The Judgment of the Court was delivered by

Sukumaran, J.:— These references are at the instance of the Revenue. They pertain to the two assessment years 1972-1973 and 1973-1974. One question raised is common and one arises only for the assessment year 1973-1974. The common question is:

“Whether, on the facts, and in the circumstances of the case, the Tribunal is right in law in not excluding ‘borrowed capital’ from the computation of capital for purposes of S. 80-J?”.

2. As regards this question, it is agreed that it has been already answered in respect of a similar question by the decision reported in Traco Cable Company Ltd. v. Commissioner of Income-tax, (1982 (8) Tax Mann (7) Kerala). It was held therein that amounts borrowed would have to be deducted for determining the capital employed for the purpose of S. 80-J. In view of the above legal position, question No. 1 is answered by holding that the borrowed capital will have to be deducted from the computation of capital for the purpose of S. 80-J. The question is therefore answered in the negative, in favour of the Revenue and against the assessee.

3. The second question which arises for consideration in respect of the assessment year 1973-1974 reads as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in limiting the disallowance to Rs. 8,000/- as against Rs. 20,000/- disallowed by the Income-tax Officer?”

4. The facts relevant for the purpose of this question are: The Managing Director of the assessee had been paid during the year a sum of Rs. 80,000/- as remuneration. The components of the above figure are: Rs. 60,000/- by way of salary; Rs. 15,000/- as House Rent Allowance; and Rs. 5,000/- by way of payments relating to electricity, gas etc. Holding that the entire amount represented salary, the Incometax Officer invoked the provisions of S. 40A(5)(i) and held that payment of salary in excess of Rs. 5,000/- per month was liable to be disallowed. The amount of disallowance thus arrived at was Rs. 20,000/-. The assessee did not succeed in his appeal complaining about such a disallowance before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner noted that the assessee had conceded before the Tribunal that the Managing Director was an employee and consequently the Appellate Assistant Commissioner also took the view that S. 40A(5) governed the question. Under that section, the maximum amount permitted was held to be Rs. 5,000/- for each month or part thereof. In that view of the matter, he did not find any reason for interference with the order of the Income-tax Officer.

5. The assessee took up the matter in appeal. Before the Tribunal, counsel for the assessee raised a contention that the provisions of S. 40(c) only applied to the payments of the Managing Director and that the reference to S. 40A(5) was unjustified. This contention was not accepted by the Tribunal. The stand taken by the assessee in respect of the earlier years, which had been referred to in the order of the Appellate Assistant Commissioner, was put against the assessee. The tribunal observed in paragraph 4 of its order:

“When this was pointed out to the learned counsel for the assessee, he did not press this point.”

6. Although an attempt had been made before this court to resile from the above position, and to argue the matter with reference to S. 40(c), in view of finding of the Tribunal, particularly having regard to the fact that it was a finding based on concession of counsel before it, we considered the question only on the basis of the facts as found in the order of the Tribunal. The claim of the assessee has therefore been considered only on the basis of S. 40A(5).

7. It was contended before the Tribunal by counsel for the assessee that House Rent Allowance paid to the Managing Director was not salary, and that the Government of India had sanctioned not only the salary at the rate of Rs. 5,000/- per month but also other amenities, which according to the assessee, did not form part of the salary. The Tribunal while considering that question observed:

“The grant of House Rent Allowance is one of the perquisites mentioned therein. Salary as defined in S. 17 clearly includes perquisites also.”

8. We may straight away observe that this finding of the Tribunal is not justified, for, as regards S. 40A(5), salary is defined with certain modifications engrafted to S. 17. This is obvious from Explanation 2 to S. 40A(5)(c) of the Act, the relevant portion of which reads:

“Explanation 2:— In this sub-section,—

(a) “salary” has the meaning assigned to it in clause (1) read with clause (3) of S. 17 subject to the following modifications namely:—

(1) in the said clause (1), the word “perquisites” occurring in sub-clause (iv) and the whole of sub-clause (vii) shall be omitted;

(2) ………”

(emphasis supplied)

9. The relevant portions of S. 17 defining “salary”, “perquisite” and “profits in lieu or salary” are 17(1), 17(2) and 17(3). S. 17(1) and (3) are extracted below. The definition of ‘perquisite’ in S. 17(2) is not of relevance in this case.

“17(1) “salary” Includes—

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part ‘A’ of the Fourth Schedule; and

(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof;”

10. 17(3) “profits in lieu of salary” includes—

“(i) the amount of any compensation due to or received by an assesses from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

(ii) any payment other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11) clause (12) or clause (13A) of S. 10, due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund), to the extent to which it does not consist of contributions by the assessee or interest on such contributions.”

