Income Tax Appellate Tribunal - Mumbai
Ajay Singh Deol vs Joint Commissioner Of Income Tax, ... on 22 October, 2003
Equivalent citations: [2004]91ITD196(MUM)
ORDER
Pramod Kumar, Accountant Member
1. This is an appeal filed by the assessee and directed against CIT(A)'s order dated 19 th March 1999 in the matter of assessment under Section 143(3) of the Income Tax Act, 1961, for the assessment year 1994-95. Solitary grievance of the assessee is that the CIT(A) erred in conforming the disallowance of Rs. 2,92,855, being medical expenses incurred on treatment of wife of appellant's chauffer, on the plea that such expenses are charitable expenses in nature and are not necessitated by business expediency.
2. We have heard the parties, perused the records and taken into account factual matrix of the case as also the applicable legal position. Before we come to the core issue in this appeal, it is desirable to briefly set out the material facts.
3. The assessee derives income from professional receipts as a cine artist. One person by the name of Shri Rawat (R, in short) was working with the assessee as a chauffer. It is not in dispute that the salaries and allowances paid to R constitute admissible deduction in the hands of the assessee and that R is in regular and bonafide employment with the assessee. Unfortunately R's wife became seriously ill and R's limited resources could not have ensured proper medical care for his ailing wife. It was in this backdrop that the assessee decided to step in and foot the medical bill in respect of R's wife. The assessee thus incurred an expenditure of Rs. 2,92,855 towards reimbursing an employee, i.e. R, medical expenses incurred on his family member. The assessee also claimed these expenses as a deduction in his computation of taxable income, being in the nature of employee cost. The assessing Officer was, however, not impressed and he rejected the claim by observing as under:
"Scrutiny of details filed by the assessee indicates that the expenditure relates to medical treatment of Ms Deepa Rawat, wife of assessee's driver. I find the expenditure incurred by the assessee is not in accordance with the terms of employment of the driver and it cannot be stated to have been incurred wholly and exclusively for business or profession. It is obvious that expenditure was guided by charitable attitude rather than business expediency. I, therefore, hold that the expenditure was not allowable as deduction"
4. Not satisfied with the above, the assessee carried the matter in appeal before the Commissioner (Appeals) but in vain. Learned Commissioner (Appeal), while appreciating the appellant's gesture of footing the medical bill in question but regretted his inability to allow the expense incurred as a deduction in computation of taxable income, by observing as follows:
"I appreciate the arguments advanced by the learned Shri Anil Sekhri more for compassionate appeal rather than legal content and justification. The learned counsel himself admits that the appellant incurred medical expenses in question as his moral duty (as distinguished from the professional obligations of the appellant) to look after the health of employee and his family. I agree with the argument of Shri Sekhri that the employer should be compassionate enough to look after the medical needs of the employees. However, the employers should charge such expenses on account of magnanimity and generousity of charitable/Moral grounds to their personal accounts, rather to the revenue. The expenditure is not allowable as a deduction under the Income tax Act."
Unable to persuade himself to accept the above stand taken by the authorities below, the assessee is in second appeal before us.
5. On thing which is immediately discernable is that the sole and proximate reason for the stand so taken by the authorities blow is that the assessee was not under a contractual for legal obligation to reimburse the employee any medical bills for the treatment of employee's family members, or, for that purpose, even the employee himself. The proposition thus impliedly laid down is that unless an assessee has an obligation to incur an expense, or, in other words, when an assessee incurs the expense voluntarily, the same does not constitute an admissible deduction. It is this proposition based on which the assessee has been declined the claim for deduction of medical expenses of employee's family member.
6. On this fundamental proposition itself, however, we cannot approve the view taken by lower authorities.
7. In our considered view, as long as expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature. In other words, it is not necessary that every expense that could be allowed as deduction should be such as a hard nosed, and perhaps devoid of senses of compassion, professional or business pursuits. It is not in dispute that R was an employee of the assessee and the employee cost in respect of R, constitutes an admissible deduction. The question then is that when an assessee incurs more cost on employment of R than the cost, strictly speaking from a legal or contractual point of view, the assessee was required to incur, whether such a cost will be admissible deduction or not.
8. We find guidance from a passage from the judgment of House of Lords in the case of Atherton v. British Insulated & Helsbey Cables Ltd. 1925 (10) Tax Cases 155) HL, referred to with approval by the Hon'ble Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), which reads as follows:
"It was made clear in the above cited cases of Usher's Wilshire Brewery v. Bruce (supra) and Smith v. Incorporated Council of Law Reporting 1914 (6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of the business may yet be expanded wholly and exclusively for the purpose of the trade; and it appears to me that the findings of the Commissioners in the present case bring the payment in question within the description. They found (in words which I have already quoted) that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible-thus is effect, though not in terms, negativing the Crown's contentions. I think that there was ample material to support the findings of the Commissioners, and accordingly hold that this prohibition does not apply."
It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as `wholly and exclusively'. Explaining this principle, Hon'ble Supreme Court has, in the case of Sasson J David & Co On Pvt. Ltd. v. CIT (118 ITR 261) inter alia observed that:
"It has to be observed here that the expression "wholly and exclusively" used in Section 10(2) (xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction Under Section 10(2) (xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of Section 37 of the I.T. Act, 1961, which corresponds to Section 10(2) (xv) of the Act. An attempt was made in the I.T. Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claming deduction under Section 37 Section 37(1) in the Bill read "any expenditure..... laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed....". The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when Section 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2) (xv) of the Act if it satisfies otherwise the tests laid down by law."
9. Let us not loose sight of the fact that R is an employee of the assessee and any costs incurred on R's employment are in the nature of employee cost to the assessee which are fully deductible under Section 37(1) of the Act. Normally when an assessee incur costs on account of reimbursement of medical expenses for employees and their family members, these costs are routinely allowed as a deduction under Section 37(1) being in the nature of employee costs. The limited question before us was that whether a payment made to the employee, which is otherwise eligible for deduction being in the nature of employee cost on account of medical reimbursements, without there being any legal or contractual obligation to o so would be disqualified from deduction, or not. Our answer is an emphatic no. We are also of the view that even if assessee's incurring an employee costs is motivated more by philanthropic desires rather than hard nosed business sense, it will still continue to be employee cost and hence deductible as usual under Section 37(1) of the Act. As for learned Commissioner (Appeals) remark that no doubt "the employer should be compassionate enough to look after the medical needs of the employees' but "employer should charge such expenses on account of magnanimity and generousity or charitable/ moral grounds to their person accounts, rather to the revenue", we may only mention that what is taxable to income tax is the income and if, to earn that income, an assessee has incurred business expenses with a sense of compassion for fellow human beings and contribution to the sense of brotherhood in society, those expenses donot cease to be deductible. The minimum one can do, to encourage such kind hearted deeds as appears to have been done by this assessee, is not to belittle those noble gestures by marking those gestures as `benevolence at the cost of exchequer'. The exchequer does not require tax payers to pay taxes on all their receipts, without any deductions, or to claim deductions for only such expenses as Shylock would have incurred if he was in assessee's place. We leave it at that.
10. For the reasons set out above, we direct the Assessing Officer to delete the disallowance of Rs. 2,92,855 towards assessee's reimbursing his employee medical expenses incurred on employee's family member.
11. The appeal thus stands allowed.