Syed Shah Mohammed Quadri, J.:— The assessee in this reference case is a company (hereinafter referred to as “the assessee”) registered under the Indian Companies Act. It manufactures fertilisers. It provided rent-free accommodation to its employees, numbering 37. In respect of the assessment for the assessment year 1973-74, the assessee claimed deduction under section 40A(5) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The Income-tax Officer worked out the quantum of allowance on the basis of perquisites that were availed of by the employees of the assessee. On appeal, the Appellate Assistant Commissioner held that the deduction claimed by the assessee should be worked out not on the basis of perquisites but on the basis of the deduction for each quarter. The matter was taken in appeal to the Tribunal. The Tribunal upheld the order of the first appellate authority, viz., the Appellate Assistant Commissioner.
2. The assessee claimed a sum of Rs. 49,463 being the expenditure incurred on the maintenance of guest-house. The Tribunal, having regard to the order passed in appeal in respect of the very same assessee for earlier assessment years, recorded a finding that the maintenance expenses do not relate to the guest-house. In regard to the other expenditure incurred by the assessee on the travelling of the employees, the question was how much quantum of expenditure is allowable having regard to the provisions of rule 6D(2) of the Income-tax Rules, 1962 (hereinafter referred to as “the Rules”). The Income-tax Officer in computing the permissibility of the expenditure took each trip made by the employee of the assessee as against the claim of the assessee that the total expenditure incurred by each employee in one year should be taken into consideration. The assessee carried the matter in appeal before the Appellate Assistant Commissioner, who, having agreed with the Income-tax Officer, dismissed the appeal. On further appeal to the Tribunal, it was held that the question of allowability of expenditure under rule 6D should be with reference to the expenditure incurred by each employee for the whole year, as claimed by the assessee. On those conclusions of the Tribunal, the Revenue sought reference to this court under section 256(1) of the Act, but the Tribunal Jeclined to refer the questions. However, this court by order dated March 1983, in I.T.C No. 83 of 1982 and order dated June 6, 1983, in I.T.C No. 95 of 1992, directed the Tribunal to refer the following questions:
“1. Whether the fair rental value of the building can be the basis for determining the value of perquisites under section 40A(5) of the Act?
2. Whether the finding of the Appellate Tribunal that the guesthouse cannot be considered as guest-house for the purpose of application of section 37(3) of the Act is devoid of material and rationally possible in the circumstances?
3. Whether the Appellate Tribunal is justified in holding that allowance of expenditure has to-be limited under rule 6D with reference to the whole of the previous year and not by splitting up each trip of an employee?
(Note: There is a typographical error in referring to section 27(3) instead of 37(3) in the second question as directed by the High Court. The question as at the end of the statement is after making due correction).”
3. Accordingly, the Tribunal stated the case and referred the said questions.
4. Question No. 1: For the purpose of coming to a conclusion as to how much expenditure is allowable under section 40A(5) of the Act, it would be useful to refer to the said provision. We may mention here that the said provision was omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. The section as it stood during the relevant period, in so far as it is relevant for our purpose, reads as follows:
“40A Expenses or payments not deductible in certain circumstances.— (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head ‘Profits and gains of business or profession’…
(5)(a) Where the assessee—
(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or
(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit,
then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction:
Provided that where the assessee is a company, so much of the aggregate of—
(a) the expenditure and allowance referred to in sub-clauses (i) and (ii) of this clause; and
(b) the expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c) of section 40,
in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of one hundred and two thousand rupees, shall in no case be allowed as a deduction:
Provided further that
5. A plain reading of the provisions of section 40A(5)(a)(ii) of the Act indicates that any expenditure incurred by an assessee which results directly or indirectly in the provision of any perquisites, whether convertible into money or not, or any expenditure in the nature of allowance in respect of any asset of the assessee used by an employee, either wholly or partly, for his purposes or benefit, then so much of such expenditure or allowance as in excess of the limit specified in respect thereof, shall not be allowed as a deduction. So having regard to the wording of section 40A, which deals with expenses or payments not deductible under certain circumstances, the expenses which are not allowable would be the expenditure incurred by the assessee directly or indirectly in the provision of any perquisite to an employee. Therefore, the direct question would be, how much expenditure was incurred by the assessee in providing rent-free accommodation to the employees. The Income-tax Officer took into consideration rule 3 of the rules and having quantified the perquisites in respect of rent-free residential accommodation, opined that the amount representing the perquisites to each employee would be ah expenditure which cannot be allowed in view of section 40A(5) of the Act. This was accepted by the appellate authority though not approved by the Tribunal as stated above. In our view, evaluation of perquisites enjoyed by the employee of the assessee has no relevance to the disallowance of expenditure under sub-section (5) of section 40A of the Act. They operate in different fields. Whereas rule 3 deals with the perquisites enjoyed by the employee, subsection (5) of section 40A deals with the amount of expenditure that cannot be allowed. The one is not relevant for the other. For purposes of section 40A, what is relevant is the incurring of expenditure by the employer and not the evaluation of the benefit of the perquisite enjoyed by the employee. In our view, the type of expenditure which sub-section (5) to section 40A is aiming at is amounts spent on furnishing, providing of fixtures and the like but not the annual rental value of the building. This view of ours is shared by the Gujarat High Court in CIT v. Rajesh Textiles Mills Ltd., [1988] 173 ITR 179; the Calcutta High Court in Commissioner Of Income-Tax v. Ashoka Marketing Ltd., [1990] 181 ITR 493; the Kerala High Court in CIT v. Malayalam Plantations (India) Ltd., [1990] 186 ITR 322; the Bombay High Court in CIT v. Empire Dyeing and Mfg. Co. Ltd., [1991] 192 ITR 245 and the Delhi High Court in Commissioner Of Income-Tax v. Shriram Refrigeration Industries Ltd., [1992] 197 ITR 431. No contrary decisions are brought to our notice. Therefore, we answer the first question in the negative, i.e, in favour of the assessee and against the Revenue.
