Madras High Court
Wheels India Ltd. vs Commissioner Of Income Tax on 9 February, 1995
Author: T. Jayarama Chouta
Bench: T. Jayarama Chouta
JUDGMENT Thanikkachalam, J.
1. At the instance of the assessee, the Tribunal referred the following questions of law said to arise out of the order of the Tribunal for our opinion under s. 256(1) of the IT Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses incurred by the applicant amounting to Rs. 9,000 fall within the provisions of s. 80VV ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the actual expenditure on house rent of employees should be taken into consideration for the purpose of disallowance under s. 40(c)/40A(5) ?"
2. In computing the disallowance under s. 40(c) of the Act relating to the managing director, S. Ram, and the director, V. R. Srinivasan, the ITO, inter alia, included the actual rent paid by the assessee in respect of the rent-free accommodation provided to these persons in the sums of Rs. 13,400 and Rs. 9,000, respectively. Before the CIT(A), the assessee contended that in respect of the rent-free accommodation, only the income-tax valuation should have been considered and not the actual rent paid by the assessee. The CIT refused to accept this view. Aggrieved, the assessee filed an appeal before the Tribunal, wherein it is contended that as far as the house rent paid to the employee is concerned, it should be considered as a perquisite and that the income-tax valuation alone should be considered. The Tribunal pointed out that there was nothing in ss. 40(c) and 40A(5) of the Act to suggest that while applying the sections, it is not the actual expenditure on house rent that should be taken into account in the hands of the employer, but the perquisite value in the hands of the employee. Thus, the Tribunal rejected the assessee's claim in respect of the house rent.
3. Before this Court, learned counsel appearing for the assessee submitted that in the matter of assessment, the Tribunal was not correct in taking into consideration the entire amount paid by way of house rent to its employees. According to learned counsel, only ten per cent of the salary payable to the employee alone can be taken into consideration in the matter of computing the house rent allowance. Learned counsel supported his contention by referring to the provision contained in r. 3 of the IT Rules. Learned counsel further submitted that wherever there is a rule, it is mandatory on the part of the Department to follow the said rule and not to deviate from it. In order to support his contention learned counsel relied on the decision of the Supreme Court in Bharat Hari Singhania vs. CWT and CIT vs. Britannia Industries Co. Ltd. .
On the other hand, learned junior standing counsel appearing for the Department, submitted that in the present case, we are concerned with the assessment to be made in the hands of the employer under ss. 40(c) and 40A(5) of the Act. All that we are concerned with is only the expenditure incurred by the assessee in respect of which payment has been made or is to be made to any person who is an employee of the employer. Therefore, the application of the provisions of r. 3 of the Rules has no relevance in the present case. Learned standing counsel further submitted that when r. 3 of the Rules has no application, the decision of the Supreme Court in Bharat Hari Singhania vs. CWT (supra) also has no relevance to the issue arising in this case. In order to support his contention, learned standing counsel relied on various decisions.
4. The fact remains that the assessee, who is an employer, paid house rent allowance to its employees. While assessing the tax, the assessee contended that only ten per cent of the house rent allowance should be taken into consideration for the purpose of levying tax and the actual payment made by the assessee to its employees by way of house rent allowance should not be taken into consideration. Since under r. 3 of the IT Rules, 1962, the value of the perquisite of free accommodation provided to the employees for the purpose of assessment under the head "Salaries" would be Rs. 150 per mensem, the value of the perquisite in the hands of the employer, i.e., the assessee-company, for the purpose of ceiling under s. 40(c)(iii) of the Act should also be taken at the same amount of Rs. 150 per mensem per employee.
5. In the decision in CIT vs. Shriram Refrigeration Industries Ltd. (1992) 197 ITR 431 (Del) Delhi High Court, after taking into consideration the decisions in Bombay Burmah Trading Corpn. Ltd. vs. CIT (1984) 145 ITR 793 (Bom), CIT vs. Rajesh Textile Mills Ltd. (1988) 173 ITR 179 (Guj), CIT vs. Ashoka Marketing Ltd. , CIT vs. Electro Steel Castings Ltd. (1992) 193 ITR 103 (Ori) and CIT vs. Malayalam Plantations (India) Ltd. , held that in the matter of assessing the cash payment made by the assessee-company to its employees by way of house rent allowance it should be assessed not at ten per cent of the actual rent paid by the employer, but the actual amount paid by the employer by way of allowance of house rent. In the matter of assessing the allowance of rent by the employer to the employee, r. 3 of the Rules has no application.
