Delhi High Court
Scott. R. Bayman vs Commissioner Of Income Tax, Del on 17 August, 2012
Author: S. Ravindra Bhat
Bench: S. Ravindra Bhat, R.V. Easwar
* IN THE HIGH COURT OF DELHI AT NEW DELHI
RESERVED ON : 09.08.2012
DECIDED ON : 17.08.2012
+ ITA 285/2003
SCOTT R.BAYMAN ..... Appellant
Through : Mr. S.Ganesh, Sr. Advocate with
Mr. Pawan Sharma, Ms. Madhavi Swaroop, Ms. Preeti Goel
and Ms. Roohina Dua, Advocates
versus
COMMISSIONER OF INCOME TAX,DEL ..... Respondent
Through : Mr. Deepak Chopra, Sr. Standing Counsel with
Mr. Harpreet Singh Ajmani, Advocate
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
MR. JUSTICE S.RAVINDRA BHAT
%
1. The present appeal is directed against an order of Income Tax Appellate
Tribunal (ITAT) dated 21.08.2012 in ITA No.1617/Del/97. The following
question of law was framed for consideration in the present appeal on
30.07.2004.
"Whether the amount spent by the employer towards the repair of
building would be covered by clauses (iii) & (iv) of Sub-Section 2 of
Section 17 of the Income Tax Act, 1961?"
2. The brief facts are that the assessee was the President and CEO of M/s
GE International Operations Corp. Inc. (in short GEIOCI). He had filed a return
of income on 30th June 1994; which was processed under Section 143(1)(a) at
ITA No.285/2003 Page 1
Rs.39,27,839/-. He later filed a revised return disclosing his total income as
Rs.84,74,828/-. He had filed a certificate of salary from his employer showing
a total receipt of US $ 276442 as salary and furnished residential
accommodation as well as other benefits. The Assessing Officer, during the
course of proceedings, observed that for the year under consideration the
assessee's employer had incurred expenses of Rs.50 lakhs towards repair and
renovations of the residential accommodation occupied by him. To examine the
matter further, a notice under Section 131 was issued to the assessee. In
response to certain queries, the assessee's representative furnished answers. He
had contended that his predecessor in the corporation had stayed longer than
was expected and for that duration very little money was incurred by GE
International Operations Corp. Inc. for maintaining the residence i.e. 4
Panchsheel Marg. When the assessee took over his position, it was difficult for
him to find a residence comparable to what he was used to in United States, as a
result of which the employer decided to extend the lease for the house which
had been leased for the assessee's predecessor and upgrade the facilities
befitting a person of his seniority and status. The employer GEIOCI approved
this arrangement and accordingly paid about Rs.50 lakhs to M/s Framework
Interiors for carrying out various works like electric wiring, plumbing, air-
condition ducting, security fencing, guard rooms etc. With this amount some
furniture etc. was also bought. The Assessing Officer held that the amount of
Rs. 50,51,971/- was a perquisite in the hands of the assessee by virtue of
Section 17 (2) (iv).
3. The reasoning of the Assessing Officer was that the expenses incurred by
the employer was to suit the requirements of employee and that it had nothing to
do with the performance of his duties for his office. The order of assessment
rejected the contention that perquisite value if any could be calculated only on
the basis of Rule 3 of the Income Tax Rules, it was held that if the expenses are
ITA No.285/2003 Page 2
only towards repairs or maintenance they could have been taken as expenditure
incurred in order to keep the house habitable. The Assessing Officer, thus,
concluded that:
"Thus, looking to the fact that these expenses were incurred by the
employer and these would have otherwise been payable by the assessee,
they are a perquisite value in terms of Sec. 17 (2) (iv). Another important
point to be noted is that the perquisite value in terms of Rule 3 is
determinable only on the basis of the rent paid by the employer to the
landlord and which has been determined as per the terms of lease
agreement and, therefore, that cannot be further modified in view of the
alleged case in the fair rental value. In subsequent years, the lease rent
may be enhanced by the landlord but that will not be based on any
modifications carried out by the landlord, as this has been paid by the
lessee for modification in the building. An increase in the lease rent in
the subsequent financial years will be attributable to the overall increase
in the rent within Delhi and not because of these modifications.
Accordingly, the expenses incurred on modifications will not form part of
the lease rental, which has been determined separately as per the lease
agreement. The sum of Rs.50,51,971 incurred accordingly is a perquisite
in the hands of Mr. Scott Bayman from his employer and is being added
to the income of the assessee as such."
