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Commissioner of Income-tax Vs. Duncan Bros. and Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 137 of 1975
Judge
Reported in(1981)23CTR(Cal)240,[1983]140ITR335(Cal)
ActsIncome Tax Act, 1961 - Sections 37 and 40
AppellantCommissioner of Income-tax
RespondentDuncan Bros. and Co. Ltd.
Appellant AdvocateAjit Sengupta and ;G. Chakraborty, Advs.
Respondent AdvocateDebi Pal and ;M. Seal, Advs.
Cases ReferredAswini Kumar Ghosh v. Arabinda Bose
Excerpt:
- .....relevant previous years were calendar years 1965 and 1966. as per the terms of the contract the assessee-company was required to reimburse the entire nursing expenses of its employees and officers. to avoid any heavy expenditure in any particular year the company took medical insurance policy from a nursing home benefit association on the individual life of each employee for which it was required to pay premia of rs. 150 to rs. 510 per year in the cases of different employees. the ito treated the amount of premia as the expenditure which resulted directly or indirectly in the provision of a benefit or amenity or perquisite to the employees for working out the disallowable item under section 40(c)(iii) of the act. the claim of the assessee, on the other hand, was that the premia as.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following two questions have been referred to this court :

' 1. Whether, on the facts and in the circumstances of the case, the premium paid by the assessee to Nursing Home Benefit Association in respect of the medical insurance policy taken on the individual life of each employee resulted directly or indirectly in the provision of any benefit or amenity or perquisite within the meaning of Section 40(c)(iii) of the Income-tax Act, 1961, and should be taken into account in computing the amount disallowable under the said section

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the purpose of computing the amounts disallowable under Section 40(c)(iii) of the Income-tax Act, 1961, the amount of salary payable to the employees should be reduced by the recoveries made from the managed companies on account of the services rendered to such companies by the said employees '

2. This reference arises out of the assessments for the assessment years 1966-67 and 1967-68, for which the relevant previous years were calendar years 1965 and 1966. As per the terms of the contract the assessee-company was required to reimburse the entire nursing expenses of its employees and officers. To avoid any heavy expenditure in any particular year the company took medical insurance policy from a Nursing Home Benefit Association on the individual life of each employee for which it was required to pay premia of Rs. 150 to Rs. 510 per year in the cases of different employees. The ITO treated the amount of premia as the expenditure which resulted directly or indirectly in the provision of a benefit or amenity or perquisite to the employees for working out the disallowable item Under Section 40(c)(iii) of the Act. The claim of the assessee, on the other hand, was that the premia as such did not result in any such benefit or amenity or perquisite. The ITO, however, rejected the assessee's contention.

3. On appeal, the AAC, however, accepted such view.

4. The assessee-company was also the managing agent of certain other companies. It had centralised working and common employees who worked both in the offices of the managed companies as well as in the office of the assessee-company. The latter also debited their salaries to its own account in the first instance but simultaneously debited the accounts of the managed companies for the amounts, which, in its opinion, were payable by them for the services by the employees to these companies, and it was the net amount which was finally debited to its profit and loss account and was claimed as expenditure Under Section 37 of the Act. This aspect is important. This was the net amount arrived at after crediting the amount debited to the managed companies and after taking into consideration the amounts actually paid to the employees. The ITO, while determining 1/5th of the amount of salary, with reference to which the benefit, amenity or perquisite were to be examined, took into account the gross salary of each employee which the assessee, as per the contract of service, was required to pay. He rejected the claim of the assessee that the 1/5th portion should have been calculated with reference to the net amount of salary which the company had actually debited to its profit and loss account and had claimed as its deductible expenditure in its own assessment. The AAC, on the other hand, accepted the contention and reversed the order of the ITO.

