TMI Blog1986 (5) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... mounting to Rs. 3,22,040. Before the Commissioner (Appeals), the assessee raised an additional ground challenging the disallowance under section 40A (8) on the ground that section 40A (8), having been introduced with effect from 1-4-1976, would, therefore, be applicable to expenditure incurred on payment of interest on deposits from that date and not to interest paid prior to that date and as the assessee's previous year relating to the assessment year 1976-77 ended on 30-6-1975, provisions of section 40A (8) were inapplicable to this year. The assessee relied on the Tribunal Madras Bench 'D' decision in A. P. P. Ltd. [IT Appeal No. 952 (Mad.) of 1980] for the assessment year 1976-77. The Commissioner (Appeals), without discussion the matter, rejected the assessee's contention and confirmed the ITO's order. 3. At the hearing before us, the learned counsel for the assessee again relied on he aforesaid decision of the Tribunal Madras Bench 'D' and emphasized that provisions of section 40A (8) operate only in respect of expenditure on interest incurred after 1-4-1976. In the Madras High Court case, the accounting year ended on 30-4-1975, while in the case before us the accounting ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must apply to the assessment for that year." These observations are again based on a number of decisions given in footnotes 12-13 on the same page. We will refer to these decisions later. 6. Similar are the observations by Sampat Iyengar in Law of Income-tax, Seventh edn., Vol. 1 at pages 450-451 under the head "14. Levy of change according to the provisions of the Income-tax Act as they stand on the first day of April each year." The learned commentator, relying on Isthmian Steamship Line's case observed that the Supreme Court pointed out that "It is a cardinal principal of tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication. But, it has been held, the subject of charge is not the income of the year of assessment, but the income of the previous year. As the Finance Acts come into force on the first day of April each year, therefore, the laws to apply is the law in force at the commencement of the year of assessment, i.e., the first day of April each year." The commentator relied on Maharahjah of Pithapuram v. CIT [1945] 13 ITR 221 (PC) as also on M. K. R. Deivanayagam Pillai's case. The commen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it by section 16(1) (c) but the Privy Council repelled that contention and held that the law as amended would apply to the assessee. 10. To the same effect is the decision of the Chief Court of Sind in CIT v. Sind Hindu Provident Funds Society (1940) 8 ITR 467 where it was held that law and statutory rules applicable for determining an assessment are the law and statutory rules in force the year of assessment and not those which were in force during the (accounting) year the income of which is sought to be assessed. Thus, for the assessment year 1936-37, the Government notifications of 2-11-1935 and 4-4-1936, limiting the exemption of interest on securities purchased through the post offices was applicable though the income assessable was for the accounting year ending 31-3-1936. 11. In Rai Bahadur H. P. Banerjee v. CIT [1941] 9 ITR 137 (Pat.), the question was whether the provisions of section 16(3) (a) (iii) inserted by section 2 of the Income-tax (Amendment) Act, 1937 applied to the assessment year 1937-38 in respect of income from assets transferred by husband to his wife otherwise than for adequate consideration before 1-4-1937 and it was held that the said provision appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y implication. They followed their decisions in Isthmian Steamship Lines' case and Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 (SC). 17. The Supreme Court in Union of India v. Madan Gopal Kabra [1954] 25 ITR 58 was considering the applicability of the Finance Act, 1950 to 'United States of Rajasthan' for the assessment year 1950-51 and they observed that the income for the assessment year 1950-51 became assessable to Indian income-tax in respect of the previous year 1949-50. They rejected the contention that as the Constitution of India had come into force only on 26-1-1950, the income of the previous year before 26-1-1950 was not taxable to Indian Income-tax. At page 70, they observed that "The case is thus one where the statute purports to operate only prospectively, but such operation has, under the scheme of the Indian Income-tax law, taken into account income earned before the statute came into force. Such an enactment cannot, strictly speaking, be said to be retroactive legislation, though its operation may affect acts done in the past." 18. The Supreme Court in Karimtharuvi Tea Estate Ltd.'s case observed : "It is well settled that the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of expenditure incurred on or after 1-4-1976, as contended by the assessee, would nullify the Legislature's intention to apply the said section with effect from the assessment year 1976-77. We may observe that arguments advanced regarding interpretation of section 64 of the Act, similar to those urged before us by the assessee company, that the taxing provisions would apply only prospectively and would not affect transactions already completed, were rejected in a number of decisions where it was held that section 64(1) concerns the income from transferred assets and not the date of transfer and if the income form transferred assets (to the wife or minor child without adequate consideration) arose in the accounting year relevant to the assessment year, the income was assessable. A number of cases are enumerated at page 1835 of Chaturvedi and Pithisaria's Income-tax, Third edn., Vol. 2. Similar are the observations at p. 2379 of Sampath Iyengar's Law of Income-tax Seventh edn., Vol. 3. 