4. The assessee's appeal to the ITAT was rejected by the impugned order
dated 24.12.1996. The Appellate Commissioner's reasoning proceeds on the
following basis:
"If a renovation is person specific, then it is only that individual who uses
it benefits. The lease is in the name of appellant and not in the name of
the employer company. Appellant's predecessor was staying in the same
premises earlier and if any normal repairs were required, the appellant
was bound to ask the owner to carry out such normal repairs and
replacement as the appellant is paying a rent as high as about Rs.2 lakhs
per month (Rs.23.70 lacs per annum) to the owner of the premises. This
rent has gone up to Rs. 5 lacs per month in later years. The definition of
perquisite is wide enough to take into account any benefits granted by the
employer whether by way of advance payment or by way of
reimbursement for the facilities and benefits which an employer agrees to
grant to its employees and the definition of perquisite as brought out is
only an inclusive definition. Whether the payment is made in one year or
two years, so long as the benefit is given and the expenditure is
ITA No.285/2003 Page 3
contracted to be paid, the perquisite resulting therefrom has to be taxed
in that year. The appellant has not brought on record any evidence that
only part of work was completed during the year. There is therefore no
ground to interfere with the order of the Dy. Commissioner bringing to
tax the perquisite on account of Rs.50 lakhs incurred by the employer for
renovation and repairs to the rented premises, leased by the appellant."
5. The Tribunal was of the view that neither the Assessing Officer nor those
of the Appellate Commissioner were in error in holding that the repairs and
renovations constituted taxable perquisite in the hands of the employee. The
Tribunal also upheld the view of the lower authorities that the lease was
executed in favour of the assessee who, in fact, was the lessee. The Tribunal
felt that having regard to the terms of the employment and the stipulations in the
lease deed, the payment made towards renovation was primarily the assessee's
obligation which was discharged by the employer and therefore, taxable in the
appellant's hands.
Contentions of the Appellant
6. It is argued by the appellant, that the Tribunal fell into an error in
upholding the contention of the Revenue that expenditure of Rs.50,51,977 was a
perquisite without any sustainable reasoning. It is urged that the perquisite
value of rent free accommodation under Section 17(2)(i) had been declared by
the appellant in return of his income which was assessed. In these
circumstances, the reference to Section 17(2)(i) was unwarranted because the
assessee was under no obligation to incur the expenses on repairs and
renovation or modification of rent free accommodation. Reliance is further
placed on Clause 3 of the Service Contract in support of the submission that the
employer had to provide the assessee with furnished accommodation including
maintenance, security and services. The employer had to renovate and upgrade
ITA No.285/2003 Page 4
the facilities upto the mark having regard to assessee's status in the company.
Reliance is also placed upon Clause 11 of the lease deed between the assessee
and the landlord which read as follows:
"11. That in consideration for payment of Rs.4,50,000 (option fee) the
lessors agree that in the event Mr. Scott R. Bayman is for any reason
transferred or leaves Delhi, then, in that event, his successor will
continue the lease for the unexpired period of the lease. Such successor
shall also be granted an option to enter into a new lease on terms to be
mutually agreed."
7. It is next contended that the method of working out rent free
accommodation for the purpose of assessment in the hands of the employees has
been provided by Rule 3 of the Income Tax Rules 1989. It is submitted that on
a fair reading of Rule 3(a)(iii), the only amount which can be taken into
consideration is that which is provided by the Rule. Counsel emphasized that if
the value of that perquisite exceeds what is actually prescribed, the legislature
has mandated a formula i.e. 10% of the salary of the individual increased by a
sum equivalent to the amount by which the fair rental value of the
accommodation exceeds 20% of the salary. In this case, the Assessing Officer
had limited discretion, if at all, in calculating the fair market value and follow
the mechanism of Rule3(a)(iii). However, he did not do so and proceeded to
add the entire sum of Rs.40,41,977/- (the sum of Rs.10 lakhs having been
charged and suitable amount, assessed as perquisite on account of furniture,
provided by the employer).
8. Counsel for the Revenue submitted that the appeal is without merit and
that the findings of the ITAT as well as the lower authorities need to be
affirmed. Reliance was placed upon the assessee's terms of appointment as
well as certain conditions in the lease deed to say that the assessee had
undertaken the obligation of hiring accommodation. If he agreed to renovate
the premises extensively, the value of the property would naturally get
ITA No.285/2003 Page 5
enhanced. In any event, the obligation to renovate the lease hold property was
that of the assessee which was discharged by the employer and therefore clearly
fell within mischief of Section 17(2)(iv).
9. Learned counsel argued that a plain reading of Clauses 7 and 9 of the
lease deed shows that the lessee could not have carried out any alternations
without the consent of the lessor. Obviously the lessee i.e. the assessee in this
case, carried out extensive repairs to suit his taste in agreement with the lessor
and undertook to bear the expenses. It was this obligation that was discharged
by the employer. By no stretch of imagination could it be excluded from the
definition of "perquisite".
