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Commissioner Of Income-Tax v. Vazir Sultan Tobacco Company Ltd.
Factual and Procedural Background
This is a reference made by the Revenue under section 256(1) of the Income-tax Act, 1961. Six specific questions relating to the tax treatment of certain expenditures and benefits provided to employees by an assessee-company were referred to the Court. The underlying controversy concerns two assessment years (1965-66 and 1967-68). The Income-tax Officer disallowed certain expenditures claimed by the assessee-company under the provisions of section 40(c)(iii) as it stood at the relevant time. On appeal, the Commissioner of Income-tax (Appeals) granted partial relief. Both sides took further appeals to the Income-tax Appellate Tribunal; the Tribunal, following its earlier decision in the assessee's appeals for later assessment years, allowed the assessee's appeals and dismissed the Department's appeals. The Revenue then referred questions to this Court arising from those decisions.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the cost of repairs to buildings owned by the assessee and taken on lease by the assessee and allotted to its employees could be treated as a perquisite for the purpose of section 40(c)(iii) of the Income-tax Act?
- Whether, on the facts and in the circumstances of the case, the buildings owned by the assessee and allowed to be occupied by the highly paid employees could be treated as business assets of the assessee?
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in treating the bonus paid to the employees as part of the salary instead of treating the same as perquisites under section 40(c)(iii) of the Income-tax Act, 1961?
- Whether, on the facts and in the circumstances of the case, the depreciation on furniture provided by the employer and on the buildings owned by the assessee is in the nature of a perquisite under section 40(c)(iii) of the Income-tax Act?
- Whether, on the facts and in the circumstances of the case, the replacement of crockery and cutlery to the employees is a perquisite under section 40(c)(iii) of the Income-tax Act, 1961?
- Whether, on the facts and in the circumstances of the case, the medical expenses paid to the employees are a perquisite under section 40(c)(iii) of the Income-tax Act, 1961?
Arguments of the Parties
Revenue's Arguments
- The Revenue relied on the Full Bench decision of the Kerala High Court in CIT v. Forbes, Ewart & Figgis (P.) Ltd. ([1982] 138 ITR 1) to contend that expenditure of the kind in question constitutes a perquisite or amenity to the employee and, if it exceeds the statutory ceiling, it cannot be allowed as a deduction under the relevant provision.
- In the context of depreciation, the Revenue also relied on the Kerala Full Bench decision and a Bombay High Court decision (Commissioner Of Income-Tax v. Yorkshire Insurance Co. Ltd., [1986] 162 ITR 565) to support the view that such allowances may be treated as part of perquisites under related statutory provisions (notably decisions under section 40(a)(v) in other cases).
Assessee's Arguments
- The assessee relied on the decision of the Calcutta High Court in CIT v. Davidson of India Pvt. Ltd. ([1984] 148 ITR 544) to contend that expenditure on maintenance and repairs of houses provided to employees cannot be treated as a benefit, amenity or perquisite to the employee; such repairs can be ordinary business expenditure undertaken in the normal course, and where the company is the owner or lessee the maintenance obligation falls on it.
- With regard to crockery and cutlery, the assessee contended that even if provision of crockery and cutlery is an amenity, only the value of the user's benefit (not the whole replacement cost) should be disallowed.
