Rane (Madras) Ltd. vs Commissioner of Income Tax

Mishra, J.—The assessee-company has kept a dispute as to eligibility of certain payments in excess of the limit u/s 40(c) of the Income Tax

Act, 1961 (""the Act""), alive on pleas which hardly require exercise of greater wisdom than ordinary for rejection. The company claimed that a sum

of Rs. 1,01,150 being the emoluments and perquisites to the managing director should be deducted as expenditure falling u/s 37 of the Act. The

Income Tax Officer disallowed the expenditure in excess of Rs. 72,000, the limit as per section 40(c) of the Act. The Commissioner confirmed the

disallowance. The company preferred an appeal before the Tribunal and urged that though sitting fees, reimbursement of medical expenses,

provision for personal accident benefit, insurance, etc., to the managing director qualified for deduction u/s 37 of the Act as expenditure falling

under the head ""Profits and gains of business or profession"", the limitations u/s 40(c)(i) and (ii) are not applicable to it.

The Tribunal has said that the maximum expenditure admissible in the case of a managing director is Rs. 72,000 per annum and thus any amount

in excess thereof was beyond the eligibility limit for deduction u/s 37 of the Act.

Learned counsel for the assessee has brought to our notice a Bench decision of the Calcutta High Court in the case of Commissioner of Income

Tax Vs. Kanan Devan Hills Produce Company Ltd., in which there is a discussion whether overseas allowance, managing allowance and transport

allowance paid in cash to employees fall under the expression ""benefit, amenity or perquisite"" as u/s 40(c)(iii) of the Act and held that these

allowances when paid in cash to the employees did not fall within the expression ""benefit, amenity or perquisite"" u/s 40(c)(iii) of the Act. Since,

however, such allowance fall under the head ""Profits and gains of business or profession"", they were deductible in computing the business profits of

the assessee-company. The Calcutta judgment, however, is of not much help to the assessee in the instant case because it is not possible, and

learned counsel for the assessee has not been able to do so before us, to identify the head under which the managing director has been paid the

amounts aforementioned except as a payment under the contract of service and thus falling under the pervasive sweep of the expression

remuneration."" The Calcutta judgment is distinguishable because the learned judges who decided the case were fully conscious that originally the

expression ""remuneration"" existed along with the expression ""benefit"" and ""amenity"" in section 40(c)(iii) of the Act, but later, the Legislature had

removed the expression ""remuneration"" from the sub-clause (iii) of clause (c) of section 40 of the Act. The expression ""remuneration"", however,

was not removed from sub-clause (i) and (ii) of clause (c) of section 40 of the Act. A Full Bench of the Kerala High Court in the case of

Commissioner of Income Tax Vs. Commonwealth Trust Ltd., has taken notice of the various provisions of the Act including sections 37 and 40

and the definition of the expression ""salary"" for the purposes of the Act and has said as follows (at page 26) :

The definition indicates that salary would include dearness allowance (if the terms of employment so provide), but all other allowances and

perquisites stand excluded from the scope of the term ''salary''. This gives a very clear concept of what is salary as defined in the Fourth Schedule.

This definition is incorporated in section 40(a)(v) by reason of Explanation 2. Therefore, when the sub-clause uses the term ''salary'', it has to be

understood as excluding all allowances and perquisites other than dearness allowance. We find that the sub-clause uses the term ''benefit, amenity

or perquisite'' as opposed to salary evidently indicating that these together will exhaust what an employee obtains in return for his service. Evidently

the object of section 40(a)(v) is to persuade the employer to set a limit on the extent of the benefits of any kind that could be extended to any

employee by an employer. Of course, any employer is free to provide his employee with the salary agreed upon and also allowances, perquisites

and such amenities as the parties may choose to stipulate by way of terms of employment. Though these will be expenses falling within section

