2003 (4) TMI 36 - HC - Income Tax

Whether the Tribunal was right in holding that the club membership fees paid to the employees of Citibank did not constitute perquisite within the meaning of section 40A(5)? we answer this question in the affirmative, i.e., in favour of the assessee - Whether the Tribunal was right in holding that for the purpose of disallowance under section 40A(5), the word salary included encashment of unavailed leave? - we answer this question in favour of the Department - Whether the Tribunal was right in holding that two separate limits have to be applied for computing disallowance u/s 40A(5) qua an employee who retires and qua an employee who ceases to be in the employment during the previous year - we answer this question in the negative, i.e., in favour of the Department - Whether the Tribunal was right in holding that interest for the broken period should not be considered as part of the purchase price, but should be allowed as revenue expenditure in the year of purchase of securities? This question is answered in the affirmative, i.e., in favour of the assessee

Summary

Issues:
1. Interpretation of club membership fees as perquisite under section 40A(5) of the Income-tax Act.
2. Inclusion of retirement benefits like encashment of unavailed leave in disallowance under section 40A(5) and distinction between employees and former employees.
3. Treatment of interest for the broken period in the purchase of securities as revenue expenditure.

Issue 1 - Club Membership Fees:
The court considered whether club membership fees paid to employees constituted a perquisite under section 40A(5) of the Income-tax Act. Referring to a previous judgment, the court ruled in favor of the assessee, stating that the club membership fees did not fall under the definition of perquisite.

Issue 2 - Retirement Benefits and Disallowance under Section 40A(5):
The court addressed the ambiguity in the question related to the inclusion of retirement benefits like encashment of unavailed leave in disallowance under section 40A(5). The assessee argued that such payments were non-periodic and not covered by the section. However, the court disagreed, emphasizing that section 40A(5) pertains to the ceiling on expenditure resulting in the payment of salary or provision of perquisite. The court held that retirement benefits like pension and encashment of earned leave were included in the definition of salary under section 17(1) of the Act. Additionally, the court rejected the argument for separate limits for employees retiring or ceasing employment during the previous year, citing a previous judgment in favor of the Department.

Issue 3 - Treatment of Interest for Broken Period:
Regarding the treatment of interest for the broken period in the purchase of securities, the court referred to a previous judgment and ruled in favor of the assessee. The court held that interest for the broken period should not be considered part of the purchase price but allowed as revenue expenditure in the year of purchasing securities.

In conclusion, the court disposed of the reference, answering the questions in favor of the assessee on the club membership fees and interest for the broken period issues, while ruling in favor of the Department on the inclusion of retirement benefits in disallowance under section 40A(5.