Vildirect: IncomeTax-caselaws-1997-VIL-241-MAD-DT

1997-VIL-241-MAD-DT

Equivalent Citation: [1999] 239 ITR 405

MADRAS HIGH COURT

Date: 26.11.1997

SUNDARAM INDUSTRIES LTD.

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s) : N. V. BALASUBRAMANIAN., P. THANGAVEL

JUDGMENT

The judgment of the court was delivered by

N. V. BALASUBRAMANIAN J.---This is a consolidated reference both at the instance of the Revenue as well as at the instance of the assessee relating to the assessment years 1975-76 and 1976-77. The questions of law referred at the instance of the assessee are as under :

"1. Whether the expenditure incurred by the assessee on the maintenance of its motor cars which have been used, if not wholly, at least partly, for the personal purposes of the directors, can be taken into consideration for purposes of disallowance in excess of the prescribed limit of Rs. 72,000 ?

2. Whether the Tribunal is justified in law in holding that the expenses incurred by the assessee-company in reimbursement of medical expenses of one of its directors is liable to be treated as perquisites enjoyed by the director and that it is liable to be disallowed under section 40(c) of the Act ?

3. Whether the Tribunal is justified in law in holding that with reference to the sum of Rs. 1,856 paid by the assessee to the ICICI on account of fluctuation in foreign exchange the assessee is not entitled to claim deduction as revenue expenditure or business loss ?"

The question of law referred at the instance of the Revenue is as under :

"Whether the amount of depreciation allowed to the assessee on cars maintained by it and which, have been used, if not wholly, at least partly, for the personal purposes of the directors, can be taken into consideration for purposes of disallowances in excess of the prescribed limit of Rs. 72,000?"

We will deal with the questions separately. The assessee is a private limited company in which the public are not substantially interested doing business of manufacture of rubber products for automobiles, tyre retreading and coach building.

The first question raised at the instance of the assessee relates to the assessment year 1975-76 and in the assessment made on the assessee-company, the Income-tax Officer applied the provisions of section 40A(5) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), and made an addition of a sum of Rs. 19,433 representing a portion of the expenditure incurred by the assessee as perquisites and benefits allowed to four directors and depreciation allowed on the assets of the company. The figure of Rs. 19,433 was arrived at by the Income-tax Officer as under :

---------------------------------------------------------------------------------------------------------------------------------------------------

Name Remuneration Maintenance 1/5th of remu- Excess to be

expenses of vehi- neration disallowed

cle including

depreciation

------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. Rs.

--------------------------------------------------------------------------------------------------------------------------------------------------- Santhanam 30,000 14,366 6,000 8,366

Ratnam 60,000 16,382 12,000 4,382

Ramachandran 30,000 9,688 6,000 3,688

Ramesh 35,000 9,997 7,000 2,997

---------------------

19,433

---------------------------------------------------------------------------------------------------------------------------------------------------

The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) against the disallowance made by the Income-tax Officer. The Commissioner (Appeals) found that the question of disallowance of the excess expenditure or depreciation has to be considered with reference to the provisions of section 40(c) of the Act and applying the said provisions, he held that the total remuneration paid to two of its directors, namely, T. S. Santhanam and R. Ramachandran was less than what is admissible in section 40(c) of the Act and deleted the addition in so far as those two directors are concerned. As regards the other two directors, namely R. Ratnam and R. Ramesh, the Commissioner (Appeals) held that the cars have been given to the directors as a perquisite and it is incorrect to say that the cars were used only for the purpose of business and there was no evidence to show the cars have not been used for personal and family purposes of the directors as well. The Commissioner (Appeals) held that even though the assets were owned by the company, the expenditure relating to the maintenance of the cars and the depreciation allowed in respect of the cars have to be taken into account for the purpose of determining the ceiling limit prescribed under section 40(c) of the Act. He also held that in the case of Ratnam, there was a reimbursement of medical expenses and that amount also should be taken into account for the purpose of section 40(c) of the Act. The Commissioner (Appeals) directed the Income-tax Officer to take into account the maintenance expenses, the depreciation allowance in respect of the cars, reimbursement of medical expenses and contribution of the company towards provident fund in determining the total disallowance in respect of the salary and perquisites and disallow the same.