6. Question No. 2: The question as framed has a very limited scope. We are told that the provision of law is wrongly referred to as section 37(3) and that it should be 37(4). Be that as it may. Our scrutiny to answer this question, is limited to finding out as to whether there is any material on which the Tribunal could have reasonably held that the building in question is not guest-house within the meaning of the said provision. A perusal of the order of the Tribunal shows that in respect of the very same building, the same question arose in the assessment years 1971-72 and 1972-73 in Income-tax Appeals Nos. 2077 and 2078 of 1976-77. Having gone through the material placed, before the Tribunal, it recorded the finding that the accommodation maintained by the assessee was used only by the executives of the assessee-company as a transit accommodation who were visiting Hyderabad on company's business and as the company's employees could not be treated as guests, it could not be said that the accommodation provided was maintained in the nature of guest-house. It further recorded a finding that in respect of persons other than the directors and employees of the company who officially stayed in the building, they were not accommodated on rent-free basis but were charged for the accommodation provided to them. On that material, the Tribunal recorded the finding in the said order that the accommodation provided by the assessee could not be considered as the one in the nature of guest-house. It followed the same reasoning in the order in respect of the assessment year 1973-74 to which the present question relates. We also perused the said order of the Tribunal dated May 31, 1979. In paragraph 24 of that order, the Tribunal has exhaustively considered that question before recording the finding that the accommodation provided was not in the nature of guest-house. Therefore, it cannot be said that there was no material on which a reasonably possible conclusion could have been arrived at. It follows that the finding of the Tribunal that the guest-house cannot be considered as a guest-house for the purpose of application of section 37(3) of the Act, was based on material and was rationally possible. The question is, therefore, answered in the negative, i.e, in favour of the assessee and against the Revenue.
7. Question No. 3: As noted above, question No. 3 deals with allowability of expenditure under rule 6D(2) of the Rules. We may note here that sub-section (3) of section 37 provides that any expenditure incurred by the assessee after March 31, 1964, in connection With travelling of an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent and subject to the conditions, if any, as may be prescribed. This would be so, even if the expenditure incurred is not a capital expenditure or personal expenditure of an assessee and was laid out or expended wholly and exclusively for the purposes of the business or profession, which is admissible under sub-section (1) of section 37 of the Act, as sub-section (3) opens with a non obstante clause and excludes the provisions of subsection (1) of section 37. It would now be relevant to read rule 6D(2) here, which runs thus:
“6D. (2) The allowance in respect of expenditure incurred by an assessee in connection with travelling by an employee or any other person within India outside the headquarters of such employee or other person for the purposes of the business or profession of the assessee shall not exceed the aggregate of the amounts computed as hereunder:
(a) in respect of travel by rail, road, waterway or air, the expenditure actually incurred;
(b) in respect of any other expenditure (including hotel expenses or allowances paid) in connection with such travel, an amount calculated at the following rates for the period spent outside such headquarters:
(i) where the amount of such expenditure does not exceed Rs. 1,500 per day, the whole of such amount;
(ii) in any other case, Rs. 1,500 as increased by a sum equal to seventy-five per cent, of such expenditure in excess of Rs. 1,500 per day.”
8. Clause (b) of sub-rule (2) is a relevant provision with which we are concerned. A careful reading of the said provision shows that while computing the expenditure under sub-section (3) of section 37 of the Act, subject of course to the limitations imposed therein, the amount has to be calculated with reference to each individual employee. It may be that the total expenditure incurred by the assessee throughout the year will have to be arrived at in view of the phrase “whole of such amount” as mentioned in sub-clause (i) of clause (b) of rule 6D(2). The argument put forth by learned counsel for the assessee is somewhat strange because learned counsel did agree that the total amount incurred by the assessee during the year on travelling of the employees will have to be arrived at but what he contends is that if an employee travels more than once in an year and spends, more amount in one trip but less in another trip, the excess amount expended in one trip has to be adjusted against the expenditure made in the next or subsequent trips. We are afraid, we may not accede to such a contention. The provision speaks of the total expenditure incurred by an assessee on travelling, etc., of the employee the actual expenditure incurred on each trip has to be ascertained with reference to the provisions of rule 6D. The unit of expenditure for purposes of rule 6D is the trip but not the individual employee. Therefore, it necessarily follows that the expenditure incurred by the assessee will have to be taken into consideration with reference to each trip of an individual employee but not with reference to the totality of the trips made by an individual employee. In our view, the Tribunal is not correct in coming to the conclusion that the Income-tax Officer has to compute the disallowance under rule 6D with reference to the expenditure incurred by each employee for the whole year as claimed by the assessee. In this view of the matter, the third question is answered in the negative, i.e, in favour of the Revenue and against the assessee.
9. The reference is answered accordingly.