Kerala High Court
C.W.S. (India) Ltd. vs Commissioner Of Income-Tax on 22 October, 1991
Equivalent citations: [1992]198ITR660(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.S. Paripoornan, J.
1. This batch of six referred cases are connected. Three cases have been referred to this court, at the instance of an assessee to income-tax (I.T. R. Nos. 24 to 26 of 1989). The Revenue is the respondent herein. They relate to the assessment years 1979-80, 1980-81 and 1981-82. For the identical three years, certain questions of law have been referred, at the instance of the Revenue, and they form the subject matter of I.T.R. Nos. 27 to 29 of 1989. So, this batch of six cases, three at the instance of an assessee and three at the instance of the Revenue, relate to the assessment years 1979-80, 1980-81 and 1981-82. All the six referred cases arise out of the common appellate order passed by the Income-tax Appellate Tribunal, dated May 12, 1987.
2. Only one common question of law, referred to this court at the instance of the assessee, relates to the three years and the other question, referred at the instance of the assessee, relates only to the assessment year 1981-82. Similarly, one question has been referred, at the instance of the Revenue, for all the assessment years and a different question has been referred relating to the two assessment years (1980-81 and 1981-82). So, the questions referred at the instance of the assessee and at the instance of the Revenue are as follows :
3. A. The questions referred at the instance of the assessee, for the assessment years 1979-80, 1980-81 and 1981-82 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that--
(i) educational allowance ;
(ii) servants' allowance ; and
(iii) leave travel allowance be treated as perquisites for the purpose of computing the disallowance under Section 40A(5) of the Income-tax Act?"
For the assessment year 1981-82 only :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest paid on housing loan for the purpose of construction of employees' quarters was not deductible as being capital in nature?"
B. The question referred at the instance of the Revenue :
For all the assessment years :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the perquisite value of cars provided by the assessee to its employees should be valued as per Rule 3(c)(iii) for the purposes of disallowance under Section 40A(5)?"
Question for the assessment years 1980-81 and 1981-82 only :
"Whether, on the facts and in the circumstances of the case, 15% of expenditure on maintenance of shade trees is an allowable deduction ?"
4. For the three assessment years (1979-80, 1980-81 and 1981-82), in the appeals filed by the assessee, the Income-tax Appellate Tribunal passed a common order dated May 12, 1987. The assessee is a non-resident company incorporated in the U. K. It is maintaining its accounts on mercantile basis. It owns rubber plantations in Tamil Nadu and Assam. While effecting the assessments, the Income-tax Officer included the following items of expenditure for computing the disallowance under Section 40A(5) of the Income-tax Act :
(1) Expenditure on maintenance of buildings ;
(2) Depreciation on buildings ;
(3) Educational allowance ;
(4) Servants' allowance ; and (5) Leave travel allowance.
5. The disallowances in respect of the above items were confirmed by the Commissioner of Income-tax (Appeals) and by the Income-tax Appellate Tribunal. The expenditure on maintenance of buildings and depreciation on buildings were treated on the same basis. Relying on a Full Bench decision of this court in CIT v. Forbes, Ewart and Figgis (P) Ltd. [1982] 138 ITR 1, the Appellate Tribunal held that the expenditure relating to maintenance of buildings and depreciation on buildings is not permissible. The assessee has not sought for reference of any question on that aspect.
6. We shall first take up the two questions referred to this court at the instance of the Revenue which form the subject matter of I. T. R. Nos. 27 to 29 of 1989. The Income-tax Officer disallowed one-third of the expenditure and depreciation on the cars given for the use of the employees under Section 40A(5) of the Income-tax Act. It was confirmed by the Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal, relying on its earlier decision rendered in the case of Malayalam Plantations Ltd. in I. T. A. Nos. 447 & 525/Coch/1983, directed the Income-tax Officer to compute the perquisite value of the car as per Rule 3(c)(ii) of the Income-tax Rules. For all the assessments, at the instance of the Revenue, a question has been referred to this court posing as to whether the Appellate Tribunal was right in holding that the perquisite value of the car provided by the assessee to its employees should be valued as per Rule 3(c)(iii) for the purpose of disallowance under Section 40A(5) of the Act. The decision relied on by the Income-tax Appellate Tribunal (I. T. A. Nos. 447 and 525/Coch/1983) was the subject-matter of a reference to this court in I.T.R. No. 172 of 1986. A Bench of this court to which one of us was a party rendered its decision on June 18, 1990. The decision is reported in CIT v. Malayalam Plantations (India) Ltd. [1990] 186 ITR 322 (Ker). Therein, this court held that the decision of the Appellate Tribunal in applying or relying on Rule 3(c)(ii) of the Income-tax Rules and in directing the Income-tax Officer to value the perquisite of the car provided by the assessee to its employees as per the said rules cannot stand scrutiny due to non-consideration of the salient facts arising in the case and so this court declined to answer the questions referred to it ; but directed the Income-tax Officer to decide the matter afresh in accordance with law and in the light of the observations contained in the said judgment.
