The Judgment of the Court was delivered by
G. Sivarajan, J.:— In these tax references relating to the assessment year 1980-81, one question is referred at the instance of the Revenue in R.A No. 67/(Coch) of 1989 and two questions at the instance of the assessee in R.A No. 68/(Coch) of 1989. The question referred to at the instance of the Revenue is as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal is right—
(i) in applying/relying on rule 3(c)(ii) of the Income-tax Rules?
(ii) in directing the Income-tax Officer to value the perquisites of the car provided by the assessee to its employees as per income-tax rule 3(c)(ii) and to consider only this amount for disallowance under section 40A(5)?”
2. The questions referred at the instance of the assessee are questions Nos. 1 and 3 available at page 2 of the paper book as follows:
“1. Whether the Income-tax Appellate Tribunal is right in holding that the assessee is not entitled to the deduction of the entire expenditure incurred, namely, the fee and expenses paid to auditors and legal adviser, in connection with the amalgamation of the company?
2. Whether the Income-tax Appellate Tribunal is right in holding that the reimbursement of medical expenses by the assessee to the employees will be an expenditure subject to ceiling under section 40A(5) of the Income-tax Act?”
3. The facts necessary for a decision on the questions referred for our answer are as follows: The assessee is an Indian company. It owned rubber, cardamom and tea estates. The assessee-company was formed under a scheme of arrangement and amalgamation approved by this court by order dated April 4, 1979. This was formed to take over the assets and undertaking in India of Malayalam Plantations Ltd., U.K Formerly, it was a sterling company and the foreign participation was reduced to be in conformity with the foreign exchange regulation and the Indian company took over all the businesses. This taking over of the business of the sterling company was in pursuance of the scheme as approved by this court by order dated April 4, 1979, in Company Petition No. 25 of 1978 connected with Company Application No. 545 of 1978. As already stated, the assessment year concerned is 1980-81, for which the accounting period ended on March 31, 1980. During the accounting period relevant to the assessment year in question, the assessee had incurred an expenditure of Rs. 1,74,515 towards fees paid to auditors and legal advisers in connection with the approval of the scheme of amalgamation. In the assessment for the year in question, the assessee claimed deduction of this expenditure.
4. The employees of the assessee-company working in the estates and the visiting agents were using the motor cars owned by the company for their personal as well as official purposes. The assessee-company also used to reimburse its employees the actual medical expenses incurred by them.
5. In the assessment for the year in question, the assessing authority by his order dated August 24, 1983 (annexure-A), held that the assessee is not entitled to the full deduction claimed in respect of the amalgamation expenses, as according to him, it related to the taking over by the Indian company of the business of the predecessor foreign company. He took the view that it is not a revenue expenditure and that it is an expenditure coming within the ambit of section 35D of the Income-tax Act, 1961, and allowed deduction of only 10 per cent, of the said expenses. Likewise, the assessing authority also disallowed one-third of the expenditure and depreciation on the cars given for the use of the employees. The assessing authority also held that the reimbursement of medical expenses had to be treated as part of salary for computing the disallowance under section 40(c) of the Act.
6. The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals), Ernakulam, and he confirmed the order of the Income-tax Officer on all the above three points. The matter was carried in second appeal before the Income-tax Appellate Tribunal, Cochin Bench, Ernakulam.
7. The Income-tax Appellate Tribunal considered the question regarding disallowance of 90 per cent, of the expenditure incurred in connection with the amalgamation expenses of the company in paragraph 6 of its order. The Income-tax Appellate Tribunal had set out the relevant facts and then extracted a portion of the order of the Commissioner of Income-tax (Appeals) which distinguished two decisions of the Madras High Court and then straightaway entered a finding to the effect that the expenses incurred were capital expenses and not eligible for deduction. The Income-tax Appellate Tribunal then observed that the Commissioner of Income-tax (Appeals) was of the view that the expenditure was connected with the items mentioned in section 35D(2)(a), (b) and (c), that he confirmed the order of the Income-tax Officer to the effect that the assessee was entitled to 1/10th of the amount and then held that they do not see any reason to interfere with that.
8. Regarding the question of disallowance of ⅓rd of the expenditure and depreciation on the cars under section 40A(5) of the Income-tax Act, 1961, the Appellate Tribunal noted the fact that these cars had been used by the employees for their personal use also and observed that the same issue had been considered by the Tribunal in the case of the assessee for the year 1979-80 in I.T As. Nos. 447 and 525/(Coch) of 1983 and also considered the submission made on behalf of the assessee that the perquisite value for the purposes of section 40A(5) should be in accordance with the directions given in the earlier order. The Tribunal then noticed the observations in the earlier order as follows:
“So, in the circumstances, we direct the Income-tax Officer to value the perquisite of the cars provided by the assessee to its employees as per the income-tax rule 3(c)(ii) considered for disallowance under section 40A(5).”
and finally gave a similar direction to the Income-tax Officer in the said case.