In the case of Bombay Burmah Trading Corporation Ltd. vs. CIT (supra), the Bombay High Court, while considering the provisions of s. 40(c)(iii) of the Act, explained the decision of the Calcutta High Court in CIT vs. Britannia Industries Co. Ltd. (supra) in the following manner :
"It was in view of these facts that the Calcutta High Court came to the conclusion that 'if the value of the perquisite of the car provided by the company to its employees is to be taken in the hands of the employees for the purpose of assessment of the employees under the head "Income from salaries" at Rs. 150 per month, the same value should be taken in the hands of the assessee company which is the employer for the purpose of working out the ceiling under s. 40(c)(iii)'. The decision of the Calcutta High Court cannot be read as an authority that in all cases, for the purpose of s. 40(c)(iii), the value of the perquisite in the hands of the employees computed, in accordance with relevant rules, must be ascertained. It is not possible, therefore, to accept the argument of the learned counsel for the assessee that the value of the benefit or amenity or perquisite in the hands of the employees had to be taken into account for the purposes of s. 40(c)(iii). Accordingly, question No. 1 has to be answered in the affirmative and against the assessee."
Similarly, the same Calcutta High Court in CIT vs. Ashoka Marketing Ltd. (supra) while considering the provisions of s. 40A(5) of the Act and r. 3(a) of the Rules observed that r. 3 of the IT Rules, 1962, applies only to the computation of the value of the perquisite provided to an employee for the purpose of assessing the same in his hands. This rule does not apply to the computation of the value of the perquisite for making the disallowance under s. 40A(5) of the Act in the assessment of the employer company. In the abovesaid decision, the Calcutta High Court, following the view expressed by the Bombay High Court in Bombay Burmah Trading Corporation Ltd. vs. CIT (supra) held that it will have no application in the matter of assessment to be made in the hands of the employer with regard to house rent allowance given to its employees.
Similarly, in CIT vs. P. R. Ramakrishnan , this Court, while considering the provisions of ss. 2(24)(iv) and 40(c) of the Act, held that s. 40(c) of the Act can be applied to the case of a company where excessive expenditure has been incurred by it with reference to its assets which are used by the director or a person who has a substantial interest in the company or his relative and the disallowance is limited only to such excess. It is further held that the purposes behind the two provisions are wholly different and it is not possible to dovetail s. 40(c) of the Act into consideration of the assessment of the director or the person having a substantial interest in the company. Though the assessment on the company applying s. 40(c) of the Act may not be wholly irrelevant, the stand that the director's assessment must be based on such disallowance in the hands of the company is not correct. The value of the perquisite to be assessed in the hands of the director under s. 2(24)(iv) need not be the amount disallowed in the assessment of the company under s. 40(c) of the Act.
However, learned counsel for the assessee relied on the decision in CIT vs. Nuchem Plastics Ltd. , wherein the Punjab & Haryana High Court held that the value of the perquisite of free car provided to an employee should be taken at Rs. 150 per mensem as per r. 3(c)(ii) of the Rules for the assessment of the employer company. The ceiling for disallowance under s. 40(c) of the Act should be worked out accordingly. This decision was rendered following the decision of the Calcutta High Court in CIT vs. Britannia Industries Co. Ltd. (supra). We have already pointed out that the decision of the Calcutta High Courts in CIT vs. Britannia Industries Co. Ltd. (supra) has been explained by various High Courts with regard to the facts on each case.
In view of the majority judgment, rendered on this aspect by various High Courts, we consider that the order passed by the Tribunal in holding that actual amount paid by way of house rent allowance is assessable in the hands of the employer under ss. 40(c) and 40A(5) of the Act is in order. Accordingly, we answer the question referred to us in the affirmative and against the assessee. No costs.