Case: Commissioner of Income Tax, Bombay and Ors Vs. Mafatlal Gangabhai and Co. (P) Ltd.

6. Inasmuch as the main arguments have been urged in Civil Appeal No. 5946 of 1994 and Civil Appeal No. 2215 of 1978, we shall state the facts of these two appeals alone to bring out the question. The assessee in Civil Appeal No. 5946 of 1994 is a limited company and the assessment year concerned is 1982-83.This appeal is preferred against an order of the Delhi High Court rejecting an application under Section 256(2) of the Income Tax Act filed by the Revenue. The question which the Revenue sought to raise is the following :Whether on the facts and in the circumstances of the case, the ITAT is correct in law in holding that the payment in cash of House Rent Allowance, conveyance allowance, medical reimbursement etc. should not be treated as perquisite under Section 40A(5) of the I.T. Act.7. During the accounting year relevant to the Assessment Year 1982-83, the assessee made payments in cash to its employees on account of house rent allowance, conveyance allowance and medical reimbursement. The Income Tax Officer disallowed the same holding that the said payments fall within the mischief of Section 40A(5). On Appeal, the Commissioner of Income Tax (Appeals) upheld the assessees contention that cash payments cannot be treated as perquisites for the purpose of and within the meaning of Section 40A(5). Revenues appeal to the Tribunal was dismissed. An application under Section 256(1) was also dismissed by the Tribunal whereupon it approached the High Court which too rejected its application under Section 256(2), as stated above.8. Civil Appeal No. 2215 of 1978 is preferred against an order of the Bombay High Court rejecting the Revenues application under Section 256(2) insofar as Questions (1) and (3) are concerned. This Court granted leave insofar as question No. 1 is concerned, which reads :Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the cash payments made by the assessee to its Directors, such as house rent allowance, conveyance allowance, furniture allowance etc. should not be considered perquisites within the meaning of Section 40(a)(v) of the Income Tax Act, 1961 ?9. Leave was granted by this Court for the reason that there is a conflict of opinion on the said question between the High Courts in the country. The assessment year concerned in this appeal is 1971-72 and, therefore, the relevant provision is Section 40(a)(v).

Reasoning: The main limb of Sub-clause (v) places, a limit upon two kinds of expenditure, viz., (a) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or (b) any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit. The limit prescribed or ceiling provided, as it may be called - is one-fifth of the amount of salary payable to the employee or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year or whichever is less. Any expenditure over and above the said limit/ceiling has to be disallowed. It is the first part to the sub-clause we are concerned with in Civil Appeal No. 2215 of 1978. Now, what does the sub-clause say ? The opening words are any expenditure which results directly or indirectly in the provision or any benefit or amenity or perquisite, whether convertible into money or not, to an employee. It is clear from the above words that it is not any and every expenditure that is attracted by the sub-clause but only such expenditure which results directly or indirectly in the provision of any benefit, amenity or perquisite to an employee. Once this is so, it is immaterial whether such benefit, amenity or perquisite is convertible into money or not. The words directly or indirectly are equally significant. While the expressions benefit and amenity are not defined by the Act, the expression perquisite is defined in Sub-section (2) Section 17. While it is not necessary to set out the entire definition of perquisite in the said sub-section, it is sufficient to mention that it includes among others the value of rent-free accommodation provided to the assessee by his employer. (The definition, it may be remembered, is worded from the point of view of and for the purposes of Section 17 which brings to tax income under the head salaries. The said definition may not be strictly applicable to the expression perquisites in Section 40(a)(v), yet it can be taken as broadly indicating the meaning of the said expression.) Now, take a case where the assessee provides a rent-free accommodation to its employee. It would be a perquisite within the meaning of Sub-clause (v) and hence, the expenditure incurred by the assessee in providing such rent-free accommodation to its employee would fall within the sub-clause. This would be so whether the accommodation provided belongs to the assessee or is taken on rent by the assessee. In the latter event, the rent paid by the assessee to the owner of the house will be