Kerala High Court
Commissioner Of Income-Tax vs Malayalam Plantations (India) Ltd. on 18 June, 1990
Equivalent citations: [1990]186ITR322(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.S. Paripoornan, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law for the decision of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right:--
(i) in applying/relying on Rule 3(c)(ii) of the Income-tax Rules, 1962 ?
(ii) in directing the Income-tax Officer to value the perquisites by way of the car provided by the assessee to its employees as per Rule 3(c)(ii) and to consider only this amount for disallowance under Section 40A(5) ?"
2. The respondent is a plantation company. We are concerned with the assessment year 1979-80. The previous year ended on March 31, 1979. The assessee had given cars for the use of the employees. In bringing to tax the income of the respondent-company, the Income-tax Officer disallowed one-third of the expenditure and depreciation on the said cars. This was affirmed by the Commissioner of Income-tax (Appeals). But, in second appeal, the Income-tax Appellate Tribunal, purporting to follow the decision of the Calcutta High Court in CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35, held that the Income-tax Officer has not considered the total use of the cars vis-a-vis the use of the cars relating to the personal use of the employees, that he had not given any details as to how he worked out the disallowance under Section 40A(5) of the Act and, in these circumstances, the Appellate Tribunal directed the Income-tax Officer to value the perquisite by way of the cars provided by the assessee to its employees as per Rule 3(c)(ii) of the Income-tax Rules and consider the disallowance under Section 40A(5) of the Act. It is thereafter at the instance of the Revenue that the question of law formulated hereinabove has been referred for the decision of this court.
3. We heard counsel. Section 40A(5) of the Income-tax Act provides as follows :
"40A. Expenses or payments not deductible in certain circumstances.--...
(5) (a) Where the assessee-
(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or
(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of 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 : ...
(c) The limits referred to in Clause (a) are the following, namely :--. ..
Explanation 2.--In this sub-section,--
(a) "salary" has the meaning assigned ...
(b) "perquisite" means--..."
4. Rule 3(c)(ii) of the Income-tax Rules provides as follows :
"3. Valuation of perquisites.--For the purpose of computing the income chargeable under the head "Salaries", the value of the perquisites (not provided for by way of monetary payment to the assessee) mentioned below shall be determined in accordance with the following clauses, namely :--...
(c)(ii) the value of a motor car provided by the employer for use by the assessee partly in the performance of his duties and partly for his private or personal purposes shall be determined to be a sum equal to that part of the amount actually expended by the employer on the maintenance and running of the motor car during the relevant previous year (including remuneration, if any, paid by the employer to the chauffeur) which can reasonably be attributed to the user of the motor car by the assessee for his private or personal purposes or, where the motor car is owned by the employer, the aggregate of such sum and of a sum equal to that part of the amount representing the normal wear and tear of the motor car which can reasonably be attributed to the user of the motor car by the assessee for his private or personal purposes ; so, however, that where a determination on the basis mentioned above presents difficulty, the value of the perquisite may be determined on the basis provided in the Table below :--..."
5. In order to understand the true import of Section 40A(5) of the Income-tax Act vis-a-vis Rule 3(c)(ii) of the Income-tax Rules, adverted to by the Appellate Tribunal, it will be useful to trace the history of the legislation. The limit regarding deduction in respect of salary, perquisites and fees in the hands of the employer/assessee was originally dealt with by Section 40(c)(iii) for the assessment years 1963-64 to 1968-69, and, thereafter, by Section 40(a)(v) for the assessment years 1969-70 to 1971-72. From the assessment year 1972-73 onwards, the matter is dealt with by Section 40A(5) of the Income-tax Act. It should be remembered that the language and context in which Section 40(c)(iii) occurred, as also the subsequent Section 40(a)(v) is a little different from the language and setting of Section 40A(5) of the Income-tax Act. It is also worthwhile to note that the decision of the Calcutta High Court, relied on by the Appellate Tribunal, in CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35 centred round Section 40(c)(iii) of the Income-tax Act, 1961, as it stood then, read along with Rule 3(c)(ii) and Rule 6D of the Income-tax Rules, 1962. In that case, the court held that the value of the perquisite by way of free car provided to an employee should be taken in the hands of the employer-assessee, for the purpose of Section 40(c)(iii), at the same figure as it was taken in the hands of the employee. Section 40(c)(iii) of the Income-tax Act which came up for consideration before the Calcutta High Court at the relevant time stood as follows (at page 38 of 135 ITR) :
"Any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee, who is a citizen of India, to the extent such expenditure exceeds the amount calculated at the rate of five thousand rupees per month for any period of his employment after the 28th day of February, 1963 :
Provided that in computing the aforesaid expenditure any payments by way of gratuity or any sums comprised in the transferred balance of an employee participating in a recognised provident fund referred to in Clause (vii) of Sub-section (1) of Section 17, or the amount of any compensation referred to in Clause (i) or any payment referred to in Clause (ii) of Sub-section (3) of that section shall not be taken into account."
6. Section 40(a)(v), which was substituted for the above section, for the assessment years 1969-70 to 1971-72, stood as follows :
"(v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of salary payable to the employee, or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year, whichever is less :
Provided that in computing the aforesaid expenditure or allowance, the following shall not be taken into account, namely :
(a) any payment by way of gratuity ;
(b) the value of any travel concession or assistance referred to in 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) 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."
7. (We have extracted Section 40A(5) of the Income-tax Act, 1961, earlier in this judgment). A perusal of the above sections will highlight the difference in the statute from time to time (at three different stages).