37(1) of the Income Tax Act as expenditure incurred wholly for the purpose of the business, the employer''s claim for deduction is subject to the

limit specified in section 40(a)(v). This is in order that the taxable profits may not be siphoned off. If the benefit, amenity or perquisite exceeds one-

fifth of the salary or Rs. 1,000 per mensem, whichever is less, such excess over the one-fifth would not be treated as deductible expenditure with

the result that despite such payment, the assessee will have to pay tax on it. That will effectively deter an assessee from paying anything in excess of

one-fifth of the salary by way of benefits, perquisites and amenities, the object being that it is not possible to conceive any category of benefit-the

term ''benefit'' is used in a wider sense - accruing to an employee other than the salary outside the scope of the term ''benefit, amenity or

perquisite''. It is evident that the enumeration of benefit, amenity and perquisite is intended to cover exhaustively all that an employee may get in any

form other than his salary. In other words, between salary on the one hand, and benefit, amenity or perquisite on the other whatever an employee

would get from his employer in cash or kind or services must stand exhausted. It may not be necessary to consider whether an allowance paid by

way of house rent allowance, falls within the term ''perquisite''. It is sufficient for the purposes of this case of consider whether it would fall within

the scope of the term ''benefit, amenity or perquisite'', since, if it does, section 40(a)(v) would operate to restrict the claim for deduction in respect

thereof. It is in that context and particularly keeping in mind the object of the provision that we have indicated that what the law purports to do is to

limit what an employer can claim by way of deduction on account of payment to his employee by way of benefit, again in the extended sense of

that term.

The only question before us is whether, despite the very clear indication by reason of the context of the provision in section 40(a)(v) that the term

''benefit, amenity or perquisite'' must exhaust all advantages that an employee gets other than his salary, a different meaning should be given to this

term because of the words ''whether convertible into money or not'' following it. It is seen to have been argued, and successfully, in some cases

that the words ''whether convertible into money or not'' reflect on the nature of ''benefit, amenity or perquisite''. Such a qualification is said to be

inappropriate in the case of a case benefit. In other words, cash cannot be qualified by the term ''whether convertible into money or not'' and

therefore, whatever may be the natural meaning of the term ''benefit, amenity or perquisite'', any advantage in terms of money which may fall

normally within any one of these three must stand excluded. We notice that this argument succeeded before the Karnataka High Court in

Commissioner of Income Tax Vs. Mysore Commercial Union Ltd., , before the Calcutta High Court in Commissioner of Income Tax Vs. Kanan

Devan Hills Produce Company Ltd., and before the Madras High Court in Commissioner of Income Tax, Tamil Nadu-V Vs. Manjushree

Plantations Ltd., . Though reference is made by the counsel for the assessee to the decision of the Madras High Court in CIT v. G. Venkataraman

[1978] 111 ITR 444, that could easily be explained because the language of the section which the court considered in that case was materially

different from what we are dealing with here.

We don''t see any reason to give undue emphasis to the words ''whether convertible into money or not'' so as to give a very restricted meaning to

the term ''benefit, amenity or perquisite'', a meaning which would not serve the evident purpose of the section. We say so because that would mean

that any cash allowance paid by the employer to an employee of any sum whatsoever will be entitled to deduction despite section 40(a)(v) because

the restriction is limited only to non-cash advantage given to the employee. Such a construction appears to us to be quite irrational defeating the

very purpose of prescribing the limit u/s 40(a)(v) so as to dissuade an employer from paying unduly large sums by way of benefit, amenity or

perquisite. The statute itself lays down the permissible limit of deduction in respect of salary and that would be incomplete unless a permissible limit

of deduction is laid down in respect of other benefits that are extended to an employee. Though the words ''whether convertible into money or not''

may at first sight appear to indicate that whatever is not convertible into money stands excluded from the scope of the term ''benefit, amenity or

perquisite'', that need not necessarily be so. The term ''benefit, amenity or perquisite'' may take in any benefits in kind and in service and may take

in also cash. ''Whether convertible into money or not'' need not qualify the whole range. It only means that it is immaterial whether the benefit,

perquisite or amenity may or may not be convertible into money. That would be immaterial. According to us, this would be the proper reading of

the section.

We are in complete agreement with the meaning as given by the Kerala High Court. It is not possible to accept the approach of the Calcutta

High Court as the same will defeat the very purpose of the legislation, and give a free hand to the employer to show payments in cash to employees

in the shape of various allowances and escape taxes. This also is the view of the Gujarat High Court in the case of Alembic Glass Industries Ltd.

Vs. Commissioner of Income Tax, . The Gujarat High Court has also taken pains in the instant judgment to discuss the fact of the later

amendments in the Act and finally has said that ""remuneration"" is the expression which would include that which is quantified in money and paid to

a person for his services or work.

The reference is answered accordingly. There shall be no order as to costs.