Calcutta H.C : Whether, on the facts and in the circumstances of the case, the reimbursement of medical expenses by the assessee to its employees is to be considered as perquisite, benefit or amenity for the purpose of s. 40(a)(v) of the IT Act, 1961 ?

Counsel Appeared

A.C. Moitra, for the Revenue : Miss M. Seal led by Dr. Pal, for the Assessee

AJIT KUMAR SENGUPTA, J.:

At the instance of the CIT, the following six questions of law have been referred to this Court under s. 256(1) of the IT Act, 1961, for the assr. yr. 1971-72, 1972-73 and 1973-74

“(1) Whether, on the facts and in the circumstances of the case, the disallowance to be, made under ss. 40(a)(v)/40A(5) of the IT Act, 1961, in the case of the assessee for the accounting years 1971-72, 1972-73 and 1973-74 in the matter of rent should be on the line of the formula laid down in r. 3 of the IT Rules, 1962, and not on the basis of the actual expenditure incurred by the, assessee for providing accommodation to the employees in each of the said years ?

(2) Whether, on the facts and in the circumstances of the case, the reimbursement of medical expenses by the assessee to its employees is to be considered as perquisite, benefit or amenity for the purpose of s. 40(a)(v) of the IT Act, 1961 ?

(3) Whether, on the facts and in the circumstances of the case, the expenses of the club bills reimbursed by the assessee to its employees is to should be excluded from the computation of the total expenditure for the purpose of the disallowance under s. 40(a)(v) of the IT Act, 1961 ?

(4) Whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee by way of legal expenses pertaining to the transfer of its registered office from Calcutta to New Delhi is an allowable revenue expenditure in computing the total income of the assessee for the accounting period relevant to the asst. yr. 1972-73 ?

(5) Whether, on the facts and in the circumstances of the case, the provision for gratuity estimated on actuarial basis is an allowable revenue deduction in computing the income of the assessee for the accounting period relevant to the asst. yr. 1972-73 ?

(6) Whether, on the facts and in the circumstances of the case, the ITO, in the absence of proof of understatement of the consideration, would invoke the provisions of s. 52(2) of the IT Act, 1961, for the purpose of computing the capital gains in respect of the transfer of 2,600 shares of Kalinga Tubes Ltd. by the assessee in the accounting period relevant to the asst. yr. 1973-74?”

2. It is not in dispute that some of the questions are concluded by decisions of this Court or of the Supreme Court. Only two questions would require consideration in this case. Before dealing with these questions, the questions which are concluded are answered first.

3. The second question is concluded by the decision of this Court in Indian Leaf Tobacco Development Co. Ltd. vs. CIT (1982) 137 ITR 827. Following the said decision, we answer the second question in the affirmative and in favour of the assessee.

4. The third question is also concluded by the decision of this Court in CIT vs. Johnston Pumps (India) Ltd. (1988) 172 ITR 333. Following the said decision, we answer the third question in the affirmative and in favour of the assessee.

5. The fifth question is also concluded by the decision of this Court in CIT vs. Eastern Spinning Mills Ltd. (1980) 19 CTR (Cal) 94 : (1980) 126 ITR 686.

6. The sixth question is concluded by the decision of the Supreme Court in, K. P. Varghese vs. ITO Following the said decision, we answer the fifth question in the affirmative and in favour of the assessee. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597. Following the said decision, we answer, the sixth question in the negative and in favour of the assessee.

The facts relating to the first question is that the ITO, in the assessments of the assessee for the years under consideration, made diverse additions as being perquisites to the employees not allowable under s. 40A(5) of the Act (and not allowable under s. 40(a)(v) of the Act). The AAC has held that, under the said provision, any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to any employee to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee, shall not be deducted in computing the income chargeable under the head “Profits and gains of business”.

As far as house rent is concerned, the position, according to him, was different. The actual rent paid by the company for the different flats was separately known and ascertained. Therefore, there was no question of restricting it to 10 per cent or 12per cent as laid down in r. 3(a) of the IT Rules, 1962. These percentages were laid down for purposes of valuation of rent-free residential accommodation enjoyed by the employees. In the case of the employer, the amount to be taken into account is the actual rent incurred.

On further appeal, the Tribunal held as follows : “…We have heard both the representatives of the assessee and the Department. It is true that r. 3 of the IT Rules, 1962, applies only to the computation of the value of the perquisite provided to an employee for the purpose of assessing the same in his hands and the said rules do not, in turn, apply to the computation of the value of the perquisite for the purposes of making the disallowance under s. 40(a)(v)/ 40A(5) of the Act in the assessment of the employer-company. However, the Benches of the Tribunal have been consistently taking the view that, in computing the value of the perquisites provided to the employees, the formula laid down in r. 3 of the IT Rules, 1962, may conveniently be adopted, though that rule does not, in turn, apply.”

