IMPORTANT POINT
Payments made in cash by an assessee to its employees do not fall within the ambit of Section 40(a)(v) or Section 40A(5)(a)(ii) of the Income Tax Act.

Headnote:Income Tax Act-Section 40(a) (v) and 40-A(5)(ii)-Amounts not deductible-Payments made in cash by an assessee to his/its employees-Whether fall within the ambit of Section 40(a)(v) or 40-A(5)(a)(ii) of the Act ? -(No)-Commonwealth Trust Ltd. case, (1982) 135 ITR 19 (Ker.) (FB) : Overruled-Distinction between Section 40(a)(v) and Section 40-A(5).
       Held : The language employed in the sub-clause is not capable of taking within its ambit cash payments made to the employees by the assessee. These cash payments will, of course, be treated as salary paid to the employees and will be subject to the limits/ceiling, if any, in that behalf. But they 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" - more so because of the following words "whether convertible into money or not . (Para 9)
       Further held : Now, coming to Section 40-A(5), the position is no different. It would, however, be appropriate to point out the distinction between Section 40(a)(v) and Section 40-A(5). We shall refer to the former provision as "sub-clause" and the latter provision as "sub-section". The sub-section is wider in its scope and application than the sub-clause. Sub-clause (i) of clause (a) of sub-section (5) deals with "and expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee". Sub-clause (i) of clause (c) of sub-section (5) sets out the limits/ceilings on such expenditure while clause (a) of Explanation (2) appended to the sub-section defines the expression "salary" for the purposes of this sub-section. These features were absent in sub-clause (v) of Section 40(a). Now, coming to sub-clause (ii) of clause (a) of sub-section (5) -- which corresponds to Section 40(a)(v) -- it uses only one expression "perquisite" as against Section 40(a)(v) which spoke of "benefit or amenity or perquisite", but this is no real distinction because the definition of "perquisite" in clause (b) of Explanation (2) to the sub-section takes in both benefits and amenities. The said definition also includes inter alia "payment by the assessee of any sum in respect of any obligation which but for such payment, would have been payable by the employee" -- words which are found in the main limb of Section 40(a)(v) but which are missing in the main limb of sub-clause (ii) of clause (a) of sub-section (5). Thus, except for certain structural changes, Section 40A(5)(a)(ii) and Section 40(a)(v) are similar in all material aspects. It, therefore, follows that what we have said with respect to Section 40(a)(v)applies equally to Section 40A(5)(a)(ii). (Para 10)
       There still remain the words "including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee" in Section 40(a)(v) and similar words found in Section 40-A(5)(a)(ii) as well, i.e., in sub-clause (iv) of the definition of "perquisite" in clause (b) of Explanation (2) to sub-section (5). What do they mean ? The said words contemplate a situation where the assessee makes a payment (in cash) in respect of an obligation - obligation of the employee - which would have been payable by the employee if it is not paid by the assessee. The payment by the assessee contemplated by these words is not evidently a payment to the employee but to a third party, no doubt, on account of the employee. Sub-clause (v) of the definition of "perquisite" in clause (b) of Explanation (2) to sub-section (5) also refers to cash payment but that too is not to the employee, though undoubtedly for his benefit. (Para 11)
       Finally held : That cash payments by an assessee to his/its employees do not fall within the ambit of Section 40(a)(v) or Section 40-A(5)(a)(ii), as the case may be. (Para 12)

JUDGMENT

B.P. Jeevan Reddy, J.-Leave granted in the Special Leave Petition.

2. The only question in this batch of appeals is whether the payments made in cash by an assessee to its employees are within the mischief of Section 40(a)(v) and Section 40-A(5). Sub-clause (v) was inserted in clause (a) of Section 40 by the Finance Act, 1968 with effect from April 1, 1969. Section 40(a)(v) reads as follows :

"Section 40. Amounts not deductible.-Notwithstanding anything to the contrary in (sections 30 to 38), the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-

(a) in the case of any assessee-

(v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to any employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of salary payable to the employee, or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year, whichever is less :

Provided that in computing the aforesaid expenditure or allowance, the following shall not be taken into account, namely :-

(a) any payment by way of gratuity;

(b) the value of any travel concession or assistance referred to in clause (5) of Section 10;

(c) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of Section 10;

(d) any payment of tax referred to in sub-clause (vii) or sub-clause (vii-a) of clause (6) of Section 10;

(e) any sum referred to in sub-clause (vii) of clause (1) of Section 17;

(f) any sum referred to in sub-clause (v) of clause (2) of Section 17;

(g) the amount of any compensation referred to in sub-clause (i) or any payment referred to in sub-clause (ii) of clause (3) of Section 17;

(h) any payment referred to in clause (iv) or clause (v) of sub-section (1) of Section 36; and

(i) any expenditure referred to in clause (ix) of sub-section (1) of Section 36 :

Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head "Salaries" is seven thousand five hundred rupees or less.

Explanation 1.-The Provisions of this sub-clause shall apply notwithstanding that any amount not to be allowed under this sub-clause is included in the total income of the employee.

Explanation 2.-In this sub-clause, the word salary shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule."

Sub-clause (v) of Section 40(a) was omitted by the Finance (No. 2) Act, 1971, which simultaneously introduced sub-section (5) in Section 40-A. Sub-section (5) of Section 40-A, omitting unnecessary clauses, reads thus :

"Section 40-A. Expenses or payments not deductible in certain circumstances.-(1) The provisions of this Section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head Profits and gains of business or profession -

(5)(a) Where are 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

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Judicial Analysis

SupremeToday

1996 Supreme(SC) 539

IMPORTANT POINTPayments made in cash by an assessee to its employees do not fall within the ambit of Section 40(a)(v) or Section 40A(5)(a)(ii) of the Income Tax Act.

Cases Referred (2)

Judicial Analysis

IMPORTANT POINT
Payments made in cash by an assessee to its employees do not fall within the ambit of Section 40(a)(v) or Section 40A(5)(a)(ii) of the Income Tax Act.