The Judgment of the Court was delivered by

Paripoornan, J.:— At the instance of the Revenue, the Incometax Appellate Tribunal has referred the following question of law, for the decision of this Court:

“Whether, on the facts and in the circumstances of the case, the Tribunal is right:—

(i) in applying/relying on R. 3(c)(ii) of the Incometax Rules?

(ii) in directing the ITO to value the perquisites of the car provided by the assessee to its employees as per Incometax Rule 3(c)(ii) and to consider only this amount for disallowance under S. 40A(5)?”

2. The respondent is a plantation company. We are concerned with the assessment year 1979-80. The previous year ended on 31-3-1979. The assessee had given cars for the use of the employees. In bringing to tax the income of the respondent-company, the Income Tax Officer disallowed ⅓rd of the expenditure and depreciation on the said cars, This was affirmed by Commissioner of Incometax (Appeals). But, in second appeal, the Incometax Appellate Tribunal purporting to follow the decision of the Calcutta High Court in C.I.T v. Britannia Industries Co. Ltd. (135 ITR 35), held that the Incometax Officer has not considered the total use of the cars vis-a-vis the use of the cars relating to the personal use of the employees, that he had not given any details as to how he worked out the disallowance under S. 40A(5) of the Act and in these circumstances the Appellate Tribunal directed the Incometax Officer to value the perquisite of the cars provided by the assessee to its employees as per rule 3(c)(ii) of the. Incometax Rules and consider the disallowance under S. 40A(5) of the Act It is thereafter, at the instance of the Revenue, the question of law formulated herein above has been referred for the decision of this Court. We heard counsel. S. 40A(5) of the Incometax Act provides as follows:

“40A. Expenses or payments not deductible in certain circumstances.

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(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 asa deduction:

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(c) The limits referred to in clause (a) are the following, namely:

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Explanation 2-In this sub-section,…

(a) “salary” has the meaning assigned………

(b) “perquisite” means………

3. Rule 3(c)(ii) of the Incometax Rules provide as follows:

“3. Valuation of perquisites.-For the purpose of computing the income chargeable under the head “Salaries” the value of the perquisites (not provided for by way of monetary payment to the assessee) mentioned below shall be determined in accordance with the following clauses, namely:—

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(c)(i)…………

(ii) The value of a motor car provided by the employer for use by the assessee partly in the performance of his duties and partly for his private or personal purposes shall be determined to be a sum equal to that part of the amount actually expended by the employer on the maintenance and running of the motor car during the relevant previous year (including remuneration, if any, paid by the employer to the chauffeur) which can reasonably be attributed to the user of the motor car by the assessee for his private or personal purposes or, where the motor car is owned by the employer, the aggregate of such sum and of a sum equal to that part of the amount representing the normal wear and tear of the motor car which can reasonably be attributed to the user of the motor car by the assessee for his private or personal purposes; so, however, that where a determination on the basis mentioned above presents difficulty, the value of the perquisite may be determined on the basis provided in the Table below:—

4. In order to understand the true import of S. 40A(5) of the Incometax Act vis-a-vis Rule 3(c)(ii) of the Incometax Rules, adverted to by the Appellate Tribunal, it will be useful to trace the history of the legislation. The limit regarding deduction in respect of salary, perquisites and fees in the hands of the employer/assessee was originally dealt with by S. 40(c)(ii) for the assessment years 1963-64 to 1968-69, and thereafter by S. 40(a)(v) for the assessment years 1969-70 to 1971-72. From the assessment year 1972-73 onwards, the matter is dealt with by S. 40A(5) of the Incometax Act. It should be remembered that the language and context in which S. 40(c)(iii) occurred, as also the subsequent S. 40(a)(v) occurred is little different from the language and setting of S. 40A(S) of the Incometax Act It is also worthwhile to note that the commision of the Calcutta High Court, relied on by the Appellate Tribunal, in C.I.T.V Britannia Industries Co. Ltd. (135 ITR 35) centered round S. 40(c)(iii) of the Incometax Act, 1961, as it stood then, read along with rule 3(c)(ii) and rule 6D of the Incometax Rules, 1962. In that case, the Court held that the value of the perquisite of free car provided to an employee should be taken in the hands of the emplover-assessee. for the purpose of S. 40(c)(iii). at the same figure as it was taken in the hands of the employee. S. 40(c)(iii) of the Incometax Act, which came up for consideration before the Calcutta High Court at the relevant time, stood as follows:

