S.H Kapadia, J.:— By Order dated 13th March 1995 passed by the Tribunal under section 256(1) of the Income-tax Act, the following three Questions have been referred for our opinion arising during the Assessment Year 1978-1979. This Reference is at the instance of the department.
Question No. 1.:
2. Whether the Tribunal was right in holding that the Club Membership fees paid to the employees of Citibank did not constitute perquisite within the meaning of section 40A(5) of the Income Tax Act.?
Answer to Question No. 1:
3. In view of our judgment in the case of American Express Bank v. CIT, reported in 258 ITR Page 601, we answer the above Question in the affirmative i.e in favour of the assessee and against the department.
Question No. 2:
4. Whether the Tribunal was right in holding that for the purposes of disallowance under section 40A(5) salary include retirement benefits like encashment of unavailed leave and whether the Tribunal was right in holding that for the purposes of disallowance under section 40A(5), distinction should be made between employees and former employees.?
Answer to Question No. 2:
5. The above Question has been reframed by us as the Question referred to us was ambiguous. The Question is in two parts. The first part of the Question is:
6. Whether the Tribunal was right in holding that for the purpose of disallowance under section 40A(5), the word “salary” included encashment of unavailed leave.
7. It is argued on behalf of the assessee that section 40A(5) refers to disallowance in the hands of an employer. It was submitted that section 40A(5) does not cover non-periodic payments, not relatable to the previous year. It was argued that encashment of unavailed leave on retirement was a non-periodic payment and consequently, section 40A(5) was not applicable to such payment. In this connection reliance was placed on the judgment of the Bombay High Court in the case of Commissioner Of Income-Tax v. Colgate Palmolive (India), Pvt. Ltd. reported in 210 ITR Page 771. It was argued that encashment of unavailed leave on retirement was a one-time payment and not a recurring payment. That, looking to the definition of salary for the purposes of section 40A(5), any one-time payment or payment which is not relatable to any period covered by the previous year cannot be taken into account for computation of the ceiling prescribed under section 40A(5). That the ceiling was to be calculated with reference to the period covered by the previous year. That including such payment in section 40A(5) would make it impossible to calculate the ceiling prescribed in that section and therefore, such payments cannot be considered as forming part of the expenditure covered by section 40A(5). We do not find any merit in this argument. Section 40A(5), inter alia states that where the assessee incurs any expenditure which results in payment of salary to an employee, or which results in provision of perquisite to an employee, then such expenditure would be subjected to a ceiling and any expenditure beyond that ceiling stands disallowed. Under Explanation-2, the word “salary” is assigned the meaning contemplated by section 17(1) of the Act. Therefore, section 40A(5) refers to ceiling on expenditure, which results in payment of salary or provision of perquisite. The emphasis should be on expenditure resulting in payment of salary. Explanation-2 clearly lays down that the word “salary” shall have the same meaning assigned to it in section 17(1) read with section 17(3). Section 17(1) defines the expression “salary” in a very wide manner. It is an inclusive definition. It included within its purview, profit in lieu of or in addition to any salary or wages. The expression “Profits in lieu of salary” is also defined in an inclusive manner in section 17(3) of the Act and it included within its purview, any payment due to or received by an assessee from his employer. In the circumstances, we hold that the word “salary” in section 40a(5)(a)(i) would cover retirement benefits like pension as also encashment of Earned leave. Accordingly, we answer this part of the Question in favour of the department and against the assessee.
8. The second part of Question No. 2 is: Whether the Tribunal was right in holding that two separate limits have to be applied for computing disallowance under section 40A(5) qua an employee who retires and qua an employee who ceases to be in the employment during the previous year.
Answer:
9. In view of our judgment in the case of CIT v. Mercantile Bank Limited, reported in 237 ITR Page 676, we answer this part of the Question in the negative i.e in favour of the department and against the assessee.
Question No. 3:
10. Whether the Tribunal was right in holding that interest for the broken period should not be considered as part of the purchase price, but should be allowed as revenue expenditure in the year of purchase of securities.?
Answer:
11. In view of our judgment in the case of American Express Bank v. CIT, reported in 258 ITR Page 601, the above question is answered in the affirmative i.e in favour of the assessee and against the department.
12. The Reference stands disposed of accordingly. No order as to costs.
Order accordingly.