10. The learned counsel for the Revenue also relied upon the judgment of the
Karnataka High Court in CIT Vs. Motor Industries Co. Limited 1988 173 ITR
374 in support of his submission. The relevant extract is as under:
"We are of the view that the entire approach made by the Tribunal is not
sound. After all, each and every amount spent on buildings cannot be
treated as spent on repairs. The term "repairs" has a special meaning.
What is necessary for the upkeep and maintenance of a building which
necessarily includes periodical colour/whitewashing and painting can
undoubtedly be treated as repairs. But, the amounts lavishly or even
unnecessarily spent just to satisfy the ego or the eccentricities of an
employee cannot be treated as an amount spent on repairs. Bearing this
and other relevant principles, the Tribunal had to decide the claim of the
assessee on repairs which it had failed to do. We have, therefore, no
alternative but to answer on the expenditure on repairs as above."
11. Before analyzing the submissions of the parties it would be necessary to
extract certain terms and conditions spelt out in the assessee's contract with his
employer, pertaining to compensation and benefits. The relevant part reads as
follows:
"a Your annual salary will be $ 200,000 and will be subject to
periodically to the normal Company Review.
ITA No.285/2003 Page 6
b You will be provided with furnished accommodation, including
maintenance, security and services at the Company's cost. Part of
such official duties and meeting business associates, holding staff
conferences, etc.
c The company will reimburse all utility costs including electricity, gas
and water at your residence.
d You will be entitled, if appropriate, to education allowance for any
eligible children.
e You will be provided with a telephone at your residence.
f You will be provided with a company car and driver for business and
personal use, for which you will be liable for tax.
g. Medical expenses incurred for you and your dependents for health care
services, including physicians and hospitalization expenses, will be
reimbursed by the company in accordance with standard practice.
h. You will be entitled to 20 days of annual vacation during each year of
service.
i. You will be eligible for those local holidays recognized by GEIOC,
India.
j. The provisions of these benefits will be in accordance with GEIOC
procedures and within any cost limits imposed by those procedures. "
12. In this case the assessee shifted into the premises 4, Panchsheel Marg,
which before him, had been in occupation of his predecessor, Mr. Bradon. The
assessee's contention that his predecessor had not renovated the premises and
that in tune with his service conditions and the status that he enjoyed within his
employer's organization, he was entitled to a certain standard of living has not
been disputed. The lease deed concededly was between the assessee and the
landlord of the premises. Apart from Clause 11 which was extracted previously
in the judgment, the material conditions are embodied in clauses 7, 8 and 9.
13. Rule 3 of the Income Tax Rules as it existed at the relevant part of the
Rule reads as follows:
"R.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
ITA No.285/2003 Page 7
assessee) mentioned below shall be determined in accordance with
the following clauses, namely: -
[(a) The value of rent-free residential accommodation shall be
determined on the basis provided hereunder, namely: -
{(i) where the accommodation is provided -
(A) by Government to a person holding an office or post
in connection with the affairs of the Union or of State;
xxx xxx xxx xxx xxx
(iii) In any other case, --
(A)the value of rent-free residential accommodation which is not
furnished shall ordinarily be a sum equal to 10 per cent of the
salary due to the assessee in respect of the period during which the
said accommodation was occupied by him during the previous
year:
Provided that ---
(1) where the fair rental value of the accommodation is in excess of
20 per cent of the assessee's salary, the value of the perquisite
shall be taken to be 10 per cent of the salary increased by a sum
equal to the amount by which the fair rental value exceeds 20
per cent of the salary; so, however, that the [Assessing Officer]
may, having regard to the nature of the accommodation,
determine the sum by which 10 per cent of the salary is to be
increased, as a percentage (not exceeding 100 per cent) of the
amount by which the fair rental value exceeds 20 per cent of the
salary;
(2) where the assessee claims, and the [Assessing Officer] is
satisfied that the sum arrived at on the basis provided above
exceeds the fair rental value of the accommodation, the value of
the perquisite to the assessee shall be limited to such fair rental
value;
(B)where the accommodation is furnished, the value of rent free
residential accommodation shall be the aggregate of the following
sums, namely: -
(1) the fair rental value of the accommodation arrived at in
accordance with the provisions of sub-clause (iii) (A) as if the
accommodation were not furnished; and
(2) the fair rent for the furniture (including television sets, radio sets,
refrigerators, other household appliances and air-conditioning
plant or equipment) calculated at [10 percent] per annum, of the
original cost of such furniture of if such furniture is hired from a
third party, the actual hire charges payable therefore."