“Any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee, who is a citizen of India, to the extent such expenditure exceeds the amount calculated at the rate of five thousand rupees per month for any period of his employment after the 28th day of February, 1963:

Provided that in computing the aforesaid expenditure any payments by way of gratuity or any sums comprised in the transferred balance of an employee participating in a recognised provident fund referred to in clause (vii) of sub-section (1) of S. 17, or the amount of any compensation referred to in clause (i) or any payment referred to in clause (ii) of sub-section (3) of that section shall not be taken into account.”

5. S. 40(a)(v), which was substituted for the above section, for the assessment years 1969-70 to 1971-72, stood as follows:

“(v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into moneyor not, toan employee (includingany sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of 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 his employment during the previous year, whichever is less:

Provided that in computing the aforesaid expenditure or allowance, the following shall not be taken into account, namely:

(a) any payment by way of gratuity;

(b) the value of any travel concession or assistance referred to in clause (5) of S. 10;

(c) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of S. 10;

(d) any payment of tax referred to in sub-clause (vii) of clause (6) of S. 10;

(e) any sum referred to in sub-clause (vii) of clause (1) of S. 17;

(f) any sum referred to in sub-clause (v) of clause (2) of S. 17;

(g) the amount of any compensation referred to in sub-clause (i) or any payment referred to in sub-clause (ii) of S. 17;

(h) any payment referred to in clause (iv) or clause (v) of sub-section (1) of S. 36; and

(i) any expenditure referred to in clause (ix) of sub-section (1) of S. 36:

Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head ‘Salaries’ is seven thousand five hundred rupees or less.

Explanation 1: The provisions of this sub-clause shall apply notwithstanding that any amount not to be allowed under this sub-clause is included in the total income of the employee.

Explanation 2: In this sub-clause, the word ‘salary’ shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule”.

6. (We have extracted S. 40A(5) of the Incometax Act, 1961 earlier in this judgment). A perusal of the above sections will highlight the difference in the statute from time to time, (at three different stages).

7. The respondent is a public limited company. The assessing authority was computing its taxable income. During the course of assessment, the assessing authority found that the assessee had given cars for the use of its employees. Therefore, the Incometax Officer/assessing authority invoked S. 40A(5) of the Incometax Act, and disallowed ⅓rd of the expenditure and depreciation on the cars given for the use of its employees. This was concurred by the Commissioner of Incometax (Appeals). The Incometax Officer did not give the breakup of the disallowance under S. 40A(5) of the Act. Before the Tribunal, the plea of the assessee was that the valuation of perquisite for the purpose of disallowance under S. 40A(5) of the Act should be done in accordance with Rule 3(c)(ii) of the Incometax Rules. Reliance was placed on the decision of the Calcutta High Court in Britannia Industries Co. Ltd. case (135 I.T.R 35). The Revenue contended that Rule 3(c)(ii) of the Incometax Rules is applicable only for valuing the perquisite in the hands of the employees for assessment under the head ‘Salaries’ and not for the purpose of the disallowance to be made under S. 40A(5) in the hands of the employer. The detailed statement filed by the assessee before the Incometax Officer showing salaries, expenses incurred and depreciation claimed on buildings and cars used partly for business and partly for personal purposes, was adverted to and it was contended by the Revenue that the assessee could have in a similar manner arrived at the amount actually expended by it on the maintenance expenditure of the motor cars and depreciation which can reasonably be attributed to the personal use by the employees. The Incometax Appellate Tribunal held that the Incometax Officer has not considered the total use of the cars vis-a-vis the use of the cars relating to the personal use of the employees, that the Incometax Officer had not given any details as to how he worked out the disallowance at Rs. 4,46,500/- and so, in the circumstances, the Appellate Tribunal directed the assessing authority to value the perquisite of the cars provided by the assessee to the employees as per Rule 3(c)(ii) of the Incometax Rules considered for disallowance under S. 40A(5) of the Act.

