Madras H.C : Whether, on the facts and in the circumstances of the case, the expenditure of the assesseecompany which resulted in the provision of a perquisite to the employees or benefit or amenity to a director by reason of his being provided with cars used for both official and private purposes, should be taken to be the actual expenditure incurred in respect of the cars amounting to Rs. 3,98,746 in respect of the employees and Rs. 4,49,072 in respect of the directors or at the value of the perquisite of private use of the cars estimated in the assessments of the employees at Rs. 1,26,413 and the directors at Rs. 3,55,988 for the purpose of making disallowance under s. 40A(5) and s. 40(c)(i) of the IT Act, 1961 ?

High Court Of Madras

CIT vs. Madura Coats Ltd.

Sections 40(c), 40A(5)

Asst. Year 1976-77

N.V. Balasubramanian & Mrs. A. Subbulakshmy, JJ.

Tax Case No. 895 of 1983

30th April, 1998

Counsel Appeared

C.V. Rajan, for the Revenue : P.P.S. Janarthana Raja, for the Assessee

JUDGMENT

N.V. BALASUBRAMANIAN, J. :

The question of law referred for our consideration, at the instance of the Revenue, relating to the assessee’s assessment for its asst. yr. 1976-77 reads as under :

“Whether, on the facts and in the circumstances of the case, the expenditure of the assesseecompany which resulted in the provision of a perquisite to the employees or benefit or amenity to a director by reason of his being provided with cars used for both official and private purposes, should be taken to be the actual expenditure incurred in respect of the cars amounting to Rs. 3,98,746 in respect of the employees and Rs. 4,49,072 in respect of the directors or at the value of the perquisite of private use of the cars estimated in the assessments of the employees at Rs. 1,26,413 and the directors at Rs. 3,55,988 for the purpose of making disallowance under s. 40A(5) and s. 40(c)(i) of the IT Act, 1961 ?”

2. The question is an involved question and the facts are not so complicated. The assessee is a public limited company. The assessee is carrying on business in spinning and weaving. The assessee for the asst. yr. 1976-77 returned an income from the business of Rs. 22,24,043. The assessee while computing the income under the head “Business” has not taken into account a sum of Rs. 1,26,413 with reference to s. 40A(5)(a)(ii) of the IT Act, 1961 (hereinafter to be referred to as “the Act”), and a sum of Rs. 3,55,988 with reference to s. 40(c)(i) of the Act. The disallowance made by the assessee relates to the expenditure incurred by the assessee on the cars maintained for the use of employees and its directors. The ITO, while completing the assessment, found that there should be a further disallowance of Rs. 2,72,333 with reference to the employees, and a sum of Rs. 93,084 with reference to directors with the result the total disallowance would be Rs. 3,98,746 with reference to s. 40A(5)(a)(ii) of the Act and a sum of Rs. 4,49,072 with reference to s. 40(c)(i) of the Act, and determined the business income of the assessee. The ITO, while making the further disallowance has not given any reason for such disallowance, however, the order of the ITO refers to the amount to be further disallowed and also he made reference to ss. 40A(5)(a)(iii) and 40(c)(ii) of the Act for making further disallowance. It will be better if the ITO recorded his reasons for the disallowance because he is a quasi-judicial authority and the order passed by him is liable to be appealed and it is imperative for the officer to record reasons for the disallowance he has made.

The assessee went in appeal against the order of assessment made to the CIT(A). The contention urged on behalf of the assessee before the CIT(A) was that the major portion of the expenditure by way of maintenance inclusive of the depreciation incurred by the company in respect of cars, even though used by the directors and employees, was mainly for the company’s business purpose and only a portion of the expenditure should be considered as relating to the personal use of cars by the employees and directors. The CIT(A), following an earlier order passed by his predecessor held that only a portion of the expenditure relatable to the user of the cars provided by the company to its employees or directors for the personal use should be disallowed as perquisite. He calculated the perquisite value at Rs. 400 per month in the cases of employees and directors and on that basis, he came to the conclusion that in so far as s. 40A(5) is concerned, the additional amount that should be disallowed over and above what had been added back by the assessee was Rs. 3,573 and he held that the assessee was entitled to the relief of Rs. 2,68,700. As regards the directors, he came to the conclusion that the amount added back by the assessee was more than adequate and the entire disallowance was deleted. The Revenue carried the matter on appeal before the Tribunal objecting to the restriction made by the CIT(A) on the disallowances made under s. 40A(5) and 40(c) of the Act. The Tribunal, following a decision of the Calcutta High Court in the case of CIT vs. Britannia Industries Co. Ltd. (1981) 20 CTR (Cal) 272 : (1982) 135 ITR 35 (Cal) : TC 18R.323, held that in respect of cars used for the purpose of the company’s business as well as for the personal purpose of the directors, an estimated value of perquisite would represent the expenditure incurred by the company which would be disallowable under that section. The Tribunal, in this view of the matter, upheld the order of the CIT(A) and dismissed the appeal preferred by the Revenue. On an application filed by the Revenue, the Tribunal has referred the question of law set out earlier.

