Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right : (i) in applying/relying on r. 3(c)(ii) of the Income-tax Rules, 1962 ? (ii) in directing the ITO to value the perquisites by way of the car provided by the assessee to its employees as per rule 3(c)(ii) and to consider only this amount for disallowance under section 40A (5) ?

High Court Of Kerala

CIT vs. Malayalam Plantations (India) Ltd.

Section 40A(5), Rule 3C(ii)

Asst. Year 1979-80

K.S. Paripoornan & D.J. Jagannadha Raju, JJ.

IT Ref. No. 172 of 1986

18th June, 1990

Counsel Appeared

Menon & N.R.K. Nair, for the Revenue : C.N. Ramachandran Nair, for the Assessee

S. PARIPOORNAN, J.:

At the instance of the Revenue, the Tribunal has referred the following question of law for the decision of this Court : “Whether, on the facts and in the circumstances of the case, the Tribunal is right : (i) in applying/relying on r. 3(c)(ii) of the Income-tax Rules, 1962 ? (ii) in directing the ITO to value the perquisites by way of the car provided by the assessee to its employees as per rule 3(c)(ii) and to consider only this amount for disallowance under section 40A (5) ?”

2. The respondent is a plantation company. We are concerned with the asst. yr. 1979-80. The previous year ended on March 31, 1979. The assessee had given cars for the use of the employees. In bringing to tax the income of the respondent- company, the ITO disallowed one-third of the expenditure and depreciation on the said cars. This was affirmed by the CIT (A). But, in second appeal, the Tribunal, purporting to follow the decision of the Calcutta High Court in CIT vs. Britannia Industries Co. Ltd. (1981) 20 CTR (Cal) 272 : (1982) 135 ITR 35, held that the ITO has not considered the total use of the cars vis-a-vis the use of the cars relating to the personal use of the employees, that he had not given any details as to how he worked out the disallowance under s. 40A(5) of the Act and, in these circumstances, the Tribunal directed the ITO to value the perquisite by way of the cars provided by the assessee to its employees as per r. 3(c)(ii) of the Income-tax Rules and consider the disallowance under s. 40A(5) of the Act. It is thereafter at the instance of the Revenue that the question of law formulated hereinabove has been referred for the decision of this Court.

3. We heard counsel. Sec. 40A(5) of the IT Act provides as follows : “40A. Expenses or payments not deductible in certain circumstances. – . . . (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 : … (c) The limits referred to in cl. (a) are the following, namely :- . . . Explanation 2. -In this sub-section, (a) “salary” has the meaning assigned … (b) “perquisite” means

4. Rule 3(c)(ii) of the IT Rules provides as follows: “3. Valuation of perquisites.-For the purpose of computing the income chargeable under the head “Salaries”, the value of the perquisites (not provided for by way of monetary payment to the assessee) mentioned below shall be determined in accordance with the following clauses, namely:… (c)(ii) the value of a motor car provided by the employer for use by the assessee partly in the performance of his duties and partly for his private or personal purposes shall be determined to be a sum equal to that part of the amount actually expended by the employer on the maintenance and running of the motor car during the relevant previous year (including remuneration, if any, paid by the employer to the chauffeur) which can reasonably be attributed to the user of the motor car by the assessee for his private or personal purposes or, where the motor car is owned by the employer, the aggregate of such sum and of a sum equal to that part of the amount representing the normal wear and tear of the motor car which can reasonably be attributed to the user of the motor car by the assessee for his private or personal purposes ; so, however, that where a determination on the basis mentioned above presents difficulty, the value of the perquisite may be determined on the basis provided in the Table below : . . . “

