1998 (5) TMI 10 - HC - Income Tax

Summary

Issues involved:
1. Taxability of reimbursement of medical expenses under the Income-tax Act, 1961.
2. Constitutional validity of proviso (v) to clause (2) of section 17 of the Act.
3. Discrimination in tax treatment based on the hospital where medical treatment is received.
4. Rationality of the provision limiting tax exemption to Rs. 10,000.
5. Impact of the provision on employees facing medical expenses exceeding the exemption limit.
6. Conversion of employer's welfare measure into a penal measure for employees.
7. Practical challenges in obtaining proper medical facilities within the exemption limit.

Analysis:
1. The main issue in these petitions is whether the reimbursement of medical expenses is taxable under the Income-tax Act, 1961. The petitioners, employees of the Reserve Bank of India and the State Bank of India, challenge the constitutional validity of proviso (v) to clause (2) of section 17 of the Act, which limits the exemption on medical expenses to Rs. 10,000 per year. The petitioners argue that medical expenditure should not be treated as a 'perquisite' and there should be no discrimination based on the hospital where treatment is received.

2. The specific cases cited in the writ petitions highlight the challenges faced by employees with substantial medical expenses. For instance, one petitioner incurred significant expenses for the treatment of a kidney condition, while another petitioner's minor son required treatment for haemophilia. The court granted interim relief in some cases to prevent tax deduction at the source on the reimbursement of medical expenses pending final disposal of the petitions.

3. The petitioners argue that the current provision creates arbitrary classifications and penalizes employees for receiving necessary medical treatment. They emphasize that obtaining proper medical care for less than Rs. 10,000 is nearly impossible in cities like Mumbai. The petitioners contend that the provision is irrational and unjust, especially for employees facing medical emergencies or natural calamities.

4. In response to the submissions and recognizing the hardships faced by employees, the court directs the Central Board of Direct Taxes to issue appropriate directions or clarifications under section 119 of the Income-tax Act, 1961, to alleviate the suffering of genuinely affected employees. Additionally, the court instructs the Registrar to send a copy of the order to the Finance Ministry for necessary action and filing of affidavits in reply to the petitions.

5. Furthermore, the court issues notice to the Attorney General of India for further proceedings on June 22, 1998, and expedites the issuance of certified copies of the order. The judgment reflects a comprehensive analysis of the taxability of medical expense reimbursements and the constitutional validity of the relevant provisions under the Income-tax Act, 1961.