5. There was a further appeal before the Tribunal. The question canvassed before the Tribunal on behalf of the Revenue was whether the amount of premia paid by the assessee to Nursing Home Benefit Association on the individual life of each employee could be included in the perquisites or benefit for working out the disallowance Under Section 40(c)(iii) of the I.T. Act, 1961, and further, whether the disallowance under the above section should be related to 1/5th of the amount of salary claimable by the assessee as expenditure Under Section 37 of the Act or the amount of gross salary ithad paid to its employees irrespective of the fact whether any portion thereof had been recovered from its managed companies.

6. The Tribunal, after considering the rival contentions and the relevantsections, was of the opinion that the contention of the assessee must beaccepted. The Tribunal observed that the contract between the employeesand the assessee was that the company would reimburse the entiremedical expenses to the employees. The Tribunal was of the view thatthe assessee in order to minimise the hardship took medical insurancepolicies for which it paid certain premia. The right of the employee toclaim the reimbursement continued, even after taking that policy, from theassessee directly. The Tribunal was also told that the assessee either afterreimbursing the employee or even before, made a claim, from the insurancecompany which normally was not accepted in full. The amount whichwas received by the assessee-company from the insurance company washeld as its own money and the employee was not concerned with its disposal. The employees continued to receive the reimbursement of theactual expenses incurred in their nursing. These facts found by the Tribunal are not controverted. Therefore, the Tribunal was of the view thatit could not be said that the insurance premium was an expenditure whichresulted directly or indirectly in the provision of any benefit oramenity or perquisite to the employees. In the opinion of the Tribunal,the perquisite to the employee was the reimbursement of the medicalexpenses by the assessee which was not affected by taking an insurancepolicy. If anything at all could be added as perquisite to the employees,it were the medical expenses reimbursed by the assessee. in the year inwhich they were so reimbursed.

7. So far as the other contention was concerned, the Tribunal referred to the section and to the non obstante clause of the section and was of the view that the AAC, on the facts found, was correct in upholding the assessee's contention. In those circumstances, the aforesaid two questions have been referred to this court.

8. In order to consider this controversy, we have to bear in mind that we are dealing with the effect of the provision of Section 40(c)(iii), as it stood at the relevant time. Now, Section 40 is the section which deals with ' Amounts not deductible'. Normally, amounts deductible have been provided in the previous sections, viz., Sections 30 to 39, and Section 40 opens with a non obstante clause by stating that ' 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 ' '. The different clauses thereunder deal with different types of expenditure. We are concerned with Clause (c) which deals with theassessee in the instant reference and Sub-clause (iii), as it stood at the relevant time, was in the following terms:

' (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 aforesaid date :

Provided that in computing the aforesaid expenditure any payment by way of gratuity or the value of any travel concession or assistance referred to in Clause (5) of Section 10 or passage moneys or the value of any free or concessional passage referred to in Sub-clause (i) or any payment of tax referred to in Sub-clause (vii) of Clause (6) of that section or any sum referred to in Clause (vii) of Sub-section (1) of Section 17 or in Clause (v) of Sub-section (2) of that section or the amount of any compensation referred to in Clause (i) or any payment referred to in Clause (ii) of Sub-section (3) of that section or any payment referred to in Clause (iv) or Clause (v) or any expenditure referred to in Clause (ix) of Sub-section (1) of Section 36 shall not be taken into account:

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. '

9. Bearing in mind with what we are concerned, we must actually construe the effect of the section. We have to bear in mind that the section indicates that normally sums or amounts, which were deductible under Sections 30 to 39, could not be allowed as deductions because of the express terms of Section 40. Now, this section, therefore, as it stood at the relevant time, limits the claim for deducibility, so that the claim for deducibility of the assessee is in accordance with the terms which are used. This is an aspect which has to be kept in view. Secondly, it appears to us that the amounts referred to in Section 40 in the first clause only indicate the nature or the quality of the amounts which would merit deduction or which were deductible. This does not resolve the question whether in a particular case the same should be allowed as a deduction or not. With these preliminary observations in mind, the facts of this case will have to be considered.

