TMI Blog1988 (4) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... shed accommodation given by the assessee to its managing directors should be worked out on the basis of the relevant provisions of rule 3 of Income-tax Rules, 1962 ? 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in disallowing the amount of Rs. 39,300 being the actual expenditure incurred by the assessee in maintenance of residential accommodation for managing directors as perquisites under section 40A(5) of the Act ? 4. Whet-her the expenditure of Rs. 2,810 being the value of canteen coupons to guests and technicians is disallowable under section 37(2B) of the Income-tax Act, 1961 ? " The facts leading to this reference may be noted at the outset. The assessee is a textile mill. The year of assessment is 1972-73. So far as question No. 1 is concerned, the Income-tax Officer noted that the assesseecompany had spent an amount of Rs. 39,809 towards expenditure on motor cars given to its managing directors for their use at Bombay. He had disallowed this amount under the provision of section 40A(5) of the Income-tax Act, 1961 (" the Act " for short), being the actual expenditure incurred by the assessee on this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Profits and gains of business or profession'. (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Income-tax Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : Provided that the provisions of this sub-section shall not apply in the case of an assessee being a company in respect of any expenditure to which sub-clause. (i) of clause (c) of section 40 applies. (b) The persons referred to in clause (a) are the following, namely : (i) where the assessee is an any relative of the assessee ; individual (ii) whether the assessee is any director of the company, a company, firm, association of partner of the firm, or member persons or Hindu undivided family of the association or family, or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubclause (iv) and the whole of sub-clause (vii) shall be omitted; (2) in the said clause (3), the references to 'assessee' shall be construed as references to `employee or former employee' and the references to 'his employer or former employer' and 'an employer or a former employer' shall be construed as references to `the assessee'; (b) perquisite means (i) rent-free accommodation provided to the employee by the assessee; (ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee (iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee ; (iv) payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee; and (v) payment by the assessee of any sum, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity. The other relevant provision which is required to be noted at this stage is found in section 40 which at the relevant time read as under : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the provisions of s. 40A will have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head " Profits and gains of business or profession". Thus, the provisions of section 40A represent a special scheme of its own vis-a-vis computation of income under the said head. Once this aspect of the matter is kept in view, it becomes immediately apparent that the provisions of section 40A arid its various sub-sections, will have to be given full play while deciding the question whether certain expenses referred to in various clauses of section 40A have to be deducted or not while computing the income under the head " Profits and gains of business or profession ". Mr. J. P. Shah, for the assessee, vehemently submitted that the Tribunal was right in law in invoking the provisions of rule 3 of the said Rules in computing the deductible amount of expenditure of perquisites in the light of the provisions of section 40A(5)(a) of the Act. On the other hand, Mr. Raval, for the Revenue, submitted that the operation of the rule is totally beside the point while considering the question of permissible expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y section 295 of the Act. Part II of the Rules deals with definition of income and so far as the head 'Salaries' is concerned, it is dealt with at topic " A ". Under that topic are found rules 2A, 2B and 3. Rule 3 provides for valuation of perquisites. It states that " for the purposes 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 clause, namely : " 3. 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: (a) The value of rent-free residential accommodation shall be determined on the basis provided hereunder, namely: (i) where the accommodation is provided (A) by Government to a person holding an office or post in connection with the affairs of the Union or of a State ; (B) by a body or undertaking under the control of Government to any officer of Government whose services have been lent to that body or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e per calendar month --------------------------------------------------------------------------------------------------------------------------------------------------- 1 2 3 --------------------------------------------------------------------------------------------------------------------------------------------------- Where the h. p. rating of Where the h. p. rating of the car does not exceed the car exceeds 16 or the 16 or the cubic capacity cubic capacity of the engine of the engine does not exceeds 1.88 litres. exceed 1.88 litres. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Rs. Rs. 1. Where the motor car 300 400 is owned or hired by the employer and all the expenses on maintenance and running are met or reimbursed to the assessee by the employer 2. Where the motor car is owned or hired by the employer but the expenses on maintenance and running for the assessee's private or personal purposes are met by the assessee 100 150." --------------------------------------------------------------------------------------------------------------------------------------------------- It is obvious that the said rule 3 has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable to the employee as contemplated by section 40A(5)(a). For ascertaining the same, the focus of attention is on the employer-assessee and not on the employee who is not an assessee so far as the aforesaid provision is concerned. It is for this reason that rule 3 of the Rules which deals with an entirely different topic and which focuses its attention not on the employer-assessee but on the employee-assessee gets completely ruled out so far as the applicability of section 40A(5) is concerned. Thus, on the scheme of the relevant provisions of the Act, it is not possible to countenance the contention of Mr. J. P. Shah, for the assessee, that rule 3 of the Rules can be pressed into service for computing the permissible expenses while determining the income of the employer-assessee under the head " Profits and gains of business or profession ". In our view, the Tribunal was not justified in resorting to rule 3 in this connection. However, Mr. Shah, for the assessee, laid great stress on the language of section 40A(5)(a)(ii) and submitted that from a practical point of view, an analogous provision of rule 3 can be imported while computing deductible expenses in the said provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecially defined in Explanation 2(b) of section 40A(5) for the purpose of this sub-section and the definition given in section 17(2) is not to be referred to. The reason is that for the purpose of computing permissible deductions from the income of the employer under the head " Profits and gains of business ", what is taken into account by this sub-section is the actual expenditure incurred by the employer-assessee on providing the perquisites which may be different from, and would be higher in several cases than, the value of the perquisite as defined in section 17(2) and computed under the Income-tax Rules, 1962, for the purpose of inclusion in the employee's total income. For instance, where an employer takes on lease a flat to provide rent-free accommodation to his employee, the amount of the actual rent paid by the employer which is to be taken into account for the purpose of disallowance under this sub-section may be higher than the value of the accommodation included as a perquisite in the employee's assessment. It is, therefore, not possible to agree with the submission of Mr. Shah that expenditure incurred by the employer-assessee on providing concerned perquisites to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the asset which is actually used by the employee for his own purpose. But, in either case, whether it is ascertainment of actual expenditure incurred by the employer-assessee on the perquisites made available to the employee or actual expenditure incurred by the employer-assessee on the maintenance of the asset which is partly or fully used by the employee for his own purpose, it is for the employer-assessee who is in the personal know of such matters to point out the actual break-up figures. In case the employee is using one room in a bungalow of 10 rooms belonging to the employer for his residential purpose, and if 9 rooms are utilised by the employer-assessee for the purpose of business, it is for the employer-assessee to submit details of break-up figures of such expenses and it is expenditure actually incurred by the employer-assessee on the part of the asset actually used by the employee for his own purpose that would be covered by section 40A(5)(a)(ii). Similar is the situation so far as ascertainment of actual expenditure incurred by the employer-assessee and perquisites being provided to the employee as contemplated by the first part of clause (ii) of section 40A(5)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch rule cannot be brought in, as if by the back door, by the employer-assessee on the one hand sitting tight on the details of the figures of expenditure which would be incurred by him on diverse heads and on the other hand insisting that as break-up figures of relevant expenditure are not available on record, provision of rule 3 of the Rules should be brought to his aid, for the purpose of computing permissible deductions of expenses under section 40A(5)(a). In fact, such a stand on the part of the assessee-employer would amount to taking advantage of his own wrong. That cannot be countenanced and is contra indicated by the statutory scheme under consideration. Mr. Shah submitted an extreme argument for convincing us about the need to bring in the operation of rule 3 even for such purposes. He posed a question that supposing the employer is having a palace as his asset and one of the rooms of the palace is made available to the employee to stay therein, should the entire expenditure for maintaining such big palace be disallowed because of the sweep of section 40A(5)(a) ? In our view, this hypothetical question really presents no difficulty. It is for the employer to point out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outer limit of allowable deduction on the expenditure on such employee-director or their relatives. So far as clause (c)(ii) of section 40A(5) is concerned, it deals with an inner limit so far as only one head is concerned, viz., head " Salaries contemplated by section 40A(5)(a)(i). A conjoint reading of section 40A(2)(a), proviso, and the proviso to section 40A(5)(a) projects the following picture. If the assessee-company claims any deduction from its income under