TMI Blog1981 (6) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in relation to the year 1974-75. The two questions referred to this court in I.T.R. No. 44 of 1979 are: " 1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the entire expenses on the cars used by the directors could not be considered under s. 40(a)(v) of the Income-tax Act, 1961 2. Whether, on the facts and in the circumstances of the case and on an interpretation of section 40(a)(v) of the Income-tax Act, 1961, the Tribunal is right in law allowing the expenses incurred for the maintenance of the buildings?" In I.T.R. No. 76 of 1978, the question referred is this : " Whether, on the facts and in the circumstances of the case and on an interpretation of section 40(a)(v) of the I.T. Act, 1961, the Tribunal is right in law in allowing the expenses incurred for the upkeep of the building ? " This is substantially question No. 2 in I.T.R. No. 44 of 1979. In I.T.R. No. 103 of 1980; there is a separate reference because the Tribunal declined to refer the question and, on this court directing such reference, it was independently referred. The question so referred is identical with question No. 1 in I.T.R. No. 44 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notice of the ITO by the audit note, the assessment was reopened. In the reassessment proceedings the entire expenses on the motor cars and the buildings were considered as falling under s. 40(a)(v) and, therefore, the permissible expenditure in this behalf was limited to Rs. 12,000. Such disallowance was confirmed in appeal. The Appellate Tribunal found that the vehicles were used also for the personal purposes of the directors. But, at the same time, the Tribunal found that the cars had not been exclusively used for the personal purposes of the directors., Part of the expenses on the cars was, therefore, found to be for the purpose of business. The Tribunal fixed 2/3rd of the total expenses as for the purpose of business, and 1/3rd as for personal purposes. Therefore, it held that only 1/3rd of such expenses on the cars could be considered for the purpose of s. 40(a)(v) of the Act. Considering the expenditure on bungalows occupied by the directors free of rent, the Tribunal held that such expenditure did not fall under s. 40(a)(v). It was of the view that the employees should have derived some benefit from such expenditure. Inasmuch as the case was found not to fall within s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in sub-clause (vii) of clause (6)of section 10; (e) any sum referred to in sub-clause (vii) of clause (i) of section 17: (f) any sum referred to in sub-clause of clause (2) of section 17 (g) the amount of any compensation referred to in sub-clause (i) or any payment referred to in sub-clause (ii) of clause (3) of section 17; (h) any payment referred to in clause (iv) or clause (v) of subsection (1) of section 36 ; and (i) any expenditure referred to in clause (ix) of sub-section (1) of section 36 : Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head 'Salaries' is seven thousand five hundred rupees or less. Explanation 1.-The provisions of this sub-clause shall apply notwithstanding that any amount not to be allowed under this sub-clause is included in the total income of the employee. Explanation 2.-In this sub-clause, the word 'salary' shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule." After the Finance Act of 1971 brought about the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -clause (viia) aforesaid ; (iii) any employee whose income chargeable under the head `Salaries' is seven thousand and five hundred rupees or less." Section 40A(5)(a) could be understood only with reference to cl. (c) which prescribes the limits. Clause (c) of s. 40A(5) reads thus: "40A. (5)(c) The limits referred to in clause (a) are the following, namely:- (i) in respect of the expenditure referred to in sub-clause (i) of se (a), in the case of an employee, an amount calculated at the rate of thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the of a former employee, being an individual who ceases or ceased to be employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees: Provided that where the expenditure is incurred on payment of any salary to an employee or a former, employee engaged in scientific research during any one or more of the three years immediately preceding the commencement of the business and such expenditure is deemed under the explanation to clause (i) of subsection (1) of section 35 to have been laid or expended in the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee or to effect a contract for an annuity." The definition of " perquisite " in Expln. 2(b) of this clause is relevant as that applies to the term "perquisite " in s. 40A(5)(a)(ii). Sections 30 to 37 of the I.T. Act deal with the permissible deductions relevant for the purpose of ascertaining the net income of the assessee. Section 37(1) takes in all expenditure, not particularly described in ss. 30 to 36 and s. 80VV, which are laid out or expended wholly and exclusively for the purpose of the business or profession if such expenses are not of a capital nature. Such expenses are to be deducted in computing the income chargeable under the head " Profits and gains of business or profession". Normally, the salary paid to the employees, the money value of perquisites given to them and other benefits extended to them would be deductible as amounts expended for the business. But evidently with a view to check the offer of extravagant benefits or perquisites to employees, a ceiling limit is prescribed as the permissible expenditure on such account, If the company extends more benefits than so permitted, though the financial commitment in that behalf may have been laid out for the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0(a)(v), as also s. 40A(5), contemplate expenditure in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit. That the car is used partly by the employee for his own purpose is admitted. It is not wholly used for such purpose. The assessee incurs expenditure directly in respect of such car belonging to the assessee. That car is used by the employee. Therefore, according to the Revenue, the plain language of the section indicates that the entire expenditure incurred on the car is to be subject to the ceiling specified in the provision and not 1/3rd only. May be the use of the car for business purpose may be estimated at 2/3rd. But according to the Revenue it is not only the estimated part of the use for personal purposes in regard to the car that would be relevant in the context of the