- Both counsel (Revenue and assessee) accepted the applicability of this Court's earlier decision in Commissioner Of Income-Tax v. Warner Hindusthan Ltd. ([1986] 160 ITR 217) that bonus and medical expenses are not perquisites for the purpose in question.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Forbes, Ewart & Figgis (P.) Ltd., [1982] 138 ITR 1 (Kerala Full Bench) | Held that certain expenditures (in that case considered under section 40(a)(v)) amount to perquisites and, if exceeding the ceiling, are not allowable as deductions. | The Revenue relied on this decision. The Court noted the decision but distinguished it because that case was decided under section 40(a)(v) (a provision with wider scope) and therefore did not apply directly to section 40(c)(iii) as it stood for the years in question; the Court did not follow the Kerala Full Bench decision for purposes of section 40(c)(iii). |
| CIT v. Davidson of India Pvt. Ltd., [1984] 148 ITR 544 (Calcutta High Court) | Held that expenditure on maintenance and repairs of houses allotted to employees is not necessarily a benefit/amenity or perquisite to the employee where such expenditure is the normal obligation of the owner/occupier. | The Court accepted and applied this ratio to conclude that repair and maintenance expenditure incurred by the assessee (as owner or lessee) was an obligation of the company and not a perquisite under section 40(c)(iii); the Court followed this decision in answering Question No. 1 in favour of the assessee. |
| Commissioner Of Income-Tax v. Warner Hindusthan Ltd., [1986] 160 ITR 217 (this Court) | Recognized that certain payments (here, bonus and medical expenses) are not to be treated as perquisites for the relevant purpose. | Both parties accepted this Court's decision. The Court applied it and answered Question No. 3 (bonus) and Question No. 6 (medical expenses) accordingly: bonus and medical expenses are not perquisites under section 40(c)(iii) for the purposes of these questions. |
| Commissioner Of Income-Tax v. Yorkshire Insurance Co. Ltd., [1986] 162 ITR 565 (Bombay High Court) | Addressed treatment of depreciation and related matters in the context of provisions comparable to section 40(a)(v). | The Revenue relied on this decision in support of treating depreciation as a perquisite under the related provision. The Court, however, confined itself to section 40(c)(iii) and held that depreciation (being in relation to an asset of the company) does not attract the provision of section 40(c)(iii) as a denial of deduction; the Court did not express an opinion on section 40(a)(v). |
Court's Reasoning and Analysis
The Court proceeded by considering the statutory provision applicable to the facts—section 40(c)(iii) as it stood with effect from April 1, 1964—and by reference to legislative changes and the scope of differently worded statutory sub-clauses enacted in subsequent Finance Acts. The Court applied the following analytical steps that are set out in the opinion:
- Statutory focus: The Court confined its analysis to section 40(c)(iii) (applicable for the assessment years in question) rather than to later or broader provisions such as section 40(a)(v), and extracted the precise language of section 40(c)(iii) to determine what expenditures are excluded from deduction.
- Lease obligations and legal incidence: In assessing whether repair and maintenance costs for leased premises constitute a perquisite, the Court referred to Section 108(m) of the Transfer of Property Act to establish the default rights and liabilities of lessor and lessee. The Court observed that, absent a contract to the contrary, the lessee is bound to keep and restore the property in as good a condition as received (subject to wear and tear), and therefore maintenance/repair expenditure by the lessee is its own obligation.
- Application to the facts on repairs: Because the assessee was the lessee of certain buildings and also the owner of others, and there was no suggestion that extraordinary amounts were spent or that the expenditure was other than routine maintenance, the Court concluded that such expenditure constituted a company obligation rather than a perquisite to employees. The Court followed the Calcutta High Court's reasoning in CIT v. Davidson of India Pvt. Ltd. and answered Question No. 1 in the negative (i.e., not a perquisite) in favour of the assessee.
- Declining to answer Question No. 2: The Court found that the question whether buildings allowed to be occupied by highly paid employees could be treated as business assets did not arise on the facts before it and therefore declined to answer that reference question.
- Bonus and medical expenses: Both counsel accepted Warner Hindusthan (this Court), and the Court applied that authority to hold that bonus and medical expenses already paid are not perquisites for the purposes of section 40(c)(iii). Accordingly Question No. 3 was answered in the affirmative (the Tribunal was justified in treating bonus as salary rather than perquisite) and Question No. 6 was answered in the negative (medical expenses are not a perquisite), both in favour of the assessee.
- Depreciation: The Court considered whether depreciation on assets (buildings and furniture used to provide accommodation) falls within section 40(c)(iii). Noting that depreciation is an allowance in relation to the company's own assets, and emphasizing the difference in language and scope between section 40(c)(iii) and section 40(a)(v) (the latter being broader), the Court concluded that depreciation does not attract the disallowance under section 40(c)(iii). The Court expressly declined to express any opinion on section 40(a)(v), as that provision did not arise on these facts.
- Crockery and cutlery replacement: The Court held that provision (and replacement) of crockery and cutlery is an amenity within the meaning of section 40(c)(iii). The Court rejected the assessee's contention that only the value of use should be disallowed and held that replacement cost constitutes expenditure for the amenity; if inclusion of that expenditure as a perquisite causes the statutory ceiling to be exceeded, the amount cannot be allowed as a deduction under the language of the section.
