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Commissioner Of Income-Tax v. Duncan Bros. & Co. Ltd.

Calcutta High Court

Mar 2, 1981

Judgment

Subsequent
References

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Structured Summary of the Court's Opinion (Reference under s.256(1) of the Income-tax Act, 1961)

Factual and Procedural Background

This reference arises from assessments for the assessment years 1966-67 and 1967-68 (previous years 1965 and 1966). The assessee-company had a contractual obligation to reimburse the entire nursing (medical) expenses of its employees and officers. To avoid heavy expenditure in any particular year, the company purchased individual medical insurance policies (Nursing Home Benefit Association) on the life of each employee and paid annual premiums ranging approximately from Rs. 150 to Rs. 510 for different employees.

The Assessing Officer (ITO) treated the premiums as expenditure which "resulted directly or indirectly in the provision of any benefit or amenity or perquisite" to employees, and therefore considered them for disallowance under section 40(c)(iii) of the Income-tax Act, 1961. The assessee contended that the premiums did not confer any such benefit or amenity or perquisite on the employees. The ITO rejected the assessee's contention; on appeal the Appellate Assistant Commissioner (AAC) accepted the assessee's view. The Revenue appealed to the Tribunal.

A second related factual feature: the assessee was the managing agent of other companies and employed centralized staff who worked both for the assessee and for the managed companies. The assessee initially debited the salaries to its own account and simultaneously debited the managed companies for amounts it considered payable by them; the net amount (after crediting the managed companies' share and after considering amounts actually paid to employees) was ultimately debited to the assessee's profit and loss account and claimed as expenditure under section 37. The ITO calculated the 1/5th threshold for s.40(c)(iii) with reference to the gross salary the assessee was contractually required to pay; the assessee contended the 1/5th should be calculated with reference to the net amount actually debited to its profit and loss account (the amount claimed as expenditure). The AAC accepted the assessee on this point as well.

Two questions were referred to this Court under s.256(1):

Whether the premium paid by the assessee to the Nursing Home Benefit Association in respect of the medical insurance policy taken on the individual life of each employee resulted directly or indirectly in the provision of any benefit or amenity or perquisite within the meaning of section 40(c)(iii) and should be taken into account in computing the amount disallowable under that section?
Whether, for computing amounts disallowable under section 40(c)(iii), the amount of salary payable to the employees should be reduced by the recoveries made from the managed companies on account of services rendered by those employees (i.e., whether the 1/5th threshold should be applied to the net amount claimed as expenditure rather than the gross contractual salary)?

Legal Issues Presented

Whether the insurance premiums paid by the employer on individual policies for employees constitute expenditure "which results directly or indirectly in the provision of any benefit or amenity or perquisite" to employees within the meaning of s.40(c)(iii) of the Income-tax Act, 1961?
Whether, for the purpose of computing the disallowance under s.40(c)(iii), the calculation of the one-fifth threshold should be made with reference to the gross salary payable under the service contract or with reference to the net salary amount actually debited to the assessee's profit and loss account (after charging amounts to managed companies)?

Arguments of the Parties

Revenue / Assessing Officer (ITO)

The ITO treated the premiums as expenditure that resulted directly or indirectly in providing a benefit, amenity or perquisite to the employees and thus should be taken into account for disallowance under s.40(c)(iii).
On the second point, the ITO calculated the one-fifth threshold with reference to the gross salary of each employee (i.e., the full contractual salary payable), not the net amount after recoveries from managed companies.