the head " Profits and gains of business or profession" on the ground that it has expended or is entitled to allowances in connection with employment of director or a person who has a substantial interest in the company or relative of the director or of such person, its aggregate of allowable expenditure for such employee would consist of the following sub-heads: (i) Expenditure and allowances covered by section 40A(5)(a)(ii). Expenditure and allowances referred to in clause (i) of section 40A(5)(a) will get ruled out because of the proviso to section 40A(2)(a). (ii) Expenditure and allowances referred to in sub-clause (i) of clause (c) of section 40. (iii) Expenditure and allowances referred to in sub-clause (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, clearly shows that the Tribunal was in error in invoking the operation of rule 3 of the Income-tax Rules for the purpose of tackling the problem posed for consideration in the present case. Mr. Shah, for the assessee, placed for our consideration three decisions one of this court, another of the Calcutta High Court and the third of the Mysore High Court. So far as the decision of the Mysore High Court in Controller of Estate Duty v. J. Krishna Murthy [1974] 96 ITR 87 is concerned, in our view, that decision is totally beside the point. The question before the Mysore High Court was as to how the value of unquoted shares can be determined for the purpose of computing estate duty under section 36(1) of the Estate Duty Act, 1953. It was noted that no rules were made under the Act prescribing the manner in which the value of unquoted shares may be determined for purposes of estate duty. In the absence of rules, valuation for purposes of the Act had to be made in accordance with well-recognised methods of valuation followed in India. The method of valuation prescribed under rule ID of the Wealth-tax Rules, 1957, being the only statutorily recognised method of valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Officer's estimate that 50 per cent. of the expenses relating to the maintenance and running of the cars were for the personal use of the employees. The Tribunal, therefore, held that since under rule 3 of the Income-tax Rules, the value of the perquisite of the free car provided to the employees for the purpose of assessment under the head " Salaries " would be Rs. 150 per month, the value of the perquisite in the hands of the employer, that is, the assessee-company, for the purpose of the ceiling under section 40(c)(iii) should also be taken at the same amount, that is, Rs. 150 per month per employee. It is this approach of the Tribunal which was confirmed by the Calcutta High Court. While confirming the said approach, the following observations were made by the Calcutta High, Court, speaking through Sudhindhra Mohan Guha J., on which great reliance was placed by Mr. Shah for the assessee (at p. 38): "We are fully in agreement with the view of the Tribunal that there cannot be any two different standards for assessment in respect of the employee and the employer. It is also equitable that what the payer gives is what the receiver receives. " It has to be appreciated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible limits of expenditure " in the case of any company.. It becomes obvious on a conjoint reading of these two sub-clauses of section 40 that section 40(a)(v) referred to cases of assessees in general while subclause (c) of section 40 contemplated cases of a company-assessee and that sub-clause (c) indicated a special scheme as contra-distinguished with clause (a) of section 40 with its various sub-clauses which reflected general scheme and it is in the background of this statutory setting of section 40 that the Division Bench, speaking through B. K. Mehta J., held that the special scheme of clause (c) of section 40 excluded general scheme of section 40(a)(v). The decision of this court in that case, therefore, will have to be read in the light of this peculiar statutory scheme with which the Division Bench was concerned. In the present case, it is not as if section 40A represents a general scheme and section 40(c) represents special scheme so that the latter can exclude the former. Here, both the schemes are different and special. Sub-clause (c) of section 40 represents a statutory scheme of a special type applicable to the assessee-companies. Similarly, section 40A(5)(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the Income-tax Rules, meaning thereby, that perquisites in the hands of the managing directors-employees had to be so valued for deciding their liability to pay income-tax on these perquisites. But that does not mean that the Central Government had taken a decision that even for the purpose of income-tax payable by the assessee-company, on its income under the head " Profits and gains of business or profession ", rule 3 had to be applied while considering the question of permissible deductions of expenses under section 40A. This has to be done independently by the taxing authority in the light of the statutory scheme as discussed by us in the earlier part of this judgment. Mr. Shah's effort to spell out binding rule of conduct for the taxing authority under the Income-tax Act, 1961, on the basis of the view-point expressed by the Government of India in the said letter under the Companies Act, 1956, therefore, cannot be countenanced. It has to be kept in view that there is no circular issued by the Central Board of Direct Taxes in that connection. However, the fact remains that from the aforesaid letter, it is clearly established that the managing directors were given free furni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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