Holding and Implications
The Court answered the reference questions as follows (direct effects on the parties are stated exactly as in the opinion):
- Question No. 1: Answered in the negative, against the Revenue and in favour of the assessee-company (repairs/maintenance of buildings owned or leased by the company and used for employee accommodation are not perquisites under section 40(c)(iii) on the facts before the Court).
- Question No. 2: Declined to answer (the Court found no facts bearing on whether buildings occupied by highly paid employees could be treated as business assets).
- Question No. 3: Answered in the affirmative, against the Revenue and in favour of the assessee (the Tribunal was justified in treating bonus as part of salary rather than as a perquisite under section 40(c)(iii), consistent with Warner Hindusthan).
- Question No. 4: Answered in the negative, against the Department and in favour of the assessee (depreciation in respect of company assets used to provide accommodation does not attract disallowance under section 40(c)(iii) as applied on these facts).
- Question No. 5: Answered in the affirmative, in favour of the Revenue and against the assessee-company (replacement of crockery and cutlery is an amenity/perquisite for the purposes of section 40(c)(iii); replacement cost may be disallowed if it causes the statutory ceiling to be exceeded).
- Question No. 6: Answered in the negative, against the Revenue and in favour of the assessee (medical expenses paid to employees are not perquisites under section 40(c)(iii) for the purposes of this case).
Implications: The decision confines its conclusions to the construction and application of section 40(c)(iii) as it stood with effect from April 1, 1964, and applies established principles (including the lessee's maintenance obligation under the Transfer of Property Act) to determine whether particular expenditures constitute perquisites. The Court expressly declined to consider or pronounce upon the interpretation or effect of section 40(a)(v) (a provision with different language and scope), and therefore limited its holdings to the specific provision and facts before it. The reference was answered accordingly, and the Court ordered that there be no costs.
Final procedural note: "The reference is accordingly answered. No costs." (as stated in the opinion)
Upendralal Waghray, J.:— This reference under section 256(1) of the Income-tax Act, 1961, is made at the instance of the Revenue and the following questions have been referred:
“1. Whether, on the facts and in the circumstances of the case, the cost of repairs to buildings owned by the assessee and taken on lease by the assessee and allotted to its employees could be treated as a perquisite for the purpose of section 40(c)(iii) of the Income-tax Act?
2. Whether, on the facts and in the circumstances of the case, the buildings owned by the assessee and allowed to be occupied by the highly paid employees could be treated as business assets of the assessee?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in treating the bonus paid to the employees as part of the salary instead of treating the same as perquisites under section 40(c)(iii) of the Income-tax Act, 1961?
4. Whether, on the facts and in the circumstances of the case, the depreciation on furniture provided by the employer and on the buildings owned by the assessee is in the nature of a perquisite under section 40(c)(iii) of the Income-tax Act?
5. Whether, on the facts and in the circumstances of the case, the replacement of crockery and cutlery to the employees is a perquisite under section 40(c)(iii) of the Income-tax Act, 1961?
6. Whether, on the facts and in the circumstances of the case, the medical expenses paid to the employees are a perquisite under section 40(c)(iii) of the Income-tax Act, 1961?”
2. The controversy relates to the two assessment years, viz., 1965-66 and 1967-68. The Income-tax Officer had disallowed certain expenditure incurred by the assessee-company during the said assessment years relying upon the provisions of section 40(c)(iii) as it existed at the relevant time. On the two appeals by the assessee-company, the Commissioner of Income-tax (Appeals) granted relief in part. The assessee-company filed two further appeals before the Tribunal, in so far as the relief was denied, and the Income-tax Officer filed two appeals to the extent relief was granted to the assessee. The Tribunal has, by a common judgment, following its own earlier judgment in the assessee's appeals for the assessment years 1968-69 and 1969-70, allowed the assessee's appeals and dismissed the Department's appeals. The earlier judgment of the Tribunal related to the assessment years 1968-69 and 1969-70 during which period, sub-clause (iii) was replaced by sub-clause (v). Sub-clause (iii) to section 40(c) was first added by the Finance Act, 1963, but the original sub-clause was substituted by the Finance Act, 1964, with effect from April 1, 1964. Again, with effect from April 1, 1969, sub-clause (iii) was omitted by the Finance Act, 1968, and in its place, sub-clause (v) was inserted. This sub-clause (v) was in turn replaced by section 40A(5) with effect from April 1, 1972. For the purpose of this case, we are concerned with section 40(c)(iii) as it stood with effect from April 1, 1964. It reads as follows:
“40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’,……….