7. Following the earlier Bench decision of this court in CIT v. Malayalam Plantations (India) Ltd. [1990] 186 ITR 322, we decline to answer the first question referred to this court, at the instance of the Revenue, in I.T.R. Nos. 27 to 29, but direct the Income-tax Appellate Tribunal to restore the appeals to its file on that aspect and decide the matter afresh in accordance with law.
8. The second and the only other question referred to this court, at the instance of the Revenue, in I.T. R. Nos. 27 to 29 of 1989, relates to the assessment years 1980-81 and 1981-82. It relates to the disallowance of 15 per cent. of expenditure on maintenance of shade trees. The Income-tax Officer disallowed 15 per cent. of the expenditure on maintenance of shade trees, as was done in the earlier years. It was confirmed on the same lines by adopting the same reasoning by the Commissioner of Income-tax (Appeals). The Appellate Tribunal, in paragraph 12 of its order, held that the disallowance cannot be confirmed or upheld only because it was not challenged in the earlier years by the assessee and that no sufficient reason was made out for disallowing a part of the expenditure on maintenance. But, without further discussion, while setting aside the orders of the authorities below, the Appellate Tribunal directed deletion of the entire disallowance of Rs. 20,955. Counsel for the Revenue contended that it was arbitrarily done. No independent consideration as to whether any disallowance is called for, and if so, the percentage of disallowance that should be made, is seen. It was submitted that the Appellate Tribunal, no doubt, could set aside the orders of the authorities below regarding the disallowances, but it should be for valid reasons and, in adjudicating it, the fact that such disallowance made was not challenged in the earlier years could be borne in mind. The fixation of the quantum of disallowance of any amount should not be arbitrary. But, the Appellate Tribunal has a duty to consider as to whether the "entire" expenditure on maintenance of shade trees was, on the facts, allowable and, on that aspect, there was no proper evaluation of the various aspects that arose for consideration. We find that this matter has been dealt with by the Appellate Tribunal in paragraphs 11 and 12 of its order. There is no proper evaluation or finding or adjudication as to whether the expenditure on maintenance of shade trees made is allowable in full, and if not, the quantum of disallowance called for. Since no independent consideration has been made by the Appellate Tribunal in accordance with law, we hold that the decision of the Appellate Tribunal deleting the entire disallowance of Rs. 20,955 is unjustified in law. The matter should be adjudicated afresh in accordance with law.
9. We decline to answer the second question referred at the instance of the Revenue, relating to the assessment years 1980-81 and 1981-82, but direct the Income-tax Appellate Tribunal to restore the appeals to its file on that aspect and decide the matter afresh in accordance with law.
10. The above two questions exhaust the three references (I. T. R. Nos. 27 to 29 of 1989) made to this court, at the instance of the Revenue.
11. Now, we will take up the questions referred to this court, at the instance of the assessee, in I. T. R. Nos. 24 to 26 of 1989. Two questions have been referred in I. T. R. Nos. 24 to 26 of 1989. One question is common for all the assessment years 1979-80, 1980-81 and 1981-82. The said question is to the following effect : .
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that--
(i) educational allowance ;
(ii) servants' allowance ; and
(iii) leave travel allowance.
be treated as perquisites for the purpose of computing the disallowance under Section 40A(5) of the Income-tax Act?"