22. In this context, we have to refer to CIT v. Bombay Photo Stores (P.) Ltd. [1970] 76 ITR 84 (Cal.) on which the assessee has relied in support of his proposition that only the law in force in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure. Under the aforesaid provisions, a private company must distribute out of its total income statutory percentages as dividend within 12 months of expiry of its previous year, otherwise, it will have to pay additional income-tax. Thus, the law applicable would be as obtaining immediately on close of the previous year. The proposition regarding applicability of income-tax laws as on 1st April being applicable in assessment year would, therefore, not be applicable while considering the special provision of levy of income-tax on undistributed income. That is why the case law relevant to the controversy before us, namely, of law existing on 1st April being applicable to assessment year was neither cited nor considered by the Calcutta High Court in Bombay Photo Stores (P.) Ltd.'s case. We may point out that the assessee had to take positive action of declaring dividend with a time framework, i.e., immediately after the close of accounting year an in any case before the expiry of 12 months thereafter so as to avoid levy of additional income-tax. If the assessee did not declare dividend of statutory percentages of total income, then additional income-tax was to be levied by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using the issue. We, therefore, cannot accept the proposition that disallowed expenditure becomes deemed income. 29. Regarding given the assessee a chance to arranges its affairs, we are unable to find any such rule of construction f statutes. When the Parliament has full and plenary powers even to make laws retrospective in operation, we do not see anything wrong with the Legislature introducing section 40A (8) by the Finance Act, 1975 and making it effective only one year later, i.e., from 1-4-1976 which would thus be operative in the assessment year 1976-77. The Privy Council in Maharajah of Pithapuram's at p. 223 observed "under the express terms of section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year. This is in direct contrast with the English Income-tax Acts, under which the subject of assessment is the income of the year of assessment, though the amount is measured by yardstick based on previous years." Similarly, the Delhi High Court in R. Dalmia's case at p. 665 observed : "It was contended by the learned counsel for the assessee that section 2(6C) (iii) came into force on Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (on the same page) the author observed : "The cardinal rule for the construction of Acts of the Parliament is that they should be construed according to the intention expressed in the Acts themselves. If the words of the statute are themselves precise and unambiguous, then no more can be necessary than to expound those words in their ordinary and natural sense. The words themselves alone do in such a case best declare the intention of the law-giver." It was further observed (on p. 65) that the primary rule is the literal rule and that the intention of the Legislature is not be speculated on. 34. Bindra on Interpretation of Statutes, Fifth edn. at pages 552-553 under the heading 'Rule to determine tax liability' noted that the Lord Cairns observed in Partington v. Attorney General [1869] LR 4 HL 100 : As I understand the principle of all fiscal legislation, it is this : if the person sought to be taxed comes within the letter of the law, he must be taxed, however, great the hardship may be appear to the judicial mind to be." Similarly, Collins M. R. in Attorney General v. Earl of Selborne said : "Therefore, the Crown fails if the case is not brought within the words of the statute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the said provisions would apply, irrespective of the facts as to which previous year the particular assessee follows and so long as the previous year followed by the assessee would be relevant for the assessment year 1976-77, the provisions of section 40A (8) would apply to that particular assessee. we have already noted that the Legislature had given the assesses one year's notice by introducing the said provision in the Finance Act, 1975 though it was applicable for the assessment year 1976-77. Therefore, the submission of Shri Dastur that an assessee should be given adequate notice to arrange his affairs, though legally not correct, is still factually invalid because the Parliament did give one year's advance notice to the assessee to arrange their affairs. The Parliament has plenary powers to legislate prospectively as well as retrospectively and there is no limitation on the Parliament's power to direct from which date a particular fiscal provision would operate. It is true that in some cases the Parliament does specify a date from which date the said provision is to come into force. For example, under section 40A (3) in respect of disallowance of payment of Rs. 2,500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n applying section 40A (5) which finding, according to us, was unnecessary as there was no controversy regarding the disallowance of expenses of Rs. 2,60,659 and the only controversy before the Commissioner (Appeals) was regarding the treatment of reimbursement of medical expenses as perquisite by the ITO. Hence, ground No. 2 raising the point whether section 40A (5) or section 40(c) applied to director employees being academic is rejected. Salaries of all the directors were above Rs. 72,000 and, therefore, it is immaterial whether section 40(c) or proviso to section 40A (5) applies in the case of director employees. 