(c) in the case of any company—
(iii) any expenditure incurred after the 29th day of February, 1964, 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 company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date:
Provided that in computing the aforesaid expenditure any payment by way of gratuity or the value of any travel concession or assistance referred to in clause (5) of section 10 or passage moneys or the value of any free or concessional passage referred to in sub-clause (i) or any payment of tax referred to in sub-clause (vii) of clause (6) of that section or any sum referred to in clause (vii) of sub-section (1) of section 17 or in clause (v) of sub-section (2) of that section or the amount of any compensation referred to in clause (i) or any payment referred to in clause (ii) of sub-section (3) of that section or any payment referred to in clause (iv) or clause (v) or any expenditure referred to in clause (ix) of sub-section (1) of section 36 shall not be taken into account:
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.”
(Extracted from the book “The Law and Practice of Income-tax”, by Kanga and Palkhivala, Seventh Edition, Volume I, page 513)
3. Question No. 1: The assessee had, for providing residential accommodation to its employees, taken on lease some buildings. It had also provided accommodation to some of its employees in buildings owned by it. During the relevant periods, the assessee claimed the amount spent for repairs of the said buildings as business expenditure. This was disallowed by the Income-tax Officer with reference to section 40(c)(iii), but the Appellate Tribunal has taken a different view. Counsel for the Revenue has relied upon a decision of the Full Bench of the Kerala High Court in CIT v. Forbes, Ewart & Figgis (P.) Ltd., [1982] 138 ITR 1 and contended that the said expenditure is a perquisite provided to the employee and if it exceeds the allowable ceiling, it cannot be allowed as a deduction. In this case, as the said amounts exceeds the limit contemplated, by the Act, it cannot be allowed as a deduction and has to be included in the taxable income of the assessee-company.
4. Counsel for the assessee has, however, placed reliance on the decision of the Calcutta High Court in CIT v. Davidson of India Pvt. Ltd., [1984] 148 ITR 544 and contended that the expenditure on maintenance and repairs with respect to the said houses cannot be treated as a benefit, amenity or perquisite to the employee and the repairs were undertaken by the company in the normal course. Any, expenditure incurred by an owner for normal maintenance and keeping the building in good repair will be its obligation vis-a-vis an occupant like an employee unless there is a contract to the contrary.
5. The terms of the lease or the quantum of expenditure on each house are not available. Section 108 of the Transfer of Property Act deals with the rights and liabilities of lessor and lessee. Section 108(m) reads as follows:
“108. In the absence of a contract or local usage to the contrary, the lessor and the lessee of immovable property, as against one another, respectively, possess the rights and are subject to the liabilities mentioned in the rules next following or such of them as are applicable to the property leased:— …
(m) the lessee is bound to keep, and on the termination of the lease to restore, the property in as good a condition as it was in at the time when he was put in possession, subject only to the changes caused by reasonable wear and tear or irresistible force, and to allow the lessor and his agents, at all reasonable times during the term, to enter upon the property and inspect the condition thereof and give or leave notice of any defect in such condition; and, when such defect has been caused by any act or default on the part of the lessee, his servants or agents, he is bound to make it good within three months after such notice has been given or left.”
