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Petitioner: MIHIR TEXTILES LTD. VS Respondent: COMMISSIONER OF INCOME-TAX , . (
Court Name: Gujarat High Court Judge(s): Rajesh Balia, M. S. Shah Title: MIHIR TEXTILES LTD. vs COMMISSIONER OF INCOME-TAX , . ( Case No.: Income-tax Reference No,130. of 1983 Date of Judgment:1995-10-05 Reported As: 1999 PTD 579 Result: Order accordingly
JUDGMENT
JUDGMENT ' RAJESH BALIA, J.--- The aforesaid reference has been made by the Income-tax Appellate Tribunal, Ahmedabad Bench "C", Ahmedabad. From the statement of case submitted by the Tribunal, it appears that while three questions have been referred at the instance of the Commissioner of Income-tax, as many as seven questions have been referred to this Court for its decision at the instance of the assessee. The issues raised in this reference relate to the assessment of the assessee for the assessm ent year 1975-76. ' The questions referred to the opinion of this Court at the instance of the Revenue which are reproduced here in below:-- "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the expenditure on items like gas and electricity expenses, motor car, personal accident insurance premium, telephone expenses were not in the nature of perquisites for the purpose of disallowance under section 40-A(5) of the Income-tax Act, 1961? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the expenditure on items like rent allowance, conveyance allowance medical insurance premium and personal accident premium were not in the nature of perquisites for the purpose of allowance under section 40-A(5) of the Income-tax Act, 1961? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the gratuity paid to an employee could not be regarded as remuneration under section 40-A(5) of the Income-tax Act, 1961." ' From the questions, it appears that questions Nos.1 and 2 are overlapping and question No,3 appears to be a substitute for another question intended to be referred to this Court. This we
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gather from the statement of the case. While dealing with the questions which are proposed to be referred at the instance of the Commissioner, the statement of case referring to disallowance made under section 40(c) in respect of remuneration paid to managing director, and the disallowance, made in respect of excess amount of salary/perquisite/benefits made available to one of the employees. R.C. Parikh and inclusion by the Income-tax Officer in arriving at the figure of remuneration paid to the employees by the employer in excess of the amount permissible under section 40-A(5) of the Income-tax Act. No reference in the statement of case has been made to the question relating to payment of gratuity to R.C. Parikh at the instance of the Revenue. We also notice from the previous order that, in fact, the Tribunal has not found that the gratuity paid to the employee is not remuneration. On the other hand, the Tribunal has positively found that it amounts to remuneration to be included in arriving at the maximum limit of allowable remuneration to the assessee as reduction under section 40-A(5). ' We also find that while questions Nos.1 and 2 referred to disallowance negative by the Tribunal under section 40-A(5), no question has been framed with respect to disallowance under section 40(c) for compensation payable to the managing director. No question has been asked by the Revenue in the reference application about the computation of remuneration paid to the managing director. ' In the light of the statement of the case, we consider question No,1 as referable to the computation of remuneration payable to Shri R.C. Parikh apart from gratuity and question No,2 as applicable to house rent allowance, conveyance allowance, medical insurance premium, personal accident claims premium in respect of other employees. The Income-tax Officer while computing the remuneration payable to R.C. Parikh has found that the salary payable to R.C. Parikh and the value of perquisites or benefits provided directly or indirectly to R.C. Parikh exceed by a sum of Rs,19,650, the permissible limit of allowable deduction under section 40-A(5) of the Income-tax Act. The value of perquisites under consideration were cooking gas, electricity charges, motor car, personal accident insurance premium, telephone expenses and medical insurance premium. In respect of telephone expenses, the Income-tax Officer included one-third of telephone expenses on account of estimated personal use of the telephone. On appeal, motor car, perquisites, gas and electricity charges and expenses on servants were held to be perquisites made available to the assessee but the amount includible on that account which resulted in direct or indirect benefit to the employee otherwise than for purpose of business was slashed down to a lower figure and finally disallowed by the Income-tax Officer. There is no finding that the telephone was provided by the assessee to its employee for personal use. The fact that only one-third of the expenses have been added by the Income-tax Officer on estimate basis goes to show that the telephone was provided for use for the business by the assessee to its employee, R.C. Parikh. Under these circumstances, the finding in this respect that only Rs,790 is disallowable expenditure out of amount of remuneration to R.C. Parikh has been affirmed by the Tribunal. In the aforesaid circumstances, it can well be said that so far as gas and electricity expenses, motor car expenses are concerned, the Tribunal has not held them to be not in the nature of perquisites. While holding them to be in the nature of perquisites it has determined at a lesser amount than that taken by the Income-tax Officer as properly required to be considered for the purposes of determining the value of direct or indirect benefit that arose to the employee by providing these facilities by the assessee. Obviously, under section 40-A(5), the benefit which is to be considered resulting in the provision of direct or indirect benefit of the employee is the benefit, expenses, relating to which, but for such provision or facility, amenity or perquisite, would have been the employee's obligation to discharge. Any expenses incurred by the company for its employees for the purpose of its own business cannot be said to be a perquisite or amenity resulting in direct or indirect benefit to the employee so as to fall within the purview of
