Case: C.I.T.,Bombay City-Iii,Bombay Vs. British Bank Of Middle East

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)." 9. The Bombay High Court in the judgment and order under appeal has answered the question in favour of the assessee following its earlier decision in the case of Geoffrey Manners. In the said decision, the High Court held that though Rule 3 has been framed for determination of the value of the motor car provided by the employer to the employee for the purpose of computing the income chargeable under the head "Salaries", there is nothing wrong in applying the same for valuing the perquisites for the purpose of computing the disallowance under Section 40A(5) of the Act because the rule has been framed by the Central Board of Revenue with a view to get over the difficulties that might arise in determining the value of the perquisite in respect of the use of the car owned and maintained by the employer of the employees. As already noticed, the Bombay High Court followed the opinion expressed by the Calcutta High Court in the case of Britannia Industries Ltd. 10. In Commissioner of Income Tax v. Rajesh Textiles Mills Ltd. (173 ITR 179) the Gujarat High Court has analyzed the legal position for coming to the conclusion that the computation of monetary benefit of perquisites in the hands of the employees has to be on an entirely different footing and concerns entirely a different topic and the head of income as compared to the computation of expenses actually incurred by the employer-assessee from the point of view of their deductibility from the income of the employer under the head "Profit and Gain of business or profession". Dealing with the decision in the case of Britannia Industries Ltd., the Gujarat high Court attempted to distinguish it on facts and said that the general observations in that decision were made on an entirely different statute scheme as compared to the one with which that court was concerned. Those general observations of the Calcutta High Court that there cannot be any two different standards for assessment in respect of employee and employer. We, however, do not think that the observations made in Calcutta case were no consideration of different scheme or there was any distinction of facts. There, Rule 3 was erroneously invoked for determining the deduction of expenditure in the assessment of assessee-employer. 11. It has to b borne in mind that Section 40A(5) and Rule 3 deal with different situation and different set of assessee - one dealing with the employer-assessee and the other the employee-assessee. Rule 3 deals with the other the employee-assessee. Rule 3 deals with valuation for the purposes of the computing the income of the employees chargeable under the head "Salaries" whereas Section 40A(5) deals with computation of the income under the head "Profits and Gains of business or profession". The object of enacting Section 40A(5) was to discourage the assessee from incurring expenditure which resulted directly or indirectly in the provision of any benefit, amenity or perquisite to their employees beyond a particular limit and any expenditure incurred beyond the prescribed limit was liable to be disallowed. The said provision constitutes a composite scheme and the purpose of prescribing a ceiling on expenditure in connection with directs and employees is to discourage the employer from paying excessive salaries, remuneration, perquisites etc. to its employees and directors, and if paid, the employer would not be able to claim the entire expenditure as deduction. It will be able to claim deduction of expenditure upto the ceiling limit provided in the said section. This provision was enacted to curb extravagant expenditure. It does not contemplate deduction of notional value of perquisite assessed in the hands of the employees. It contemplates the deduction of actual expenditure or on estimate basis where the details of the actual expenditure are not furnished. 12. The employer has incurred the expenditure on the care and should be able to provide its figures. If he cannot, it is fair that the expenditure should be assessed in a realistic basis and not on the basis of rule 3 which applies qua the employee, who cannot provide the figures of actual expenditure since it is not he who has incurred it. 13. The High Court of Calcutta and Bombay have not properly considered that Section 40A(5) and Rule 3 operate in different fields and apply to different set of assessee. The provision of the Act was enacted to provide for ceiling on expenditure on employees. The object of the rule is to give relief to the employees. The object of the rule is to give relief to the employees. Applying Rule 3 for the purpose of determining the deduction in relation to the assessment of the employer would be doing violence to and ignoring the legislative intent evident in Section 40A(5). The question is not whether there is anything wrong in applying Rule 3 or any anomalous situation arising on account of determining different values of the same perquisite in the hand of employee or employer-assessee. there is no anomaly in applying Section 40A(5) while making assessment of the assessee-employer and it will clearly be wrong to apply Rule 3. That cannot be done in the teeth of the language of the section. In our opinion the law has been correctly laid down by Gujarat High Court and not by the Calcutta and Bombay Courts. 14. Before the parting we wish to place on record our sincere gratitude for the valuable assistance rendered by Mr. B. sen, Senior Advocate who readily acceded to our request to assist the court as an amicus curiae since the respondent did not appear in the matter despite being served.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]We, however, do not think that the observations made in Calcutta case were no consideration of different scheme or there was any distinction of facts. There, Rule 3 was erroneously invoked for determining the deduction of expenditure in the assessment of assessee-employer.11. It has to b borne in mind that Section 40A(5) and Rule 3 deal with different situation and different set of assessee - one dealing with the employer-assessee and the other the employee-assessee. Rule 3 deals with the other the employee-assessee. Rule 3 deals with valuation for the purposes of the computing the income of the employees chargeable under the head "Salaries" whereas Section 40A(5) deals with computation of the income under the head "Profits and Gains of business or profession". The object of enacting Section 40A(5) was to discourage the assessee from incurring expenditure which resulted directly or indirectly in the provision of any benefit, amenity or perquisite to their employees beyond a particular limit and any expenditure incurred beyond the prescribed limit was liable to be disallowed. The said provision constitutes a composite scheme and the purpose of prescribing a ceiling on expenditure in connection with directs and employees is to discourage the employer from paying excessive salaries, remuneration, perquisites etc. to its employees and directors, and if paid, the employer would not be able to claim the entire expenditure as deduction. It will be able to claim deduction of expenditure upto the ceiling limit provided in the said section. This provision was enacted to curb extravagant expenditure. It does not contemplate deduction of notional value of perquisite assessed in the hands of the employees. It contemplates the deduction of actual expenditure or on estimate basis where the details of the actual expenditure are not furnished.12. The employer has incurred the expenditure on the care and should be able to provide its figures. If he cannot, it is fair that the expenditure should be assessed in a realistic basis and not on the basis of rule 3 which applies qua the employee, who cannot provide the figures of actual expenditure since it is not he who has incurred it.13. The High Court of Calcutta and Bombay have not properly considered that Section 40A(5) and Rule 3 operate in different fields and apply to different set of assessee. The provision of the Act was enacted to provide for ceiling on expenditure on employees. The object of the rule is to give relief to the employees. The object of the rule is to give relief to the employees. Applying Rule 3 for the purpose of determining the deduction in relation to the assessment of the employer would be doing violence to and ignoring the legislative intent evident in Section 40A(5). The question is not whether there is anything wrong in applying Rule 3 or any anomalous situation arising on account of determining different values of the same perquisite in the hand of employee or employer-assessee. there is no anomaly in applying Section 40A(5) while making assessment of the assessee-employer and it will clearly be wrong to apply Rule 3. That cannot be done in the teeth of the language of the section. In our opinion the law has been correctly laid down by Gujarat High Court and not by the Calcutta and Bombay Courts.14. Before the parting we wish to place on record our sincere gratitude for the valuable assistance rendered by Mr. B. sen, Senior Advocate who readily acceded to our request to assist the court as an amicus curiae since the respondent did not appear in the matter despite being served.