Commissioner of Income Tax vs Porritts and Spencer (Asia) Ltd.

Jawahar Lal Gupta, J.—Income Tax References Nos. 32 to 37 of 1983 relate to the assessment years 1973-74 to 1975-76. The Tribunal had referred a total of 18 questions for the opinion of this court u/s 256(1) of the Income Tax Act, 1961. The record shows that all these matters were posted before a Bench of this court (G. C. Garg and N. K. Agrawal JJ.) on November 30, 1998. The questions were answered by their Lordships. However, in Income Tax Reference No. 34, of 1983, the following order was passed :

"Learned counsel appearing on behalf of the Revenue states that the question raised for the assessment year 1975-76 in regard to perquisite value of expenditures incurred on the maintenance of rent-free accommodation and on the servants provided by the assessee-company to its directors needed consideration and, thus, these questions are not covered by any earlier decision of this court."

Thus, the matter has now been placed before this Bench.

A perusal of the paper book shows that in respect of the assessment year 1975-76, the following two questions have been referred by the Tribunal :

"(x) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred on maintenance of rent-free accommodation provided to the director should not be considered as a benefit/perquisite provided to such director and should not be considered for computing the disallowance u/s 40A(5) ?

(xi) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the perquisite value of servants provided by the company to its directors/employees should not be worked out on the basis of actual expenditure for making disallowances u/s 40A(5) ?"

A few facts may be noticed.

The assessee is engaged in the manufacture and sale of "felts" which are used for manufacturing paper. The assessee claims that the expenses incurred by it on the maintenance of the property provided to an employee could not be taken into account while computing the disallowance to be made u/s 40A(5) of the Act. This claim was disallowed by the Income Tax Officer and affirmed by the Commissioner (Appeals). However, the Tribunal relying upon the decision of the Kerala High Court in Commissioner of Income Tax Vs. Travancore Tea Estates Co. Ltd., , held that the expenses incurred on upkeep of building could not be taken into consideration for the purpose of disallowance u/s 40A(5) of the Act. Thus, the addition of Rs. 15,209 was allowed.

Mr. Sawhney, learned counsel for the Revenue, contends that the expenses incurred by the assessee on the maintenance of a building provided as rent-free accommodation to one of the directors by the assessee are directly relat-able to a perquisite and had to be taken into consideration while determining the amount admissible u/s 40A(5) of the Act. On behalf of the assessee, it has been pleaded that the view taken by the Tribunal is in strict conformity with the provisions of law.

A perusal of the order passed by the Tribunal shows that the decision was based on the view taken by the Kerala High Court in the case of Commissioner of Income Tax Vs. Travancore Tea Estates Co. Ltd., . It deserves mention that this view of the Division Bench was expressly overruled by a Full Bench of the Kerala High Court in Commissioner of Income Tax Vs. Forbes, Ewart and Figgis (P.) Ltd. and Harrison and Crossfield Ltd., . It was held that (page 18) "the Tribunal was not right in law in allowing the expenses incurred for the maintenance of the buildings beyond the limit specified in Section 40(a)(v) of the Act for the period when that provision was in force and the corresponding limit specified in Section 40A(5) of the Act for the years when that section was in force". Still further at page 18, it was observed that the "approach" of the Bench in the case of Commissioner of Income Tax Vs. Travancore Tea Estates Co. Ltd., "to the construction of Section 40(a)(v) is wrong". In any case, the issue is authoritatively settled by the observations of their Lordships of the Supreme Court in C.W.S. (India) Limited Vs. Commissioner of Income Tax, , their Lordships have observed as under :

"We find it difficult to agree with learned counsel for the assessees. The first thing to be noticed is that of the two Clauses in Sub-clause (v), Clause (i) was already there in Section 40(c)(iii). If an asset belonging to the assessee--say, for example, a furnished house--was placed in the possession and enjoyment of its employee and it was being maintained by the assessee, there could be little doubt that any expenditure incurred on such asset/house was subject to the ceiling prescribed therein. Similarly, if a house taken on rent by the assessee was furnished by the assessee and put in the possession and enjoyment of its employee, the expenditure incurred in that behalf would equally have been subject to the ceiling in Section 40(c)(iii). Suppose, in another case, a house owned by the assessee (furnished and maintained by the assessee) is similarly placed in the possession and enjoyment of the employee and the assessee took on rent an air-conditioner and installed it in the said house, the whole expenditure would have been subject to the ceiling in Section 40(c)(iii). Now, the question is whether Parliament intended differently when it put in Section 40(a)(v) in the place of Section 40(c)(iii). In this connection, it may be noted that Section 40(a)(v) was in force from April 1, 1969, to March 31, 1972, only and that Section 40A(5) which came into force with effect from April 1, 1972, in place of Section 40(a)(v) does not admit of any such controversy in view of the fact that it uses the words ''an employee'' in the corresponding clause. The controversy is limited only to Section 40(a)(v) and only because of the use of the words ''such employee''."