ITA No.285/2003 Page 8
14. In Commissioner Of Income-Tax, vs L. W. Russel AIR 1965 SC 49 the
Supreme Court noticed that perquisites are "causal emoluments, fee or profit
attached to an office or position in addition to salary or wages". Essentially,
they are non-cash benefits given by an employer to employees in addition to
cash salary or wages. However, these may include cases where the employer
reimburses expenses or pays for obligations incurred by the employee. The term
is defined in the Section 17(2) of the Income-tax Act as including:
(1) Value of rent-free or concessional rent accommodation provided by the
employer.
(2) Value of any benefit/amenity granted free or at concessional rate to specified
employees etc.
(3) Any sum paid by employer in respect of an obligation, which was actually
payable by the assessee.
15. "Salary" in Section 17 of the Act has been defined in an inclusive
manner. So is the expression "perquisite". Now, in this case, concededly, the
employer did not provide rent free accommodation. Therefore, the lower
authorities did not include the value or cost of repairs under Section 17(1). The
assessee was entitled to allowances; he hired the premises which he occupied.
Those premises were occupied by his predecessor; it is contended that such
official's stay was longer than anticipated, as a result of which the premises
were not renovated. When the assessee came to India, he decided to occupy the
same premises. At the same time, he needed to get them repaired and carry out
extensive renovations to match the position he was employed in, and the life
style he was used to in the United States. The lease deed in this case spelt out
clearly that the lessor had the right to carry out major repair works. At the same
time, it also clarified that in the event of the assessee moving out of India, his
successor in office could occupy the premises.
ITA No.285/2003 Page 9
16. A careful reading of the Lease Deed nowhere suggests that the assessee
had agreed to an obligation to renovate the expenses. It would be useful, in this
context, to recollect that of the original sum of Rs. 50.51 lakhs, Rs. 10 lakhs was
spent towards furniture; the Assessing Officer took that into consideration while
working out the value of furnished residence, for the purpose of calculating the
tax liability. Having done so, the question is whether, he could have ignored the
method of calculating a higher rent, or "fair" rent, after renovation of the
premises. The other way of looking at the issue is whether the Income tax
authorities could have deviated from the prescribed method of computing the
value of the premises after renovation, by arriving at the fair rent, in the manner
stipulated in Rule 3.
17. The maxim expressio unis est exclusion atlerius means that the express
mention of one thing implies the exclusion of another. In D.R. Venkatachalam
& Ors vs Dy. Transport Commissioner AIR 1977 SC 842 the Supreme Court
held as follows:
"That rule says that an expressly laid, down mode of doing
something necessarily implies a prohibition of doing it in any other
way."
This was explained in Md.Alauddin Khan vs Karam Thamarjit Singh (2010) 7
SCC 530 as follows:
"As the principle of statutory construction, Expressio Unius Est Exclusio
Alterius states, the express inclusion of one thing is the exclusion of all
others. In this case, the specific inclusion of a condition for filing a
recriminatory petition under Section 97 of the Act, namely that a
declaration that the election petitioner or any other candidate is the
returned candidate should be filed, excludes its filing in all other cases.
Simply put, Section 97 of the Act bars filing of a counter-claim by way of
a recrimination petition when an election petition is filed without seeking
for a declaration that the election petitioner or any other candidate is the
returned candidate."
ITA No.285/2003 Page 10
The express provision of Rule 3 of the Valuation Rules - which elaborates
various contingencies in relation to the perquisite of rent free accommodation,
rules out the intention of Parliament to treat expense in relation to improvement,
repairs or renovations, as falling within the meaning of "perquisite".
18. As regards Section 17 (2) (iv), the argument on behalf of the revenue that
repairs and renovation expenses constituted an obligation of the employee/
assesse, which was borne by his employer, is meritless. The material extracts of
the Lease Deed nowhere spell out any obligation to carry out repairs and
renovations. Therefore, that provision cannot be made applicable.
19. In the present case, if the Assessing Officer had returned a finding that
the premises were to be valued at market value (of the rental), in case it
increased as a result of the renovations, the only prescribed mode was to apply
the method indicated by Rule 3 (a) (iii) of the Valuation Rules. The AO could
not have included the entire expenses, and spread it over a period of five years,
for the purpose of saying that the whole of such expense constituted a
perquisite.
20. In view of the above discussion, the Appeal has to succeed; the impugned
order of the Tribunal is hereby set aside. The cost of repairs and renovation
shall be deleted from the taxable income of the assessee. The appeal is
accordingly allowed.
S. RAVINDRA BHAT, J.
R.V.EASWAR, J. AUGUST 17, 2012 ITA No.285/2003 Page 11