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PETITIONER: COMMISSIONER OF INCOME TAX, BOMBAY ETC.

       Vs.

RESPONDENT: M/S.MAFATLAL GANSABHAI & CO. (P) LTD. ETC.

DATE OF JUDGMENT:       12/03/1996

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) MUKHERJEE M.K. (J)

CITATION:  1996 SCC  (7) 569        JT 1996 (3)   173  1996 SCALE  (2)676

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T B.P.JEEVAN REDDY,J,      Leave granted in the Special Leave Petition.      The only  question in  this batch of appeals is whether the payments  made in  cash by  an assessee to its employees are within  the mischief of Section 40(a)(v) and Section 40- A(5). Sub-clause  (v) was  inserted in clause (a) of Section 40 by  the Finance Acts 1968 with effect from April 1, 1969. Section 40(a)(v) reads as follows: <SLS> "S.40. Amounts  not deductible.--Notwithstanding anything to the contrary  in (sections  30 to 38), the following amounts shall not  be deducted  in computing  the income  chargeable under  the   head  "Profits   and  gains   of  business   or profession",-- (a) in the case of any assessee-- (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  any  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 purpose or benefits to the extent  such expenditure  or allowance exceeds one-fifth of the  amount of  salary payable  to the  employees  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 years whichever is less:      Provided that in computing the aforesaid expenditure or allowance, the  following shall  not be  taken into accounts namely:- (a) any payment by way of gratuity; (b)  the  value  of  any  travel  concession  or  assistance referred to in clause (5) of section 10;

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(c) passage  moneys or the value of any free or concessional passage referred  to in  sub-clause (i)  of  clause  (6)  of section 10; (d) any  payment of  tax referred  to in sub-clause (vii) or sub-clause <vii-a) of clause (6) of section 10; (e) any sum referred to in sub-clause (vii) of clause (1) of section 17; (f) any  sum referred  to in sub-clause (v) of clause (2) of section 17; (g) the amount of any compensation referred to in sub-clause (i) or  any payment referred to in sub-clause (ii) of clause (3) of section 17; (h) any  payment referred to in clause (iv) or clause (v) of sub-section (1) of section 36; and (i) any  expenditure referred  to in  clause  (ix)  of  sub- section (1) of section 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 notwithstanding  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 clause (h) of rule 2 of Part A of the Fourth Schedule." <SLE>      Sub-clause (v)  of Section  40(a) was  omitted  by  the Finance (No.2)  Act, 1971,  which simultaneously  introduced sub-section (5)  in Section 40-A. Sub-section (5) of Section 40-A, omitting unnecessary clauses, reads thus: <SLS> "S. 40A.  Expenses or  payments not  deductible  in  certain circumstances.-- (1)  The provisions  of this  section shall have  effect   notwithstanding  anything   to  the  contrary contained in any other provision of this Act relating to the computation of  income under  the head ’Profits and gains of business or profession’-- (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 purpose or benefit, then, subject  to the  provisions of  clause (b), so much of such expenditure  or allowance  as is in excess of the limit specified in  respect thereof  in clause  (c) shall  not  be allowed as a deduction:      Provided that  where the assessee is a company, so much of the  aggregate of- (a) the expenditure and allowance referred to in sub-clauses (i) and (ii) of this clause; and (b) the expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c) of section 40, in respect  of an  employee or  a former  employee, being  a director or  a person  who has a substantial interest in the company or  a relative of the director or of such person, as