Learned counsel for the Revenue submitted that under s. 40(c)(ii) of the Act, any expenditure or allowance in respect of any asset of the company used for the own purpose or benefit of the director, either wholly or partly, would be subject to the ceiling under that section. He submitted that the same analogy should be employed to s. 40A(5)(ii) of the Act as well and the emphasis given in both the sections is “any expenditure or allowance in respect of the assets used by the director or employee either fully or partly and for considering the ceiling limit”, it is only the actual expenditure that has to be taken into account and not the total expenditure prescribed under r. 3 of the IT Rules. Learned counsel for the assessee, on the other hand, submitted that both ss. 40(c) and 40A(5) of the Act deal with the expenditure in respect of the assets of the company used wholly or partly for the purpose of the director or employee and if an asset has been used partly for business purpose, the entire expenditure has to be allowed and only on the rest, ceiling limit prescribed under ss. 40(c) and 40A(5) would apply. According to him, in estimating expenditure that would be disallowed either under s. 40(c) or under s. 40A(5) of the Act, r. 3 of the rules would apply and in the absence of any amount being available, the amount arrived at by the application of r. 3 would be the proper amount for consideration under s. 40(c) or under s. 40A(5) of the Act. Learned counsel for the assessee in support of his contention relied upon several decisions. We have carefully considered the rival contentions. The Supreme Court in CWS (India) Ltd. vs. CIT (1994) 118 CTR (SC) 118 : (1994) 208 ITR 649 (SC) : TC 18R.625 considered the legislative history of ss. 40(a)(v), 40A(5) and 40(c)(iii) of the Act and observed that the provisions were enacted with a view to discourage the assessees from incurring expenditure whichresulted directly or indirectly in the provision of any benefit, amenity or perquisite to their employees beyond a particular limit and any expenditure incurred beyond the prescribed limit is liable to be disallowed. The apex Court in CIT vs. Continental Construction Ltd. (1998) 145 CTR (SC) 1 : (1998) 230 ITR 485 (SC) : TC S18.2045 held that ss. 40(c) and 40A(5) constituted a composite scheme and the purpose of prescribing a ceiling on expenditure in connection with directors and employees is to discourage a company or an organisation from paying excessive salaries, remuneration, perquisites, etc., to its employees and directors, and if it did so, the organisation would not be able to claim the entire expenditure as deduction, but only expenditure up to the ceiling limit. The decisions of the Supreme Court make it clear that it is only the actual expenditure that is relevant for consideration for the purpose of determining the ceiling limit of allowance either under s. 40(c) or under s. 40A(5) of the Act.