Assessee

The assessee contended that the premium payments did not result in any benefit, amenity or perquisite to employees because the company retained the right to claim from the insurer, employees' contractual rights to reimbursement remained unaffected, and the policy primarily safeguarded the employer's own contingent liability.
On the second issue, the assessee argued (and the AAC accepted) that the 1/5th threshold should be calculated with reference to the net salary amount actually debited to its profit and loss account (the amount finally claimed as expenditure), after crediting sums to managed companies, rather than on gross contractual salary before such adjustments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Eastern Scales (P.) Ltd. v. Commissioner Of Income-Tax, West Bengal-I, [1979] 117 ITR 477 (Cal)	That cl. (c) of s.40 speaks of disallowance of expenditure, must be strictly construed; expenditure should be incurred by the company and result in a benefit to employee.	The Court noted this case (though it dealt with different sub-clauses) to support the proposition that s.40(c) must be strictly construed and that an expenditure disallowed under this clause must be one which confers a benefit on the employee.
CIT v. L.W. Russel, [1964] 53 ITR 91 (SC)	Observation that a perquisite implies a right conferred on the employee; perquisite normally requires a vested right—contingent payments to which employee has no right until contingency occurs are not perquisites.	The Court relied on this principle to underline that for something to be a perquisite (or analogous benefit) the employee must obtain a right or benefit; since the policy left the employer's liability intact and conferred no right on the employee, the premium was not a perquisite.
The Commissioner Of Income-Tax, Delhi v. Lala Shri Dhar, [1972] 84 ITR 192 (Delhi HC)	Held that annual premium paid by employer for personal accident insurance to meet contingencies was not a perquisite in the employee's hands where the employer took the policy to meet contingencies and the employee did not voluntarily take it.	The Court endorsed the approach of the Delhi High Court as appropriate and applied similar reasoning: the employer's precautionary insurance did not create a perquisite for the employee.
CIT v. Kanan Devan Hills Produce Co. Ltd., [1979] 119 ITR 431 (Cal)	Interpretation of s.40(c)(iii): the phrase "whether convertible into money or not" applies to the phrase "any benefit or amenity or perquisite" collectively; certain allowances were held not to fall within those expressions.	The Court cited this decision to support a narrow reading of "benefit or amenity or perquisite" in s.40(c)(iii) and to show that not every employer payment/allowance will qualify as such.
A.V. Fernandez v. State of Kerala, [1957] 8 STC 561 (SC) (with reference to Aswini Kumar Ghosh v. Arabinda Bose, [1953] SCR 1 : AIR 1952 SC 369)	General observations on the effect of a non obstante clause: where applicable, such clause can set aside other provisions; demonstrates the power/effect of non obstante wording.	The Court relied on these observations to explain the proper approach to construing the non obstante clause of s.40 and to confirm that, when applied in context, the section must be construed so as to curtail deductions but not to extend beyond its text; these principles supported the Tribunal's view on the second question.

Court's Reasoning and Analysis

The Court proceeded by reference to the text and purpose of s.40 (Amounts not deductible), and in particular s.40(c)(iii) as it stood at the relevant time. The Court emphasized:

Section 40 operates by a non obstante clause to limit deductions otherwise allowable under ss. 30–39; therefore the scope of non-deductibility must be determined by the exact terms of s.40 and be strictly construed.
The expressions used in s.40 indicate the nature or quality of amounts that merit (or fail to merit) deduction; however, whether a particular item falls within the scope must be determined with reference to its nature and the factual matrix.

On the first question (whether premiums resulted directly or indirectly in the provision of any benefit, amenity or perquisite to employees), the Court accepted the Tribunal's factual findings (not controverted) that:

The company was under a contractual obligation to reimburse employees' medical/nursing expenses.
In taking out insurance and paying the premiums the company was safeguarding its own liability; the policy did not exonerate the company from its contractual obligation.
The employees' right to reimbursement remained; employees continued to receive reimbursement of actual nursing expenses; amounts recovered from the insurer were the company's money and the company handled claims and receipts as its own funds.

Applying the statutory language and the cited authorities, the Court reasoned:

The phrase "benefit or amenity or perquisite" must be read ejusdem generis and with reference to the employee — the benefit must result to the employee (directly or indirectly).
Authorities such as L.W. Russel indicate that a perquisite generally implies a right conferred on the employee (a vested right), and contingent payments to which the employee has no right until a contingency occurs are not perquisites.
The policy premium, being paid to safeguard the employer's liability and not conferring any additional right or benefit on the employee, did not result directly or indirectly in providing any benefit, amenity or perquisite to the employee within the meaning of s.40(c)(iii).
Accordingly, the Tribunal correctly held that premiums should not be taken into account for disallowance under s.40(c)(iii); if any perquisite existed it would be the reimbursement of medical expenses when actually paid by the employer, not the procurement of an insurance policy or the payment of its premium.