39. The Commissioner (Appeals) further held that cash reimbursement of expenses constituted a distinct addition to the salary of the director employees. He thus varied the ITO's findings because the ITO had treated the reimbursement of medical expenses as perquisite. The assessee-company as per Annexure XIII (paper book, page 31) had worked out the disallowance under section 40A (5) in respect of other employees at Rs. 32,235 and the total disallowance at Rs. 2,60,659 and had given a note that the medical expenses reimbursed to the employees and directors had not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dical reimbursement was a perquisite but in view of expression 'whether convertible into money or not' qualifying perquisite in section 40A (5) (a) (ii), cash payment could not be covered by the said sub-clause. Support was taken from CIT v. Indokem (P.) Ltd. [1981] 132 ITR 125 (Bom.) where, following CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.) and CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad.), the Bombay High Court held that amount paid by way of bonus and commission in cash by the assessee-company to employees was not a perquisite within the meaning of section 40(c) (ii) in view of the said term 'whether convertible into money or not' used in the said section (which was operative in the assessment year 1964-65). The Bench accepting this contention held that medical reimbursement paid in cash was not a perquisite, as section 40A (5) (a) (ii) contemplated disallowance of payment in kind only by the employer to the employee. The Bench noted that similar view had been taken in CIT v. Tecalemit (Hind) Ltd. [1982] 137 ITR 285 (Cal.) which had followed its earlier decision in Kanan Devan Hills Produce Co. Ltd.'s case while interpreting provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "'Perquisite'-'Perquisite' is defined in the Oxford English Dictionary as 'any causal employment, fee, or profit, attached to an office or position in addition to salary or wages'. 'Perquisite' denotes a personal advantage; it is something that benefits a man by going 'into his own pocket' : it does not cover a mere reimbursement (be it by way of allowance) of travelling or other expenditure incidental to the employment. Thus, transport facilities made available to an employee for going from home to office and back, should not be regarded as a perquisite". 49. The assessee relied on CGT v. N. S. Getti Chettiar [1971] 82 ITR 599 where the Supreme Court approved the following observations of Craies on Statute Law, Sixth edn. at p. 213 : "... An interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable, but to enable the word as used in the Act, when there is nothing in the context or the subject-matter to the contrary, to be applied to some things to which it would not ordinarily be appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in modifications. The expression 'salary' will include wages; any annuity or pension; any gratuity, any fees, commissions or profits in lieu of or in addition to any salary or wages ... It will, however, not include perquisites ..." It was, therefore, urged that reimbursement of medical expenses having been held to be not perquisite in view of the expression 'whether convertible into money or not' governing the expression 'perquisite' in section 40A (5) (a) (ii) and thus restricting its ordinary meaning, the cash reimbursement would necessarily fall under 'salary' in view of the inclusive and wide definition of 'salary' in section 17(1), read with section 17(3) and in view of the clear enunciation of law by the Tribunal, Special Bench, Bombay in Blackie Sons. (India) Ltd.'s case. 51. We see merit in the revenue's contentions. While definitions of 'salary' and 'perquisite' in section 17(1) are inclusive, in Explanation 2(b) to section 40A (5) an exclusive and exhaustive definition of 'perquisite' was given as per clause (b) covering only five categories enumerated therein, but in respect of 'salary', the inclusive definition of section 17(1) was adopted, which means that what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eat quam pereat' observed : "If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.' 'Where alternative constructions are equally open, that alternative is to be chosen which will be consistent with the smooth working of the system which the statute purports to be regulating; and that alternative is to be rejected which will introduce uncertainty, friction or confusion into the working of the system." Applying the above principle, we have to avoid an interpretation which would make the provisions of section 40A (5) ineffective in curbing the mischief which the Legislature intended. 