South India Corporation Agencies P. Ltd. vs Commissioner of Income Tax

N.V. Balasubramanian, J.—In respect of its assessment of income for the assessment years 1974-75 and 1975-76, the assessee sought for

a statement of the case, on the following two questions of law :

Whether, under the facts and circumstances of the case, the reopening of the assessments u/s 147(a) is valid ?

Whether under, the facts and circumstances of the case, the expenditure incurred by the company on the house occupied by the deputy

chairman towards property tax, electricity charges, depreciation and repairs should be included in arriving at the amount disallowable u/s 40A(5) ?

The assessee is a company which filed returns for the assessment year 1974-75 on November 1, 1974, declaring a total income of Rs.

6,98,100 and for the assessment year 1975-76 on September 26, 1975, declaring a total income of Rs, 6,69,440. The Income Tax Officer

completed the original assessment for the two assessment years on December 15, 1977, and March 4, 1978, respectively. The assessee along

with the returns filed for those assessment years, filed statements showing the amounts of expenditure disallowable u/s 40A(5) of the Income Tax

Act, 1961 (hereinafter to be referred to as ""the Act""), in respect of a house utilised by its deputy chairman free of rent and in the statements filed

along with the returns, the assessee had shown the salary and allowance to the deputy chairman as Rs. 60,000, 20 per cent. thereof being Rs.

12,000 and the money value of perquisite was shown as Rs. 7,500 and claimed ""nil"" the excess over 20 per cent. of the salary. The Income Tax

Officer on the basis of the information furnished by the assessee, completed the original assessment for the two assessment years, in question.

The Income Tax Officer subsequently came to know that the assessee had incurred certain expenditure on the property belonging to the

company in which the deputy chairman was allowed to reside and the expenditure incurred on the building for the two assessment years was as

under :

Assessment year

1874-75 1975-76

Property tax 5,559 8,715

Electricity charges 24,651 27,173

Depreciation 24,864 24,242

Repairs 24,651 23,588

79,725 83,718

The Income Tax Officer came to the conclusion that the assessee had not furnished full and true particulars of its income at the time of original

assessment and, therefore, he formed a reasonable belief that the income has escaped assessment and he issued the notices of reassessment. The

Income Tax Officer found that the income has escaped assessment and completed the reassessment. The Income Tax Officer in the reassessment

proceedings held, that the income to the extent to which it was disallow-able u/s 40A(5)(a) of the Act has escaped assessment and computed the

amount to be disallowed for the two years at Rs. 27,232 and Rs. 42,700 respectively, and made additions of the same to the assessee''s total

income for the respective assessment years.

Aggrieved by the orders of reassessment, the assessee preferred appeals before the Commissioner of Income Tax (Appeals). The

Commissioner (Appeals) accepted the objection raised by the assessee with regard to the reopening of the assessment u/s 147(a) of the Act and

he also held that no part of the expenditure in question can be the subject-matter of ceiling u/s 40A(5) of the Act. The Commissioner (Appeals)

allowed the appeals preferred by the assessee.

The Revenue, dissatisfied with the order of the Commissioner, preferred appeals before the Income Tax Appellate Tribunal challenging the

views of the Commissioner (Appeals) both on the question of jurisdiction of the Income Tax Officer to reopen the assessment as well as on the

merits of the case. The Tribunal came to the conclusion that the assessee had not disclosed full and true particulars at the time of original

assessment and since the assessee had not disclosed full and true particulars, the Tribunal upheld the action taken by the Income Tax Officer to

reopen the assessment u/s 147(a) of the Act. The Tribunal also held that the asses-see-company allowed its deputy chairman to use one of its

assets for his own purpose and benefit and the assessee had not disclosed the fact that the property was used by its deputy chairman for his

personal purposes in the statement filed by the company and furnished the amount disallow-able u/s 40A(5) of the Act. The Tribunal, therefore,

came to the conclusion that the Income Tax Officer has jurisdiction to reopen the assessment proceedings.