The assessee carried the matter by way of appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal did not accept the contention on behalf of the assessee that the cars were used only for business purposes of the directors-employees and not for the private purposes of the directors- employees. The Tribunal held that the assets of the company would have been used, if not wholly, at least partly for personal purposes of the directors. In this view of the matter, the Tribunal confirmed the findings of the Commissioner (Appeals) that the expenditure incurred on the cars has to be taken into account in the computation of the ceiling limit of Rs. 72,000. The first question referred to us at the instance of the assessee challenges this finding of the Appellate Tribunal.

Mr. S. A. Balasubramanian, learned counsel for the assessee, reiterated before us the same contentions that were urged before the Appellate Tribunal. We are of the view that the finding of the Appellate Tribunal that the motor cars were used if not wholly, at least partly for the personal purposes of the directors does not give rise to any question of law, and it is only on the appreciation of the facts and taking into account the nature of the assets, the Appellate Tribunal has recorded a finding that the cars have been used at least partly for the personal purposes of the directors. The assessee has not placed any material before the Tribunal to show that the cars were not even partly used for personal purposes and in the absence of any material or evidence, the Appellate Tribunal was justified in coming to the correct conclusion in holding that the provisions of sub-clause (ii) of clause (c) of section 40 of the Act were attracted to the facts of the case. The onus is on the assessee to prove that the assets were not used even partly for the personal purposes of the directors and the assessee has not discharged the burden. Therefore, we hold that the Tribunal has come to a correct conclusion in holding that the motor cars were used if not wholly, at least partly for the personal purposes of the directors and maintenance expenditure of the cars should be taken into account for the purpose of disallowance under section 40(c) of the Act.

The second question involves an issue whether the reimbursement of medical expenses to one of its directors is liable to be treated as perquisite for the purpose of disallowance under section 40(c) of the Act. Mr. S. A. Balasubramanian, learned counsel for the assessee, contended that it was a cash payment and hence it cannot be regarded as perquisite within the meaning of section 40(c) of the Act. Learned counsel further contended that the cash payment to the director would not fall in the ambit of section 40(c) of the Act and hence, the payment made in cash is not covered under section 40(c) of the Act. Mr. S.A. Balasubramanian, learned counsel placed reliance on a decision of the Supreme Court in the case of CIT v. Mafatlal Gangabhai and Co. P. Ltd. [1996] 219 ITR 644, wherein the Supreme Court after considering the provisions of section 40A(5) of the Act held that the cash payment cannot be brought within the purview of the words, "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite". He, therefore, submitted that the Tribunal was not correct in holding that the medical expenses reimbursed would constitute the benefit or amenity for the purpose of computation of allowance under section 40(c) of the Act. Mr. S.A. Balasubramanian also contended that if under section 40A(5) of the Act, cash payment cannot be regarded as perquisite the same principle would apply to the provisions of section 40(c) of the Act as the Supreme Court in the case of CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723, has held that in the case of directors who are employees, both the provisions of section 40A(5) and section 40(c) of the Act would apply and the higher ceiling has to be applied. Therefore, according to learned counsel for the assessee, the principles of section 40A(5) of the Act should also be incorporated to the provisions of section 40(c) of the Act and cash payment cannot be regarded as falling within the ambit of section 40(c) of the Act. Learned counsel for the assessee also placed reliance on a decision of this court in the case of CIT v. Madras Rubber Factory Ltd. [1995] 216 ITR 277, wherein this court held that the cash payment is not qualified as a perquisite within the meaning of section 40A(5) of the Act.

Mr. C. V. Rajan, learned counsel for the Revenue, on the other hand, submitted that the decision of the Supreme Court in CIT v. Mafatlal Gangabhai and Co. P. Ltd. [1996] 219 ITR 644, has no application to the facts of the case. He strongly placed reliance on a decision of this court in Rane (Madras) Ltd. v. CIT [1995] 212 ITR 583 and submitted that the cash payment has to be taken into account for the purpose of invoking section 40(c) of the Act.