In order to understand the true import of s. 40A(5) of the IT Act vis-a-vis r. 3(c)(ii) of the IT Rules, adverted to by the Tribunal, it will be useful to trace the history of the legislation. The limit regarding deduction in respect of salary, perquisites and fees in the hands of the employer/assessee was originally dealt with by s. 40(c)(iii) for the asst. yrs. 1963- 64 to 1968-69, and, thereafter,by s. 40(a)(v) for the asst. yrs. 1969-70 to 1971-72. From the asst. yr. 1972-73 onwards, the matter is dealt with by s. 40A(5) of the IT Act. It should be remembered that the language and context in which s. 40(c)(iii) occurred, as also the subsequent s. 40(a)(v) is a little different from the language and setting of s. 40A(5) of the IT Act. It is also worthwhile to note that the decision of the Calcutta High Court, relied on by the Tribunal, in CIT vs. Britannia Industries Co. Ltd. (supra) centred round s. 40(c)(iii) of the IT Act, 1961, as it stood then, read along with r. 3(c)(ii) and r. 6D of the IT Rules, 1962. In that case, the Court held that the value of the perquisite by way of free car provided to an employee should be taken in the hands of the employerassessee, for the Purpose of s. 40(c)(iii), at the same figure as it was taken in the hands of the employee. Sec. 40(c)(iii) of the IT Act which came up for consideration before the Calcutta High Court at the relevant time stood as follows (at page 38 of 135 ITR) : “Any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee, who is citizen of India, to the extent such expenditure exceeds the amount calculated at the rate of five thousand rupees per month for any period of his employment after the 28th day of February, 1963 : Provided that in computing the aforesaid expenditure any payments by way of gratuity or any sums comprised in the transferred balance of an employee participating in a recognised provident fund referred to in clause (vii) of sub-s. (1) of s. 17, or the amount of any compensation referred to in cl. (i) or any payment referred to in cl. (ii) of sub-s. (3) of that section shall not be taken into account.”

5. Section 40(a)(v), which was substituted for the above section, for the asst. yrs. 1969-70 to 1971-72, stood as follows : “(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 : 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 cl. (5) of s. 10 ; (c) passage moneys or the value of any free or concessional passage referred to in sub-cl. (i) of cl. (6) of s. 10 ; (d) any payment of tax referred to in sub-cl. (vii) of cl. (6) of s. 10; (e) any sum referred to in sub-cl. (vii) of cl. (1) of s.17; (f) any sum referred to in sub-cl. (v) of cl. (2) of s. 17 ; (g) the amount of any compensation referred to in sub-cl. (i) or any payment referred to in sub-cl. (ii) of cl. (3) of s. 17; (h) any payment referred to in cl. (iv) or cl. (v) of sub- s. (1) of s. 36 ; and (i) any expenditure referred to in cl. (ix) of sub-s. (1) of s. 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 not withstanding 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 cl. (h) of r. 2 of Part A of the Fourth Schedule.” (We have extracted s. 40A(5) of the IT Act, 1961, earlier in this judgment). A perusal of the above sections will highlight the difference in the statute from time to time (at three different stages).

6. The respondent is a public limited company. The assessing authority was computing its taxable income. During the course of assessment, the assessing authority found that the assessee had given cars for the use of its employees. Therefore, the ITO/AO invoked s. 40A(5) of the IT Act and disallowed one-third of the expenditure and depreciation on the cars given for the use of its employees. This was concurred with by the CIT (A). The ITO did not give the break up of the disallowance under s. 40A(5) of the Act. Before the Tribunal, the plea of the assessee was that the valuation of a perquisite for the purpose of disallowance under s. 40A(5) of the Act should be done in accordance with r. 3(c)(ii) of the IT Rules. Reliance was placed on the decision of the Calcutta High Court in Britannia Industries Co. Ltd.’s case (supra). The Revenue contended that r. 3(c)(ii) of the IT Rules is applicable only for valuing the perquisite in the hands of the employees for assessment under the head “Salaries” and not for the purpose of the disallowance to be made under s. 40A(5) in the hands of the employer. The detailed statement filed by the assessee before the ITO showing salaries, expenses incurred and depreciation claimed on buildings and cars used partly for business and partly for personal purposes, was adverted to and it was contended by the Revenue that the assessee could have in a similar manner arrived at the amount actually expended by it on the maintenance expenditure on motor cars and depreciation which can reasonably be attributed to the personal use by the employees. The Tribunal held that the ITO has not considered the total use of the cars vis-a-vis the use of the cars relating to the personal use of the employees, that the ITO had not given any details as to how he worked out the disallowance at Rs. 4,46,500 and so, in the circumstances, the Tribunal directed the AO to value the perquisite by way of the cars provided by the assessee to the employees as per r. 3(c)(ii) of the IT Rules for disallowance under s. 40A(5) of the Act.