11. The Tribunal took the view that under S. 40A(5), a claim for payment to an employee being allowed up to Rs. 72,000/- was not sustainable under the first proviso to S. 40A(5)(a). The Tribunal had held so in an earlier case. However, the Tribunal felt that the claim was tenable, on the basis of Explanation 2 to S. 40A(5), which according to it, reads as follows:

“For the purpose of S. 40A(v), the perquisites have to be excluded and their value has to be considered separately at 20 percent of the salary subject to a maximum of Rs. 1,000/- per month.”

12. On this basis, the Tribunal held that 20% of the salary subject to a maximum of Rs. 12,000/- could be granted as allowance. A sum of Rs. 12,000/- was thus granted by the tribunal being 20% of the salary (Rs. 60,000/-) and the disallowance under the head was restricted to Rs. 8,000/-, and not Rs. 20,000/- as was done by the Incometax Officer and the Appellate Assistant Commissioner.

13. We may point out that the extract made in the order of the Tribunal of the provision purporting to be the Explanation 2 to S. 40A(5) is wrong. That there is no such Explanation as extracted in its order, has been admitted by counsel on either side.

14. It is desirable for the purpose of easy understanding of the question posed, that S. 40A(5) is extracted:

“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 an expenditure or is entitled to any allowance in respect or 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;”

15. Proviso to S. 40A(5)(a) not being one which is relevant, is omitted. S. 40A(5)(c) is relevant, and is referred to in S. 40A(5)(a) itself. That provision, omitting the first proviso to sub-clause (i) which is not relevant, reads as follows:

“40A[5][c] The limits referred to in clause [a] are the following, namely:—

[i] in respect of the expenditure referred to in sub-clause [i] of clause [a] in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees;

[ii] in respect of the aggregate of the expenditure and the allowance referred to in sub-clause (ii) of clause [a], one-fifth of the amount of the salary payable to the employee or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of employment in India of the employee during the previous year, whichever is less.”

16. This clause (c) of S. 40A(5) has two Explanations. Explanation I is not very relevant for the purpose of this case, but Explanation 2 is very relevant. It is therefore desirable that it is extracted:

“Explanation 2—In this sub-section,—

[a] “salary” has the meaning assigned to it in clause [1] read with clause 3 of S. 17 subject to the following modifications namely:—

[1] in the said clause [1], the word “perquisites” occurring in sub-clause [iv] and the whole of sub-clause [vii] shall be omitted;

[2] in the said clause [3], the references to “assessee” shall be construed as references to “employee or former employee” and the references to “his employer or former employer” and “an employer or a former employer” shall be construed as references to “the assessee”

[b] “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 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 and assurance on the life of the employee or to effect a contract for an annuity.”

17. This Explanation, as has been noted, has two important aspects: (1) It gives a special definition to the term salary for the purpose of the limits of allowances permissible under S. 40A(5)(a); and (2) it engrafts a special definition in relation to the term perquisite.

18. We are of the view that the provisions of S. 40A(5)(c) govern the question and that thereunder the maximum deduction that could be allowed is only Rs. 60,000/-. As is evident from a reference to S. 40A(5)(a), the assessee in this case incurs an expenditure which results in the payment of salary to its Managing Director, who is concededly an employee thereunder. Salary, as regards this Section, has a modified definition, where under perquisites are omitted in relation to S. 17(1)(iv). Thus, the payment of Rs. 80,000/- would come within the inclusive definition of salary, particularly under clause (iv) thereof, which, with the modification introduced under Explanation 2 to S. 40A(5)(c) would read:

“19[1][iv] any fees, commission or profits in lieu of or in addition to any salary or wages;”

19. ‘Profits in lieu of salary’ is defined under S. 17(3)(i) and takes in among others and includes any payment other than those detailed under the Section specifically enumerated in clause (ii) of S. 17(3), due to or received by the employee from the assessee (This is the effect of the change effected to the term ‘assessee’) and ‘an employer or formal employer’, as brought about by the second sub-clause in Explanation 2(a) to S. 40A(5)(c). If the amounts thus come within the ambit of S. 40A(5)(a)(i), the maximum that could be claimed is only Rs. 60,000/-. In that view of the matter, the entire Rs. 20,000/- disallowed by the Income-tax Officer and the Appellate Assistant Commissioner will have to stand.

