1998 (3) TMI 129 - HC - Income Tax

Summary

Issues Involved:
1. Whether cash reimbursement of medical expenses to the managing director is a perquisite and subject to disallowance under section 40A(5) or 40(c) of the Income-tax Act, 1961.
2. Whether the claim for deduction of medical expenses was premature for the assessment year 1980-81.

Issue-Wise Detailed Analysis:

1. Cash Reimbursement of Medical Expenses as a Perquisite:
The Tribunal held that cash reimbursement of medical expenses to the managing director is a perquisite and should be considered for disallowance under section 40A(5) or 40(c). The Tribunal followed the decision in the case of Glaxo Laboratories, which stated that cash reimbursement of medical expenses falls under the provisions of section 40A(5) and section 40(c). The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals), which treated the medical benefits as perquisites under section 40A(5).

2. Prematurity of the Claim for Assessment Year 1980-81:
The Tribunal found that the claim for deduction of medical expenses was premature for the assessment year 1980-81. The medical expenses were incurred for the managing director's treatment abroad, and the payment was approved in a general body meeting. However, the required government approval was obtained only on January 8, 1981. The Income-tax Officer and the Commissioner of Income-tax (Appeals) both held that the claim was premature and would be considered in the year the payment was authorized by the Central Government.

Legal Provisions and Interpretation:
- Section 40(c) and 40A(5): These sections specify amounts that are not deductible in computing income under "Profits and gains of business or profession." Section 40(c) deals with expenditure on remuneration, benefit, or amenity to a director, while section 40A(5) deals with expenditure on salary and perquisites to an employee.
- Section 310 of the Companies Act: This section requires Central Government approval for any increase in the remuneration of a director. The approval for the medical expenses was obtained on January 8, 1981, making the claim premature for the assessment year 1980-81.

Court's Conclusion:
- The court held that the cash reimbursement of medical expenses to the managing director falls under section 40(c)(i) and not under section 40A(5). This is because the expenditure related to the managing director in his capacity as a director, not as an employee.
- The court referenced previous decisions, including Gujarat Steel Tubes Ltd. v. CIT, which held that cash medical reimbursement is a benefit to a director within the meaning of section 40(c)(i).
- The decision of the Supreme Court in CIT v. Mafatlal Gangabhai and Co. P. Ltd., which dealt with cash payments to employees under section 40A(5), was deemed not applicable to this case.

Final Judgment:
- Question 1: The Tribunal was correct in holding that the claim was premature for the assessment year 1980-81.
- Question 2: The cash reimbursement of medical expenses to the managing director is covered by section 40(c)(i) and not section 40A(5).

The reference was disposed of with no order as to costs.