54. Sampath Iyengar in Law of Income-tax, Seventh edn., Vol. 1 under section 17 under the head "4. 'Perquisites' sub-section (2). -'Perquisite', meaning of ", observed : "Formerly, the word 'perquisite' was used to denote emoluments not fixed generally and granted mostly ex gratia, whether i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th disallowance under section 40(a) (v) of reimbursement by employer company of medical expenses incurred by managing director in the assessment year 1969-70 and 1970-71 when the said provision was in force. [Section 40(a) (v) was deleted and substituted by section 40A (5) with effect from 1-4-1972] The Delhi High Court dissented from the full Bench decision of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 where it was held that house rent Delhi High Court in allowance paid by the employer company to its employee was a perquisite and the words 'whether convertible into money or not' qualifying the words 'benefit, amenity or perquisite' would not exclude cash payments by the employer to the employee and a contrary construction accepted by the Karnataka, Calcutta and Madras High Courts was irrational defeating the very purpose of section 40(a) (v). The Kerala High Court, therefore, held that house rent allowance received by an employee from an employer was covered by section 40(a)(v). 59. The Delhi High Court, however, fell in line with the aforesaid three High Courts, who, in Mysore Commercial Union Ltd.'s case, Kanan Devan Hills Produce Co. Ltd.'s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f company's assets. 60. In this context, we may also note that the head-note in Mysore Commercial Union Ltd.'s case is incorrect insofar as it is indicated that house rent allowance is not a perquisite 'or part of salary. All that the High Court held at page 342 was that payment of house rent allowance or bonus is not a perquisite because of the expression 'whether convertible into money or not' qualifying the words 'benefit, amenity or perquisite'. 61. We are, therefore, of the view that the reimbursement of medical expenses being a cash payment by the employer to the employee would fall under 'salary' in view of the very wide and inclusive definition of 'salary' as per section 17(1) which is adopted by clause (a) of Explanation 2 of section 40A (5), in contradistinction to only five enumerated categories being covered under 'perquisite' as per clause (b) of said Explanation 2 to section 40A(5). Thus, salary would cover any perquisite not falling in the said five categories of perquisites and particularly a cash payment [being hit by the expression 'whether convertible into money or not' qualifying 'perquisite' in section 40A(5)(a) (ii)]. We have already noted above the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view taken by the Special Bench, Bombay, in Blackie Sons' case. We would accordingly hold that reimbursement of medical expenses being a cash payment was rightly treated as part of salary for computing the disallowance under section 40A (5). Position is different wile assessing perquisite of medical reimbursement in hands of employee under section 17 in view of the CBDT circulars. Circular No. 336 dated 16-4-1982 directed that only medical reimbursement in excess of one month's salary is to be included in hands of employee. Circular No. 376 dated 6-1-1984 clarified that only reimbursement in excess of Rs. 5,000 was includible. However, Circular No. 445 dated 31-12-1985 exempted all expenditure in a recognised public hospital in India. 66. We may further observe that the position under section 40(c) is clearly against the assessee as the above argument is not available to the assessee because the word 'perquisite' does not appear in section 40(c) (i) which only uses the words 'remuneration or benefit or amenity'. Further, the restrictive phrases 'whether convertible into cash or not' is missing in the said clause. Under these circumstances, the reimbursement of medical expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the ITO, there was no evidence that her visit served the business interest of the assessee-company. The Commissioner (Appeals) vide paragraph 9 noted the assessee's contention that Mr. Bhoothalingam had gone abroad for business discussion with the assessee-company's British Associates and had also visited France and Italy where the assessee-company had also its associates and that on such visits it was customary for meeting at social level that the chairman should be accompanied by his wife. The Commissioner (Appeals), however, rejected the assessee's contention on the ground that the business connection of the wife's visit was too far-fetched. 70. AT the hearing before us, our attention was drawn to the companies application to Reserve Bank of India for release of foreign exchange for the chairman and his wife and the application form indicated that they were proceeding abroad for business purposes. Reserve Bank of India sanctioned on 7-5-1975 foreign exchange of pounds 840 for Mr. Bhoothalingam and pounds 210 for his wife for their stay of 40/42 days in UK, Italy and France. The learned counsel for the assessee reiterated that the wife accompanying the husband (chairman) was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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