20. Counsel for the assessee, however, made an attempt to bring the amount of Rs. 20,000/- under clause (ii) of S. 40A(5)(a), contending that the amounts represented the perquisites. It has already been noted that the ‘perquisite’ has a special definition for the purpose of S. 40A(5) as contained in clause (b) of Explanation 2 to S. 40A(5)(c) referred to earlier.

21. The emphasis of counsel was that the House Rent Allowance came within sub-clause (iii) or (iv). We are unable to agree. In respect of rent-free accommodation, the legislature appears to have exhausted the categories under that head by clauses (i) and (ii). Obviously, in the present case, what had been given is not the rent-free accommodation nor any concession in the matter of rent respecting any accommodation provided to the employee. In such circumstances, clauses (i) and (ii) in the definition of perquisite have to be ruled out. The payment in question, being one related to the house rent accommodation, but not coming within clauses (i) and (ii), cannot be brought within clause (iii). The words “granted or provided free of cost or at concessional rate to the employee by the assessee”, gives an indication as to the meaning which has to be assigned to the term ‘benefit’ or ‘amenity’. House Rent Allowance or the payments in respect of electricity and gas, cannot be termed as “benefit” granted or provided free of cost or at concessional rate as that word is understood particularly in the setting and scheme of the taxing enactment. Nor can it answer to the description of a payment of a sum in respect of any obligation which, but for such payment, would have been payable by the employee. It is not necessary for the purpose of this case to consider whether the term ‘benefit’ is to be understood in the manner the word has been understood in Rendell v. Went (Inspector of Taxes), (1963) 1 W.L.R 1085, where the Court of Appeal considered the question whether the expenses incurred by a company in the defence of a Director in legal proceedings was a benefit to the Director. Nor is it necessary to refer to the analogy of a ‘benefit’ derived by an employee when his employer attended to the medical necessities of such employee in a specialised manner notwithstanding the availability or ordinary medical facilities otherwise as pointed out by Sellers, L.J in the above case. We cannot agree with counsel for the assessee that the payments referred to above would answer the description of ‘amenity’ which is referred to in clause (iii) in the definition of ‘pesquisite’ referred to above. Scrutton, L.J in Ellis and the Ruislip-North-wood Urban District Council (In re), (1920) 1 K.B 343 at p. 370 observed about ‘amenity’ in the following words:

“The word ‘amenity’ is obviously used very loosely; it is, I think, novel in an act of Parliament, and appears to mean ‘pleasant circumstances or features, advantages. Wide streets and plenty of air and room between houses seem clearly to be amenities…”

22. In India, the term ‘amenity’ appears to have gathered a wider meaning particularly with the growth of industrial jurisprudence. The word is understood to take in advantages which have financial implications to those provided with such ‘amenities’. Awards of the industrial courts and labour appellate tribunals had occasion to consider many demands of the workers other than wages. Many such claims were grouped as ‘amenities’ and dealt with as such. Whatever be the amplitude of that term as generally understood, it appears to us that the amounts paid by the assessee to its Managing Director as house rent allowance, and payments relating to electricity, gas etc., cannot be treated as amenities in the statutory setting and scheme of the Income-tax Act and in the circumstances discussed above.

23. This court had to recently consider the scope of S. 40(a)(v) in the decision of Commissioner of Income Tax v. Common Wealth Trust Ltd., 1982 KLT. 30 : 1982 KLJ. 1. That, however, dealt with a different situation and a statutory provision which is dissimilar. We are, therefore, not discussing that decision in great detail.

24. Having regard to the statutory setting of the various provisions, we are of the view that the entire amount received by the Managing Director comes squarely under S. 40A(5)(a)(i) and in that view of the matter, the maximum deduction claimable is only Rs. 60,000/-. The result is that the view taken by the Tribunal (carried as it was apparently by a wrong extract of the relevant Explanation) is erroneous. We therefore answer the question in the negative, that is in favour of the Revenue and against the assessee, holding that the disallowance of the entire sum of Rs. 20,000/- made by the Income-tax Officer was correct. The references are answered as above. There will be no order as to costs, particularly in view of the involved statutory provisions, which may remind one of the observations of Starke, J. in Koitaki Para Rubber Estates Ltd. v. The Federal Commissioner of Taxation, 64 CLR. 241 at p. 246, when he expressed his distress in his attempts ‘to traverse the weary road of tax cases’ and those of J.T Farrand about ‘such an inherently distasteful subject as taxation’, when he was reviewing the British Tax Encyclopaedia. (See 70 Law Quarterly Report 605 at p. 607). A copy of the judgment under the signature of the Registrar and seal of the Office will be forwarded to the Tribunal as required by law.