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is in  excess of  the sum  of one  hundred and  two thousand rupees, shall in no case be allowed as a deduction: Exaltation 2.--  In this  sub-section, (a)  ’salary’ has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject to the following modifications, namely:- (1) in the said clause (1), the word ’perquisites’ occurring in sub-clause  (iv) and  the whole of sub-clause (vii) shall be omitted; (2) in  the said  clause (3),  the reference  to  ’assessee’ shall be  construed as  reference  to  ’employee  or  former employee’ and  the references  to ’his  employer  or  former employer’ and  ’an employer  or a  former employer’ shall be construed as references to ’the assessee’; (b) ’Perquisite’ means-- (i) rent-free  accommodation provided to the employee by the assessee; (ii) any  concession in  the matter  of rent  respecting any accommodation provided to the employee by the assessee; (iii) any  benefit or  amenity granted  or provided  free of cost  or  at  concessional  rate  to  the  employee  by  the assessee; (iv) payment  by the  assessee of  any sum in respect of any obligation which,  but for  such payment,  would  have  been payable by the employee; and (v) payment  by the assessee of any sum, whether directly or indirectly or  through  a  fund,  other  than  a  recognized provident fund or an approved superannuation fund, to effect an assurance  on the  life of  the employee  or to  effect a contract for an annuity." <SLE>      Section 40(a)(v)  was introduced  with a  view to check the deductible  expenditure incurred by assessees [including companies] in  providing amenities, benefits and perquisites to their higher paid employees. This sub-clause is indeed an improvement upon Section 40(c)(iii) which preceded it. Under sub-clause (v),  the deduction  in  respect  of  expenditure which results  directly or  indirectly in  the provision  of benefits etc.  to an  employee is limited to an amount equal to one-fifth  of salary  paid to  such employee  during  the relevant year  or to  an amount  calculated at  the rate  of Rupees one  thousand per  month, whichever is less. Further, any expenditure  incurred upon  and any allowance admissible to the  assessee/employer in  respect of any assets provided by him  to the  employee free of charge or at a concessional rate is  also brought  within  the  purview  of  the  limits prescribed by  the sub-clause  Payment of any sum in respect of any  obligations which,  but for Such payment, would have been payable  by the  employee in  also brought  within  the ambit of  the sub-clause.  Section 40-A(5) is an yet further improvement on  Section 40(a)  (v). Under sub-section (5) of Section 40-A,  the following  restrictions/limits have  been placed: (1)  any expenditure  incurred by  the  assessee  on payment of salary to an employee in respect of his period of employment in  India during  the relevant  year will  not be allowed as  a deduction  in computing the taxable profits to the extent  it exceeds  the amount calculated at the rate of Rupees five  thousand per  month.  [Similar  restriction  is placed on  salary paid  to an ex-employee as well.] For this purpose, the expression "salary" is defined in clause (a) of Explanation (2)  to the sub-section (5). (2) Any expenditure incurred by  the assessee  in providing  whether directly or indirectly any perquisite [whether convertible into money or not] to  an  employee  and  the  amount  of  expenditure  or allowance  [e.g.,  depreciation  allowance]  in  respect  of assets of  the assessee  used by  the employee  for his  own

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purposes" whether  wholly or  partly, will not be allowed as deduction in  computing  the  profits  of  the  business  or professions to  the extent  it exceeds twenty percent of the salary payable  to the  employee or  an amount calculated at the rate  of Rupees  one thousand  per month,  whichever  is less. The  expression "perquisite"  is defined in clause (b) of Explanation  (2) sub-section  as including  not only  any benefit or  amenity but also "payment by the assessee of any sum in  respect  of  any  obligation  which,  but  fur  such payment, would have been payable by the employee".      Certain types  of expenditure  are  excluded  from  the purview of  both Section  40 (a)(v)  as well  as Section 40- A(5)(a)(ii). For  the sake  of completion,  it may  also  be stated that  though Section  40(a)(v)  does  not  place  any restriction  upon  the  amount  of  salary  payable  to  the employee, such  a restriction  was implicit in clause (c) of Section 40.  Clause (c)  of Section  40 continued  to be  in force till  March 31,1989. It was omitted by Direct Tax Laws (Amendment) Act,  1987 along with sub-section (5) of Section 40-A.      Inasmuch as the main arguments have been urged in Civil Appeal No.  5946 of  1994 and Civil Appeal No. 2215 of 1978, we shall state the facts of these two appeals alone to bring out the  question. The  assessee in  Civil Appeal No.5946 of 1994 is  a limited company and the assessment year concerned is 1982-83. This appeal is preferred against an order of the Delhi High  Court rejecting  an  application  under  Section 256(2) of  the Income  Tax Act  filed by  the  Revenue.  The question which the Revenue sought to raise is the following: <SLS> "Whether on  the facts and in the circumstances of the case, the ITAT  is correct  in law  in holding that the payment in cash of  House rent Allowance, conveyance allowances medical reimbursement etc.  should not  be treated as perquisite u/s 40A (J) of the I.T.Act." <SLE>      During the  accounting year  relevant to the Assessment Year 1982-83,  the assessee  made payments  in cash  to  its employees on  account of  house rent  allowances  conveyance allowance and medical, reimbursement. The Income Tax Officer disallowed the   same  holding that  the said  payments fall within the  mischief of  Section  40-A(5).  On  Appeal,  the Commissioner of  Income Tax  (Appeals) upheld the assessee’s contention  that   cash  payments   cannot  be   treated  as "perquisites" for  the purpose  of and within the meaning of Section  40-A(5).  Revenue’s  appeal  to  the  Tribunal  was dismissed. An  application under  Section  256(1)  was  also dismissed by  the Tribunal  whereupon it approached the High Court which  too  rejected  its  application  under  Section 256(2), as stated above.      Civil Appeal  No.2215 af  1978 is  preferred against an order of  the Bombay  High  Court  rejecting  the  Revenue’s application under  Section 256  (2) insofar as Questions (1) and (3)  are concerned.  This Court granted leave insofar as Question No.1 is concerned, which reads: <SLS> "Whether on  the facts and in the circumstances of the case, the Tribunal  was right  in law  in holding  that  the  cash payments made  by the  assessee to  its Directors,  such  as house  rent   allowance,  conveyance   allowance,  furniture allowance etc. should not be considered ’perquisites’ within the meaning  of section  40(a)(v) of  the  Income  Tax  Act, 1961?" <SLE>      Leave was  granted by  this Court  for the  reason that