6. In the absence of any contract to the contrary, it is the obligation of the lessee to keep and maintain the leased premises in good condition. In respect of the leased buildings, the assessee-company is the lessee. Any expenditure incurred for this purpose is the obligation of the company. It is not the case of the Department that any unusual or extraordinary amounts were spent for the houses. The ratio of the Calcutta decision which is with reference to section 40(c)(iii) applies to this case. The decision of the Kerala High Court was with reference to the subsequently introduced provision, viz., section 40(a)(v), which in its second limb refers to expenditure spent on the assets of the assessee. This has also been brought out in the said decision. In this case, we are concerned with section 40(c)(iii) and have proceeded on the basis that the expenditure incurred was for maintaining and keeping the buildings in good repair in respect of the buildings belonging to the assessee-company or taken on lease by it for providing accommodation for its employees. Though the Tribunal has followed its earlier decision under section 40(a)(v), we do not consider it necessary to go into the interpretation of the said clause, as the relevant clause applicable to this case is section 40(c)(iii). For the purpose of this case, we agree with the, view of the Calcutta High Court. We do not want to express any opinion on the interpretation of section 40(a)(v) as it does not arise in this case. We answer question No. 1. in the negative, against the Revenue, and in favour of the assessee company.
7. Question No. 2: This question does not arise from the order of the Tribunal and we do not find any facts which have a bearing on this question. We, therefore, decline to answer this question.
8. Questions Nos. 3 and 6: These relate to payment of bonus and medical expenses already incurred on the employees. Both counsel do not dispute that in view of the decision of this court in Commissioner Of Income-Tax v. Warner Hindusthan Ltd., [1986] 160 ITR 217, these are not perquisites. We, therefore, answer question No. 3 in the affirmative and question No. 6 in the negative both against the Revenue and in favour of the assessee.
9. Question No. 4: Whether the depreciation allowance in respect of the buildings and furniture owned by the assessee-company which have been used for providing accommodation to its employees is to be treated as a part of perquisite for the purpose of calculating the ceiling allowable under the Act for the purpose of section 40(c)(iii): Counsel for the Revenue has placed reliance on the Full Bench decision of the Kerala High Court in CIT v. Forbes, Ewart & Figgis (P.) Ltd., [1982] 138 ITR 1, already referred to under question No. 1 and also a decision of the Bombay High Court in Commissioner Of Income-Tax v. Yorkshire Insurance Co. Ltd., [1986] 162 ITR 565. Both these decisions are under section 40(a)(v). As already pointed out while dealing with question No. 1, the scope of section 40(a)(v) is wider than section 40(c)(iii) which has also been brought out by the Kerala High Court with reference to the statements of objects and reasons and the Finance Bill by which section 40(a)(v) was introduced. The Tribunal has relied upon its earlier decision under section 40(a)(v), but as the present case arises under section 40(c)(iii), we would like to confine our decision to a consideration under the said provision only. In view of the difference in language in sections 40(c)(iii) and 40(a)(v) in which the further limb was added, as noticed by the Kerala High Court, we consider that the depreciation allowance, which could only be in relation to an asset of the company, does not attract the provision of section 40(c)(iii) for a denial of deduction. We do not express any opinion regarding the effect of section 40(a)(v) as it does not arise in this case. The question is, therefore, answered in the negative, against the Department and in favour of the assessee.
10. Question No. 5: This relates to the amount spent by the assessee for replacing the crockery and cutlery at the residences of its various officers. The provision of crockery and cutlery is an amenity provided by the employer within the meaning of section 40(c)(iii). It is, however, contended by counsel for the assessee that even if it is an amenity, the entire cost of the crockery and cutlery replaced cannot be disallowed and the value of its user alone can be disallowed. We are not able to accept this contention. The company has spent amounts for making available the crockery and, cutlery as an amenity. Having regard to its nature, replacement could be either for breakages or the desire to change the old crockery and cutlery. In view of this, the amount spent for replacement is an expense incurred for the amenities. If, by its inclusion as a perquisite or amenity, the permissible ceiling under the Act is exceeded, it cannot be allowed as a deduction in view of the language of section 40(c)(iii). This question is, therefore, answered in the affirmative, in favour of the Revenue and against the assessee-company. Our answers to the questions referred are as follows:
Question No. 1: We answer this question in the negative, against the the Revenue and in favour of the assessee-company.
Question No. 2: We decline to answer this question.
Question No. 3: We answer this question in the affirmative, against the Revenue and in favour of the assessee.
Question No. 4: We answer this question in the negative, against the Department and in favour of the assessee.
Question 5: We answer this question in the affirmative, in-favour of the Revenue and against the assessee-company.
Question 6: We answer this question in the negative, against the Revenue and in favour of the assessee.
11. The reference is accordingly answered. No costs.
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