The main legal point established in the judgment is that for a payment to be considered a perquisite under s. 40A(5) of the Income-tax Act, 1961, it must finally ensure to the benefit of the employees and the employees must have a right therein.

Jagannatha Shetty, J.

1. This is a reference under s. 256(1) of the I.T. Act, 1961. The question referred by the Income-tax Appellate Tribunal, Bangalore Bench, reads :

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the premium paid on personal accident insurance policies of its employees should not be treated as a perquisite for the purpose of section 40A(5) of the Income-tax Act, 1961 ?"

2. The facts behind the legal formulation are as follows :

The assessee is an industrial company. The assessment year is 1974-75 the relevant previous year ending on March 31, 1974. The ITO made a disallowance of Rs. 19,182 under s. 40A(5) of the I.T. Act. 1961 (shortly "the Act"). That sum represents the premia paid on the accident insurance policy taken by the assessee-company in relation to personal accident or death by accident of some of the employees. The ITO was of the opinion that the benefit under the insurance policy accrued to the employees and not to the employer. So he considered it as a perquisite under Explanation 2 to s. 40A(5) of the Act.

3. Upon appeal, the AAC held that the contract of insurance for personal accident was between the assessee-company and the insurance company and the amounts under the policy were payable to the assessee-company and, therefore, the premia paid under the policy should not be taken as perquisites for purposes of s. 40A(5), Explanation 2.

4. Aggrieved by the order of the AAC the Department preferred an appeal before the Tribunal. The Tribunal took the same line of reasoning and affirmed the view taken by the AAC following the judgment of the Delhi High Court in CIT v. Lala Shri Dhar . The Tribunal also relied upon its own earlier decision in the same assessee's case relating to the previous assessment year.

The answer to the question turns on the scope of Explanation 2(b)(iv) and (v) to s. 40A(5) of the Act. For immediate reference, it is set out hereunder :

"(b) 'perquisite' means -......

(iv) payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee; and

(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."

5. Clause (iv) envisages payment by the assessee of any sum under an obligation which, but for such payment, would have been payable by the employee. It must also a payment by the assessee of any sum to effect an assurance on the life of the employee or to effect a contract for an annuity. Brief reference to clauses (i), (ii) and (iii) to Explanation 2(b) of s. 40A(5) of the Act may also be made in this context. Clause (i) refers to rent-free accommodation provided to the employee by the assessee, clause (ii) refers to concession in the matter of rent for any accommodation provided to the employee and clause (iii) refers to benefit or amenity granted or provided free of cost or at concessional rate to the employee. A casual look at the definition of "perquisite" would clearly indicate that any payment made by the assessee on behalf of employees either under an obligation or voluntarily must finally ensure to the benefit of the employees and the employees must have a right therein.

6. The Supreme Court in CIT v. Russel, while considering the provisions of s. 7(1) of the Indian I.T. Act, 1922, which is similar to s. 17(2) of the 1961 Act, observed at page 97 :

"It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein."

The law being thus made clear, we may now proceed to consider whether the