We have carefully considered the submissions of learned counsel for the respective parties. It is no doubt true that the Supreme Court in the case of Mafatlal Gangabhai and Co. P. Ltd. [1996] 219 ITR 644, while construing the provisions of section 40A(5) of the Act held that the cash payment cannot be brought within the purview of the words, "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite". The above decision of the Supreme Court was rendered in the context of section 40A(5) of the Act, and the question is whether the provision of section 40A(5) of the Act is in pari materia with the provisions of section 40(c) of the Act. The structure, language and ambit of section 40(c) of the Act, in our view are different from the language, structure and ambit of section 40A(5) of the Act. Section 40A(5) of the Act applies to all cases of employers and clause (a) of sub-section (5) of section 40A of the Act takes within its ambit the cash payment and such cash payment would be regarded as salary. In addition, the expression, "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite" found in sub-clause (ii) of clause (a) of sub-section (5) of section 40A of the Act is followed by the qualifying words, "whether convertible into money or not" and the expression, "whether convertible into money or not" is not only conspicuously absent in the provisions of section 40(c) of the Act, but the word "perquisites" is also absent in section 40(c) of the Act. Therefore, the cash payment paid to an employee by an employer can be included under the head, "Salary", under section 40A(5) of the Act, though it may fall within the expression, "benefit, amenity or perquisite". It is significant to notice that separate ceiling limits are prescribed under clause (c) of sub-section (5) of section 40A of the Act with reference to the salary and the perquisites enjoyed by the employees. On the other hand, the expression employed in sub-clause (i) of clause (c) of section 40 of the Act is "any remuneration or benefit or amenity" and those words are not qualified by the expression, "whether convertible into money or not" and the word, "any" preceding the expression "remuneration" indicates that the expression should receive a wider meaning. That apart, there are no separate ceiling limits in section 40(c) of the Act for salary as well as perquisite as found in section 40A(5) of the Act. Therefore, we are of the view that the language structure, and ambit of section 40A(5) of the Act is not the same as found in section 40(c) of the Act.

The decision of this court in the case of CIT v. Madras Rubber Factory Ltd. [1995] 216 ITR 277 is also a case arising under section 40A(5) of the Act and for the same reasons stated earlier, the abovesaid decision of this court has no application to the facts of the case. On the other hand, in the decision in Rane (Madras) Ltd. v. CIT [1995] 212 ITR 583, this court has held that the medical reimbursement expenditure has to be taken into account to determine the ceiling under the provisions of section 40(c) of the Act. The criticism of Mr. S. A. Balasubramanian is that this court has relied upon a decision of a Full Bench of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19, and the decision of the Kerala High Court (Full Bench) was overruled by the Supreme Court in Mafatlal Gangabhai and Co. P. Ltd.'s case [1996] 219 ITR 644, and, therefore, the decision in Rane (Madras) Ltd.'s case [1995] 212 ITR 583 (Mad), requires reconsideration. We are, however, of the view that there is no need to reconsider the earlier decision of this court as this court has independently come to a conclusion that the medical reimbursement expenditure, quantified in terms of money and paid to a person should also be taken into account for the purpose of determining the ceiling limit under section 40(c) of the Act.

The Gujarat High Court in the case of Alembic Glass Industries Ltd. v. CIT [1994] 205 ITR 200 has construed the provisions of section 40(c)(i) of the Act and held that the expression, "remuneration" would include all those quantifiable in money and paid to a person for his service or work. In Indian Oxygen Ltd. v. CIT [1994] 210 ITR 274, the Calcutta High Court has taken a similar view and held that the reimbursement of medical expenses to a director-employee would amount to benefit or amenity to the director and it is liable to be included under section 40(c) of the Act. The Calcutta High Court pointed out that the word, "perquisite" does not appear in section 40(c) of the Act and further the expression, "whether convertible into cash or not" is also missing in the sub-clause. The Calcutta High Court, therefore, held that the word, "remuneration or benefit or amenity" under section 40(c)(i) of the Act has a wider meaning and it includes any remuneration or any benefit or any amenity to the director and when there is a reimbursement of medical expenses to the director, it can only be by virtue of some express terms of the contract and, therefore, the reimbursement of medical expenses to a director is liable to be taken into account for the purpose of determining the ceiling limit under sub-clause (i) of clause (c) of section 40 of the Act.

