The main legal point established in the judgment is that for expenses to fall under S.40(a)(v) of the I.T. Act, 1961, the employee must have derived a benefit or amenity from the expenditure.

1. This is a reference at the instance of the Commissioner of Income-tax, Ernakulam. The following question of law has been referred for our determination, namely:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenses on the maintenance of the buildings owned by the company and given rent-free to the employees cannot be considered for the purpose of disallowance under S.40 (a) (v) of the I.T. Act, 1961?"

The assessee is a limited Company running a tea estate. To six of its employees the assessee provided rent-free accommodation. The buildings thus provided are owned by the assessee. The assessee also incurred certain expenses on the maintenance and upkeep of those buildings. These have been exhibited in the form of a chart in the statement of the case, as follows:

Educa- Value of Upkeep

tion Rent of

Allow free build Total

ings

ance accom-

iodation con

sidered

for per

sonal in

come-tax

purposes.

Rs. Rs. Rs. Rs.

Mr. G. B. Shuttle worth 14480 1960 5028 21468

Mr. H. D. Dhunjoobhoy 1960 4957 6917

Mr. George Joseph 1960 4821 6781

Mr. P.O. Machiah 1960 5159 7119

Mr. R P. Boson 1470 3921 5391

Mr. K. Jayakumar 1092 4747 5839"

The Income-tax Officer was of the view that to the extent to which the total expenses shown in the last column was in excess of 1/5th of the salary of the respective employees, a disallowance had to be made under S.40(a)(v). This worked out to Rs. 14,555/-. The assessee appealed to the Appellate Assistant Commissioner. That Officer, following the order of the Tribunal in another case, held that the expenses on the repair and maintenance of the bungalows cannot be included as a perquisite. He allowed the assessee's appeal. There was a further appeal by the Department to the Appellate Tribunal. The only point in controversy before the tribunal which had to be dealt with was of the expenses on the upkeep of the buildings. The Tribunal considered the provisions also. It was of the opinion that the expression 'employee' is qualified by the word 'such'. It would therefore refer to the type of employees which appear in the earlier part of the Section. That earlier part of the Section has made it clear that the employee must have had some benefit or amenity arising out of the expenditure. Unless there was such benefit arising directly out of the expenditure, the Tribunal took the view that S.40(a)(v) cannot be applied. The maintenance expense in respect of the buildings, does not give the employee any benefit or amenity. Whether the building is occupied or not, the Company as the owner has to incur expenses on maintenance and repairs. There was no special amenity or benefit enjoyed by the employee merely because the building was maintained by the Company. There was no evidence before the Tribunal to show that any special repair was done to suit the convenience of the employee. The Tribunal therefore found that there was no benefit or amenity derived by the employee by the expenses incurred on the maintenance of the buildings. So, such expenses had to be excluded, which meant that the addition made under S.40(a)(v) had to be deleted. The question of law was therefore referred.

2. S.40(a)(v) of the Act reads thus:

"Notwithstanding anything to the contrary in S.30 to 39, 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 an 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 an 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 sala