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there is  a conflict of opinion on the said question between the  High   Courts  in  the  country.  The  assessment  year concerned in  this appeal  is 1971-72  and,  therefore,  the relevant provision is Section 40(a)(v).      We shall  first take  up Section 40(a)(v). According to Section  40,   which  opens   with  a  non-obstante  clause, "notwithstanding anything  to the contrary in sections 30 to 38", the  amounts mentioned in several clauses therein shall not be deducted in camputing the income chargeable under the head "Profits  and gains  of business or profession". Clause (a) contains several sub-clauses. We are concerned with sub- clause (v)  alone. The  main limb of sub-clause (v) places a limit  upon   two  kinds   of  expenditure,  viz.,  (a)  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  (b) 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. The limit prescribed -  or  ceiling provided, as it may be called - is 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 or  whichever is less. Any expenditure over and above the said limit/ceiling has to be disallowed. It is the first part of the sub-clause we are concerned with  in Civil  Appeal No.2215  of 1978. Now, what does  the   subclause  say?   The  opening  words  are  "any expenditure which  results directly  or  indirectly  in  the provision or any benefit or amenity or perquisite, whether convertible into  money or not, to an employee". It is clear from  the   above  words  that  it  is  not  any  and  every expenditure that  is attracted  by the  sub-clause but  only such expenditure which results directly or indirectly in the provision of  any  benefit,  amenity  or  perquisite  to  an employee. Once  this is  so, it  is immaterial  whether such benefit, amenity  or perquisite is convertible into money or not.  The   words  "directly   or  indirectly"  are  equally significant. While  the expressions  "benefit" and "amenity" are not  defined by  the Act, the expression "perquisite" is defined in  sub-section (2)  of Section  17. While it is not necessary to  set out  the entire definition of "perquisite" in the said sub-section, it is sufficient to mention that it includes among  others "the value of rent-free accommodation provided to  the assessee by his employer". [The definition, it may  be remembered,  is worded  from the point of view of and for  the purposes  of Section  17 which  brings  to  tax income under  the head  "salaries". The  said definition may not be  strictly applicable  to the expression "perquisites" in  Section  40(a)(v),  yet  it  can  be  taken  as  broadly indicating the  meaning of the said expression.] Now, take a case where the assessee provides a rent-free accommodation to its  employee. It  would be  a  "perquisite"  within  the meaning  of   sub-clause  (v)  and  hence,  the  expenditure incurred  by   the  assessee  in  providing  such  rent-free accommodation to  its employee  would fall  within the  sub- clause. This  would be so whether the accommodation provided belongs to the assessee or is taken on rent by the assessee. In the  latter event,  the rent  paid by the assessee to the owner of  the house  will be  an expenditure incurred by the assessee in  providing a  perquisite to  its employee within the meaning  of the  sub-clause. Similarly,  any expenditure incurred by  the assessee  in providing a benefit or amenity

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to its  employee will  equally fall  within the  sub-clause. This much is not in dispute. Now, take another case where an assessee pays a cash amount of, say, Rupees five thousand to its employee  asking him  to find  a house  on rent  himself instead of the assessee himself taking the house on rent and providing it  to the  employee. In  this case,  however, the assessees say, such cash payment made by the assessee is not within the  mischief of  the sub-clause  while  the  Revenue characterizes  the   assessee’s   contention   as   ex-facie illogical and  absurd.  In  principle,  it  should  make  no difference, the  Revenue submits, whether the assessee takes a house  on rent  and provides  it to the employee or pays a cash amount  directly to  the employee  asking him to find a house on rent himself. The counsel for the Revenue commended the reasoning and conclusion of the Full Bench of the Kerala High Court  in Commissioner  of Income  Tax v.  Commonwealth Trust Limited  [(1982) 135 I.T.R.19] for our acceptance. The counsel for  the assessees,  however, lay  stress  upon  the language of  the sub-clause,  to wit,  upon  the  words  any expenditure incurred  for providing  a benefit  etc.  to  an employee. They also emphasise the words "whether convertible into money  or not"  following the  words  "any  benefit  or amenity or  perquisite". Their  submission is  that what  is within the  mischief of  the sub-clause  is  an  expenditure incurred for  providing a  benefit, amenity or perquisite to an employee  and that  a cash payment to the employee is not an "expenditure" contemplated by the sub-clause. They submit that the  use of  the qualifying  words "whether convertible into money  or not"  puts the matter beyond doubt. They also submit that  almost all  the High Courts in the country have accepted this submission.      On a  consideration of  both the points of view, we are inclined to agree with the submission of the learned counsel for the  assessees. The  language employed in the sub-clause is not capable of taking within its ambit cash payments made to the  employees by the assessee. These cash payments will, of course,  be treated  as salary  paid to the employees and will be  subject to  the limits/ceiling,  if  any,  in  that behalf. But they cannot be brought within the purview of the words "any  expenditure which results directly or indirectly in the  provision of  any benefit  or amenity or perquisite’ more so  because of the following words "whether convertible into money or not".      Now, coming  to Section  40-A(5), the  position  is  no different. It  would, however,  be appropriate  to point out the  distinction   between  Section   40(a)(v)  and  Section 40(A)(5). We  shall refer  to the  former provision as "sub- clause" and  the latter provision as "sub-section". The sub- section is  wider in its scope and application than the sub- clause. Sub-clause  (i) of  clause (a)  of  sub-section  (5) deals  with  "any  expenditure  which  results  directly  or indirectly in  the payment of any salary to an employee or a former employee".  Sub-clause (i)  of  clause  (c)  of  sub- section (5) sets out the limits/ceilings on such expenditure while clause  (a) of  Explanation (2)  appended to  the sub- section defines  the expression "salary" for the purposes of this sub-section.  These features  were absent in sub-clause (v) of  Section 40(a).  Now, coming  to sub-clause  (ii)  of clause (a) of sub-section (5) - which corresponds to Section 40(a)(v) -  it uses  only  one  expression  "perquisite"  as against Section  40(a)(v) which spoke of "benefit or amenity or perquisite",  but this is no real distinction because the definition of  "perquisite" in clause (b) of Explanation (2) to the sub-section takes in both benefits and amenities. The said definition  also includes  inter alia  "payment by  the

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assessee of  any sum  in respect of any obligation which but for such  payment, would have been payable by the employee"- words which  are found  in the main limb of Section 40(a)(v) but which are missing in the main limb of sub-clause (ii) of clause (a)  of sub-section  (5). Thus,  except  for  certain structural  changes,   Section  40A(5)(a)(ii)   and  Section 40(a)(v) are similar in all material aspects. It, therefore, follows that  what we  have said  with  respect  to  Section 40(a)(v) applies equally to Section 40-A(5)(a)(ii).      There still remain the words "including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee" in Section (a)(v) and  similar words found in Section 40-A(5)(a)(ii) as well,  i.e.,   in  sub-clause  (iv)  of  the  definition  of "perquisite" in clause (b) of Explanation (2) to sub-section (5). What  do  they  mean?  The  said  words  contemplate  a situation where  the assessee  makes a  payment [in cash] in respect of  an obligation  - obligation  of the  employee  - which would  have been  payable by the employee if it is not paid  by   the  assessee.   The  payment   by  the  assessee contemplated by  these words  is not  evidently a payment to the employee  but to  a third party, no doubt, on account of the  employee.   Sub-clause  (v)   of  the   definition   of "perquisite’ in clause (b) of Explanation (2) to sub-section (5) also  refers to  cash payment but that too is not to the employee, though undoubtedly for his benefit.      For the above reasons, we hold that cash payments by an assessee to  his/its employees  do not fall within the ambit of Section  40(a)(v) or  Section 40-A(5)(a)(ii), as the case may be.  We disagree  with the  opinion of  the Kerala  High Court in  Commonwealth Trust  Limited [supra] and agree with the other High Courts which have taken a view according with our view,  viz., Commissioner  of Income  Tax, Karnataka  v. Mysore  Commercial  Union  Limited  [(1980)  126  I.T.R.340] (Karnataka),  Commissioner     of   Income  Tax  v.  Shriram Refrigeration Industries  Limited [(1992)  197  I.T.R.  431] (Delhi), Commissioner  of Income  Tax v.  Kanan Devan  Hills Produce Company  Limited [(1979) 119 I.T.R. 431] (Calcutta), commissioner  of  Income  Tax  v.  Indokem  Private  Limited [(1981) 132 I.T.R. 125] (Bombay), Commissioner of Income Tax v. arner  Hindustan Limited  [(1984) 145  I.T.R. 24] (Andhra Pradesh), Instalment  Supply Private Limited v. Commissioner of Income  Tax [(1984) 149 I.T.R. 457] (Delhi), Commissioner of Income  Tax v. Manjushree Plantations Limited [(1980) 125 I.T.R. 150]  (Madras) and  Commissioner of Income Tax v. new India Industries Limited [(1993) 201 I.T.R. 208] (Gujarat).      Accordingly, the appeals are dismissed. No costs.