1998 (11) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Validity of medical expenditure as business expenditure u/s 37 of the Income-tax Act, 1961.
2. Applicability of section 40A(5) to the medical expenditure incurred on an employee.

Summary:

Issue 1: Validity of Medical Expenditure as Business Expenditure u/s 37
The court examined whether the medical expenditure of Rs. 2,54,994 incurred on an employee could be allowed as a valid business expenditure u/s 37 of the Income-tax Act, 1961. The assessee-company had borne the full expenditure for the by-pass surgery of Sri Arunachalam, his wife, and a relative, which was not mandated by the terms of his employment contract. The Income-tax Officer and the Commissioner of Income-tax disallowed the expenditure, deeming it gratuitous and not incurred for business purposes. The Tribunal, however, held that the expenditure was for the company's business benefit, considering the valuable advice rendered by Sri Arunachalam. The High Court, referencing the Supreme Court's decision in Gordon Woodroffe Leather Manufacturing Company v. CIT [1962] 44 ITR 551, concluded that the payment did not meet the criteria of commercial expediency or facilitating business operations. The court found no evidence that Sri Arunachalam accepted a lower salary in anticipation of such benefits or that the payment was necessary for business purposes. Thus, the expenditure was deemed gratuitous and not allowable as business expenditure. The first question was answered in favor of the Revenue and against the assessee.

Issue 2: Applicability of Section 40A(5)
The second issue was whether the medical expenditure could be considered a perquisite and disallowed u/s 40A(5) of the Income-tax Act, 1961. The Tribunal had held that the expenditure did not attract section 40A(5). The High Court referred to the Supreme Court's decision in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 644, which clarified that cash payments are outside the purview of section 40A(5). Since the expenditure was incurred through cash payments, it did not attract section 40A(5). The second question was answered in favor of the assessee and against the Revenue.