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perquisites for the purpose of limit prescribed under section 40-A(5) for computing the allowable deduction on account of such expenses. ' Likewise from the Tribunal's order it is not apparent whether the policies were taken by the assessee for its business purposes or for the reimbursement of personal benefit of the employee. In the absence of any finding that the personal accident insurance or motor accident insurance taken by the company was for the personal benefit of the employee and not to safeguard the company's own interest against possible disablement of its employee, it is not possible to come to conclusive finding whether the personal accident insurance premium or medical insurance premium amounts to perquisite. It depends upon the terms and conditions on which the insurance policy has been taken by the employer. Moreover, it appears from the statement of the case and the order of the Tribunal, that the disallowance under section 40-A(5) in respect of remuneration payable to R.C. Parikh has been restricted on account of computation of expenses or valuation of perquisites attributable to personal benefit to the employee and, in these circumstances, in our opinion, the question referred to us is not a question of law, but a pure question of fact in the realm of arithmetic computation of valuation of perquisites payable to the employee. ' We, therefore, answer question No,1 in the affirmative that is to say the Tribunal was right in affirming the finding of the Commissioner of Income-tax (Appeals) in computing the disallowance in respect of remuneration paid to R.C. Parikh at Rs,790. ' Coming to the second question, we find that while the Income-tax Officer has computed the disallowance under section 40-A(5) at Rs,18,872 on account of house rent allowance, conveyance allowance, medical insurance and personal accident insurance premium, the Income-tax Officer has calculated all these sums in respect of R.M. Patel, S.K. Shah, C.D. Desai, S.K. Deay and V.T. Desai cumulatively and not with reference to each employee separately. The ceiling fixed under section 40-A(5) for the purpose of disallowance of expenditure incurred by the assessee in paying remuneration to the employees is in respect of remuneration paid to each employee separately and there cannot be any cumulative disallowance by clubbing the allowance paid to a number of employees. In different cases, a different amount may be treated as payment made to the employee beyond the ceiling fixed under section 40-A(5). The result may be that even including some items within the definition of perquisite resulting in direct or indirect benefit to the employee in one case it may not exceed the permissible ceiling and in another case it may exceed it. Therefore, the very foundation of calculation made by the Income-tax Officer was contrary to the provision. The Commissioner of Income-tax (Appeals) had found in respect of these items as a fact that there is no excess in view of what has been stated in the statement submitted by the assessee that is to say on the computation it was found' as a fact by the Commissioner of Income- tax (Appeals) that the amount paid to the employees is not in excess of the permissible ceiling. This finding has not been reversed by the Tribunal. In that view of the matter, the question whether any of the items mentioned in question No,2 are perquisites or not do not call for any decision inasmuch as the matter is only of academic nature. We, therefore, decline to answer that question. ' Question No,3 which has been referred to us at the instance of the Revenue relates to the question whether gratuity paid to an employee could be regarded as remuneration under section 40-A(5) of the Act or not. ' From the order of the Tribunal, we find that in fact the Tribunal has found that the payment of gratuity would be clearly hit by section 40-A(5) of the Act. The foundation on which question No,3 has been referred to us having been decided in favour of the Revenue, it could not have been a cause of grievance by the Revenue. However, as the question of gratuity being considered as perquisite under section 40-A(5) is even otherwise covered under question No,5 referred to us at the instance of the assessee, we intend to deal with the aforesaid question along with questions Nos.5, 6 and 7 referred at the instance of the assessee relating to include ability of amount paid to