As regards the other contention of Mr. S. A. Balasubramanian, learned counsel for the assessee, that both the sections 40(c) and 40A(5) of the Act should be read together and the cash allowance under section 40(c) should be excluded, we are of the view that the contention is untenable. The proviso to section 40A(5) contemplates that the allowance under section 40(c) should be taken into account for the purpose of determining higher ceiling limit of Rs. 72,000 which indicates that the provisions of section 40A(5) of the Act are not ipso facto attracted or applied in determining the ceiling limit prescribed under section 40(c) of the Act. If the intention of Parliament had been otherwise, they would not have indicated in the proviso to section 40A(5) of the Act that the ceiling limit in section 40(c) has to be taken into account. In other words, to determine the ceiling limit the provisions of section 40(c) and the provisions of section 40A(5) of the Act have to be worked out independently of each other in the case of a director-employee and the higher ceiling limit will be allowed in the case of the assessment of a company. The Supreme Court in CIT v. Indian Engg. and Commercial Corporation P. Ltd. [1993] 201 ITR 723, therefore, held that both the provisions of sections 40A(5) and 40(c) of the Act would apply in the case of a director-employee and the higher ceiling limit will have to be applied, and consequently the contention of Mr. S. A. Balasubramanian, learned counsel, that since cash payments are excluded from the scope of perquisite under section 40A(5) of the Act, the, same must be excluded for section 40(c) of the Act is untenable and we are not able to accept the contention of learned counsel for the assessee. We are of the view that the Appellate Tribunal has come to a correct conclusion in holding that the medical expenses reimbursed would certainly constitute the benefit or amenity to the director and should be taken into account for computing the ceiling limit of Rs. 72,000.

The third question raised at the instance of the assessee is with reference to the claim of deduction on certain sum of money paid to the ICICI on account of fluctuation in foreign exchange. This question also raises for the assessment year 1976-77. It is fairly conceded by Mr. S. A. Balasubramanian, learned counsel for the assessee, that the issue raised by the third question is covered against the assessee by the decision of this court in CIT v. Elgi Rubber Products Ltd. [1996] 219 ITR 109 wherein this court held that the extra expenditure incurred by way of additional amount paid to the ICICI due to fluctuation in the exchange rate would constitute capital expenditure and it cannot be allowed as revenue expenditure in the computation of business income of the assessee. Following the said decision, we hold that the Tribunal was correct in holding that the loss on fluctuation in foreign exchange is not liable to be deducted in the computation of business income.

The only question referred for the assessment year 1975-76 at the instance of the Revenue challenges the view of the Appellate Tribunal in holding that the depreciation on the cars provided to the assessee's directors for their personal use should not be taken into account for the purpose of disallowance under section 40(c) of the Act. The Appellate Tribunal held that the depreciation allowance is a statutory allowance and hence it cannot be regarded either as excessive or unreasonable and, therefore, the depreciation allowance can never come up for adjudication for the purpose of section 40(c) of the Act. Mr. C. V. Rajan, learned counsel for the Revenue, contended that the depreciation allowance is also liable to be taken into account for the purpose of determining the ceiling limit under section 40(c) of the Act. Mr. S. A. Balasubramanian, on the other hand, submitted that the provisions of clause (c) of section 40 of the Act would not apply to the statutory allowance as there is no question of any excessive or unreasonable allowance in the case of statutory allowance.