In Wheels India Ltd. vs. CIT (1996) 130 CTR (Mad) 350 : (1996) 218 ITR 293 (Mad) : TC S18.2050, this Court has held that in computing the disallowance under s. 40(c) and s. 40A(5) of the Act, the actual expenditure on house rent of the employees has to be taken into consideration for the purpose of disallowance in the hands of the employer. This Court expressly dissented from the decision of the Calcutta High Court in the case of CIT vs. Britannia Industries Co. Ltd. (supra), and the decision of the Punjab & Haryana High Court in CIT vs. Nuchem Plastics Ltd. (1990) 82 CTR (P&H) 357 : (1989) 179 ITR 196 (P&H) : TC 18R.1103. Learned counsel for the assessee, on the other hand, submitted that the decision of this Court in Wheels India Ltd. vs. CIT (supra), is concerned with the expenditure by way of house rent and it has no application for the valuation of perquisite on the car provided by the employer to the director. We are unable to accept the contention of learned counsel for the assessee. There is no material difference between the use of a car and the use of a house, and in the light of the ambit of ss. 40(c) and 40A(5) of the Act, the principle laid down by this Court that only the actual expenditure has to be taken will apply in the case of use of the car also. As a matter of fact, in CIT vs. P.R. Ramakrishnan (1980) 18 CTR (Mad) 52 : (1980) 124 ITR 545 (Mad) : TC 38R.365, this Court was considering the use of the car and telephone of the company by the director for his personal purposes and this Court considering the provisions of s. 40(c) of the Act and the relevant rule regarding the valuation of perquisite in the hands of the employee made the following observations which are applicable to the facts of the case. “The purposes behind the two provisions are so wholly different that it is not possible to dovetail s. 40(c) into the consideration of the assessment of the director or the person having a substantial interest in the company. We may make our idea clear by taking an example. Supposing the company had incurred an expenditure of a sum of Rs. 1,000 per month on the provision of a motor car for a director, part of that expenditure may have been incurred for the purpose of utilising the conveyance for the actual business needs of the company. In such a case, the ITO is to find out as to what would be the expenditure that the company would have incurred for its own purposes and what would be the expenditure that would have been incurred excessively or unreasonably beyond its legitimate needs. The part of the expenditure in excess of the legitimate needs would come in for consideration under s. 40(c). But when it comes to the assessment of the director himself, what has to be found out is what would be the expenditure that he would have incurred if he had himself maintained a motor car. If it is estimated that the maintenance of a motor car would cost him less than what the company has spent, then to the extent to which he would have incurred his own expenditure, he would be liable to be taxed. In other words, the test for applying s. 40(c) is not what is reasonable expenditure that has been incurred by the company. We have, already indicated that s. 2(24)(iv) falls into two parts. We are, in the present case, considering only the second part of that provision. With reference to the first part, it may not be relevant to consider as to what he would have incurred as his own expenditure, but for the fact that the company incurred the expenditure on his behalf. In the context of the difference in approach pointed out above in applying the two provisions the Revenue does not appear to be right in seeking to link the assessment of the director with the disallowance in the hands of the company. As the standards are different, it may even be conceivable that a director may be assessed on a larger figure than what has been disallowed in the hands of the company as the officer assessing the company may have been disallowed at all anything under s. 40(c).”

9. The above decision makes it clear that if a company claims certain expenditure for the assets used by the director either partly or wholly for his personal use, it claims the same as its business expenditure to be deducted in the computation of its income. The ITO has to find out what would have been the expenditure incurred for the company’s purpose and if it exceeds the ceiling limit, that amount would be disallowed. Therefore, the question of applicability of r. 3 does not arise in determining the ceiling under s. 40(c) and 40A(5) of the Act. The same view has taken by the Kerala High Court in the case of CIT vs. Malayalam Plantations (India) Ltd. (1990) 186 ITR 322 (Ker) : TC 18R.627, wherein the Kerala High Court held that the objects of s. 40A(5) of the Act and r. 3(b) of the rules are distinct and different and s. 40A(5) was intended to effectively check extravagant expenditure by the employer. The above view of the Kerala High Court was reiterated by the same Court in C.W.S. (India) Ltd. vs. CIT (1992) 101 CTR (Ker) 36 : (1992) 198 ITR 660 (Ker) : TC 18R.628, which also deals with the perquisite value on a car provided by the employer to the employee. The same view has been taken by the same Court in CIT vs. Malayalam Plantations (India) Ltd. (1997) 141 CTR (Ker) 97 : (1997) 224 ITR 126 (Ker) : TC S18.2051, which deals with a case of motor car and the Kerala High Court held that taxability of such amount in the hands of the employee would not be a criterion for the deductibility of the same amount in the hands of the employer under s. 40A(5) of the Act.

10. The Orissa High Court in the case of CIT vs. Electro Steel Castings Ltd. (1991) 99 CTR (Ori) 184 : (1992) 193 ITR 103 (Ori) : TC 18R.628 has also taken the same view and held that s. 17 insofar as it relates to perquisites which cover perquisites on motor vehicles has no application to s. 40A(5) of the Act and there is no scope to apply r. 3 in computing the income in respect of the business or profession. Therefore, we are unable to uphold the view of the Tribunal that the estimated value of perquisite under r. 3 would represent the expenditure incurred by the company which is disallowable under s. 40A(5) of the Act. The Tribunal overlooked that the Calcutta High Court in the case of CIT vs. Britannai Industries Co. Ltd. (supra), dealt with the s. 40(c)(ii) of the Act, as it stood then. On the other hand, the objects and purposes of s. 40A(5) and r. 3 are distinct and different and the taxability of the amount in the hands of the employee would not be a criterion for deductibility of the said amount in the hands of the employer, either under s. 40(c) or under s. 40A(5) of the Act. The Kerala High Court in CIT vs. Malayalam Plantations (India) Ltd. (supra) has discussed the matter in great detail and held that the decision of the Calcutta High Court in CIT vs. Britannia Industries Co. Ltd.’s case (supra), has no application in the matter ofinterpretation of s. 40A(5) of the Act. We are in complete agreement with the views expressed by the Kerala High Court and the Tribunal has omitted to take note of the provisions of s. 40(c) and s. 40A(5) of the Act. So also, on the same reasoning, we are unable to agree with the decision of the Punjab & Haryana High Court in CIT vs. Nuchem Plastics Ltd. (supra).

