Madras High Court
Commissioner Of Income-Tax vs Madras Rubber Factory Ltd. on 22 February, 1995
JUDGMENT Mishra, J.
1. Two questions (1) whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the disallowance of Rs. 60,718 for the assessment year 1972-73 and Rs. 1,70,800 for the assessment year 1973-74, made under section 40A(S) of the Income-tax Act, 1961, holding that the cash payments should not be treated as perquisite ? and (2) whether; on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the royalty paid to the foreign collaborators relating to the export sales, was entitled to weighted deduction under section 35B of the Income-tax Act, 1961 ? have been referred to us for our opinion at the instance of the Revenue.
2. The assessee is a public limited company and carries on business in the manufacture and sale of automobile tyres and tubes. In its return for the assessment year 1972-73, the assessee claimed a deduction of Rs. 60,718 on the ground that it had provided to its employees perquisites in the form of hiring out residential accommodation, paying cash allowance towards rent for residence, facility of using the company's car or in lieu of it giving them some cash allowance towards it, meeting the medical expenses of the employees, etc. For the assessment year 1973-74, it claimed a deduction of Rs. 1,70,800 and claimed additionally deduction under section 35B of the royalty payment to the foreign collaborator. The Income-tax Officer as well as the Appellate Assistant Commissioner disallowed the said claim under section 40A(5) of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for short). The Tribunal, however, held that the assessee is entitled to weighted deduction under section 35B on the royalty payments and that the disallowance made under section 40A(5) was not warranted, as the allowances are cash allowances.
3. The almost yearly exercise of the assessees seeking deduction and the tax collectors not accepting their claims, appeals and references to the various High Courts of the country, has given rise to a plethora of decisions. We have, however, the advantage of the consensus of judicial pronouncements and choice to pick up such judgments, which specifically speak about section 40A(5)(a) of the Act and/or section 40(a)(v) of its predecessor Act. The Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 [FB] has considered the provision as it stood in the year 1971-72, omitted with effect from April 1, 1972, and re-enacted in section 40(a)(v) , with which we are concerned, which provision read :
"40. Notwithstanding anything to the contrary in sections 30 to 39, 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 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 clause (5) of section 10;
(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 (viia) 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."
4. The Kerala High Court has noted that the word "salary" is to be understood in the light of the definition in clause (h) of rule 2 of Part A of the Fourth Schedule, which has defined "salary" to include dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites and commented that the definition indicates that salary would include dearness allowance (if the terms of employment so provide), but all other allowances and perquisites stand excluded from the scope of the term "salary". It has proceeded to observe (at page 27 of 135 ITR) :
"We find that the sub-clause uses the term 'benefit, amenity or perquisite' as opposed to salary evidently indicating that these together will exhaust what an employee obtains in return for his service. Evidently, the object of section 40(a)(v) is to persuade the employer to set a limit an the event of the benefits of any kind that could be extended to any employee by an employer. Of course, any employer is free to provide his employee with the salary agreed upon and also allowances, perquisites and such amenities as the parties may choose to stipulate by way of terms of employment. Though these will be expenses falling within section 37(1) of the Income-tax Act as expenditure incurred wholly for the purpose of the business, the employer's claim for deduction is subject to the limit specified in section 40(a)(v). This is so in order that the taxable profits may not be siphoned off."
5. Commenting upon, however, whether the terms "benefit", "amenity" or "perquisite" should receive a different meaning because of the words "whether convertible into money or not" following it, the Kerala High Court has observed (at page 27 of 135 ITR) :
"It is seen to have been argued, and successfully, in some cases that the words 'whether convertible into money or not' reflect on the nature of 'benefit, amenity or perquisite'. Such a qualification is said to be inappropriate in the case of a cash benefit. In other words, cash cannot be qualified by the term 'whether convertible into money or not', and, therefore, whatever may be the natural meaning of the term 'benefit, amenity or perquisite', any advantage in terms of money which may fall normally within any one of these three must stand excluded. We notice that this argument succeeded before the Karnataka High Court in CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340, before the Calcutta High Court in CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 and before the Madras High Court in CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150. Though reference is made by counsel for the assessee to the decision of the Madras High Court in CIT v. G. Venkataraman [1978] 111 ITR 444 that could easily be explained because the language of the section which the court considered in that case was materially different from what we are dealing with here.