8. We heard counsel. The entire argument centered round the validity and propriety of the direction given by the Incometax Appellate Tribunal, as aforesaid. We are of the view that the Appellate Tribunal probably proceeded on the basis that the decision of the Calcutta High Court in Britannia Industries Co. Ltd case (135 I.T.R 35) is squarely applicable herein and on that basis issued the direction contained in para 4 of the appellate order. It is evident that the Appellate Tribunal failed to note, that in Britannia Industries Co. Ltd. case (135 I.T.R 35), the Calcutta High Court was concerned with S. 40(c)(iii) of the Incometax Act, as it stood then. It is plausible to take the view that the non-deductibility of the expenditure or of the allowance in the hands of the company (employer) is not to be affected in any way by the consideration that the remuneration, or benefit or amenity or privilege is included as a perquisite, in the hands of the employee-recipient and is taxable. The objects of S. 40A (5) of the Act and rule 3(c)(ii) of the Rules are distinct and different. Prima facie, it appears to us; that S. 40A(5) of the Act is intended to effectively check the extravagant expenditure by the employer. On the other hand, Rule 3(c)(ii) of the Incometax Rules is a provision bringing to tax the amount or perquisites actually received by an employee. The taxability of such amounts in the hands of the employee cannot ordinarily be a criterion for the deductibility of the said amount in the hands of the employer. The ratio of the Calcutta High Court decision in Britannia Industries Co. Ltd. Case (135 I.T.R 35) that where the value of a perquisite for the purposes of an employee's assessment has been worked out in accordance with the relevant rule-rule 3(c)(ii)-, the same value should be adopted for the purpose of disallowance in the hands of the employer cannot ipso facto be applied for evaluating the disallowance permissible under S. 40A(5) of the Act. The scope of the relevant statutory provision as it stood when the Calcutta decision was rendered, and the scope of the statutory provision applicable herein (S. 40A(5)was not properly evaluated or considered by the Appellate Tribunal. It need hardly be stated that as per the ratio of the Full Bench decision of this Court in C.I.T v. Forbes, Ewart and Figgis (P) Ltd. (1981 KLT 483 : 138 I.T.R 1), the control or regulation is on the amount expended on the asset which is used by the employee for his own benefit to the extent, he uses it for his personal purposes. None of the above salient features were considered by the Appellate Tribunal before giving the direction, as contained in para 4 of the appellate order, dated 29th August, 1985. In other words, we hold that the Appellate Tribunal gave the direction, as it did, without applying its mind. It assumed that the decision of the Calcutta High Coutt in Britanrna Industries Co. Ltd. (135 I.T.R 35) is squarely applicable and on that basis stated that the value of the perquisites for the purpose of disallowance should be on the basis of rule 3(ii) of the Incometax Rules. The said direction has been given without a proper evaluation of the relevant provisions of the Act and the Rules and without considering the objects of the two provisions-the one contained in the Act and the other contained in the Rules. The perspective with which the provisions of the Act and the provisions in the Rules should be viewed are different. These are matters for a detailed and indepth consideration. As a result of which alone, a proper conclusion can be arrived at. It has not been done in this case. The conclusion arrived at by the Appellate Tribunal is, in the circumstances, totally unsatisfactory and perfunctory.

9. In this view, we decline to answer the questions referred to us. But, at the same time, we direct the Incometax Appellate Tribunal to restore the appeal to file and decide the matter afresh, in accordance with law and in the light of the observations contained herein. The Reference is disposed of as above.

10. A copy of this judgment, under the seal of this Court and the signature of the Registrar, shall be forwarded to the Incometax Appellate Tribunal, Cochin Bench.