9. Regarding the disallowance of reimbursement of medical expenses, the Appellate Tribunal relying on the decision of the Special Bench of the Tribunal in the case of Glaxo Laboratories India Lid. v. ITO (Second), [1986] 18 ITD 226 (Bom) held that if the reimbursement of medical expenses is to be treated as part of salary for the purpose of section 40(c), on the same analogy the provisions of section 40A(5) have to be applied to a case covered by that provision and accordingly upheld the orders of the authorities below.
10. It is against these findings of the Income-tax Appellate Tribunal that both the Revenue and the assessee have come up before this court with the above references. We will first take the question referred to at the instance of the Revenue. The question is as to whether the Tribunal is justified in applying/relying on rule 3(c)(ii) of the Income-tax Rules and in directing the Income-tax Officer to value the perquisites of the car provided by the assessee to its employees in accordance with the provisions of the said sub-rule. As we have already noticed, what the Income-tax Appellate Tribunal has done is to follow the same course which was adopted in the case of the assessee itself for the earlier assessment year, where also the Tribunal had applied the provision of rule 3(c)(ii) of the Income-tax Rules and directed the Income-tax Officer to value the perquisites of the car provided by the assessee to its employees in accordance with the said rules. It is pertinent to note at this juncture that the said decision of the Income-tax Appellate Tribunal rendered in I.T Rs. Nos. 447 and 525/(Coch) of 1983 for the year 1979-80 came up for, consideration before this court in reference. The question referred to this court in that case was identical to the one referred for our decision. In that connection, this court considered the objects with which section 40A(5) of the Income-tax Act, 1961, and rule 3(c)(ii) of the Income-tax Rules, 1962, were enacted and observed that the scope of these two provisions are distinct and different. It was observed that section 40A(5) is intended to effectively check the extravagant expenditure by the employer. On the other hand, rule 3(c)(ii) of the 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. It was also observed that 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 in-depth consideration as a result of which alone, a proper conclusion can be arrived at. After making the above observations, this court declined to answer the question. Instead, this court took the view that the Income-tax Appellate Tribunal has not considered the matter in the above perspective and further observed that the conclusion arrived at by the Tribunal is totally unsatisfactory and perfunctory. Accordingly, this court directed the Income-tax Appellate Tribunal to restore the appeal to the file and decide the matter afresh in accordance with law and in the light of the observations contained therein.
11. As we have already stated, what the Income-tax Appellate Tribunal has done in the instant case is to follow the same course adopted in th, e earlier order which was the concern of this court in CIT v. Malayalam Plantations (India) Ltd., [1990] 186 ITR 322. In these circumstances, we also feel that the proper course to be adopted in the instant case is to decline to answer the question referred at the instance of the Revenue, and to direct the Income-tax Appellate Tribunal to restore the appeal to the file and decide the matter afresh in accordance with law and in the light of the observations contained herein as also in the judgment under reference. We do so.
12. Now, we will consider the second question referred at the instance of the assessee, i.e, the third question in the assessee's reference application regarding the disallowance of the reimbursement of medical expenses incurred by the assessee by resort to the provision of section 40A(5) of the Income-tax Act. We find that a similar question has come up for consideration before this court in I.T.R No. 28 of 1991—Aspinwall and Co. Ltd. v. CIT (No. 1), [1996] 220 ITR 611. This court with reference to the special definition of perquisites contained in Explanation 2(b) to section 40A(5) of the Income-tax Act, 1961, as well as the provision of section 17(2) of the said Act observed as follows (at page 615):
“It would be seen that the payment in question with regard to the question of reimbursement would necessarily have a fluctuating character depending on the expenses incurred in relation to the illness or suffering. It would not have any fixed character. On the other hand, there would be months and years when there would be no question of medical expenses and their consequential reimbursement. This is because medical expenses and the question of reimbursement could never be understood as having a static uniform and continuous character in terms of payment or reimbursement in regard thereto.”
13. This court ultimately held that the medical expenses and consequent reimbursement would not be a perquisite. Following the said judgment dated February 2, 1996, rendered in I.T.R No. 28 of 1991—Aspinwall and Co. Ltd. v. CIT (No. 1), [1996] 220 ITR 611 (Ker), we hold that the Income-tax Appellate Tribunal was not justified in holding that the reimbursement of the medical expenses by the assessee to the employees will be an expenditure subject to ceiling under section 40A(5) of the Act and that the assessee is entitled to the said deduction.
14. Now, coming to question No. 1 referred at the instance of the assessee, we have already set out the relevant facts necessary for consideration of the issue as to whether the assessee is not entitled to the deduction of the entire expenses incurred, namely, the fees and expenses paid to auditors and legal advisers in connection with the amalgamation of the company. We have seen that the Income-tax Appellate Tribunal has noted the relevant facts in paragraph 6 of its order in the following terms:
“Formerly it was a sterling company and the foreign participation was reduced to be in conformity with the foreign exchange regulation and the Indian company took over all the business. There was a scheme of amalgamation between the two companies.”