an expenditure incurred by the assessee in providing a perquisite to its employee within the meaning of the sub-clause. Similarly, any expenditure incurred by the assessee in providing a benefit or amenity to its employee will equally fall within the sub-clause. This much is not in dispute. Now, take another case where an assessee pays a cash amount of, say, Rupees five thousand to its employee asking him to find a house on rent himself instead of the assessee himself taking the house on rent and providing it to the employee.In this case, however, the assessees say, such cash payment made by the assessee is not within the mischief of the sub-clause while the Revenue characterizes the assessees contention as ex-facie illogical and absurd.11. On a consideration of both the points of view, we are inclined to agree with the submission of the learned Counsel for the assessees. The language employed in the Sub-clause v of Clause (a) of Section 40 of the Income tax Act 1961 is not capable of taking within its ambit cash payments made to the employees by the assessee. These cash payments will, of course, be treated as salary paid to the employees and will be subject to the limits/ceiling, if any, in that behalf. But they cannot be brought within the purview of the words any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite - more so because of the following words whether convertible into money or not.12. Now, coming to Section 40A(5), the position is no different. It would, however, be appropriate to point out the distinction between Section 40(a)(v) and Section 40A(5). We shall refer to the former provision as sub-clause and the latter provision as sub-section. The provision of Section 40A(5) is wider in its scope and application than the sub-clause. Sub-clause (i) of Clause (a) of Sub-section (5) deals with any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee. Sub-clause (i) of Clause (c) of Sub-section (5) sets out the limits/ceilings on such expenditure while Clause (a) Of Explanation (2) appended to the sub-section defines the expression salary for the purposes of this sub-section. These features were absent in Sub-clause (v) of Section 40(a). Now, coming to Sub-clause (ii) of Clause (a) of Sub-section (5) - which corresponds to Section 40(a)(v) - it uses only one expression perquisite as against Section 40(a)(v) which spoke of benefit or amenity or perquisite, but this is no real distinction because the definition of perquisite in Clause (b) of Explanation (2) to the sub-section takes in both benefits and amenities. The said definition also include inter alia payment by the assessee of any sum in respect of any obligation which but for such payment, would have been payable by the employee - words which are found in the main limb of Section 40(a)(v) but which are missing in the main limb of Sub-clause (ii) of Clause (a) of Sub-section (5). Thus, except for certain structural changes, Section 40A(5)(a)(ii) and Section 40(a)(v) are similar in all material aspects. It, therefore, follows that what we have said with respect to Section 40(a)(v) applies equally to Section 40A(5)(a)(ii).The words including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee in Section 40(a)(v) as well as in Section 40A(5)(a)(ii) contemplate a situation where the assessee makes a payment (in cash) in respect of an obligation - obligation of the employee - which would have been payable by the employee if it is not paid by the assessee. The payment by the assessee contemplated by these wounds is not evidently a payment to the employee but to a third party, no doubt on account of the employee. Sub-clause (v) of the definition of perquisite in Clause (b) of Explanation (2) to Sub-section (5) also refers to cash payment but that too is not to the employee, though undoubtedly for his benefit.14. For the above, reasons, we hold that cash payments by an assessee to his/its employees do not fall within the ambit of Section 40(a)(v) or Section 40A(5)(a)(ii), as the case may be. We disagree with the opinion of the Kerala High Court in Commonwealth Trust Limited (supra) and agree with the other High Courts which have taken a view according with our view, viz., Commissioner of Income Tax, Kamataka v. Mysore Commercial Union Limited [1980]126ITR340(KAR) , Commissioner of Income Tax v. Shriram Refrigeration Industries Limited [1992]197ITR431(Delhi) , Commissioner of Income Tax v. Kanan Devan Hills Produce Company Limited [1979]119ITR431(Cal) , Commissioner of Income Tax v. Indokem Private Limited [1981]132ITR125(Bom) , Commissioner of Income Tax v. Warner Hindustan Limited [1984]145ITR24(AP) , Installment Supply Private Limited v. Commissioner of Income Tax [1984]149ITR457(Delhi) Commissioner of Income Tax v. Manjushree Plantations Limited (1980) 125 I.T.R. 150 and Commissioner of Income Tax v. New India Industries Limited [1993]201ITR208(Guj) .