Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the cost of repairs to the buildings taken on lease by the assessee or on the buildings of its own and allotted to its employees could be treated as perquisite for the purpose of s. 40A(5) of the IT Act ?

Counsel Appeared

M.S.N. Murthy, for the Revenue : Y. Ratnakar, for the Assessee

B.P. JEEVAN REDDY, J.:

In these two references made under s. 256(2) of the IT Act, seven questions arise for our consideration. They are :

“1. Whether, on the facts and in the circumstances of the case, the cost of repairs to the buildings taken on lease by the assessee or on the buildings of its own and allotted to its employees could be treated as perquisite for the purpose of s. 40A(5) of the IT Act ?

Whether, on the facts and in the circumstances of the case, the buildings owned by the assessee and allowed to be occupied by some highly-paid employees could be treated as the business assets of the assessee for the purpose of s. 40A(5) ?

Whether, on the facts and in the circumstances of the case, the expenditure incurred for replacement of crockery used by the employees in the buildings allotted to them could be treated as a separate perquisite for the purpose of computing the disallowance under s. 40A(5) ?

Whether, on the facts and in the circumstances of the case, the reimbursement of medical expenses did not come within the meaning of s. 40A(5) ?

Whether, on the facts and in the circumstances of the case, the difference between the concessional rate of interest and the prevailing market rate of interest on the loans advanced to the employees was not a perquisite under s. 40A(5) ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the rental income from the buildings owned by the assessee was to be treated as income from business ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure on account of sweeper, watchmen and gardener could not be considered as perquisite for the purpose of s. 40A(5) ?”

The assessee is the Vazir Sultan Tobacco Company Limited, a public limited company, engaged in the manufacture of cigarettes and other tobacco products. The assessment years are 1972-73 and 1973-74. We may straightaway say that out of the seven questions referred to us, four questions are concluded one way or the other by an earlier decision of this Court. Questions Nos. 1, 4 and 7 have to be answered in favour of the assessee in view of our judgment in Ref. Case No. 120 of 1982 dt. 14th April, 1987 [CIT vs. Vazir Sultan Tobacco Co. Ltd. (1988) 169 ITR 324 (AP) : TC18R.351], pertaining to this very assessee. By virtue of the very same decision, question No. 3 has to be answered against the assessee. Thus, questions Nos. 2, 5 and 6 alone survive for our consideration. Among these three questions, again questions Nos. 2 and 6 go together. We have to answer question No. 6 first and the answer to question No. 2 will follow as a consequence. We shall, therefore, first take up question No. 6.

The assessee owns certain buildings which it allots for the occupation of its directors and other senior executives. It does not collect any rent from them. They are given free of rent. The ITO felt that the notional income from these properties should be determined and included in the income of the assessee under the head “Income from property”. The assessee’s contention, however, was that these buildings are business assets of the company and are being used for its business purpose and hence the income therefrom cannot be so included. The ITO rejected the said contention. But, on appeal, the AAC upheld it. On further appeal, the Tribunal, following its earlier decision in the case of this very assessee, rejected the Department’s contention, whereupon the present reference was obtained.

We have to consider this question on the language of s. 22 of the IT Act, which reads as follows : “The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head ‘Income from house property’.”

The assessee’s contention is that these properties are occupied by the assessee for the purpose of its own business and hence they fall within the exception contained in s. 22 of the Act. The question is whether the assessee is right in its contention. We have also perused the earlier decision of the Tribunal which was followed in the present case and we are satisfied that the Tribunal was right in holding that these properties are occupied by the assessee for its own business purposes. The assessee is a corporate body and the occupation of the buildings by its employees as licensees is undoubtedly occupation by the assessee for the purpose of s. 22 of the Act. It must also be said that the occupation by its employees is for the purpose of the assessee’s business. With a view to illustrate the proposition, we may take a slightly different example. Take a case where an assessee builds a number of houses or a colony for the purpose of accommodating its workers. The idea is that the workers should be nearer to the factory or should be housed in hygienic and proper conditions so as to improve their productivity, health and their commitment to the employer. No rent is collected from such workers, though, according to the terms of employment, the assessee is under no obligation to provide such houses. It is done only with a view to keep the workers happy, in good cheer and in good humour. In such a case, the purpose of such allotment is undoubtedly a business purpose, for it ultimately goes to promote the assessee’s business. Now, how does it make any difference if a similar arrangement is made for the directors or senior executives ? After all, workers and senior executives are also necessary for a proper and successful running of an organisation. It must, therefore, be held that the occupation of the houses by its employees is for the business purpose of the assessee. If so, the income from such houses cannot be treated as income from property and included in the assessee’s total income. Accordingly, we answer question No. 6 in the affirmative, i.e., in favour of the assessee and against the Revenue.

Once we answer question No. 6 in the above manner, the answer to question No. 2 should also be in the affirmative. Indeed, the assessee has treated the said buildings as business assets. Accordingly, question No. 2 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

So far as question No. 5 is concerned, what is happening is that again with a view to keep its employees happy and satisfied, the assessee has been giving loans to them at a concessional rate of interest. The loans are given to employees to build their own houses. If they build the houses and live in them themselves, the rate of interest is 6 per cent and if they let out the houses, the interest will be charged at 9 per cent per annum. The Department says that the difference between the concessional rate of interest and the prevailing market rate of interest should be disallowed under s. 40A(5) of the Act. On this question too, the Tribunal, following its earlier decision, held in favour of the assessee. This question has to be answered with reference to the language employed in sub-s. (5) of s. 40A of the Act. Insofar as it is relevant, the provision reads thus : “40A. (5) (a) Where the assessee— (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 provision 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 assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of cl. (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in cl. (c) shall not be allowed as a deduction :…….”

It would be evident from a perusal of sub-s. (5) that it contemplates disallowance of certain expenditure incurred by the assessee which it claims as a deduction. Certain ceilings are fixed in the case of such expenditure. The assessee’s contention is that it has not incurred any expenditure by giving the loans to its employees at a concessional rate of interest and, therefore, the said provision has no application. On the other hand, learned standing counsel for the Revenue says that if this money had not been lent to the employees at a concessional rate of interest, it would have earned interest at a higher rate had it been put in fixed deposit in a bank. But, this argument involves importing a fiction into sub-s. (5) of s. 40A of the Act. We must assume that this money, if not lent to the employees, would have been put in a fixed deposit or would have been invested in some other profitable manner and then say that the difference amount should be disallowed. We do not think that the language of sub-s. (5) of s. 40A of the Act provides for or permits such a course. Sub-s. (5) applies where an assessee claims a certain deduction saying that he has spent that money in providing, directly or indirectly, either as salary to an employee or in the provision of perquisite to an employee. Only then do the ceilings prescribed in the said sub- section come into play. It is true that in some cases this facility may be abused. We know public corporations like banks lending money to their own employees at practically no interest, say for example, one or two per cent interest per annum, whereas those very banks lend to people at rates of interest ranging from 13 per cent to 19 per cent per annum. But the remedy for that must lie elsewhere, either in the proper control of the public corporations or in the amendment of the IT Act, as the case may be. As the provision of law of s. 40A(5) of the Act now stands, it is not possible to answer the said question in the manner suggested by the Department. Accordingly, we answer question No. 5 in the affirmative, i.e., in favour of the assessee and against the Revenue.

6. There shall be no order as to costs.

[Citation : 173 ITR 290]