TMI Blog1995 (10) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... nue which are reproduced hereinbelow : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the expenditure on items like gas and electricity expenses, motor car, personal accident insurance premium, telephone expenses were not in the nature of perquisites for the purpose of disallowance under section 40A(5) of the Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the expenditure on items like rent allowance, conveyance allowance, medical insurance premium and personal accident premium were not in the nature of perquisites for the purpose of allowance under section 40A(5) of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the gratuity paid to an employee could not be regarded as remuneration under section 40A(5) of the Income-tax Act, 1961 ? " From the questions, it appears that question Nos. 1 and 2 are overlapping and question No. 3 appears to be a substitute for another question intended to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of telephone expenses, the Income-tax Officer included one-third of telephone expenses on account of estimated personal use of the telephone. On appeal, motor car, perquisites, gas and electricity charges and expenses on servants were held to be perquisites made available to the assessee but the amount includible on that account which resulted in direct or indirect benefit to the employee otherwise than for purpose of business was slashed down to a lower figure and finally disallowed by the Income-tax Officer. There is no finding that the telephone was provided by the assessee to its employee for personal use. The fact that only one-third of the expenses have been added by the Income-tax Officer on estimate basis goes to show that the telephone was provided for use for the business by the assessee to its employee, R. C. Parikh. Under the circumstances, the finding in this respect that only Rs. 790 is disallowable expenditure out of amount of remuneration to R. C. Parikh has been affirmed by the Tribunal. In the aforesaid circumstances, it can well be said that so far as gas and electricity expenses, motor car expenses are concerned, the Tribunal has not held them to be not in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) in computing the disallowance in respect of remuneration paid to R. C. Parikh at Rs. 790. Coming to the second question, we find that while the Income-tax Officer has computed the disallowance under section 40A(5) at Rs. 18,872 on account of house rent allowance, conveyance allowance, medical insurance and personal accident insurance premium, the Income-tax Officer has calculated all these sums in respect of R. M. Patel, S. K. Shah, C. D. Desai, S. K. Deay and V. T. Desai cumulatively and not with reference to each employee separately. The ceiling fixed under section 40A(5) for the purpose of disallowance of expenditure incurred by the assessee in paying remuneration to the employees is in respect of remuneration paid to each employee separately and there cannot be any cumulative disallowance by clubbing the allowance paid to a number of employees. In different cases, a different amount may be treated as payment made to the employee beyond the ceiling fixed under section 40A(5). The result may be that even including some items within the definition of perquisite resulting in direct or indirect benefit to the employee in one case it may not exceed the permissible ceiling and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d proviso to section 40A(5)(a) ? 7. Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the gratuity paid in excess of the ceiling limit prescribed in section 10(10) of the Act would be includible in determining the disallowance under section 40A(5) and in not excluding entire gratuity from the provisions under section 40A(5) ? " Shri R. C. Parikh, one of the employees, was paid Rs. 1,25,000 as gratuity on his retirement. The assessee had claimed that the amount of gratuity paid to an employee from an approved fund was not includible as remuneration in computing the disallowance under section 40A(5) of the Act. He claimed that the payment of such gratuity was covered by the provisions of section 36(1)(v) and section 40A(7) of the Act, therefore, the said amount was not includible. The contention of the Revenue was that the expression "perquisite" has been defined in Explanation 2(b) to section 40A(5) which includes payment of any sum by the assessee through any fund except through a recognised provident fund or approved superannuation fund. Therefore, the payment of gratuity is covered by the above definition and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and expenditure which may be described as perquisites. Salary and perquisites are two independent and distinct expressions used in the Income-tax Act. This is also apparent from the Explanation which gives a meaning to salary and perquisites separately. Salary for the purpose of the above provision has been assigned the same meaning as in clause (1) read with clause (3) of section 17 subject to certain modifications with which we are not concerned and perquisite has been further defined to mean in clause (b) of Explanation 2. Section 17 which comes under Chapter IV deals with computation of total income under the head "salaries". Section 17 defines "salary", "perquisite" and "profits in lieu of salary" for the purpose of the Act. Section 17(1) reads as under : " 17. (1) salary includes :-- (i) wages ; (ii) any annuity or pension ; (iii) any gratuity ; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages ; (v) any advance of salary ; (va) any payment received by an employee in respect of any period of leave not availed of by him ; (vi) the annual accretion to the balance at the credit of an employee participating in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly by the employer to his employee de hors the provisions of section 36(1)(v). It may be noticed that a gratuity may be paid directly by the employer to an employee without an approved gratuity fund but in that event the deduction on such expenditure may not be considered under section 36(1)(v). But we are not concerned with that situation. Contributions made to an approved gratuity fund are not to be included irrespective of the fact whether such contribution comes under sub-clause (i) or sub-clause (ii) of sub-section (5)(a). The expenditure having been incurred at the time when the contribution was made and not included in the computation of expenditure for the purpose of sub-section (5)(a), it cannot be so included when payment out of that fund has been made later on. The expenditure when made by the assessee has been dealt with in accordance with section 36(1)(v) read with section 40A(7), if the approved gratuity fund or the condition of allowability of contributions to an approved gratuity fund as laid down under section 40A(7) are not fulfilled, the expenditure made by the assessee would not be entitled for deduction. If the conditions of entitlement of deduction are fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, which clearly