On the merits of the case, the Tribunal held that the expenditure incurred towards property tax, electricity charges, repairs and depreciation

should be included in arriving at the amount disallowable u/s 40A(5).of the Act. The Tribunal followed a decision of this court in the case of

Commissioner of Income Tax Vs. Kisenchand Chellaram (India) P. Ltd., and a Full Bench decision of the Kerala High Court in the case of

Commissioner of Income Tax Vs. Forbes, Ewart and Figgis (P.) Ltd. and Harrison and Crossfield Ltd., and came to the conclusion that the

expenditure incurred by the assessee would fall within the scope of Section 40A(5) of the Act and as the amount exceeded the limit prescribed in

the said section, the amount was to be disallowed to the extent to which it was in excess of the limit prescribed for allowance. The assessee has

challenged the order of the Appellate Tribunal and the Appellate Tribunal has stated a case and referred the two questions of law set out earlier.

Learned counsel for the assessee submitted that the assessee had disclosed all facts necessary for the assessment at the time of original

assessment and in the original return filed at the time of original assessment, the assessee had shown the entire expenditure in the profit and loss

account of the company and it has also drawn to the notice of the Income Tax Officer that the building was in occupation of the deputy chairman of

the assessee and in the statement filed along with the original return, the assessee had shown that the building was in occupation of the deputy

chairman of the assessee and the expenditure incurred. He, therefore, submitted that the Income Tax Officer should have drawn a proper inference

from the statement filed by the assessee before him at the time of original assessment and for his failure to draw a proper inference, it is not open to

the Income Tax Officer to resort to reassessment proceedings to cover up his fault. On the question of merits, learned counsel for the assessee

submitted that in so far as the property tax is concerned, the assessee had incurred expenditure on the property tax for its own house occupied by

the deputy chairman and the same would not come within the purview of Section 40A(5) of the Act. He has not seriously disputed with reference

to the electricity charges and depreciation. He relied upon a decision of the Karnataka High Court in the case of Commissioner of Income Tax Vs.

Motor Industries Co. Ltd., and submitted that normal repair charges would not come within the purview of Section 40A(5) of the Act.

On the other, hand, learned counsel for the Revenue submitted that the assessee had not disclosed primary facts at the time of completion of the

original assessment which warranted reassessment proceedings on the facts of the case. Learned counsel for the Revenue relied upon a decision of

the apex court in the case of C.W.S. (India) Limited Vs. Commissioner of Income Tax, and submitted that the repair charges would also fall within

the scope of Section 40A(5) of the Act.

We have carefully considered the rival submissions of learned counsel. In so far as the question of jurisdiction of the Income Tax Officer to

reopen the assessment proceedings is concerned, the facts found by the Appellate Tribunal clearly show that the assessee had not disclosed

material facts before the Income Tax Officer at the time of original assessment proceedings to determine the amount to be disallowed u/s 40A(5)

of the Act. It was found that the assessee had not even disclosed the fact that the asset was used or allowed to be used by the deputy chairman for

his personal use in the statement filed along with the return. The assessee, no doubt, might have claimed the expenditure incurred by the assessee

on the house and had shown the same in the profit and loss account filed along with the return, but is was not shown separately, but as part of the

business expenditure of the company and claimed as a deduction. There was no itemwise classification of the expenditure. In the column with

reference to the amounts which are disallowable u/s 40A(5) of the Act, the assessee had not shown various types of expenditure incurred by the

assessee on the house used by the deputy chairman free of rent. The facts as found by the Appellate Tribunal clearly show that the assessee had

neither disclosed in the statement filed along with the return, nor informed the officer during the course of assessment proceedings that out of the

entire amounts shown in the profit and loss account, part of it was with reference to the expenditure on the house used by the deputy chairman for

his personal use. Though the expenditure incurred might have been shown or figured in the profit and loss account, mere filing of the profit and loss

account would not be sufficient and that would not discharge the duty cast upon the assessee to disclose all primary facts before the Income Tax

Officer for the application of Section 40A(5) of the Act. The Tribunal referred to the original return filed by the assessee and found that in respect

of the amounts to be disallowed u/s 40A(5) of the Act, the full details of the expenditure have not been disclosed or mentioned in the return or in

the statement accompanying the return. Consequently, we hold that the assessee had not disclosed the full details in respect of the expenditure

either at the time of filing of the return or in the statement filed along with the return or subsequently before the Income Tax Officer at the time of

completion of the original assessment. Therefore, the statement filed by the assessee along with the return cannot be taken to be as disclosure of

the full and true facts necessary for the assessment for the two assessment years, and once such a conclusion is reached, we are of the opinion, the

Income Tax Officer has the necessary jurisdiction to reopen the assessment u/s 147(a) of the Act. We find no infirmity in the order of the Appellate

Tribunal in holding that the Income Tax Officer has properly exercised his jurisdiction to reopen the assessment for the two assessment years u/s

147(a) of the Act. Therefore, the first common question of law referred for both the assessment years is liable to be answered against the assessee.