11. Learned author Sampath Iyengar in Law of Income-tax (Vol. 2, 9th Edn.), at pp. 2761 and 2762 observed as under : “The section further enacts that, in respect of any asset of the company used by such persons as aforesaid, not only expenditure thereon, but also any allowances in respect thereto can be disallowed……..In order to render an allowance disallowable under this clause it is important that a personal benefit must have been derived by the director or the person having a substantial interest in the company, that is the company did not, and the director or other person alone did, use that particular asset. It is only in respect of such cases that the allowance is sought to be curtailed by sub-cl. (ii) of cl. ©”.

12. Now, it is necessary to consider the other arguments of Mr. Janarthana Raja, learned counsel for the assessee, that though r. 3 may not be strictly applicable for the purpose of determining the expenditure to be disallowed under s. 40(c) or 40A(5), the amount determined under r. 3 can be relied upon for the purpose of such disallowance. He strongly placed reliance on a decision of the Bombay High Court in the case of Geoffrey Manners & Co. Ltd. vs. CIT (1996) 136 CTR (Bom) 169 : (1996) 221 ITR 695 (Bom) : TC S18.2014, wherein the Bombay High Court held as under (headnote) : “Sec. 40A of the IT Act, 1961, is an overriding provision which operates notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of the income under the head ‘Profits and gains of business or profession’. In various sub-sections, it sets out certain expenditures or payments, which are not deductible in the computation of income under the head ‘Profits and gains of the business or profession’ in the circumstances set out therein. Sub-s. (5) thereof deals, inter alia, with expenditure incurred, by the assessee, which results directly or indirectly in the provision of any perquisite to an employee. A plain reading of sub-cl. (ii) of cl. (a) of sub-s. (5) makes it clear that this provision is intended to place a certain ceiling on the deductible amount of expenditure incurred by the assessee on providing any perquisite to an employee and expenditure in respect of assets of the assessee used by an employee either wholly or partly for his own purposes or benefit. The ceiling is 20 per cent of the amount of salary payable or an amount calculated at the rate of Rs. 1,000 for each month whichever is less, subject, however, to a further overall ceiling of salary (including the above perquisites and benefits) of Rs. 72,000 per annum. In such a case the first stage to find out the amount of disallowance would be to determine the amount of expenditure attributable to the use of such assets by the employee directors for their personal purposes or benefit. Sub-cl. (iii) of cl. (c) of r. 3 of the IT Rules, 1962, provides for the manner of valuation of the perquisite in respect of the use of the motor car by an employee for his personal use in all conceivable types of cases. Though the above rule has been framed for determination of the value of a motor car provided by the employer to the employee for the purpose of computing the income chargeable under the head ‘Salaries’ there is nothing wrong in applying the same for valuing the perquisites for the purpose of computing the disallowance under s. 40A(5) of the Act because it has been framed by the Central Board of Revenue with a view to getting over the difficulties that might arise in determining the value of perquisites in respect of the use of the car owned and maintained by the employer for theemployee…..The method of valuation of perquisite in respect of motor car set out in the first part of sub-cl. (ii) of cl. (c) of r. 3 of the IT Rules would be applicable in all cases where it is possible to do so. It is only in cases where determination of the value in the manner laid down in the first part of cl. (c)(ii) is found to be difficult that the valuation should be made on the basis set out in the second part thereof and the table appended thereto.”

