of any benefit or amenity or perquisite whether convertible into money or not' in clause (c)(iii) of s. 40 excludes cash paid directly to an employee as there is no question of convertibility to money where cash would be paid. This interpretation is reinforced by the fact that originally the said sub-section contained the expression 'remuneration' which was specifically excluded by the amendment introduced in 1964 which also introduced the clause 'whether convertible into money or not.'

In sub-clause (i) of the said clause (c), the expression 'remuneration' was retained also with the other expressions 'benefit' and 'amenity' even after the amendment. This would show that the legislature had in view the distinction between the said expressions and yet chose to delete the expression 'remuneration' from the said clause (iii).

The phrase 'whether convertible into money or not' in our opinion does not govern only the expression 'perquisite'. The words in the section are 'any benefit or amenity or perquisite'. If the phrase 'whether convertible into money or not' was intended to govern only the word 'perquisite' then the correct grammatical form would have been 'any benefit or amenity or any perquisite whether convertible into money or not.'

13. In Indian Leaf Tobacco Dev. Co. Ltd. v. CIT : [1982]137ITR827(Cal) , the court was concerned with the question as to whether monetary payment made by the company to its employees for reimbursement of medical expenses incurred by the employees represented by the employees represented expenditure resulting directly or indirectly in the provision to any benefit or amenity or perquisite to the said employee within the meaning of s. 40A(5) of the Act. The court following its earlier decision in CIT v. Kanan Devan Hills : [1979]119ITR431(Cal) , held that a direct payment to the employee did not come within the scope of expenditure resulting directly or indirectly in the provision of any perquisite to an employee whether convertible into money or not for the purpose of working out disallowance under s. 40A(5).

14. The court, thereforee, held that the expenditure incurred by the company for reimbursement of medical expenses incurred by the employee could not be treated as a perquisite of the employee for the purpose of making disallowance under s. 40A(5).

15. In another case of the Calcutta High Court in CIT v. National and Grindlays Bank Ltd. : [1984]145ITR457(Cal) , the question was whether the cash payments on account of reimbursement of medical expenses of the employees of the company could not be included in the value of benefits, a amenities or perquisites for the purpose of disallowance in excess of the limits laid down under s. 40(c)(iii) or s 40(a)(v) of the Act. The court answered the question in favor f the assessed following its decision in Indian Leaf Tobacco Dev. Co. : [1982]137ITR827(Cal) .

16. In CIT v. Venkatraman [1978] 111 ITR 444, the Madras High Court had occasion to consider a similar provision as contained in s. 2(6C)(iii) of the Indian I.T. Act, 1922, which defined income as including 'the value of any benefit or perquisite, whether convertible into money or not obtained from the company'. It was held that 'from this language it is clear that the benefit or perquisite' contemplated cannot be money itself. If it is money, the question of its value being taken into account or the benefit or perquisite being converted into money will not arise.'

17. It was also observed that the same section made a distinction between 'benefit or perquisite' on the one hand and 'any sum paid' on the other indicating that the benefit or perquisite contemplated by the section was other than money.

18. In CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 , the question was whether the leave allowance was not a perquisite and, thereforee, the allowance of the same would not fall to be restricted in terms of s. 40(a)(v) of the Act. The court referred to the decision of the Calcutta High Court in Kanan Devan's case : [1979]119ITR431(Cal) , and also to an earlier decision of the Madras High Court in CIT v. Venkataraman [1978] 111 ITR 444, and held that in order to term a payment in pursuance of a contract of service.

19. In CIT v. Warner Hindustan Ltd. : [1984]145ITR24(AP) the question was as to whether the fees and medical bills should be taken into account as perquisite for the purpose of disallowance under s. 40A(5) of the Act. Relying on the decision of the Calcutta and Madras High Courts, it was held that payments made directly to an employee do not fall within the meaning of the expression 'perquisite'.

20. In CIT v. Mysore Commercial Union Ltd. : [1980]126ITR340(KAR) , the Karnataka High Court was of the view that the expression 'whether convertible into money or not', occurring in s. 40(a)(v), is something apart from money such as something in kind, which may be convertible into money or not and that this expression would not be appropriate when one considers a payment in cash. It, thereforee, held that payment of bonus to its employees in cash was not a perquisite and could not be disallowed under s. 40(a)(v).

21. Mr. Wazir Singh, appearing for the Revenue, however, referred to a Full Bench decision of the Kerala High Court in CIT v. Commonwealth Trust Ltd. : [1982]135ITR19(Ker) . This decision took a contrary view. In this case the house rent allowance paid by the assessed-company to its employee was treated as perquisite by the ITO. On appeal the Tribunal held that the house rent allowance should not be treated as part of the perquisite. The question turned on what exactly the term 'benefit or amenity or perquisite' meant. The court was concerned with s. 40(a)(v) of the Act as it stood during the assessment year 1971-72. the court referred to the definition of salary as given in clause (h) of rule (2) of Part A of the IV Schedule to the Act which was referred to in Explanationn 2 to s. 40(a)(v). Under this, salary includes dearness allowance, if the term of employment so provides, but excludes all other allowances and perquisites. The court was, thereforee, of the view that when the sub-clause uses the term 'salary' it has to be understood as excluding all allowances and perquisites other than dearness allowance. That the term 'benefit, amenity or perquisite' is opposed to salary evidently indicated that these together would exhaust what an employee would obtain in terms of the return of his services. The court thus differed from the view of other High Courts and observed : 'It is immaterial whether the benefit, perquisite or amenity may or may not be convertible into money.

22. With respect we are unable to agree with the line of reasoning adopted by the Kerala High Court. The term 'benefit or amenity or perquisite' could not include cash payments, otherwise the words immediately following this term become redundant. Such type of construction has to be avoided. As a matter of fact, the use of the words 'whether convertible into money or not' goes to show that the term 'benefits or amenity or perquisite' cannot relate to cash payments. Any cash payment could well be part of the salary as given in s. 17 of the Act. It cannot certainly be a 'benefit or amenity or perquisite whether convertible into money or not'. Definition of salary given in s. 40(a)(v) is restricted in its applicability only to this clause for the purpose of calculation of the value of the benefit, amenity or perquisite when it is to be restricted to 1/5th of the amount of salary payable to an employee. Thus, reimbursement of medical expenditure to the managing director by the assessed-company is not an expenditure by the assessed-company which results directly or indirectly in the provision of any benefit, amenity or perquisite whether convertible are in agreement with the view expressed by the Calcutta High Court in Kanan Devan Hills Produce Co. case : [1979]119ITR431(Cal) , and followed in other cases mentioned above.

23. We are, thereforee, of the opinion that s. 40(a)(v) is inapplicable where the employee is given cash payments by the company, as cash payments would not come within the scope of term 'benefit, amenity or perquisite' as used in the section. In this view of the matter there could not be any limit on the allowance given by the assessed-company to its managing director to meet his medical expenses, and the Tribunal was not correct in restricting the reimbursement of medical expenses to Rs. 12,000 for each of the assessment years 1969-70 and 1970-71. Accordingly, we answer the question referred to us in the negative, i.e., in favor of the assessed and against the Revenue. The Commissioner will pay costs of this reference to the assessed-company. Counsel's fee Rs. 800.


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