12. The matter has been dealt with by the Tribunal in paragraphs 4 and 5 of the appellate order dated May 12, 1987. The question that arose before the Tribunal was whether the Income-tax Officer was justified in effecting any disallowance in the above categories of allowances under Section 40A(5) of the Act. Reliance was placed by the assessee's counsel on the decisions reported in CIT v. Toshiba Anand Lamps Ltd. [1984] 145 ITR 563 (Ker) and Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444 (Ker) to contend that the aforesaid allowances, namely, educational allowance, servants' allowance and leave 'travel allowance, cannot be considered to be perquisites and cannot be taken into account for computing the disallowance to be made under Section 40A(5) of the Act. In paragraph 5 of the appellate order, the Appellate Tribunal held that the decision in Travancore Tea Estates Co. Ltd.'s case [1985] 153 ITR 444 (Ker) deals with marriage allowance and the decision in Toshiba Anand Lamps Ltd.'s case [1984] 145 ITR 563 (Ker) did not deal with the allowances that arose for consideration in the instant cases. It also held that educational allowance specifically came up in the assessee's own case for the assessment year 1978-79 and the Appellate Tribunal held that the cash allowances received by the employees from the assessee are to be taken into account for the purpose of Section 40A(5) of the Act. On this basis, the decision of the Commissioner of Income-tax (Appeals) was affirmed. The assessee's plea was rejected. We are of the view that the Appellate Tribunal has not adjudicated the question that arose before it in a fair or proper manner. The Tribunal failed to advert to the provisions of Section 40A(5) of the Act. There is no finding that the educationa allowance, servants' allowance and leave travel allowance are perquisites. There is no reasoning or discussion as to whether these allowances can be taken into account for computing the disallowance to be made under section 40A(5) of the Act. The import of the two decisions in CIT v. Toshiba Anand Lamps Ltd. [1984] 145 ITR 563 (Ker) and Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444 (Ker) have not been properly adverted to. What is more, its own earlier decision in the assessee's own case for the year 1978-79 (Order dated March 26, 1984, in I.T.A. No. 554(Coch) of 1980) relied on does not form part of the paper book and there is no knowing on what ground and on what basis and to what extent, the Tribunal held that the cash allowances received by the employees from the assessee are to be taken into account for the purpose of Section 40A(5) of the Act. Though it is stated that educational allowance was specifically in dispute in the assessee's own case for the assessment year 1978-79, what was the decision rendered on that score by the order dated March 26, 1984, in I.T.A. No. 554(Coch) of 1980 is not stated. We are not in a position to know the reasons or basis on which the Tribunal adjudicated that the educational allowance can be considered to be a perquisite under Section 40A(5) of the Act and even so, was it so held in the assessee's own case for the assessment year 1978-79 is not clear. Since the reasoning and the conclusion in deciding the disallowance under Section 40A(5) of the Income-tax Act are clumsy and vague and relevant and proper materials in that regard have not been adverted to, the conclusion of the Appellate Tribunal is not in accordance with law. We should state that the Appellate Tribunal has failed to consider the question posed before it in accordance with law. Therefore, we decline to answer the common question that arose for decision, for all the three years (1979-80, 1980-81 and 1981-82)--"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that (i) educational allowance ; (ii) servants' allowance ; and (iii) leave travel allowance be treated as perquisites for the purpose of computing the disallowance under Section 40A(5) of the Income-tax Act ? "We direct the Income-tax Appellate Tribunal to restore the appeals to its file on that aspect and proceed to determine the question in accordance with law afresh.
13. The only further question referred to this court, at the instance of the assessee, relates to the assessment year 1981-82. That relates to the interest paid on housing loan for the purpose of construction of employees' quarters. The matter has been dealt with by the Tribunal in paragraphs 18 and 19 of the appellate order dated May 12, 1987. The plea of the assessee was that the loan amount was utilised for the construction of employees' quarters and the interest paid on the loan is properly deductible under Section 36(1)(iii) of the Income-tax Act. The rival pleas were noticed by the Appellate Tribunal in paragraph 18 of its order. The Tribunal carne to the conclusion that the house building loan was not capital borrowed for the business. The house building loan was taken for the construction of a capital asset, viz., residences for the employees. So, the interest paid is of a capital nature and rightly disallowed. In dealing with the above, the Appellate Tribunal should have adverted to the fact as to whether there was any obligation, express or implied, on the assessee to provide quarters to the employees and whether it is in pursuance of any such obligation that the quarters were provided to the employees. In other words, what is the basis or reason that prompted the assessee to provide quarters to its employees ? A probe or finding on that aspect has a bearing on the further question as to whether the capital was borrowed for the purpose of business or otherwise. Without adverting to that fundamental fact, the Appellate Tribunal has surmised that the assessee took a house building loan for construction of residences for the employees which was not capital borrowed for the purpose of business. Moreover, there is no discussion about the decision of the Supreme Court brought to its notice--State of Madras v. G.J. Coelho [1964] 53 ITR 186. We should say that the finding of the Appellate Tribunal that the house building loan was taken for construction of a capital asset, i.e., residences for the employees, and so the interest paid is of a capital nature and rightly disallowed, is perfunctory and the finding and conclusion in that regard have been arrived at without investigating as to in what circumstances the assessee provided quarters for the employees and whether the quarters were provided in pursuance of any legal obligation. We are of the view that an investigation and finding on that aspect will go a long way in evaluating and finding whether the loan was taken for the purpose of business or otherwise. In so far as such investigation has not been done and a finding has not been entered, and the question referred to us is rather broad and vague in its sweep, we decline to answer the only question referred for the assessment year 1981-82, at the instance of the assessee. We direct the Income-tax Appellate Tribunal to restore the appeal to its file on that aspect and decide the question in accordance with law afresh.
14. Briefly stated, we decline to answer both the questions referred to this court, at the instance of the assessee, but direct the Income-tax Appellate Tribunal to restore the relevant appeals to its file and decide the matters afresh in accordance with law and in the light of the observations contained hereinabove.
15. The references are disposed of as above.
16. 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.