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the employee as gratuity in computing the ceiling up to which remuneration paid to its employee is allowable expenditure under section 40-A(5). ' For the present purpose, questions Nos.5, 6 and 7 referred at the instance of the assessee are as under:-- (5) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the provisions of section 40-A(S) are applicable to the payment of gratuity and that provisions of section 40-A(7) are not overriding in this respect? (6) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that payment of gratuity would not be covered in clause (iii) of the second proviso to section 40-A(5)(a)? (7)- Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the gratuity paid in excess of the ceiling limit prescribed in section 10(10) of the Act would be includible in determining the disallowance under section 40-A(5) and in not excluding entire gratuity from the provisions under section 40-A(5)? ' Shri R.C. Parikh, one of the employees, was paid Rs,1,25,000 as gratuity on his retirement. The assessee had claimed that the amount of gratuity paid to an employee from an approved fund was not includible as remuneration in computing the disallowance under section 40-A(5) of the Act. ' He claimed that the payment of such gratuity was covered by the provisions of section 36(1)(v) and section 40-A(7) of the Act, therefore, the said amount was not includible. The contention of the Revenue was that the expression "perquisite" has been defined in Explanation 2(b) to section 40- A(5) which includes payment of any sum by the assessee through any fund except through a recognized provident fund or approved superannuation fund. ' Therefore, the payment of gratuity is covered by the above definition and has rightly been included in computing the disallowance by the Income-tax Officer. ' It would be pertinent to refer to the relevant provisions of the Act as it was existing during the assessm ent year in question. Section 40-A(5) to the extent it is relevant reads as under:-- "40A.(5)(a) Where the assessee-- (i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, ' Then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c)' shall not be allowed as a deduction: ' Provided that where the assessee is a company, so much of the aggregate of-- (a) the expenditure and allowance referred to in sub-clauses (i) and (ii) of this clause; and (b) the expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c) of section 40, ' in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of one hundred and two thousand rupees, shall in no case be allowed as a deduction: ' Provided further that in computing the expenditure referred to in sub-clause (i) or the expenditure or allowance referred to the sub-clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely-- (i) the value of any travel concession or assistance referred to in clause (5) of section 10; (ii) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of section 10;
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(iii) any payment referred to in clause (iv) or clause (v) of subsection (1) of section 36; (iv) any expenditure referred to in clause (ix) of subsection (1) of section 36." ' From the perusal of the aforesaid provision it is obvious that it deals with two types of expenditure, namely, expenditure which is described as salary and expenditure which may be described as perquisites. Salary and perquisites are two independent and distinct expressions used in the Income-tax Act. This is also apparent from the Explanation which gives a meaning to salary and perquisites separately. Salary for the purpose of the above provision has been assigned the same meaning as in clause (1) read with clause (3) of section 17 subject to certain modifications with which we are not concerned and perquisite has been further defined to mean in clause (b) of Explanation 2. ' Section 17 which comes under Chapter IV deals with computation of total income under the head "salaries". Section 17 defines "salary", "perquisite" and "profits in lieu of salary" for the purpose of the Act. Section 17(1) reads as under:-- "17. (1) salary includes:-- (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (v-a) any payment received by an employee in respect of any period of leave not availed of by him; (vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub- Rule (2) of the Rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it' is chargeable to tax under sub-Rule (4) thereof;" ' Under section 17(1)(iii) gratuity has been included in the definition of salary. This is to say that gratuity is a part of salary itself and it is not a perquisite, which is in the nature of benefits other than or any addition to salary, which are being provided to an employee by the employer. Therefore, for the purpose of finding the meaning of gratuity one does not have to travel beyond section 17(1) and to find out a different meaning, whether it amounts to a perquisite or not. It is to be noticed that under the main provision of subsection (5)(a) of section 40-A in the further proviso any payment referred to in clause (iv) or clause (v) of subsection (1) of section 36 have been excluded from inclusion in the computation of expenditure referred to in sub-clause (i) or in sub- clause (ii) of section 40-A(5)(a). Clause (v) of subsection (1) of section 36 reads as under:-- "36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust." ' The above clause shall be read in respect of matters spelt out therein in computing the income referred to in section 28. Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. ' On a plain reading of these provisions it is apparent that any sum paid by an employer as contribution to an approved gratuity fund is not to be included in computing the expenditure referred to under subsection (5)(a) of section 40-A for the purpose of arriving at the ceiling. The fact that payment has been made out of an approved gratuity fund clearly goes to show that