On the second question (the base for calculating the one-fifth threshold), the Court analysed the accounting and contractual facts found by the Tribunal:

The assessee initially debited salaries to its own account but simultaneously debited the managed companies for what it considered payable by them; the net amount actually debited to the assessee's profit and loss account was the amount claimed as expenditure under s.37.
Section 40 curtails deductions otherwise allowable and must be strictly construed; it applies to the deductible expenditures as finally claimed by the assessee under ss.30–39 (and s.37).
Consequently, the gross salary amount (before the simultaneous debits to managed companies and before arriving at the net amount actually debited to profit and loss) cannot be taken as the base for the 1/5th threshold where the assessee did not in fact claim that gross amount as expenditure.
The Court also referred to principles governing the operation of a non obstante clause (citing A.V. Fernandez and Aswini Kumar Ghosh) to support the reading that the section should be applied according to its plain terms and the factual pattern of amounts actually claimed as expenditure.

The Court concluded that, on the facts found, the Tribunal was correct on both issues: premiums were not part of the "benefit or amenity or perquisite" for disallowance, and the 1/5th computation must be done with reference to the net amount actually debited and claimed as expenditure.

Holding and Implications

Core Ruling:

Question 1: Answered in the negative — premiums paid for the medical insurance policies do not, on these facts, result directly or indirectly in the provision of any benefit, amenity or perquisite to employees under s.40(c)(iii) (decision in favour of the assessee).

Question 2: Answered in the affirmative — the Tribunal was correct in holding that the 1/5th threshold under s.40(c)(iii) should be computed with reference to the net amount of salary actually debited to the assessee's profit and loss account and claimed as expenditure (decision in favour of the assessee).

Implications

Direct consequences: The Court vindicated the assessee on both referred questions — premiums paid to the Nursing Home Benefit Association were not to be treated as perquisites/benefits for disallowance under s.40(c)(iii) on the facts found, and the 1/5th calculation should be based on the net salary amount actually charged to the assessee's accounts and claimed as expenditure.

The opinion does not elaborate broader doctrinal consequences beyond applying the statutory text and cited authorities to the facts. The Court emphasised strict construction of s.40 and that the benefit or perquisite must be something that inures to the employee; no new broad precedent beyond the facts and reasoning set out was announced in the opinion. Each party was ordered to bear its own costs.

Judges: Sabyasachi Mukharji, J., Sudhindra Mohan Guha, J. (concurring).

Show all summary ...

Sabyasachi Mukharji, J.:— In this reference under s. 256(1) of the I.T Act, 1961, the following two questions have been referred to this court:

“1. Whether, on the facts and in the circumstances of the case, the premium paid by the assessee to Nursing Home Benefit Association in respect of the medical insurance policy taken on the individual life of each employee resulted directly or indirectly in the provision of any benefit or amenity or perquisite within the meaning of section 40(c)(iii) of the Income-tax Act, 1961, and should be taken into account in computing the amount disallowable under the said section?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the purpose of computing the amounts disallowable under section 40(c)(iii) of the Income-tax Act, 1961, the amount of salary payable to the employees should be reduced by the recoveries made from the managed companies on account of the services rendered to such companies by the said employees?”

2. This reference arises out of the assessments for the assessment years 1966-67 and 1967-68, for which the relevant previous years were calendar years 1965 and 1966. As per the terms of the contract the assessee-company was required to reimburse the entire nursing expenses of its employees and officers. To avoid any heavy expenditure in any particular year the company took medical insurance policy from a Nursing Home Benefit Association on the individual life of each employee for which it was required to pay premia of Rs. 150 to Rs. 510 per year in the cases of different employees. The ITO treated the amount of premia as the expenditure which resulted directly or indirectly in the provision of a benefit or amenity or perquisite to the employees for working out the disallowable item u/s. 40(c)(iii) of the Act. The claim of the assessee, on the other hand, was that the premia as such did not result in any such benefit or amenity or perquisite. The ITO, however, rejected the assessee's contention. On appeal, the AAC, however, accepted such view.