We heard counsel. The entire argument centred round the validity and propriety of the direction given by the Tribunal as aforesaid. We are of the view that the Tribunal probably proceeded on the basis that the decision of the Calcutta High Court in Britannia Industries Co. Ltd.’s case (supra), is squarely applicable herein and, on that basis, issued the direction contained in para 4 of the appellate order. It is evident that the Tribunal failed to note that in Britannia Industries Co. Ltd.’s case (supra), the Calcutta High Court was concerned with s. 40(c)(iii) of the IT Act as it stood then. It is plausible to take the view that the non-deductibility of the expenditure or of the allowance in the hands of the company (employer) is not to be affected in any way by the consideration that the remuneration or benefit or amenity or privilege is included as a perquisite in the hands of the employee-recipient and is taxable. The objects of s. 40A(5) of the Act and r. 3(c)(ii) of the Rules are distinct and different. Prima facie, it appears to us that s. 40A(5) of the Act is intended to effectively check the extravagant expenditure by the employer. On the other hand, r. 3(c)(ii) of the IT Rules is a provision bringing to tax the amount of perquisites actually received by an employee. The taxability of such amounts in the hands of the employee cannot ordinarily be a criterion for the deductibility of the said amount in the hands of the employer. The ratio of the Calcutta High Court decision in Britannia Industries Co. Ltd. Is case (supra) that where the value of a perquisite for the purposes of an employee’s assessment has been worked out in accordance with the relevant rule-r. 3(c)(ii)-the same value should be adopted for the purpose of disallowance in the hands of the employer cannot ipso facto be applied for evaluating the disallowance permissible under s. 40A(5) of the Act. The scope of the relevant statutory provision as it stood when the Calcutta decision was rendered and the scope of the statutory provision applicable herein (s. 40A(5)) were not properly evaluated or considered by the Tribunal. It need hardly be stated that, as per the ratio of the Full Bench decision of this Court in CIT vs. Forbes, Ewart and Figgis (P.) Ltd. (1984) 24 CTR (Ker) 87 (FB) : (1982) 138 ITR 1, the control or regulation is on the amount expended on the asset which is used by the employee for his own benefit to the extent he uses it for his personal purposes. None of the above salient features was considered by the Tribunal before giving the direction, as contained in para 4 of the appellate order, dated August 29, 1985. In other words, we hold that the Tribunal gave the direction, as it did, without applying its mind. It assumed that the decision of the Calcutta High Court in Britannia Industries Co. Ltd. (supra) is squarely applicable and, on that basis, stated that the value of the perquisites for the purpose of disallowance should be on the basis of r. 3(c)(ii) of the IT Rules. The said direction has been given without a proper evaluation of the relevant provisions of the Act and the Rules and without considering the objects of the two provisions- the one contained in the Act and the other contained in the Rules. The perspective with which the provisions of the Act and the provisions in the Rules should be viewed are different. These are matters for a detailed and in-depth consideration, as a result of which alone, a proper conclusion can be arrived at. It has not been done in this case. The conclusion arrived at by the Tribunal is, in the circumstances, totally unsatisfactory and perfunctory.

In this view, we decline to answer the questions referred to us. But, at the same time, we direct the Tribunal to restore the appeal to the file and decide the matter afresh in accordance with law and in the light of the observations contained herein.

The reference is disposed of as above. A copy of this judgment under the seal of this Court and the signature of the

Registrar shall be forwarded to the Tribunal, Cochin Bench.

[Citation : 186 ITR 322]

Malcare WordPress Security