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payment has not been made directly by the employer to his employee de hors the provisions of section 36(1)(v). It may be noticed that a gratuity may be paid directly by the employer to an employee without an approved gratuity fund but in that event the deduction on such. Expenditure may not be considered under section 36(1)(v). But we are not concerned with that situation. Contributions made to an approved gratuity fund are not to be included irrespective of the fact whether such contribution comes under sub-clause (i) or sub-clause (ii) of subsection (5)(a). The expenditure having been incurred at the time when the contribution was made and not included in the computation of expenditure for the purpose of subsection (5)(a), it cannot be so included when payment out of that fund has been made later on. The expenditure when made by the assessee has been dealt with in accordance with section 36(1)(v) read with section 40-A(7), if the approved gratuity fund or the condition of allow ability of contributions to an approved gratuity fund as laid down under section 40-A(7) are not fulfilled, the expenditure made by the assessee would not be entitled for deduction. If the conditions of entitlement of deduction are fulfilled and the assessee becomes entitled to claim deduction, in that event, the deduction is allowable under section 36(1)(v) read with subsection (7) of section 40-A. As undisputedly the claim of the assessee was about the payments made out of an approved gratuity fund to an employee, it is not to be included for computation of ceiling of expenditure. That contention of the assessee is required to be accepted on the plain reading of the provision itself. ' The Tribunal has apparently erred firstly in considering the payment of gratuity to an employee as perquisite under section 17(2) of the Act read with Explanation 2(b) of section 40-A(5) in consideration, by overlooking section 17(1)(iii) itself which unequivocally states that gratuity is deemed to be a salary distinct from perquisite under section 17(2). ' It has further fallen into error by applying sub-clause (v) of clause (b) of Explanation' 2 to section 40-A(5) to the payments made out of approved gratuity fund. "Explanation 2.-- In this subsection-- (a) ' salary' ... (b) 'perquisite' means ... (v) payment by the assessee of any sum, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity." ' A bare perusal of the provision makes it clear that it does not refer to all payments made out of all or any fund. It only refers to payment made by the assessee to effect an assurance on the life of the employee or to effect a contract for an annuity, and not to any other payments. Even such payments are not included in "perquisite" if the same are made out of recognised provident fund or approved superannuation fund, for the purpose of section 40-A(5). This is so because such payments out of recognised provident fund or approved superannuation fund are not to be considered perquisite under section 17(2)(v) either. Payment of gratuity cannot be said to be payment to effect assurance on the life of the employee or for effecting contract for an annuity. ' Moreover, even if it amounts to perquisite or salary, Explanation 2 does not lay down the principle for including or excluding any amount in the computation of expenditure for the purposes of arriving at a ceiling under subsection (5)(a). That is to be governed by the substantive provision referred to above, which clearly excludes contributions made to a recognised provident fund or an approved superannuation fund or contributions towards an approved gratuity fund under clause (v) of section 36(1). ' Therefore, notwithstanding the fact that gratuity is a part of salary, expenditure made by the assessee for making a contribution towards an approved gratuity fund is not to be included in computing the amount of remuneration for the purpose of ceiling of deductible expenditure under section 40-A(5). The assessee does not make an expenditure twice over, that is to say once by
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making the contribution towards approved gratuity fund, and then when the approved gratuity fund makes payment to the employee. If the argument of the Revenue was to be accepted, it would amount to holding that the assessee makes the very same expenditure twice over first expenditure would be incurred when contribution is to be made to gratuity fund, that obviously cannot be included in the computation for the purpose of section 40-A(5)(a). Then again, according to the Revenue, when the gratuity fund makes payment to the employee and it reaches the hands of employee, it becomes part of salary paid by the assessee. That result obviously would, in our opinion, does not flow from the reading of the provision and contrary to all canons of construction. ' Accordingly, we answer question No,6 referred to above, that payment of gratuity to an employee made through an approved gratuity fund to which contribution may have been made by the assessee-employer and such contribution being expenditure of the employer covered under sub- clause (iii) of the proviso to section 40-A(5)(a) cannot be included in the computation of expenditure for its purpose. ' In view of our answer to question No,6, questions Nos.3, 5 and 7 are of academic interest and we decline to answer the same. ' Question No,4 referred at the instance of the assessee reads as under:-- "4. Whether, on the facts and 'circumstances of the case, the Appellate Tribunal was right in law in holding that the fees paid to the Registrar of Companies for getting permission to increase the authorised capital is expenditure of capital nature?" ' The assessee had paid a sum of Rs, 15,000 to the Registrar of Companies for getting permission to increase its authorised capital. The assessing authority as well as the Commissioner of Income-tax (Appeals) and the Tribunal has rejected the claim of deduction of the said expenditure as revenue expenditure for…
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