Mentha and Allied Products (P.) Ltd. vs Commissioner of Income Tax

The following two questions have been referred in this case :

"1. Whether, the Tribunal was correct in law in holding that the medical expenses of the managing director could not be allowed u/s 37(1) and had to be considered subject only to the limit u/s 40A(5)/40(c)(i) of the income tax Act, 1961 ?

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the deduction allowable u/s 80HHA with regard to the income derived from industrial undertaking after setting off such income against loss from non-industrial unit in term of section 80AB and section 71 of the income tax Act, 1961 ?"

So far as the second question is concerned, it has been noted in the statement of case itself that for the earlier assessment year 1982-83, the same issue was decided in favour of the Department and against the assessee relying upon the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC). No reason has been mentioned by the Tribunal in the statement of the case, as to why despite the above, the question was referred to the High Court.

When a question is covered by the decision of the Supreme Court, there is no reason for referring the same to the High Court u/s 256(1).

Further, even during the arguments we have not been shown any good reason on the basis of which the decision of the Supreme Court could be distinguished in respect of the assessment year 1986-87, which is involved in the present case.

We, therefore, answer question No. 2 in terms of the aforesaid decision of the Supreme Court in favour of the Department and against the assessee.

So far as the first question is concerned, it appears that the managing director got his eye treatment done in the USA. The question is whether, the expenses of that medical treatment could be allowed u/s 37(1) or could not be allowed in view of section 40(c) which has been omitted with effect from April 1, 1989, by the Direct Taxes Laws (Amendment) Act, 1987, or section 40A(5) which has also been omitted by the same amending Act.

Before the omission, section 40(c) stated that notwithstanding anything to the contrary in sections 30 to 39 (i.e., including section 37) certain amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". Those amounts of which deduction was not permissible include in the case of a company, any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person, who has a substantial interest in the company or to a relative of the director or of such person, provided in the opinion of the Assessing Officer, any such expenditure is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by the company from such expenditure. Also there is a limit prescribed to such expenditure.

Reading the provision would indicate that apart from the taxation part, the provision seems to have another purpose and that is to discourage persons holding substantial interest in and consequently a control over a company from diverting the funds of the company for their personal benefits. The discouragement is achieved by refusing deduction on such expenditure.

In this case the expenditure was incurred by the assessee-company for the managing director''s eye treatment in the USA, it has been found by the Assessing Officer that the facility of that treatment was available in India also, although there was a waiting period of two years. The Commissioner of income tax (Appeals) had concluded that the medical treatment of the managing director in the USA could have been avoided to a substantial extent when the same treatment was available in India and thus the provisions of section 40(c)(ii) were applied.

It has been stated by the assessee, and it has been mentioned in the statement of the case, that according to the assessee, the services of the managing director were very important for the prosperity of the company. However, there is neither any statement nor any finding that there was no other alternative person, who could hold that post in the company, and that minus the present managing director, the company would go into loss or the profits of the company would be reduced, and if so by how much.

In the circumstances, the finding appears to be that the expenditure incurred is excessive or unreasonable having regard to the "legitimate business needs" of the company and having regard to the benefit resulting to the company or likely to result to the company by such treatment of the managing director. Thus, there appears no reason, why the said provision of section 40(c)(ii) should not apply to the present case. The opening words of section 40 made it clear that it has overriding the effect upon section 37.

From the side of the assessee reliance has been placed upon the decision of the Calcutta High Court in the case of Commissioner of Income Tax Vs. National and Grindlays Bank Ltd. (now known as Grindlays Bank Ltd.), . Reliance has also been placed from the side of the assessee upon the decision of the Supreme Court in the case of Commissioner of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., . Both these decisions deal with "perquisite" as contemplated by section 40A(5). Perquisite to an employee stands on a different footing as a normal employee does not have enough control to divert the company''s funds towards his perquisite.

As already stated above section 40(c) apparently intended discouragement of controllers of the company from diverting the company''s funds to their personal amenities.

The decision of the Delhi High Court in Commissioner of Income Tax Vs. Shriram Refrigeration Industries Ltd., is also on the question of "perquisite" and it has been held that reimbursement of medical expenses in cash to an employee is not a "perquisite". It is not necessary to go into the question of section 40A because for the reasons mentioned above, we are of the opinion that the Tribunal was correct in law in holding, on the facts and circumstances of the case that the medical expenses of the managing director could not be allowed u/s 37(1) and had to be considered subject only to the limit u/s 40(c)(i) of the income tax Act, as it stood before its amendment by the amending Act of 1987. Reference is disposed of.