B.N Kirpal, J.:— The Income-tax Appellate Tribunal, in respect of the assessment year 1974–75, has stated the case under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), and referred the following three questions to this court:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the reimbursement of medical expenses to an employee is not ‘perquisites’ within the meaning of section 40A(5) of the Income-tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the quantum of perquisites to an employee on account of rent for residential accommodation or concession in the matter of rent had to be computed with reference to the expenditure in the hands of the employer and not with reference to rule 3 of the Income-tax Rules, 1962?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the cash allowances, namely, the car allowance and that the house rent allowance, could not be treated as part of the salary for the purpose of calculating the excess amount of perquisite to be disallowed under section 40A(5) of Income-tax Act, 1961?”

2. Briefly stated, the facts, as found by the Tribunal, were that the assessee raised two issues before [the Income-tax Officer. The first issue was that car allowance, house refit allowance, medical reimbursement, etc., paid to an employee could not be treated as perquisites to him. The second issue was that the above amounts should have been included in the amount of salary payable to its employees. These contentions were rejected by the Income-tax Officer, but were partly allowed by the Appellate Assistant Commissioner. Pursuant to the orders passed by the Appellate Assistant Commissioner, the Income-tax Officer passed an order under section 250 of the Act and computed the disallowable perquisite of Rs. 95,779 as against Rs. 5,599, admitted by the assessee. The assessee again filed an appeal to the Appellate Assistant Commissioner. It was held in that appeal that house rent allowance and conveyance allowance, being cash allowances, could not be treated as perquisites for the purposes of working out the disallowance under section 40A(5) of the Act. The Appellate Assistant Commissioner, however, held that medical reimbursement could not be excluded from perquisites. It was further held that the actual expenditure incurred in providing any perquisite to the employees had to be taken into account and not the value taken in the hands of the employee for the purpose of evaluating that perquisite.

3. The Tribunal upheld the decision of the Appellate Assistant Commissioner while coming to the conclusion that conveyance allowance and house rent allowance, being cash allowances, could not form part of perquisites. In respect of medical expense also, it came to the conclusion that the cash reimbursement could not form part of the perquisite. It further held that the quantum of perquisites to an employee on account of rent for residential accommodation, or concession in the matter of rent, had to be computed with reference to the expenditure in the hands of the employer and not with reference to rule 3 of the Income-tax Rules, 1962. The Tribunal, however, held that cash allowances which were paid, namely, the car allowance and the house rent allowance, could also not be treated as part of the salary for the purpose of calculating the excess amount of perquisite to be disallowed under section 40A(5) of the Income-tax Act, 1961.

4. Thereafter, on an application filed by the parties, the aforesaid three questions have been referred, questions Nos. 1 and 3 at the instance of the Revenue, and question No. 2 at the instance of the assessee.

5. As far as question No. 1 is concerned, the provisions of the Income-tax Act in relation to the disallowance have been undergoing changes from time to time. Prior to the enactment of section 40A(5) of the Act, the question with regard to the allowance on account of perquisites was dealt with by section 40(c)(iii) of the Act in relation to the assessment year 1968–69. In respect of the assessment years 1969–70 and 1970–71, instead of section 40(c)(iii), the new provision which dealt with this was section 40A(5). The relevant portion of section 40a(5)(a) is as under:

“40A.(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 seventy-two thousand rupees, shall in no case be allowed as a deduction…”

6. Explanation 2(b) to section 404(5) defines “perquisite” as follows:

“‘perquisite’ means—

(i) rent-free accommodation provided to the employee by the assessee;

(ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee;

(iii) any benefit or amenity granted or provided free of cost or at a concessional rate to the employee by the assessee;

(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 and

(v) payment by the assessee of any sum, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity.”