language of the concerned provision. We have to notice that but for the provision in s. 40(a)(v) and s. 40A(5), the expenditure incurred on the car provided for the employee would have been a permissible item of deduction. The purpose of the provision is to cut down on what otherwise would be admissible and to limit it to a specified sum. Des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g had to the object of the provision it is evident that the control is on the amount expended on the asset which is used by the employee for his benefit to the extent he uses it for his personal purposes. If the use by him is 1/3rd as in this case it is only the 1/3rd of the expenses that would call for application of the limit as rightly held by the Incometax Tribunal. The position is the same as regards s. 40A(5) as well as s. 40(a)(v). Hence, question No.1 in all cases other than I.T.R. No. 76 of 1978 (in I.T.R. No. 76 of 1978 there is only one question and that is the second question dealt with in this judgment), is answered in favour of the assessee and against the Revenue. Now, we will come to the other question concerning expenditure incurred on the buildings. That question also concerns the interpretation of s. 40(a)(v) for the years 1970-71 and 1971-72 and the interpretation of s. 40A(5) of the Act for the other years. The expenses incurred for the maintenance of the buildings (the term " upkeep " is used in place of maintenance in I.T.R. No. 76 of 1978, but it is agreed that this does not make any difference) were considered by the Tribunal as not falling within either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether convertible into money or not. The question then is: whether the expenses on the upkeep of buildings would satisfy the provision in s. 40(a)(v) of the Act; or, in other words, whether the expenses on the upkeep of the buildings would result directly or indirectly in the provision of any benefit or amenity or perquisite to the employee. The Tribunal held that it would not and we think that, in the circumstances, the Tribunal was correct. The second type of expenses provided for in the section is expenses in respect of any assets of the assessee used by such employee. In relation to this second type of expenses, again, we think the view taken by the Tribunal was correct. The Tribunal was of the opinion that the asset over which certain expenses had been incurred by the assessee should be used by the employee. The employee referred to in the earlier part of the section has been stigmatised with respect to one requirement, i.e., that he should have been the beneficiary of the expenditure or he should have derived an amenity or perquisite from the expenditure. Neither of those stands satisfied with respect to the expenses-on the maintenance of the buildings. It does not, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ceiling limit is not applied to any expenditure but to an allowance. In other words, it will be evident that the meaning given to the word " such employee " as referring to an employee who falls within the first limb of this provision will be found to be, inappropriate if the term " allowance " occurring in the second part of the provision is noticed. Evidently that has not been noticed by the Division Bench. It may be useful to, refer to the history of the relevant provision. The provision in s. 40(a)(v) as it stood immediately prior to the omission of the provision by Finance (No. 2) Act of 1971 had been re-enacted with modification in that form by the Finance Act, 1968, with effect from April 1, 1969. Prior to that, the provision, as it stood, took in only cases contemplated in the first limb of the provision in s. 40(a)(v). In the memorandum explaining the provisions of the Finance Bill, 1968, the object of the incorporation of s. 40(a)(v) in the form in which it appeared in the Act by reason of the Finance Act, 1968, is explained thus: " Expenditure on Providing Perquisites, benefits or amenities to higher paid employees in business and Professions.In the case of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurs expenditure in the maintenance of these assets or earns depreciation allowance in respect thereof and that is also sought to be brought with in the purview of the limit of deductible expenditure. As we have already indicated, the construction put on the term " such ", so as to relate the latter part of the clause to the earlier part of the provision will be quite inappropriate and inapplicable in the case of an allowance. So, such a construction would not be rational. No doubt the use of the term " such " is inappropriate in the strictly grammatical sense. But courts are not always to be guided by the strict grammatical sense of an expression. Courts called upon to construe statutes must read and understand the language of the statute in a sense that harmonises with the subject treated and the object which the Legislature would have had in view in enacting that provision. Too much emphasis on a strict grammatical construction may sometimes lead to wrong understanding of a clause and result in construction which may defeat the object of the provision or may lead to anomalous results. The best instance is the case before us. Though in a very strictly grammatical sense " such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the earlier Act was ambiguous. As observed by Lord Sterndale M. R. in Cape Brandy Syndicate v. IRC [1921] 2 KB 403 (CA), referring to Attorney-General v. Clarkson [1900] 1 QB 156, it is not as if the subsequent legislation if it proceeds upon an erroneous construction of previous legislation would alter the previous legislation, but " if there be any ambiguity in the earlier legislation then the subsequent legislation may fix the proper interpretation which is to be put upon the earlier The above discussion necessarily leads us to hold, with great respect, that the approach in CIT v. Travancore Tea Estates Co. Ltd. [1980] 122 ITR 557 (Ker), to the construction of s 40(a)(v) is wrong. The learned judges of the Division Bench seem to have placed too much emphasis on the term such " in s. 40(a)(v) of the Act qualifying the word " employee ", so much so that they came to the conclusion that according to the rules of grammar the reference can only be to an employee described earlier. Naturally, they turned to the description of employee in the earlier part of the section and applied it. For reasons stated earlier in this judgment, this approach is not justified. There can be no s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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