10. Here, so far as the first question is concerned, it has been clearly found that the company was uader a contractual obligation to the employees to reimburse tke expenses incurred towards the employees in caseof medical or nursing benefit. When the company took out the insurance and paid the insurance premium, it was in the discharge of its own liability or, in other words, more or less it was to safeguard its own liability, not in discharge of its own liability. The taking out of the policy does not exonerate the company to its employees. The employees do not get any benefit in the taking out of the policy as such. Because the policy does not either reconfer any right on the employees nor does it detract from the liability of the assessee to the employees as its employer.

11. Reliance was placed on certain observations of this court in the case of Eastern Scales P. Ltd. v. CIT, : [1979]117ITR477(Cal) . There, in the context of an entirely different controversy this court was concerned with, Section 40(c)(i) and (ii) and was not concerned with Clause (iii), as we are concerned in the instant reference. Now, dealing with the nature of the amounts spoken of, this court held that Clause (c) of Section 40 spoke of disallowance of expenditure. We have also said that it must be strictly construed. Secondly, the court reiterated in that judgment that the expenditure should be incurred by the company and the company's expenditure should result in a benefit either in the shape of remuneration or benefit or amenity.

12. We observed further that the expression in Section 40(c) eals with matters spoken of in Sections 30 to 39 of the Act and this section is primarily a section dealing with the deducibility of amounts in computing the chargeable profits of a company. Therefore, it must be construed, in the light of the expenditure incurred by the company, that the nature of the expenditure must be such as those which are permissible under Section 37 of the Act. The expenditure must be one which is for the benefit directly or indirectly of the employee and as such the benefit would accrue being the income of the employee as mentioned in the provisions of the section and the liability of the employer-company remains unchanged and that is not discharged and the employee as such had not derived any benefit from such taking out of the policy. In the case of a particular employee or is the case of some employees or in the case of large number of employees no legal expenses may be incurred. The assesses would have to incur the expenditure in taking out the policies. Therefore, the assessee, being the company, had its own benefit to safeguard the liabilities. There is no question of safeguarding or creating any benefit directly or indirectly to the employees.

13. The Supreme Court in a different context in the case of CIT v. L.W. Russel, : [1964]53ITR91(SC) observed as follows :

' It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingeutpayments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein. '

14. It is true that there the Supreme Court was considering the expression ' perquisite ' in the context of Section 7 (1) of the Indian I.T. Act, 1922, and we are not concerned with that expression. We arc concerned with the expression ' benefit or amenity or perquisite ' which has resulted directly or indirectly. The expression 'benefit or amenity or perquisite ' must, in our opinion, be read ejusdem generis in the context these are used ; the expression 'directly or indirectly' must be resulting to the employee. As we have said before, the facts as found by the Tribunal, that by taking but the policy there was no benefit accruing either directly or indirectly to the employee, and was not the income or benefit or amenity derived by the employee, because what the employer had safeguarded was its own liability. The employer remained liable to the employee in spite of the policy. The Delhi High Court in the case of CIT v. Lala Shri Dhar, : [1972]84ITR192(Delhi) was again dealing with Section 7(1) of the Indian I.T. Act, 1922, for the consideration of the expression ' perquisite '. The assessee was a director of a company stationed at the company's works at Calcutta. Pursuant to a resolution of the board of directors of the employer a policy of personal accident insurance was effected in respect of the assessee and another person. Under the policy, the insurance company undertook to pay to the assessee certain benefits if at any point of time during the period of the policy the insured (the assessee) sustained any accident, bodily injury resulting in disablement or death. Though the proposal was made by the assessee the annual premium was paid by the employer-company and the company itself directly instructed the insurance company to renew the policy from time to time. The question was whether the annual premium paid by the employer-company could be assessed in the hands of the assessee as ' perquisite ' within the meaning of Clauses (iii) and (iv) of Explan. 1 to Section 7 (1) of the Indian I.T. Act, 1922. It was held that since the assessee had not voluntarily taken the insurance policy and it was the employer-company which took the policy in order to meet the contingency of paying compensation for injuries or death, neither Clause (iii) nor Clause (iv) of Expln. 1 to Section 7 (1) applied and the premium could not be assessed in the hands of the assessee. In our opinion, with respect, the approach of the Delhi High Court is the appropriate approach.