7. There has been a catena of authorities which have taken the view that payment of cash allowance to an employee by way of reimbursement of medical expense or house rent is not a perquisite. The leading case on this point is CIT v. Kanan Devon Hills Produce Co. Ltd., [1979] 119 ITR 431 (Cal). That decision of the Calcutta High Court was based on the interpretation of section 40(c)(iii) of the Act and it came to the conclusion that the words “whether convertible into money or not” occurring in the said sub-clause clearly indicated that cash payment was not contemplated by the said provision. This decision of the Calcutta High Court was followed by the same court in [1982] 137 ITR 827 (Cal) (Indian Leaf Tobacco Development Co. Ltd. v. CIT); [1983] 139 ITR 763 (Cal) (CIT v. Orient Paper Mills Ltd.); [1984] 145 ITR 457 (Cal) (CIT v. National and Grindlays Bank Ltd.); [1986] 161 ITR 820 (Cal) (Alkali and Chemical Corporation of India Ltd. v. CIT); [1987] 165 ITR 558 (Cal) (Union Carbide India Ltd. v. CIT); [1986] Tax LR 483 (Cal) (CIT v. Darjeeling Co. Ltd.); [1989] 176 ITR 331 (Cal) (CIT v. Indian Press Exchange Ltd.); [1989] 180 ITR 275 (Cal) (National and Grindlays Bank Ltd. v. CIT); [1991] 192 ITR 144 (Cal) (CIT v. Indian Explosives Ltd.) and [1990] 184 ITR 339 (Cal) (CIT v. Indian Oxygen Ltd.).

8. The Bombay High Court followed the aforesaid decision in Kanan Devan Hills Produce Co. Ltd., [1979] 119 ITR 431 (Cal) in CIT v. Indokem (P) Ltd., [1981] 132 ITR 125. This view was reiterated by the Bombay High Court in [1988] 169 ITR 44 (CIT v. Mercantile Bank Ltd.); [1989] 177 ITR 96 (Bom) (CIT v. Boehringer-Knoll Ltd.); [1987] 163 ITR 528 (Bom) (CIT v. J. Govindram (P) Ltd.); [1989] 177 ITR 204 (CIT v. Mansants Chemicals (P) Ltd.); [1991] 191 ITR 75 (Bom) (Ruston and Hornsby (India) Ltd. v. CIT); [1991] 191 ITR 367 (Bom) (CIT v. Greaves Cotton and Co. Ltd.); [1991] 191 ITR 58 (Bom) (CIT v. Alembic Distributors Ltd.); [1986] 162 ITR 565 (Bom) (CIT v. Yorkshire Insurance Co. Ltd.); [1991] 192 ITR 169 (Bom) (CIT v. Mafatlal Gagalbhai and Co. (P) Ltd.); [1991] 192 ITR 89 (Bom) (Asbestos Cement Ltd. v. CIT) and [1991] 192 ITR 245 (Bom) (CIT v. Empire Dyeing and Mfg. Co. Ltd.). The Andhra Pradesh High Court has taken the same view and the first judgment is reported as CIT v. Warner Hindustan Ltd., [1984] 145 ITR 24. The special leave petition filed was dismissed by the Supreme Court, and is reported as [1990] 185 ITR (St.) 3. The decision in Warner Hindustan Ltd., [1984] 145 ITR 24 (AP) was followed by the Andhra Pradesh High Court in three other cases, reported as [1986] 160 ITR 217 (CIT v. Warner Hindustan Ltd.); [1989] 175 ITR 87 (CIT v. Andhra Pradesh State Financial Corporation) and [1984] 150 ITR 67 (CIT v. Singareni Collieries Co. Ltd.). The Madras High Court also has taken the same view in [1980] 125 ITR 150 (CIT v. Manjushree Plantations Ltd.) and [1992] 196 ITR 802 (CIT v. Jayanthi Films (Madurai) P. Ltd.). The Karnataka High Court has also come to the same conclusion in CIT v. Mysore Commercial Union Ltd., [1980] 126 ITR 340 and this was followed by it in [1988] 173 ITR 374 (Kar) (CIT v. Motor Industries Co. Ltd.). Two decisions of the Kerala High Court in favour of the aforesaid view of the Calcutta High Court are [1984] 145 ITR 563 (CIT v. Toshiba Anand Lamps Ltd.) and [1985] 153 ITR 444 (Travancore Tea Estates Co. Ltd. v. CIT).