It was further held that Section 40(a)(v) is only an expanded version of Section 40(c)(iii). The legislative intent was to (page 655) "bring the allowances in respect of the assets owned by the assessee, which assets are used by its employee for his own purposes or benefit, within the net of ceiling".

In view of this authoritative pronouncement, the question as posed above has to be answered in favour of the Revenue. We do so.

This brings us to the second question. The assessee had claimed a deduction of Rs. 9,240 on account of wages paid to the servants. The claim was disallowed by the assessing authority. The Commissioner of Income Tax had affirmed the decision and held that the circular dated January 12, 1970, issued by the Board would apply for the purpose of valuation of perquisite u/s 17(2) and not for the purposes of Section 40A(5) of the Act. On an appeal by the assessee, the Tribunal followed the decision in the case of Nestle''s Products (India) Ltd., given by the Delhi Bench of the Appellate Tribunal and invoked the provisions of the circular to uphold the claim of the assessee. It was held that the formula evolved by the Board that "75 per cent. of the expenditure on sweeper and 50 per cent. of the expenditure on gardeners and watchman, should reasonably represent the value of the perquisite made available to the employees . . . and directed the disallowance u/s 40(a)(v) of the Act. . .".

Mr. Sawhney contends that the wages paid to the servants constitute a perquisite within the meaning of Section 40A(5) and, thus, could not be excluded while computing the amount admissible u/s 40A(5). On the other hand, Mr. Jain contends that in view of the circular, the view taken by the Tribunal was correct in law.

It is the admitted position that the circular dated January 12, 1970, issued by the Central Board of Direct Taxes is regarding the valuation of perquisites u/s 17(2). Thus, it is not relevant for the purposes of Section 40A(5) of the Act. The method of calculating the value of the perquisites in the hands of the employees is not relevant for the purposes of determining the expenditure incurred by the employer-assessee u/s 40A(5). For this purpose, the actual expenses and not a part of it has to be taken into account. The quantum of perquisites has to be computed with reference to the expenses in the hands of the assessee and not with reference to the addition to be made in the hands of the employees. When the payment has been made by the asses-see-employer, the actual figures have to be taken into consideration and not a part thereof. A similar view was expressed by their Lordships of the Delhi High Court in Commissioner of Income Tax Vs. Shriram Refrigeration Industries Ltd., .

This leaves us with questions Nos. (viii), (ix) and (xii), which are in the following terms :

"(viii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to depreciation on technical know-how capitalised at Rs. 10 lakhs ?

(ix) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that, for the purpose of computing the disallowance u/s 40A(5) of the Income Tax Act, the provisions of Rule 3(c)(ii) of the Income Tax Rules should be invoked ?

(xii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that, for the purpose of computing relief u/s 80J, borrowed capital should not be excluded from the capital employed and the average value of the assets and liabilities during the year should be adopted instead of their value as on the first day of the previous year ?"

So far as question No. (viii) is concerned, it has been considered by the Bench (G. C. Garg and N. K. Agrawal JJ.) in I. T. R. No. 33 of 1983. Vide order dated November 30, 1998, the Bench followed the decision in Porritts and Spencer (Asia) Ltd. Vs. Commissioner of Income Tax, and answered the question in favour of the assessee. We find no reason to take a different view.

So far as question No. (ix) is concerned, Mr. Sawhney states that this question does not arise out of the order of the Tribunal. Thus, it is returned unanswered.

So far as question No. (xii) is concerned, the Bench vide its order dated November 30, 1998, passed in I. T. R. No, 33 of 1983, had answered the question in favour of the Revenue by following the decision in Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, . Answered accordingly.

The reference is disposed of in the above terms. No costs.