The Tribunal, therefore, directed the ITO to work out he disallowances to be made under s. 40(a) (v)/40A(5) of the Act for valuing the perquisites on the basis of the formula laid down in r. 3 of the IT Rules, 1962. This direction is impugned in this reference. The question that arises for consideration is whether the method of computation of the perquisite should be the same for the purposes of assessment of the employee as well as for the purpose of assessment of the employer-company. Miss Manisha Seal, learned advocate, appearing for the assessee has submitted that this Court, in CIT vs. Britannia Industries Co. Ltd. (1981) 20 CTR (Cal) 272 : (1982) 135 ITR 35, while considering the question whether the value of the perquisite of free car provided to the employees should be computed, has laid down, in general terms, that there cannot be two different standards for assessment in respect of the employee and the employer and it, is also equitable, that what the payer gives is what the receiver receives. She, therefore, submits that the same principle should apply in all cases of computation of the perquisite in the hands of the assessee-company.

This case was considered at length by the Bombay High Court in Bombay Burmah Trading Corporation Ltd. vs. CIT (1983) 32 CTR (Bom) 306 : (1984) 145 ITR 793. There, the Tribunal took the view that, for the purposes of s. 40(c)(iii), actual expenditure incurred was the only expenditure which could be taken into consideration and there was no warrant for the view to limit the expenditure to the extent of the value of the perquisite in the hands of the employees. The Bombay High Court observed as follows : “It appears that the foundation of the arguments advanced before us by Mr. Munim lies in a decision of the Calcutta High Court in CIT vs. Britannia Industries Co. Ltd. (supra). If the facts of the Calcutta case are carefully gone into, it would appear that, in that case, it was not possible either for the assessee or the Department to positively find as to what part of the expenditure could be attributable to the perquisite in the form of free use of the car which was also used for business purposes. This apportionment in respect of the use of the car for the personal use by the employees and for business purposes posed a difficulty in that case and the judgment shows that recourse was, therefore, taken to r. 3 of the Rules.”

“The decision of the Calcutta High Court cannot be read as an authority that, in all cases, for the purpose of s. 40(c)(iii), the value of the perquisite in the hands of the employees, computed in accordance with relevant rules, must be ascertained (at page 799). In order to disallow an expenditure incurred by a company in the provision of any benefit, etc., to an employee, it is not necessary that the value of the perquisite, etc., in the hands of the employee computed in accordance with the relevant rules must exceed one-fifth of the salary. For that purpose, it is the entire expenditure incurred by the employer that has to be taken into account (headnote).”

13. We are also of the view that the decision in Britannia-Industries Co. Ltd. (supra) did not lay down any general principle that, in all cases, the value of the perquisite provided to an employee should be taken in the hands of the employer-assessee for the purpose of s. 40(c)(iii) at the same figure as it was taken in the hands of the employee. In determining the value of the perquisite of free car provided to an employee, the total use of car, the use of the car for personal work of the employee and all incidental details have to be ascertained. In the absence of available data, an estimate has to be made of the expenses relating to the maintenance and running of the car for the personal use of the employee. In that context, this Court, in Britannia Industries’ case laid down an equitable formula for determination of value of such perquisite. But where the actual amount expended by the company for providing the perquisite is known to the assessee-company, the question of making any estimate in such case does not arise. In this case, the house rent was paid by the company for the flats provided to the executives. The actual rent paid by the company for the different flats were known and ascertained. In such a case, r. 3 of the IT Rules, 1962, can have no manner of application. Further , r. 3 applies only to the computation of the value of perquisite provided to an employee for the purpose of assessing the same in his hands. This rule does not apply to the computation of the value of perquisite for making the disallowance under s. 40 (a) (v) / 40A (5) of the Act in the assessment of the employer company. The formula laid down in r. 3 cannot be applied for computation of the value of the perquisite provided by the employer in this case in the form of rent for accommodation provided to the executives.

14. In our view, the Tribunal was not right in directing the ITO to proceed on the lines of the formula laid down in r. 3 of the IT Rules. The Tribunal should have restricted the disallowance on the basis of the actual expenditure incurred by the assessee for providing accommodation to the employees. For the reasons aforesaid, the first question is answered by saying that the disallowance to be made under s. 40 (a) (v) of the Act in the case of the assessee should be on the basis of the actual expenditure incurred by the assessee for providing accommodation to the employees and not on the lines of the formula laid down in r. 3 of the IT Rules, 1962.

15. The other question which remains to be considered is the fourth question. The facts relating to this question are that legal fee was paid to the lawyer for consultation regarding the transfer of the assessee’s registered office from Calcutta to New Delhi. The Tribunal held that this expenditure was necessary for the purpose of carrying on the business of the assessee-company and so it is an expenditure laid out wholly and exclusively for the purpose of carrying on the business. The expenditure is only Rs. 1,000 which was incurred by way of legal expenses and is not expenditure for shifting of its head office from Calcutta to New Delhi.