15. In the case of CIT v. Kanan Devan Hills Produce Co. Ltd., : [1979]119ITR431(Cal) , the court was concerned directly with Section 40(c)(iii) of the I.T. Act, 1961, and was of the view that the phrase ' whether convertible into money or not' does not govern only the expression ' perquisite '. The words in the section are ' any benefit or amenity or perquisite '. Ifthe 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 any amenity or any perquisite whether convertible into money or not '. There the facts were entirely different. It was held that the amounts paid as ' overseas allowance ', ' managing allowance ', ' devaluation allowance ' and ' transport allowance ' to the employees of the assessee-company did not fall within the expression 'benefit', 'amenity' or 'perquisite' within the meaning of Section 40(c)(iii) of the Act.

16. As we have mentioned before, in view of the finding made by the Tribunal that this policy really was taken by the assessee, as the employer, in discharge of his own obligations which remains unaffected, in our opinion, the Tribunal was correct in the conclusion at which it arrived.

17. Therefore, the first question is answered in the negative and in favour of the assessee.

18. So far as the second question is concerned, we have also noted the facts found by the Tribunal, that is to say, the assessee-company debited the salaries on its own account in the first instance but at the same time simultaneously debited the amounts of the managed companies, which, on their own, were payable by the managed companies. The amount which was finally debited to its profit and loss account was the amount which was claimed as expenditure. Therefore, the amount which was not claimed as an expenditure, that is to say, gross amount, before making adjustments in the manner indicated in the terms, cannot be considered in considering the amount coming within the purview of this section. After all, as we have noted before, this section must be construed which curtails the allowable expenditure under Sections 30 to 39 and shall be strictly construed.

19. Our attention was drawn to the effect of the non obstante clause. In this regard, reference was made to the observations of the Supreme Court in the case of A.V. Fernandez v. State of Kerala, : [1957]1SCR837 , the Supreme Court referred to the previous decision in the case of Aswini Kumar Ghosh v. Arabinda Bose, : [1953]4SCR1 . These observations about the effect of a non obstante clause are as follows :

' In our opinion, Section 26 of the Act, in cases falling within the categories specified under Article 286 of the Constitution has the effect of setting at nought and of obliterating in regard thereto the provisions contained in the Act relating to the imposition of tax on the sale or purchase of such goods and in particular the provisions contained in the charging section and the provisions contained in Rule 20(2) and other provisions which are incidental to the process of levying such tax. So far as sales falling within the categories specified in Article 286 of the Constitution and the corresponding Section 26 of the Act are concerned, they are, as it were, taken out of the purview of the Act and no effect is to be given to those provisions which would otherwise have been applicable if Section 26 had not been added to the Act. If these provisions of the Act and the rules made thereunder do not apply to the sales falling within those categories, the value thereof cannot be included in the turnover of the dealer and no question would arise of the applicability of Rule 7(1)(k) and Rule 20(2) at all to these cases. The amount for which the oil is sold in inter-State trade or commerce would not be lawfully included in the turnover of the dealer and if the amount for which such oil is sold cannot thus be included in his turnover no occasion would arise for the deduction under Rule 7(1)(k) of the value of the cocoanut and/or copra or groundnut and/or kernel purchased and converted by the dealer into such oil and cake.'

20. Applying the aforesaid principles in the context of this section, in our opinion, the Tribunal was right in the facts as found on the question of law.

21. Therefore, the second question must be answered in the affirmative and in favour of the assessee.

22. In the facts and circumstances of the case, each party will pay and bear its own costs.

Sudhindra Mohan Guha, J.

23. I agree.


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