Commissioner of Income Tax vs D.P. Kanodia

The Income Tax Appellate Tribunal, Allahabad, has referred the following question of law u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), for opinion to this court:

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 being the director of the company, is not ''perquisite'' within the meaning of Section 17(2)(iii)(a) of the Income Tax Act, 1961?

The present reference relates to the assessment year 1990-91.

Briefly stated the facts giving rise to the present reference are as follows:

The assessee an individual by status, is a director in a public limited company drawing salary of Rs. 24,000 per annum in addition to rent free accommodation and certain other perks.

Due to heart ailment, the assessee was advised bypass surgery outside India. An expenditure of Rs. 4,75,009 was incurred on his surgery at Texas in U.S.A., which included cost of treatment, medicines and travelling expenses for the assessee and one attendant which job was performed by his wife.

The Assessing Officer did not agree with the assessee''s contention that the expenses although allowed on the strength of a resolution of the board of directors could not be permitted to the assessee even on humanitarian grounds and it was not obligatory on the part of the employer to bear such expenses. He, therefore, taxed the amount in question in the hands of the assessee by treating the same as a perquisite in terms of provisions of Section 17(2)(iii)(a) of the Income Tax Act, 1961, also confirmed during first appeal.

The Tribunal, however, on an appeal by the assessee took the view that the receipt towards the reimbursement of medical expenses could not constitute a perquisite or benefit received by the assessee from the employer company. It also held that the expenditure in question was actuated by motive of commercial expediency and further that in the case of employer, the expenditure was allowed without making any disallowance u/s 40A(5).

We have heard Shri R.K. Upadhya, learned standing counsel for the appellant and Shri S.K. Garg for the respondent-assessee.

Learned standing counsel submitted that the amount of reimbursement provided to the respondent-assessee by his employer would clearly fall within the provisions of Clause (iv) of Sub-section (2) of Section 17 of the Act and, therefore, be treated as perquisite for the purposes of salary. Clause (iv) of Sub-section (2) of Section 17 of the Act which is to the following effect is included in the word "perquisite".

Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee.

From the perusal of the aforesaid clause, it appears that in order to qualify the amount to be a perquisite, it is necessary that the employer should have directly paid the amount to another person to discharge the obligation of the assessee. If the amount is paid by the employer towards reimbursement of the expenditure incurred by the assessee it would not fall under the aforesaid clause. Similar provision existed u/s 40A(5)(a)(ii) and Section 40(a)(v) inserted by the Finance (No. 2) Act, 1971, and Finance Act, 1968, with effect from April 1, 1969, respectively. The apex court in the case of Commissioner of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., has held as follows (page 654):

There still remain the words ''including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee'' in Section 40(a)(v) and similar words found in Section 40A(5)(a)(ii) as well, i.e., in Sub-clause (iv) of the definition of ''perquisite'' in Clause (b) of Explanation 2 to Sub-section (5). What do they mean? The said words contemplate a situation where the assessee makes a payment [in cash] in respect of an obligation-obligation of the employee-which would have been payable by the employee if it is not paid by the assessee. The payment by the assessee contemplated by these words is not evidently a payment to the employee but to a third party, no doubt, on account of the employee. Sub-clause (v) of the definition of ''perquisite'' in Clause (b) of Explanation 2 to Sub-section (5) also refers to cash payment but that too is not to the employee, though undoubtedly for his benefit.

It has held that cash payment by an assessee to his/its employees do not fall within the ambit of Section 40(a)(v) or Section 40A(5)(a)(ii) of the Act. Same principle would be applicable in the present case also while interpreting Clause (iv) of Sub-section (2) of Section 17 of the Act.

As in the present case, the payment has been made by the employer to the hospital concerned directly but the reimbursement has been made to the assessee would not come under the word "perquisite". Providing of reimbursement towards medical expenditure also cannot be considered as an amenity provided by a company to its director. It is only in an exceptional situation that the director had to undergo the by-pass surgery. Moreover, it cannot be treated as a benefit.

Thus, it would also not qualify under Sub-clause (a) of Sub-section (2) of Section 17 of the Act as it cannot be considered as a amenity or benefit granted by the employer.

In this view of the matter, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.

There shall be no order as to costs.