We don't see any reason to give undue emphasis to the words 'whether convertible into money or not' so as to give a very restricted meaning to the term 'benefit, amenity or perquisite', a meaning which would not serve the evident purpose of the section. We say so because that would mean that any cash allowance paid by the employer to an employee of any sum whatsoever will be entitled to deduction despite section 40(a)(v) because restriction is limited only to non-cash advantage given to the employee. Such a construction appears to us to be quite irrational defeating the very purpose of prescribing the limit under section 40(a)(v) so as to dissuade an employer from paying unduly large sums by way of benefit, amenity or perquisite. The statute itself lays down the permissible limit of deduction in respect of salary and that would be incomplete unless a permissible limit of deduction is laid down in respect of other benefits that are extended to an employee. Though the words 'whether convertible into money or not' may at first sight appear to indicate that whatever are not convertible into money stand excluded from the scope of the term 'benefit, amenity or perquisite', that need not necessarily be so. The term 'benefit, amenity or perquisite' may take in any benefits in kind and in service and may take in also cash. 'Whether convertible into money or not' need not qualify the whole range. It only means that it is immaterial whether the benefit, perquisite or amenity may or may not be convertible into money. That would be immaterial. According to us, this would be the proper reading of the section."
6. Since the Kerala High Court has stated that the provision of law that this (Madras) court considered in CIT v. G. Venkataraman [1978] 111 ITR 444 was materially different from what it was dealing with and chose to disagree with the judgment of this court in CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150, besides its difference with the views of the Karnataka and Calcutta High Courts, we have felt it necessary to look into these authorities and the present law with an open mind; but, before we do so, we may refer to a judgment of the Delhi High Court in CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431, which lends support to the view that we intend to take and in which judgment, the court has noted, along with other authorities, this court's judgment in Manjushree Plantations Ltd.'s case [1980] 125 ITR 160 and reiterated the consensus that payment in cash made by the employer to an employee by way of reimbursement does not fall under sub-clauses (i) to (v) of Explanation 2(b) to section 40A(5). This being so, the payment in question cannot be regarded as a perquisite at all. The new provision and the consequence thereof have been so well discussed in the various judgments of the courts that we do not feel any necessity for a detailed study of the matter. Explanation 2 to section 40A(5) reads as follows :
"Explanation 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 references to 'employee or former employee' and the reference 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 through a fund, other than a recognised 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."
The Delhi High Court has said (at page 436 of 197 ITR) :
"There has been a catena of authorities which have taken the view that payment of cash allowance to an employee by way of reimbursement of medical expense or house rent is not a perquisite. The leading case on this point is CIT v. Kanan Devan Hills Produce Co. Ltd. . That decision of the Calcutta High Court was based on the interpretation of section 40(c)(iii) of the Act and it came to the conclusion that the words 'whether convertible into money or not' occurring in the said sub-clause clearly indicated that cash payment was not contemplated by the said provision. This decision of the Calcutta High Court was followed by the same court in Indian Leaf Tobacco Development Co. Ltd. v. CIT ; CIT v. Orient Paper Mills Ltd. ; CIT v. National and Grindlays Bank Ltd. ; Alkali and Chemical Corporation of India Ltd. v. CIT ; Union Carbide India Ltd. v. CIT ; CIT v. Darjeeling Co. Ltd. [1986] Tax LR 483 (Cal); CIT v. Indian Press Exchange Ltd. ; National and Grindlays Bank Ltd. v. CIT ; CIT v. Indian Explosives Ltd. and CIT v. Indian Oxygen Ltd. .
The Bombay High Court followed the aforesaid decision in Kanan Devan Hills Produce Co. Ltd.'s case in CIT v. Indokem (P.) Ltd. [1981] 132 ITR 125. This view was reiterated by the Bombay High Court in CIT v. Mercantile Bank Ltd. [1988) 169 ITR 44; CIT v. J. Govindram (F.) Ltd. [1987] 163 ITR 528 (Bom); CIT v. Boehringer-Knoll Ltd. [1989] 177 ITR 96 (Bom); CIT' v. Mansants Chemicals (P.) Ltd. [1989] 177 ITR 204 (Bom); Ruston and Hornsby (India) Ltd. v. CIT [1991] 191 ITR 75 (Bom); CIT v. Greaves Cotton and Co. Ltd. [1991] 191 ITR 367 (Bom); CIT v. Alembic Distributors Ltd. ([1991] 191 ITR 58 BOm); CIT v. Yorkshire Insurance Co. Ltd. [1986] 162 ITR 565 (Bom); CIT v. Mafatlal Gagalbhai and Co. (P.) Ltd. [1991] 192 ITR 169 (Bom); Asbestos Cement Ltd. v. CIT [1991] 192 ITR 89 (Bom) and CIT v. Empire Dyeing and Mfg. Co. Ltd. [1991] 192 ITR 245 (Bom).