3. The assessee-company was also the managing agent of certain other companies. It had centralised working and common employees who worked both in the offices of the managed companies as well as in the office of the assessee-company. The latter also debited their salaries to its own account in the first instance but simultaneously debited the accounts of the managed companies for the amounts, which, in its opinion, were payable by them for the services by the employees to these companies, and it was the net amount which was finally debited to its profit and loss account and was claimed as expenditure u/s. 37 of the Act. This aspect is important. This was the net amount arrived at after crediting the amount debited to the managed companies and after taking into consideration the amounts actually paid to the employees. The ITO, while determining 1/5th of the amount of salary, with reference to which the benefit, amenity or perquisite were to be examined, took into account the gross salary of each employee which the assessee, as per the contract of service, was required to pay. He rejected the claim of the assessee that the 1/5th portion should have been calculated with reference to the net amount of salary which the company had actually debited to its profit and loss account and had claimed as its deductible expenditure in its own assessment. The AAC, on the other hand, accepted the contention and reversed the order of the ITO.

4. There was a further appeal before the Tribunal. The question canvassed before the Tribunal on behalf of the Revenue was whether the amount of premia paid by the assessee to Nursing Home Benefit Association on the individual life of each employee could be included in the perquisites or benefit for working out the disallowance u/s. 40(c)(iii) of the I.T Act, 1961, and further, whether the disallowance under the above section should be related to 1/5th of the amount of salary claimable by the assessee as expenditure u/s. 37 of the Act or the amount of gross salary it had paid to its employees irrespective of the fact whether any portion thereof had been recovered from its managed companies.

5. The Tribunal, after considering the rival contentions and the relevant sections, was of the opinion that the contention of the assessee must be accepted. The Tribunal observed that the contract between the employees and the assessee was that the company would reimburse the entire medical expenses to the employees. The Tribunal was of the view that the assessee in order to minimise the hardship took medical insurance policies for which it paid certain premia. The right of the employee to claim the reimbursement continued, even after taking that policy, from the assessee directly. The Tribunal was also told that the assessee either after reimbursing the employee or even before, made a claim from the insurance company which normally was not accepted in full. The amount which was received by the assessee-company from the insurance company was held as its own money and the employee was not concerned with its disposal. The employees continued to receive the reimbursement of the actual expenses incurred in their nursing. These facts found by the Tribunal are not controverted. Therefore, the Tribunal was of the view that it could not be said that the insurance premium was an expenditure which resulted directly or indirectly in the provision of any benefit or amenity or perquisite to the employees. In the opinion of the Tribunal, the perquisite to the employee was the reimbursement of the medical expenses by the assessee which was not affected by taking an insurance policy. If anything at all could be added as perquisite to the employees, it were the medical expenses reimbursed by the assessee in the year in which they were so reimbursed.

6. So far as the other contention was concerned, the Tribunal referred to the section and to the non obstante clause of the section and was of the view that the AAC, on the facts found, was correct in upholding the assessee's contention. In those circumstances, the aforesaid two questions have been referred to this court.

7. In order to consider this controversy, we have to bear in mind that we are dealing with the effect of the provision of s. 40(c)(iii), as it stood at the relevant time. Now, s. 40 is the section which deals with “Amounts not deductible”. Normally, amounts deductible have been provided in the previous sections, viz., ss. 30 to 39, and s. 40 opens with a non obstante clause by stating that notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’. The different clauses thereunder deal with different types of expenditure. We are concerned with cl. (c) which deals with the assessee in the instant reference and sub-cl. (iii), as it stood at the relevant time, was in the following terms:

“(iii) any expenditure incurred after the 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date:

Provided that in computing the aforesaid expenditure any payment by way of gratuity or the value of any travel concession or assistance referred to in clause (5) of section 10 or passage moneys or the value of any free or concessional passage referred to in sub-clause (i) or any payment of tax referred to in sub-clause (vii) of clause (6) of that section or any sum referred to in clause (vii) of sub-section (1) of section 17 or in clause (v) of sub-section (2) of that section 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 or any payment referred to in clause (iv) or clause (v) or any expenditure referred to in clause (ix) of sub-section (1) of section 36 shall not be taken into account:

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.”