In so far as the second question referred to us is concerned, there are four items of expenditure which are the subject-matter of dispute. In so

far as the expenditure of electricity charges and the claim of depreciation are concerned, in our opinion, the decision of the Supreme Court in the

case of C.W.S. (India) Limited Vs. Commissioner of Income Tax, , would apply to the facts of the case. The apex court in the abovesaid decision

held that allowance u/s 40A(5) would include depreciation allowance. The Supreme Court also held that the maintenance expenditure incurred on

the house used by the director or by the employee of the assessee would also be subject to the ceiling limit u/s 40A(5) of the Act. The electricity

charges were incurred by the assessee on the house used by the deputy chairman for his own purposes. Therefore, that would also be subject to

the ceiling limit u/s 40A(5) of the Act. In so far as the third item, namely, the expenditure on repairs is concerned, learned counsel for the Revenue

relied upon a decision of the Karnataka High Court in the case of Commissioner of Income Tax Vs. Motor Industries Co. Ltd., , wherein the

Karnataka High Court held that the normal repair expenses cannot be added u/s 40A(5) of the Act and only the repair expenses to meet special

requirements of the employee in occupation can be added u/s 40A(5) of the Act. We are of the opinion that the decision of the Supreme Court in

C.W.S. (India) Limited Vs. Commissioner of Income Tax, , would apply to the expenditure on repairs as well. The Supreme Court in the said

decision held that the maintenance expenses incurred on the asset used by an employee would also be subject to the ceiling limit prescribed u/s

40A(5) of the Act. The repair charges were incurred by the assessee for the comfortable living of the deputy chairman and it cannot be stated that

it is outside the scope and ambit of Section 40A(5) of the Act. We hold that the provision of Section 40A(5)(a) of the Act would cover any

expenditure in respect of any asset of the assessee used by the employee either Wholly or partly for his own purpose or benefit. The expression,

expenditure"" in Section 40A(5) is wide enough to cover the repair expenditure also and when there are no words limiting the scope of the

expression, ""expenditure"", it cannot be confined only to extraordinary expenditure incurred by the assessee by way of renovation, but it would

include and encompass within itself the normal repair expenditure and also the expenditure incurred at the behest of the employee to keep the

house in a comfortable living and habitable condition.

The other item that is the subject-matter of consideration is the property tax. In so far as the property tax is concerned, we are of the opinion,

it is a statutory liability falling on the assessee as an owner. The assessee has necessarily to discharge its liability towards property tax, whether the

house is in the occupation of the deputy chairman or not and the liability arises irrespective of the fact whether the asset is used by the deputy

chairman or not. Since the liability falls on the assessee by the provisions of a statute as an owner of the house property, and the liability has to be

incurred, whether the house is in occupation or not, in our opinion, the amount paid by way of property tax cannot be regarded as an expenditure

falling within the ambit and scope of Section 40A(5) of the Act. The decision of the Karnataka High Court in the case of Commissioner of Income

Tax Vs. Motor Industries Co. Ltd., , is also to the effect that the municipal tax and ground rent in respect of the building used as residential

quarters cannot be considered as perquisites within the meaning of Section 40A(5) of the Act. We are in agreement with the Karnataka High

Court to the extent to which it held that the property tax cannot be the subject-matter of ceiling u/s 40A(5) of the Act.

In the result, we answer two questions of law as under :

First question : It is answered in the affirmative and against the asses-see.

Second question : Our answer to the second question is that the expenditure incurred by the company on the house used by the deputy chairman

towards electricity charges, depreciation and repairs should be included in arriving at the amount to be disallowed u/s 40A(5) of the Act and in so

far as the expenditure by way of property tax is concerned, that cannot be a subject matter of ceiling u/s 40A(5) of the Act.

The Revenue shall be entitled to costs of Rs. 1,000.