Structured Summary of the Opinion (S.P. Bharucha, J.)

Factual and Procedural Background

This reference was made at the instance of the Revenue in respect of the assessment year 1972–73 (previous year ended March 31, 1972). Two questions were posed to the Court concerning (1) whether roads within factory premises constituted "plant" for entitlement to depreciation and (2) whether sums provided for purchase of deferred annuity policies on the lives of the assessee's directors, to meet obligations for payments to them on retirement, fell within the mischief of section 40(a)(v) of the Income-tax Act, 1961.

Procedurally, counsel agreed that the first question was covered by this Court's prior judgment in Commissioner Of Income-Tax, Bombay City I v. Colour-Chem Ltd., [1977] 106 ITR 323, and that question was answered accordingly. The second question arose from facts that the assessee paid Rs. 53,749 to the Life Insurance Corporation of India to purchase deferred annuity policies on the lives of its directors. The Income-tax Officer treated the payment as being on behalf of the directors and akin to commission (taking it into account as salary). The Appellate Assistant Commissioner allowed the assessee's appeal, and the Income-tax Appellate Tribunal (ITAT) further found that the payments had been arranged to meet the assessee's obligations for lump-sum payments on retirement or death and that the directors had no present right to the sum.

Legal Issues Presented

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that roads within the factory premises constituted "plant" to be entitled to depreciation allowance?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions made for the purchase of deferred annuity policies on the lives of the directors for meeting the assessee's obligations for payment to them at the time of their retirement would not fall within the mischief of section 40(a)(v) of the Income-tax Act, 1961?

Arguments of the Parties

Revenue (Dr. Balasubramanian)

• Relied on the definition of "perquisite" in section 40A(5), Explanation 2(b)(iv): "payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee".
• Submitted that by making payments for the annuity policies to the Life Insurance Corporation, the assessee had undertaken an obligation which properly fell upon the directors; therefore the payment operated like a perquisite or commission payable to the directors.

Assessee (Mr. Sonde)

• Relied on the Supreme Court decision in CIT v. L.W Russel, [1964] 53 ITR 91, which held that employer contributions to provide pensionary or deferred annuity benefits apply only to sums where there is an obligation on the part of the employer to pay and a vested right on the part of the employee; contingent payments to which the employee has no right until the contingency occurs do not fall within that provision.
• Argued that the employer's contributions towards premiums were not perquisites allowed to the employee or amounts due to him in the sense contemplated by the cited provision.

Table of Precedents Cited

Court's Reasoning and Analysis

On the first question the Court accepted counsel's concession that the matter was covered by this Court's decision in Commissioner Of Income-Tax, Bombay City I v. Colour-Chem Ltd., [1977] 106 ITR 323, and therefore held that roads within the factory premises are entitled to depreciation allowance as "building".

On the second question the Court proceeded from the factual findings recorded by the Income-tax Appellate Tribunal: the assessee had originally paid directors commission in addition to salary; by resolution it was agreed that instead of commission the directors would receive a lump sum on retirement or death; the assessee provided sums for the purchase of deferred annuity policies to meet that obligation; and the directors had no present right to the sums as they were payable only on termination of service or death.

The Court considered Revenue's contention invoking section 40A(5), Explanation 2(b)(iv) (definition of "perquisite") and rejected it on the ground that there was never any obligation upon the directors to make payment upon the annuity policies — the obligation lay only on the assessee. The Court then relied on the Supreme Court's ruling in CIT v. L.W Russel, which treats employer contributions to pensionary or deferred annuity schemes as outside the perquisite concept where payments are contingent and the employee has no present vested right.

Applying L.W Russel, the Court accepted the Tribunal's finding that the provision for the policies did not create any present benefit or amenity to the directors and that the payments were contingent upon retirement or death; accordingly the payments did not fall within the mischief of the provision relied upon by the Revenue.

Holding and Implications

First question: The Court held that roads within the factory premises are entitled to depreciation allowance as "building".

Second question: The Court held in the affirmative and in favour of the assessee: the Tribunal was right in holding that the provision for the purchase of deferred annuity policies on the lives of the directors, to meet the assessee's obligations for payments on retirement or death, did not fall within the provision relied upon by the Revenue and did not represent a present perquisite to the directors.

Consequences: The Tribunal's conclusions on both issues were accepted by the Court — the assessee is entitled to depreciation on factory roads (treated as building) and the provision for deferred annuity policies was not treated as a taxable perquisite to the directors. The Court concluded with no order as to costs.