8. Bearing in mind with what we are concerned, we must actually construe the effect of the section. We have to bear in mind that the section indicates that normally sums or amounts, which were deductible under ss. 30 to 39, could not be allowed as deductions because of the express terms of s. 40. Now, this section, therefore, as it stood at the relevant time, limits the claim for deductibility, so that the claim for deductibility of the assessee is in accordance with the terms which are used. This is an aspect which has to be kept in view. Secondly, it appears to us that the amounts referred to in s. 40 in the first clause only indicate the nature or the quality of the amounts which would merit deduction or which were deductible. This does not resolve the question whether in a particular case the same should be allowed as a deduction or not. With these preliminary observations in mind, the facts of this case will have to be considered.

9. Here, so far as the first question is concerned, it has been clearly found that the company was under a contractual obligation to the employees to reimburse the expenses incurred towards the employees in case of medical or nursing benefit. When the company took out the insurance and paid the insurance premium, it was in the discharge of its own liability or, in other words, more or less it was to safeguard its own liability, not in discharge of its own liability. The taking out of the policy does not exonerate the company to it's employees. The employees do not get any benefit in the taking out of the policy as such. Because the policy does not either reconfer any right on the employees nor does it detract from the liability of the assessee to the employees as its employer.

10. Reliance was placed on certain observations of this court in the case of Eastern Scales (P.) Ltd. v. Commissioner Of Income-Tax, West Bengal-I, [1979] 117 ITR 477 (Cal). There, in the context of an entirely different controversy this court was concerned with s. 40(c)(i) and (ii) and was not concerned with cl. (iii), as we are concerned in the instant reference. Now, dealing with the nature of the amounts spoken of, this court held that cl. (c) of s. 40 spoke of disallowance of expenditure. We have also said that it must be strictly construed. Secondly, the court reiterated in that judgment that the expenditure should be incurred by the company and the company's expenditure should result in a benefit either in the shape of remuneration or benefit or amenity.

11. We observed further that the expression in s. 40(c) deals with matters spoken of in ss. 30 to 39 of the Act and this section is primarily a section dealing with the deductibility of amounts in computing the chargeable profits of a company. Therefore, it must be construed, in the light of the expenditure incurred by the company, that the nature of the expenditure must be such as those which are permissible under s. 37 of the Act. The expenditure must be one which is for the benefit directly or indirectly of the employee and as such the benefit would accrue being the income of the employee as mentioned in the provisions of the section and the liability of the employer-company remains unchanged and that is not discharged and the employee as such had not derived any benefit from such taking out of the policy. In the case of a particular employee or in the case of some employees or in the case of large number of employee's no legal expenses may be incurred. The assessee would have to incur the expenditure in taking out the policies. Therefore, the assessee, being the company, had its own benefit to safeguard the liabilities. There is no question of safeguarding or creating any benefit directly or indirectly to the employees.

12. The Supreme Court in a different context in the case of CIT v. L.W Russel, [1964] 53 ITR 91 (SC), at p. 97 observed as follows:

“It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein.”

13. It is true that there the Supreme Court was considering the expression “perquisite” in the context of s. 7(1) of the Indian I.T Act, 1922, and we are not concerned with that expression. We are concerned with the expression “benefit or amenity or perquisite” which has resulted directly or indirectly. The expression “benefit or amenity or perquisite” must, in our opinion, be read ejusdem generis in the context these are used; the expression “directly or indirectly” must be resulting to the employee. As we have said before, the facts as found by the Tribunal, that by taking out the policy there was no benefit accruing either directly or indirectly to the employee, and was not the income or benefit or amenity derived by the employee, because what the employer had safeguarded was its own liability. The employer remained liable to the employee in spite of the policy.

14. The Delhi High Court in the case of The Commissioner Of Income-Tax, Delhi… v. Lala Shri Dhar…, [1972] 84 ITR 192 was again dealing with s. 7(1) of the Indian I.T Act, 1922, for the consideration of the expression “perquisite”. The assessee was a director of a company stationed at the company's works at Calcutta. Pursuant to a resolution of the board of directors of the employer a policy of personal accident insurance was effected in respect of the assessee and another person. Under the policy, the insurance company undertook to pay to the assessee certain benefits if at any point of time during the period of the policy the insured (the assessee) sustained any accident, bodily injury resulting in disablement or death. Though the proposal was made by the assessee the annual premium was paid by the employer-company and the company itself directly instructed the insurance company to renew the policy from time to time. The question was whether the annual premium paid by the employer-company could be assessed in the hands of the assessee as “perquisite” within the meaning of cls. (iii) and (iv) of Explan. 1 to s. 7(1) of the Indian I.T Act, 1922. It was held that since the assessee had not voluntarily taken the insurance policy and it was the employer-company which took the policy in order to meet the contingency of paying, compensation for injuries or death, neither cl. (iii) nor cl. (iv) of Expln. 1 to s. 7(1) applied and the premium could not be assessed in the hands of the assessee. In our opinion, with respect, the approach of the Delhi High Court is the appropriate approach.