The Andhra Pradesh High Court has taken the same view and the first judgment is CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24. The special leave petition filed was dismissed by the Supreme Court and is reported as [1990] 185 ITR (St.) 3. The decision in Warner Hindustan Ltd. was followed by the Andhra Pradesh High Court in three other cases, in CIT v. Warner Hindusthan Ltd., [1986] 180 ITR 217; CIT v. Andhra Pradesh State Financial Corporation [1989] 175 ITR 87 and CIT v. Singareni Collieries Co. Ltd. [1984] 150 ITR 67. The Madras High Court also has taken the same view in CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 and CIT v. Jayanthi Films (Madurai) P. Ltd. [1992] 196 ITR 802. The Karnataka High Court has also come to the same conclusion in CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 and this was followed by it in CIT v. Motor Industries Co. Ltd. [1988] 173 ITR 374 (Kar). Two decisions of the Kerala High Court in favour of the aforesaid view of the Calcutta High Court are CIT v. Toshiba Anand Lamps Ltd. [1984] 145 ITR 563 and Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444.
As far as this court is concerned, the view of the Calcutta High Court in Kanan Devan Hills Produce Co. Ltd.'s case [1979] 119 ITR 431 has found favour. In the case of Instalment Supply P. Ltd. v. CIT , it was held by this court that reimbursement of medical expenses by paying cash to the employee was not a perquisite. This view was reiterated by this court in CIT v. Escorts Ltd. and CIT v. Jay Engineering Works Ltd. [1990] 182 ITR 181.
Apart from the aforesaid authorities including three decisions of this court, it is clear to us that payment of the type which was made is not a perquisite. Explanation 2(b) to section 40A(5) is exhaustive."
7. In CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150, this court only reiterated what it had accepted in CIT v. G. Venkataraman [1978] 111 ITR 444 (Mad) and expressed its agreement with the judgment of the Calcutta High Court in CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 and reiterated the law that the term "payment as a perquisite had to be a payment other than cash payment in pursuance of contract of service under section 40(a)(v), as it stood before the enactment of section 40A(5)(a). The Kerala High Court sat on larger Bench no doubt and thus had the capacity to overrule the decisions of any Bench of lesser number of judges of that court. Their opinion must have caused some problems to the Revenue as well as to the assessees in the State of Kerala, whereas in other States, all assessments proceeded with one view of the law. In Kerala, it was the opposite. In the two latter cases CIT v. Toshiba Anand Lamps Ltd. [1984] 145 ITR 563 and Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444 of the Kerala High Court, it appears they could not go with the approach of the Full Bench on the subject in the case of CIT v. Commonwealth Trust Ltd. . After having clearly taken the view that Explanation 2 in clause (c) of section 40A(5) of the Act has two important aspects, (1) it gives a special definition to the term "salary" for the purpose of the limits of allowance permissible under section 40A(5); and (2) it incorporates a special definition to the term "perquisite", thus, the only answer in this behalf is, the payment in cash made by the employer to an employee by way of reimbursement does not fall under sub-clauses (i) to (v) of clause (b) of Explanation 2 to section 40A(5) of the Act. This being so, any payment in cash to the employee by the employer may not be a perquisite and thus may be disallowed under section 40A(5)(a) of the Act. Thus, in our opinion, it is not necessary to go any further. We must record our agreement with the consensus of this court. We only reiterate that the words "whether convertible into money or not occurring in section 40A(5) read with Explanation 2(a) and (b) thereto, indicate that cash payment to the employees does not qualify as a perquisite.
8. On the question of weighted deduction under section 35B of the Act, the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee and should be one incurred wholly and exclusively on items as specified in sub-section (1) (b) thereof. The expenses referred to in the instant proceeding are termed as royalty payment to a foreign collaborator. It is conceded that this expenditure is not incurred wholly and exclusively on advertisement or publicity outside India; for information regarding markets outside India; distribution, supply or provision outside India or on the carriage of such goods to their destination outside India or on the insurance of goods in transit; maintenance outside India of branch office or agency, preparation and submission of tenders for the supply or provision outside India of goods, etc.; furnishing of samples or technical opinion, travailing outside India for the promotion of the sale outside India of, goods, etc., performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of goods, etc., or other activities for the promotion of the sale outside India of goods, etc. None of the items of expenditure as shown in section 35B(i)(b) of the Act is attracted on the payment of royalty. The Tribunal has thus, on the first question, rightly decided in favour of the assessee and on the second question, erred in holding in favour of the assessee. The two questions in the instant case are answered accordingly. No costs.