16. Mr. Moitra has drawn our attention to a decision in CIT vs. Jamshedpur Engineering and Machine Manufacturing Co. Ltd. (1985) 49 CTR (Pat) 132 : (1986) 157 ITR 730 (Pat). There, the assessee incurred Rs. 3,000 on account of payment to lawyers in connection with the shifting. The company incurred huge expenses in shifting its head office. One of the items of expenditure was a sum of Rs. 3,000 incurred on account of payment to the lawyers. The ITO rejected the claim holding that the expenditure incurred on account of shifting of the head office was expenditure of a capital nature. According to the AAC, the expenditure was revenue in nature and not capital in nature. He, therefore, allowed the appeal holding that the assessee was entitled to deduction of that amount. The Tribunal, on the basis of the judgment in CIT vs. Modi Spinning and Weaving Mills Co. Ltd. (1973) 89 ITR 304 (All) affirmed the conclusion of the AAC and held that the assessee had been rightly allowed deduction of the sum of Rs. 3,000 spent on account of lawyer’s fees. The question which was referred to the High Court was whether the expenses incurred in shifting the headquarters of the company to West Bengal is revenue or capital expenditure. The High Court, relying on the decision in Sitalpur Sugar Works Ltd. vs. CIT (1963) 49 ITR (SC) 160 and after considering the reasons why the shifting of the company was made and the advantage derived from shifting, held that expenses incurred on account of shifting of the head office cannot be held to be on revenue account. There is no discussion in the judgment why the expenditure on the legal fees should not be allowed. It was treated as part and parcel of the shifting expenses. The Patna High Court held as follows : “It is true that it is connected with the business of the factory but a distinction has been made in regard to the expenses which are of enduring nature and the activities which are of recurring nature. In the instant case, we have no doubt that the advantages from the shifting of the head office, for the reasons indicated in the order of the AAC, were of enduring nature. The Tribunal was, therefore, not justified in allowing legal expenses as they were not revenue expenditure in nature.”

17. With great respect, we are unable to agree with the views expressed by the learned judges of the Patna High Court. The question is to be judged having regard to the extent of the expenses involved, the nature of expenses and the benefit and advantage derived by the said expenses. In Sitalpur Sugar Works Ltd. vs. CIT (supra), the question was whether the expenditure on shifting the business to a more advantageous or better place is capital or revenue expenditure. It was held by the Supreme Court in that case that the expenditure was not incurred for the purpose of carrying on the concern but was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set up. The expenditure was not incurred in earning profits but was incurred only for setting up its factory, that is, its capital, in better shape so that it might produce larger profits when worked. The expenditure incurred in dismantling and refitting the existing plant at a better site produced an advantage which enabled the trade to prosper and which could be expected to last for ever and was, therefore, capital expenditure. If the predominant and main purpose of incurring the expenditure is the carrying on of the business, the incidental advantage of that expenditure could not affect its revenue character. In the instant case, the assessee obtained the opinion of a lawyer in connection with the problem that may arise in case of actual shifting of the head office. This legal opinion, in our view, has nothing to do with the expenditure incurred for actual shifting of the head office. This expenditure is in connection with the carrying on of the business of the assessee. Before the Patna High Court, one of the items was lawyer’s fees in connection with the shifting which was held to be capital expenditure. If the contention of the Revenue is accepted, then, in that case, all expenditure in connection with the shifting of an office would be on capital account. Similarly, any opinion that may be obtained by the assessee for the purpose of the business may be held to be a capital expenditure as it may affect the profit-making apparatus in the long run. If the contention of the Revenue is accepted, then, even if the opinion is obtained-whether, in a particular case, a suit should be filed for protecting the plant and machinery or for the purpose of contesting the legal proceedings instituted by the financial institutions in respect of the plant and machinery hypothecated to such financial institutions or for the purpose of the renewal of lease of business premises, the expenditure would be capital expenditure as it pertains to the capital asset of the company. We are, however, unable to accept the contention. If the predominant purpose or intention for incurring the expenditure is intimately connected with the carrying on of the business, the incidental advantage of the expenditure cannot affect the character of the expenditure and such expenditure should be allowed as revenue expenditure. In the instant case, a sum of Rs.

1,000 was paid for obtaining a legal opinion in connection with the shifting of the head office which, in our view, is for the purpose of carrying on the business and cannot, by any stretch of imagination, be held to be on capital account.

For the reasons aforesaid, we are of the view that the Tribunal is right in holding that the legal expense pertaining to the transfer of its registered office is a revenue expenditure and should be allowed.

We, therefore, answer the fourth question in the affirmative and in favour of the assessee. There will be no order as to costs.

Leave is given to file the vakalatnama within a fortnight from date.

BHAGABATI PRASAD BANERJEE, J.:

I agree.

[Citation :181 ITR 493]