8. The respondent is a public limited company. The assessing authority was computing its taxable income. During the course of assessment, the assessing authority found that the assessee had given cars for the use of its employees. Therefore, the Income-tax Officer/assessing authority invoked Section 40A(5) of the Income-tax Act and disallowed one-third of the expenditure and depreciation on the cars given for the use of its employees. This was concurred with by the Commissioner of Income-tax (Appeals). The Income-tax Officer did not give the break up of the disallowance under Section 40A(5) of the Act. Before the Tribunal, the plea of the assessee was that the valuation of a perquisite for the purpose of disallowance under Section 40A(5) of the Act should be done in accordance with Rule 3(c)(ii) of the Income-tax Rules. Reliance was placed on the decision of the Calcutta High Court in Britannia Industries Co. Ltd.'s case [1982] 135 ITR 35. The Revenue contended that Rule 3(c)(ii) of the Income-tax Rules is applicable only for valuing the perquisite in the hands of the employees for assessment under the head "Salaries" and not for the purpose of the disallowance to be made under Section 40A(5) in the hands of the employer. The detailed statement filed by the assessee before the Income-tax Officer showing salaries, expenses incurred and depreciation claimed on buildings and cars used partly for business and partly for personal purposes, was adverted to and it was contended by the Revenue that the assessee could have in a similar manner arrived at the amount actually expended by it on the maintenance expenditure on motor cars and depreciation which can reasonably be attributed to the personal use by the employees. The Income-tax Appellate Tribunal held that the Income-tax Officer has not considered the total use of the cars vis-a-vis the use of the cars relating to the personal use of the employees, that the Income-tax Officer had not given any details as to how he worked out the disallowance at Rs. 4,46,500 and so, in the circumstances, the Appellate Tribunal directed the assessing authority to value the perquisite by way of the cars provided by the assessee to the employees as per Rule 3(c)(ii) of the Income-tax Rules for disallowance under Section 40A(5) of the Act.
9. We heard counsel. The entire argument centred round the validity and propriety of the direction given by the Income-tax Appellate Tribunal as aforesaid. We are of the view that the Appellate Tribunal probably proceeded on the basis that the decision of the Calcutta High Court in Britannia Industries Co. Ltd.'s case [1982] 135 ITR 35, is squarely applicable herein and, on that basis, issued the direction contained in para 4 of the appellate order. It is evident that the Appellate Tribunal failed to note that in Britannia Industries Co. Ltd.'s case [1982] 135 ITR 35, the Calcutta High Court was concerned with Section 40(c)(iii) of the Income-tax Act as it stood then. It is plausible to take the view that the non-deducibility of the expenditure or of the allowance in the hands of the company (employee is not to be affected in any way by the consideration that the remuneration or benefit or amenity or privilege is included as a perquisite in the hands of the employee-recipient and is taxable. The objects of Section 40A(5) of the Act and Rule 3(c)(ii) of the Rules are distinct and different. Prima facie, it appears to us that Section 40A(5) of the Act is intended to effectively check the extravagant expenditure by the employer. On the other hand, Rule 3(c)(ii) of the Income-tax Rules is a provision bringing to tax the amount of perquisites actually received by an employee. The taxability of such amounts in the hands of the employee cannot ordinarily be a criterion for the deductibility of the said amount in the hands of the employer. The ratio of the Calcutta High Court decision in Britannia Industries Co. Ltd.'s case [1982] 135 ITR 35 that where the value of a perquisite for the purposes of an employee's assessment has been worked out in accordance with the relevant rule--Rule 3(c)(ii)--the same value should be adopted for the purpose of disallowance in the hands of the employer cannot ipso facto be applied for evaluating the disallowance permissible under Section 40A(5) of the Act. The scope of the relevant statutory provision as it stood when the Calcutta decision was rendered and the scope of the statutory provision applicable herein (Section 40A(5)) were not properly evaluated or considered by the Appellate Tribunal. It need hardly be stated that, as per the ratio of the Full Bench decision of this court in CIT v. Forbes, Ewart and Figgis (P.) Ltd. [1982] 138 ITR 1, the control or regulation is on the amount expended on the asset which is used by the employee for his own benefit to the extent he uses it for his personal purposes. None of the above salient features was considered by the Appellate Tribunal before giving the direction, as contained in para 4 of the appellate order, dated August 29, 1985, In other words, we hold that the Appellate Tribunal gave the direction, as it did, without applying its mind. It assumed that the decision of the Calcutta High Court in Britannia Industries Co. Ltd. [1982] 135 ITR 35 is squarely applicable and, on that basis, stated that the value of the perquisites for the purpose of disallowance should be on the basis of Rule 3(c)(ii) of the Income-tax Rules. The said direction has been given without a proper evaluation of the relevant provisions of the Act and the Rules and without considering the objects of the two provisions--the one contained in the Act and the other contained in the Rules. The perspective with which the provisions of the Act and the provisions in the Rules should be viewed are different. These are matters for a detailed and in-depth consideration, as a result of which alone, a proper conclusion can be arrived at. It has not been done in this case. The conclusion arrived at by the Appellate Tribunal is, in the circumstances, totally unsatisfactory and perfunctory.
10. In this view, we decline to answer the questions referred to us. But, at the same time, we direct the Income-tax Appellate Tribunal to restore the appeal to the file and decide the matter afresh in accordance with law and in the light of the observations contained herein.
11. The reference is disposed of as above.
12. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.