15. Though the Income-tax Appellate Tribunal has referred to the scheme of amalgamation, it has not taken pains to see the same to understand the terms under which the scheme was approved by this court. We had the advantage of perusing the order dated April 4, 1979, passed by this court in Company Petition No. 25 of 1978 connected with Company Application No. 545 of 1978 and annexures thereto. Learned counsel for the assessee took us through the order and the scheme of arrangement under amalgamation. He has particularly referred to paragraphs 2 and 3 of the said order and also to the transfer date mentioned in the scheme and also paragraphs 4, 7 and 8 of the said scheme to contend that carrying on business by the sterling company will be deemed to have been carried on by the assessee-company by virtue of the scheme of amalgamation approved by this court. The Income-tax Appellate Tribunal, as already stated, has only referred to the necessary facts, the observations of the Commissioner of Income-tax (Appeals), distinguished the decision of the Madras High Court and without any further consideration in the matter, straightaway came to the conclusion that the expenses with respect to which the claim was made, are capital expenses not eligible for deduction. According to us, the Income-tax Appellate Tribunal did not advert to or consider the relevant principles settled by the decisions of the highest court to determine the nature of a particular expense as capital or revenue nor has it stated the circumstances under which it had come to the conclusion that the expenses claimed were of capital nature. Even with regard to section 35D(2)(a), (b) and (c) of the Act, the Tribunal has not bestowed any independent consideration. The Tribunal has simply stated that there is no reason to interfere with the findings of the first appellate authority.
Learned counsel for the Revenue contended before us that the expenditure in question will squarely fall under the provisions of section 35D(2)(a), (b) and (c) of the Act and the authorities and the Tribunal were perfectly justified in applying the said provision and in disallowing 90 per cent, of the said expenses. According to us, firstly, the Tribunal has not considered this question at all. Secondly, for the purpose of deciding the application of section 35D, it is necessary for the Tribunal to refer to the scheme as approved by this court whereby the assessee-company itself had come into existence. We have already referred to some of the provisions in the scheme as approved by this court and pointed out by learned counsel for the assessee. We do not propose to discuss the matter at length, for, according to us, it is the concern of the Tribunal to consider the scheme and the order passed by this court and to arrive at the conclusion as to whether the expenses in question are incurred in the formation of the company or otherwise.
16. As we have already pointed out, the Income-tax Appellate Tribunal has not considered the said question at all with reference to the principles governing the matter laid down by the Supreme Court and by this court, except to hold that the expenses incurred are of a capital nature. In this connection, it will be advantageous to refer to the decision of this court by judgment dated February 20, 1996, rendered in I.T Rs. Nos. 2 to 5 of 1991—CIT v. Polyformalin (P.) Ltd., [1996] 221 ITR 276. In that case, the question involved was as to whether the royalty payment provided with reference to the turnover in consideration of the transfer of technical knowhow was of revenue nature or capital nature. In that context, this court referred to the decisions of the Supreme Court in M.K Brothers Pvt. Ltd. v. CIT, [1972] 86 ITR 38, the decisions in Assam Bengal Cement Co. Ltd. v. CIT, [1955] 27 ITR 34, in Cit, West Bengal Ii, Calcutta v. Coal Shipment (P) Ltd., [1971] 82 ITR 902 and also the decision in Empire Jute Co. Ltd. v. CIT, [1980] 124 ITR 1 and remanded the matter to the Income-tax Appellate Tribunal to decide the issue with reference to the principles laid down by the Supreme Court in the said decisions. The relevant principles contained in the said judgments of the Supreme Court have been set out and discussed in our judgment rendered in I.T.R Nos. 2 to 5 of 1991—CIT v. Polyformalin (P.) Ltd., [1996] 221 ITR 276 and we are sure that the Appellate Tribunal will consider the said judgment while deciding the matter.
17. Since, according to us, the Income-tax Appellate Tribunal in arriving at the conclusion that the expenses in question are of capital nature and that the provisions of section 35D of the Income-tax Act, 1961, are applicable to the instant case, has not considered the issue with reference to the principles laid down by the Supreme Court in the aforementioned cases and also the order passed by this court in the company application and the scheme approved thereunder, we are of the view that the Income-tax Appellate Tribunal must be directed to consider the question in the light of the above observations.
18. Accordingly, we decline to answer this question also. We direct the Income-tax Appellate Tribunal to restore the appeal to file and to decide the issues relating to the question referred at the instance of the Revenue and also question No. 1 referred at the instance of the assessee afresh in accordance with law and in the light of the observations contained herein. We answer question No. 2 (which is question No. 3 in the statement of case) in the negative, that is, against the Revenue and in favour of the assessee.
19. A copy of this judgment under the seal of this court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench.