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2001(6) Supreme 532
Supreme Court of India
(From Bombay High Court)
S.P. Bharucha, Y.K. Sabharwal and Ashok Bhan, JJ.
Commissioner of Income Tax, Bombay City III, Bombay —Appellant
versus
British Bank of Middle East —Respondent
Civil Appeal No. 95 of 1998
Decided on 30-8-2001
Counsel for the Parties :
For the Appellant : Harish N. Salve, Solicitor General and R.P. Bhatt, Senior Advocate, K.C. Kaushik, Nikhil Sakhardande, Rajiv Nanda, B.V. Balaram Das and Ms. Sushma Suri, Advocates.
For the Respondent : B. Sen, Senior Advocate (A.C.)
Held : It has to be borne in mind that Section 40A(5) and Rule 3 deal with different situations and different set of assessees — one dealing with the employer-assessee and the other the employee-assessee. Rule 3 deals with valuation for the purposes of computing the income of the employees chargeable under the head “Salaries” whereas Section 40A(5) deals with computation of the income under the head “Profits and Gains of business or profession”. The object of enacting Section 40A(5) was to discourage the assessees from incurring expenditure which resulted directly or indirectly in the provision of any benefit, amenity or perquisite to their employees beyond a particular limit and any expenditure incurred beyond the prescribed limit was liable to be disallowed. The said provision constitutes a composite scheme and the purpose of prescribing a ceiling on expenditure in connection with directors and employees is to discourage the employer from paying excessive salaries, remuneration, perquisites etc. to its employees and directors, and if paid, the employer would not be able to claim the entire expenditure as deduction. It will be able to claim deduction of expenditure upto the ceiling limit provided in the said section. This provision was enacted to curb extravagant expenditure. It does not contemplate deduction of notional value of perquisite assessed in the hands of employees. It contemplates the deduction of actual expenditure or on estimate basis where the details of the actual expenditure are not furnished. The employer has incurred the expenditure on the car and should be able to provide its figures. If he cannot, it is fair that the expenditure should be assessed in a realistic basis and not on the basis of Rule 3 which applies qua the employee, who cannot provide the figures of actual expenditure since it is not he who has incurred it. The High Courts of Calcutta and Bombay have not properly considered that Section 40A(5) and Rule 3 operate in different fields and apply to different set of assessees. The provision of the Act was enacted to provide for ceiling on expenditure on employees. The object of the rule is to give relief to the employees. Applying Rule 3 for the purpose of determining the deduction in relation to the assessment of the employer would be doing violence to and ignoring the legislative intent evident in Section 40A(5). The question is not whether there is anything wrong in applying Rule 3 or any anomalous situation arising on account of determining different values of the same perquisite in the hand of employee or employer-assessee. There is no anomaly in applying Section 40A(5) while making assessment of the assessee-employer and it will clearly be wrong to apply Rule 3. That cannot be done in the teeth of the language of the section. In our opinion the law has been correctly laid down by Gujarat High Court and not by the Calcutta and Bombay High Courts. (Paras 11, 12 & 13)
In the conclusion, setting aside the impugned judgment and order of the High Court, we allow the appeal and answer the question in the negative in favour of the Revenue. No costs. (Para 15)
Judgment
Y.K. Sabharwal, J.—The assessee is a non-resident banking company. In respect of assessment years 1975-76 and 1976-77 the assessing officer, for the purpose of working of the disallowance under Section 40A(5) of the Income Tax Act, 1961, estimated the value of the perquisite of free cars provided to the employees at 50% of the expenses of running and maintenance of the cars. On appeal the Commissioner of Income-tax (Appeals) held that the value of perquisite of free cars provided to the employees is fixed by Rule 3(c) of the Income-tax Rules, 1962 and the same value should be taken to be the value of the perquisite of the free cars provided to the employees for the purpose of making the disallowance under Section 40A(5). In further appeal the Income-Tax Appellate Tribunal upheld the order of Commissioner of Income-tax (Appeals), in view of the decision of Calcutta High Court in the case of Commissioner of Income-tax, West Bengal v. Britannia Industries Co. Limited1.
2. At the instance of the Revenue, the question that was referred to the High Court for its opinion was as follows:
“Whether, on the facts and in the circumstances, and on a correct interpretation of Section 40A(5) of the Income Tax Act, 1961 and Rule 3(c) of the Income Tax Rules, 1962, the Appellate Tribunal was justified in law in holding that the value of the free car provided to the employees for the purpose of working out the disallowance case of the employer i.e. the assessee company should be the same as prescribed by Rule 3(c) of the Income Tax Rules, 1962 in the case of the employee.?’’
3. The High Court by impugned judgment and order answered the question in favour of the assessee, relying upon its earlier decision in the case of Geoffrey Manners and Co. Ltd. v. Commissioner of Income-tax2.
4. The Revenue is in appeal before this court on grant of leave.
5. The question for determination is that where the actual expenditure incurred by an employer on providing the facility of a car to the employee for private use is not ascertainable, is the disallowance under Section 40A(5) to be worked out on an estimated basis or by following the provision of Rule 3. According to Revenue, Rule 3 has no applicability since that rule can be invoked for computing the value of perquisite in the context of income of the employee from salary and has no relevance for determining the amount of expenditure to be disallowed to an employer- assessee under Section 40A(5).
6. On the point in issue, there is divergence of opinion between the High Courts. The opinion of Calcutta High Court which is earliest in point of time is in favour of the assessee. That has been followed by some High Courts, including Bombay High Court. According to this opinion, for determining the amount of expenditure under Section 40A(5), Rule 3 can be invoked. The contrary opinion, which is in favour of the Revenue has been expressed by the High Court of Gujarat and that has also been followed by some other High Courts, including Madras High Court. Which of these opinions lays down the correct law is the question before us.
7. Section 40A(5) and Rule 3, to the extent relevant and as those provisions stood at the material time, read as under :
“40A. 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 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
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