13. We respectfully dissent from the judgment of the Bombay High Court. We have already noticed the decision of this Court in the case of CIT vs. P.R. Ramakrishnan (supra) and the decision of this Court in Wheels India Ltd. vs. CIT (supra). In both the cases, this Court has taken a view that the valuation of perquisite under r. 3 has no relevance in determining the ceiling under s. 40(c) or 40A (5) of the Act. Sec. 40(c) of the Act deals with any expenditure or allowance in respect of any asset of the company used by the director or any person referred to in s. 40(c) either wholly or partly for his own benefit. It is to be remembered here, that the company is claiming expenditure on the assets of the company used by such persons. If the asset has been used wholly for business purpose, there is no difficulty in concluding that the entire expenditure would be allowed. If it is wholly used for the purpose of the director, there can be no quarrel from the assessee as the entire expenditure claimed would be subject to the ceiling under s. 40(c) of the Act. If the car has been used partly for business purpose of the company and partly for personal purpose of the director, then in such contingency, the ceiling limit cannot be determined on the basis of valuation of perquisite in the hands of the director or employee. Let us visualise a case of a company placing at the disposal of the director a motor car and the company had incurred expenditure such as fuel and also maintenance of the motor car. In such case, when the company claims expenditure incurred as a part of the business expenditure, the amount to be disallowed cannot be based on the valuation of the perquisite in the hands of the director in his assessment. The whole purpose of enacting s. 40(c) of the Act is to curb extravagant expenditure. In the context of s. 40(c) or 40A(5) of the Act, the expenditure that is contemplated is only the actual expenditure and not the notional value of perquisite assessed in the hands of the director or employee. It may be true that a car placed at the disposal of the director was mostly used for the company’s purpose and was used for the personal purpose of the directors rarely and even in such case, the actual expenditure incurred by the company will have to be subject to the ceiling under s. 40(c) of the Act. In considering the deductibility of the expenditure, the section is not concerned with the extent of the use of the asset by the director or employee for his personal use. But, the section focuses its attention on the expenditure claimed by the assessee on its asset used by the director.

In other words, the quantum of allowance or disallowance is not related to the extent of user by the director or employee for his personal use, but once the factum of user of the asset of the company by the director or employee for his personal purposes is found, the quantum to be disallowed will be the actual expenditure claimed by the company, provided the conditions stipulated therein are satisfied. We are in respectful agreement with the decision of the Gujarat High Court in CIT vs. Rajesh Textile Mills Ltd. (1988) 71 CTR (Guj) 65 : (1988) 173 ITR 179 (Guj) : TC 18R.642, wherein S.B. Majmudar J., as his Lordship then was, speaking for the Bench, observed that the expenditure incurred by the employer-assessee for providing perquisites to the employee cannot be a mirror image of the evaluation of such perquisite in the hands of the employee. The Gujarat High Court in the said decision observed as under : “In that view of the matter, it is not possible to agree with the submission of Mr. Shah, for the assessee, that when assets of the employer are partly used by the employee for his own purpose and partly used for the business purpose of the employer, the break-up figures of actual expenditure incurred by the employer on the one hand and the expenses incurred for maintaining that part of the asset which is used for business purposes on the other, would not be available and, therefore, the rule of thumb laid down by r. 3 of the IT Rules can be projected and can be pressed into service for the purpose of computing expenditure in such cases even in cases covered under s. 40A(5)(a). It is easy to visualise that figures of actual expenditure would always be available to the employer with necessary break-ups. If the employer chooses to make available the break-up figures for the scrutiny of the taxing authority, the taxing authority can always, after due scrutiny, accept these figures with due modifications. But these figures will always remain as figures of actual expenditure laid out by the employer-assessee for the concerned amenities made available to the employee and they can be brought to account for the provision of s. 40A(5)(a). If such break-up figures are not given, the whole of the expenditure for providing such perquisites or for maintaining such asset which might have been used wholly or partly by the employee for his own purposes would get covered by the sweep of s. 40A(5)(a)(ii) on the assumption that entire expenditure was laid out by the employer for providing these amenities to the employee. For such a situation, the employer has to thank himself as he chooses to keep back from the scrutiny of the taxing authorities the facts and figures under the relevant heads of expenditure. In either of these eventualities, operation of r. 3 would be out of question and even from the point of view of propriety, such rule cannot be brought in, as if by the back door, by the employer-assessee on the one hand sitting tight on the details of the figures of expenditure which would be incurred by him on diverse heads and on the other hand insisting that as break-up figures of relevant expenditure are not available on record, provision of r. 3 of the Rules should be brought to his aid, for the purpose of computing permissible deductions of expenses under s. 40A(5)(a). In fact, such a stand on the part of the assessee- employer would amount to taking advantage of his own wrong. That cannot be countenanced and is contraindicated by the statutory scheme under consideration.”

14. We are in respectful agreement with the views expressed by the Gujarat High Court in the above decision. The assessee in the instant case has not furnished the particulars as to the amount of expenditure which would be get covered under the provisions of s. 40(c) or 40A(5) of the Act, and it is impermissible to bring in the provisions of r. 3 of the Rules to determine the permissible ceiling limit under s. 40(c) or 40A(5) of the Act Accordingly, we answer the question of law referred to us by holding that the actual expenditure incurred by the company should be taken into account for the purpose of making disallowance under s. 40(c) or 40A(5) of the Act. The Revenue shall be entitled to costs of Rs. 750.

[Citation : 239 ITR 50]

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