We are, however, not able to accept the contention urged by learned counsel for the assessee. Sub-clause (ii) of clause (c) of section 40 of the Act employs the expression, "any expenditure or allowance in respect of any assets of the company" and, in our view, the word, "allowance" in the above provision would include statutory allowance. The object of introduction of section 40(c) of the Act is to curb excessive remuneration paid to a director by the company, and if the company was generous in making expenditure or if any allowance was granted under the Income-tax Act in respect of the assets of the company, which were wholly or partly used for the purpose of the directors, the total expenditure and allowance would call for disallowance under the provisions of section 40(c) of the Act, Secondly, the powers of the Income-tax Officer are two fold in considering the limit up to which the allowance or expenditure can be allowed. If the expenditure or the allowance is excessive or unreasonable, then, it is open to the Income-tax Officer to disallow the same on the ground that it was not necessary for the legitimate business needs of the company. Secondly, if the expenditure or allowance, whether reasonable or not, whether excessive or not, exceeds the limit prescribed by the statute, then he will be within his right to disallow the same in excess of the ceiling limit and in that situation, the question whether the allowance was excessive or unreasonable or whether the allowance was statutory or non-statutory has no role to play and if the allowance exceeds the limit prescribed under the provisions of the Act, the excess amount is liable to be disallowed. Therefore, the contention of learned counsel for the assessee that the expression, "allowance" in section 40(c) of the Act should be restricted to non statutory allowance granted by the company is devoid of force and there is no reason to restrict the same to non-statutory allowance. The question whether the statutory allowance would fall within the scope of section 40(c) of the Act came up for consideration before this court in CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385 and this court held that the statutory allowance should also be taken into account in determining the ceiling limit prescribed under section 40(c) of the Act. This court also held as under :

"The word, "allowance" itself contemplates the statutory allowances made or liable to be made under the earlier provisions of the Act, that is, sections 28 to 39. Where a flat is occupied by a director or a person having a substantial interest in the company, then to that extent there is a personal benefit derived by him. Section 40(c)(i) cannot be invoked unless there is a personal benefit derived by the director or the person having a substantial interest in the company. It would, therefore, follow that the company did not, and the director alone did, use that particular asset. It is only in respect of such cases that the allowance is sought to be curtailed by section 40(c)(ii). Therefore, it is necessary for the authorities functioning under the Act to find out as to whether any director has been in occupation of the particular flat as the one in the present case and whether the occupation is for his personal or for the company's purpose. The finding in the director's personal assessment would not really be conclusive in this behalf though it cannot be said to be irrelevant. When it is found that the director or the other person used that asset, then, the jurisdiction to disallow springs up. The Income-tax Officer is then required to go into the question of the excessive or unreasonable nature of the claim having regard to the legitimate business needs of the company. The view that a statutory allowance cannot be scrutinised under section 40(c) is the product of a misapprehension of' the provision which was brought into the statute only to curb the excessive generosity at the expense of the Revenue, practised by some erring companies, for the benefit of the directors or persons controlling their affairs. Section 40(c) is intended to interfere with allowance or expenditure which would otherwise be allowable under the statute."

The Supreme Court in the case of C. W. S. (India) Ltd. v. CIT [1994] 208 ITR 649 held that the expression, "allowance" in sections 40A(5) and 40(a)(v) would take in depreciation allowance and the ceiling on expenditure provided under these provisions would apply also to the depreciation allowance on all assets belonging to the employer-assessee used for the employee. Though the decision of the Supreme Court was rendered with reference to section 40A(5) of the Act, the principles laid down by the Supreme Court would equally apply to the provisions of section 40(c) of the Act as well. Following the decision of the Supreme Court, we hold that the Tribunal was not correct in holding that the expression, "allowance" in section 40(c) of the Act would not take in statutory allowance. In this view of the matter, we hold that the depreciation allowance should also be taken into account to determine the ceiling limit prescribed under section 40(c) of the Act. The Tribunal was not correct in holding that the amount of depreciation cannot be added to the expenditure on cars because the depreciation allowance is neither expenditure nor allowance within the meaning of section 40(c) of the Act. In this view of the matter, we answer the questions of law referred to us as under :

Questions of law referred at the instance of the assessee :

(i) First question of law : It is answered in the affirmative and against the assessee.

(ii) Second question of law : It is answered in the affirmative and against the assessee.

(iii) Third question of law : It is answered in the affirmative an against the assessee. Question of law referred at the instance of the Revenue for the assessment year 1975-76 : It is answered in the negative and in favour of the Revenue.

Question of law referred to at the instance of the assessee for the assessment year 1976-77 : It is answered in the affirmative and against the assessee.

Each party will be entitled to the costs of the reference. In respect of T. C. Nos. 388 and 389 of 1984, filed at the instance of the assessee, the costs of the assessee are fixed at Rs. 1,500, one set and in respect of T. C. Nos. 390 to 392 of 1984, filed at the instance of the Revenue, the costs are fixed at Rs. 1,500 as one set.

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