9. As far as this court is concerned, the view of the Calcutta High Court in Kanan Devan Hills Produce Co. Ltd., [1979] 119 ITR 431 has found favour. In the case Instalment Supply P. Ltd. v. CIT, [1984] 149 ITR 457 (Delhi), it was held by this court that reimbursement of medical expenses by paying cash to the employee was not a perquisite. This view was reiterated by this court in CIT v. Escorts Ltd., [1987] 59 CTR 284 and CIT v. Jay Engineering Works Ltd., [1990] 182 ITR 181.

10. Apart from the aforesaid authorities including three decisions of this court, it is clear to us that payment of the type which was made is not a perquisite. The Explanation 2(b) to section 40A(5) is exhaustive. The payment in cash made by the employer to an employee by way of reimbursement does not fall under sub-clauses (i) to (v) of clause (b) of Explanation 2. This being so, the payment in question cannot be regarded as a perquisite at all.

11. It was sought to be contended by Mr. Rajendra that section 40a(5)(a)(ii) of the Act uses the expression “incurs directly or indirectly any expenditure” and he submits that the payment which has been made by the employer to the employee would fall in this category. We are unable to agree with this submission. sub-clause (ii) of section 40a(5)(a) deals with two types of cases. Firstly, it deals with perquisite (whether convertible into money or not) and, secondly, it deals with the expenditure incurred directly or indirectly by an assessee in respect of any assets of the assessee used by an employee either wholly or partly for his own purpose or benefit. Reading the words “incurs directly or indirectly any expenditure”, in isolation, would give no meaning to the said sub-section. The nature of the expenditure is clearly indicated in the latter part of this sub-clause, and that is expenditure in respect of any assets of “the company which are used by an employee for his own purposes or benefit. The cash payment or reimbursement is not included in this sub-clause at all.

12. Therefore, while agreeing with the aforesaid decisions, question No. 1 has to be answered in the affirmative and in favour of the assessee.

13. As far as question No. 3 is concerned, in Instalment Supply P. Ltd.'s case, [1984] 149 ITR 457, the Division Bench of this court has observed as under (at page 465):

“As a matter of fact, the use of the words ‘whether convertible into money or not’ goes to show that the term ‘benefit or amenity or perquisite’ cannot relate to cash payments. Any cash payment could well be part of the salary as given in section 17 of the Act”,

(emphasis added).

14. In our opinion, on a correct reading of section 17 of the Act, it is clear that any money given by an employer to an employee by virtue of that relationship must be regarded as salary. This court, therefore, rightly, in Instalment Supply P. Ltd.'s case, [1984] 149 ITR 457, observed that such cash payment may not be regarded as perquisite, but could well be regarded as payment of salary. Question No. 3, therefore, has to be answered in the negative.

15. As far as question No. 2 is concerned, there are a number of decisions of different courts which have taken the view that the quantum of perquisite of an employee on account of rent for residential accommodation or concession in the matter of rent had to be computed with reference to the expenditure in the hands of the employer and not with reference to rule 3 of the Income-tax Rules, 1962, if it was possible to have such a computation. Where the payment is made in cash, it is obvious that the actual payment has to be taken into consideration. The cases in which this view was taken are Bombay Burmah Trading Corporation Ltd. v. CIT, [1984] 145 ITR 793 (Bom), CIT v. Rajesh Textile Mills Ltd., [1988] 173 ITR 179 (Guj), CIT v. Ashoka Marketing Ltd., [1990] 181 ITR 493 (Cal), CIT v. Electro Steel Castings Ltd., [1992] 193 ITR 103 (Orissa) and CIT v. Malayalam Plantations (India) Ltd., [1990] 186 ITR 322 (Ker). We are in respectful agreement with the aforesaid view and, in our opinion, the answer to question No. 2 is in the affirmative.

16. There will be no order as to costs.