excludes contributions made to a recognised provident fund or an approved superannuation fund or contributions towards an approved gratuity fund under clause (v) of section 36(1). Therefore, notwithstanding the fact that gratuity is a part of salary, expenditure made by the assessee for making a contribution towards an approved gratuity fund is not to be included in computing the amount of remuneration for the purpose of ceiling of deductible expenditure under section 40A(5). The assessee does not make an expenditure twice over, that is to say once by making the contribution towards approved gratuity fund, and then when the approved gratuity fund makes payment to the employee. If the argument of the Revenue was to be accepted, it would amount to holding that the assessee makes the very same expenditure twice over, first expenditure would be incurred when contribution is to be made to gratuity fund, that obviously cannot be included in the computation for the purpose of section 40A(5)(a). Then again, according to the Revenue, when the gratuity fund makes payment to the employee and it reaches the hands of the employee, it becomes part of salary paid by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank guarantee commission was not expenditure of revenue nature ? " The assessee had purchased plant and machinery for its establishment on credit and for securing such credit purchase the assessee had to furnish a bank guarantee. The assessing authority as well as the Tribunal has held that the commission for furnishing bank guarantee was not of revenue nature. This court in the case of CIT v. Bharat Suryodaya Mills Co. Ltd. [1993] 202 ITR 942 held that if an expenditure is an integral part of the cost of acquisition of the capital asset and not an integral part of the profit-earning process, such expenditure should be treated as a capital expenditure and not as a revenue expenditure ; and, therefore, payment of bank guarantee commission for purchasing machinery was held to be capital expenditure. In arriving at this conclusion, the court has followed its earlier decision in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389. In view of the aforesaid two decisions of this court, we answer question No. 8 also in the affirmative, that is, in favour of the Revenue and against the assessee. Question No. 9 reads as follows : " Whether, on the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had sold certain depreciable assets during the previous year which were acquired by him prior to January 1, 1954. By taking the written down value as the cost of acquisition, the Income-tax Officer has calculated the capital gain arising out of the transfer of such asset at Rs. 5,720. The assessee has claimed a capital loss on account of the said transfer of asset at Rs. 22,925 by claiming that he had an option to value this capital asset which were acquired before January 1, 1954, at the market price prevalent as on January 1, 1954, under section 55 as it was existing during the relevant assessment year. This claim of the assessee was rejected on the ground that there being special provisions dealing with assets in respect of which depreciation claim was allowed and under section 50, where the assessee, has acquired an asset before January 1, 1954, and the asset is being used by him, only the written down value defined under section 43 can be taken as the cost of acquisition of the asset. It is only where the assets have been acquired in any of the modes prescribed under section 49, namely, either on distribution of assets on the total or partial partition of a HUF or under a gif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the asset, as adjusted, shall be taken as the cost of acquisition of the asset. (2) Where under any provision of section 49, read with sub-section (2) of section 55, the fair market value of the asset on the 1st day of April, 1954, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset on the said date, as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted." Section 48 provides the manner of computing the capital gains by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets by deducting the other amounts enumerated in that section which provides expenditure incurred wholly and exclusively in connection with such transfer and acquisition of such asset and the cost of any improvement thereto. Section 49 deals with cases where the capital asset has become the property of the assessee in which cost of acquisition has not been incurred by the assessee but which has been acquired by him in various modes referred to in section 49 as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned in section 49 and clearly, therefore, this case falls within section 50(1) and, therefore, in the case of the applicant-company for purposes of computation of capital gains tax, the adjusted written down value as defined in clause (6) of section 43 of the Act would be the cost of acquisition of the assets. " The said view has been followed by the Allahabad High Court in the case of CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240, the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 [FB] and the Calcutta High Court in India Jute Co. Ltd. v. CIT [1982] 136 ITR 597. Section 48 states that for the purpose of arriving at the capital gains, the cost of acquisition has to be reduced from the consideration received or accrued to the assessee. What shall be the cost of acquisition has not been defined in section 48. Section 49 envisages where the assessee himself has not incurred any cost, the cost of acquisition of the asset in his hand shall be deemed to be the cost for which the previous owner of the property acquired it. Further, section 50 clearly indicates what shall be the cost of acquisition for the purpose of section 48 or 49 for deducting from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisition in terms of section 55(2) as the fair market value as on January 1, 1954, if such asset has become the property of the assessee prior to that date and then to adjust it by the actual depreciation claimed by him thereon. Thus where a special mode of determining the cost of acquisition has been provided with reference to sections 48 and 49, once again the provisions of section 55 cannot be invoked. We may further point out that while sub-section (1) of section 55 opens with "for the purposes of sections 48, 49 and 50", sub-section (2) of section 55, confines its application for the purpose of sections 48 and 49. This is also indicative of the fact that while the term "adjusted" and cost of any improvement" defined under sub-section (1) of section 55 applies to the asset, whose cost is to be determined under section 50, sub-section (2) does not..apply to the capital asset whose cost of acquisition is to be determined under section 50 by its own force. The cost of acquisition of one asset is not to be determined twice, once under section 50 and then under section 55. We have noticed that section 50 as well as section 55 both operate in the same field, namely, determining t ..... 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