15. In the case of CIT v. Kanan Devan Hills Produce Co. Ltd., [1979] 119 ITR 431 (Cal), the court was concerned directly with s. 40(c)(iii) of the I.T Act, 1961, and was of the view that the phrase “whether convertible Into money or not” does not govern only the expression “perquisite”. The words in the section are “any benefit or amenity or perquisite”. If the phrase “whether convertible into money or not” was intended to govern only the word “perquisite”, then the correct grammatical form would have been “any benefit or any amenity or any perquisite whether convertible into money or not”. There the facts were entirely different. It was held that the amounts paid as “overseas allowance”, “managing allowance” “devaluation allowance” and “transport allowance” to the employees of the assessee-company did not fall within the expression “benefit”, “amenity” or “perquisite” within the meaning of s. 40(c)(iii) of the Act.

16. As we have mentioned before, in view of the finding made by the Tribunal that this policy really was taken by the assessee, as the employer, in discharge of his own obligations which remains unaffected, in our opinion, the Tribunal was correct in the conclusion at which it arrived.

17. Therefore, the first question is answered in the negative and in favour of the assessee.

18. So far as the second question is concerned, we have also noted the facts found by the Tribunal, that is to say, the assessee-company debited the salaries on its own account in the first instance but at the same time simultaneously debited the amounts of the managed companies, which, on their own, were payable by the managed companies. The amount which was finally debited to its profit and loss account was the amount which was claimed as expenditure. Therefore, the amount which was not claimed as an expenditure, that is to say, gross amount, before making adjustments in the manner indicated in the terms, cannot be considered in considering the amount coming within the purview of this section. After all, as we have noted before, this section must be construed which curtails the allowable expenditure under ss. 30 to 39 and shall be strictly construed.

19. Our attention was drawn to the effect of the non obstante clause. In this regard, reference was made to the observations of the Supreme Court in the case of A.V Fernandez v. State of Kerala, [1957] 8 STC 561 (SC), where at p. 572, the Supreme Court referred to the previous decision in the case of Aswini Kumar Ghosh v. Arabinda Bose, [1953] SCR 1 : AIR 1952 SC 369. These observations about the effect of a non obstante clause are as follows:

“In our opinion, section 26 of the Act, in cases falling within the categories specified under art. 286 of the Constitution has the effect of setting at nought and of obliterating in regard thereto the provisions contained in the Act relating to the imposition of tax on the sale or purchase of such goods and in particular the provisions contained in the charging section and the provisions contained in rule 20(2) and other provisions which are incidental to the process of levying such tax. So far as sales falling within the categories specified in art. 286 of the Constitution and the corresponding section 26 of the Act are concerned, they are, as it were, taken out of the purview of the Act and no effect is to be given to those provisions which would otherwise have been applicable if section 26 had not been added to the Act. If these provisions of the Act and the rules made thereunder do not apply to the sales falling within those categories, the value thereof cannot be included in the turnover of the dealer and no question would arise of the applicability of rule 7(1)(k) and rule 20(2) at all to these cases. The amount for which the oil is sold in inter-State trade or commerce would not be lawfully included in the turnover of the dealer and if the amount for which such oil is sold cannot thus be included in his turnover no occasion would arise for the deduction under rule 7(1)(k) of the value of the cocoanut and/or copra or groundnut and/or kernel purchased and converted by the dealer into such oil and cake.”

20. Applying the aforesaid principles in the context of this section, in our opinion, the Tribunal was right in the facts as found on the question of law.

21. Therefore, the second question must be answered in the affirmative and in favour of the assessee. In the facts and circumstances of the case, each party will pay and bear its own costs.

Sudhindra Mohan Guha, J.:— I agree.