1996 (3) TMI 67 - HC - Income Tax

Business Expenditure, Capital Or Revenue Expenditure, High Court, Medical Expenses, Perquisite To Employees, Supreme Court

Summary

Issues Involved:
1. Application of Rule 3(c)(ii) of the Income-tax Rules for valuing perquisites of a car provided to employees.
2. Deductibility of expenses incurred on auditors and legal advisers in connection with the amalgamation of the company.
3. Treatment of reimbursement of medical expenses to employees under section 40A(5) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Application of Rule 3(c)(ii) of the Income-tax Rules:
The question referred by the Revenue was whether the Tribunal was right in applying/relying on Rule 3(c)(ii) of the Income-tax Rules and directing the Income-tax Officer to value the perquisites of the car provided by the assessee to its employees as per this rule. The Tribunal had followed the same course as in the earlier assessment year, where it applied Rule 3(c)(ii) and directed the Income-tax Officer accordingly. The High Court noted that the previous decision of the Tribunal had already been considered by this court in CIT v. Malayalam Plantations (India) Ltd. [1990] 186 ITR 322. In that case, it was observed that the scope of section 40A(5) and Rule 3(c)(ii) are distinct and different. Section 40A(5) aims to check extravagant expenditure by the employer, while Rule 3(c)(ii) deals with the taxability of perquisites in the hands of employees. The court found that the Tribunal had not considered the matter in the proper perspective and directed it to restore the appeal and decide the matter afresh. Consequently, the High Court declined to answer the question and directed the Tribunal to reconsider the matter in light of the observations made.

2. Deductibility of Expenses Incurred on Auditors and Legal Advisers:
The assessee claimed a deduction for expenses incurred towards fees paid to auditors and legal advisers in connection with the amalgamation of the company. The assessing authority disallowed 90% of these expenses, treating them as capital expenses under section 35D of the Income-tax Act, allowing only 10% as a deduction. The Tribunal upheld this view without a detailed consideration of the principles governing the nature of such expenses. The High Court observed that the Tribunal failed to consider the relevant principles laid down by the Supreme Court to determine whether the expenses were capital or revenue in nature. The Tribunal also did not independently consider the application of section 35D. The High Court referred to its own judgment in CIT v. Polyformalin (P.) Ltd. [1996] 221 ITR 276, which discussed the principles laid down by the Supreme Court for determining the nature of expenses. The High Court declined to answer the question and directed the Tribunal to reconsider the issue afresh, taking into account the scheme of amalgamation approved by the court and the relevant legal principles.

3. Treatment of Reimbursement of Medical Expenses:
The Tribunal had held that the reimbursement of medical expenses to employees was subject to the ceiling under section 40A(5) of the Income-tax Act, relying on the decision of the Special Bench in Glaxo Laboratories India Ltd. v. ITO [1986] 18 ITD 226 (Bom). The High Court referred to its own decision in Aspinwall and Co. Ltd. v. CIT (No. 1) [1996] 220 ITR 611, where it was held that medical expenses and their reimbursement do not have a static, uniform, and continuous character and thus cannot be considered as perquisites. Following this precedent, the High Court held that the Tribunal was not justified in including the reimbursement of medical expenses under the ceiling of section 40A(5) and ruled in favor of the assessee.

Conclusion:
The High Court directed the Income-tax Appellate Tribunal to reconsider the issues related to the application of Rule 3(c)(ii) and the deductibility of amalgamation expenses afresh, in accordance with the observations made. The court ruled that the reimbursement of medical expenses should not be treated as a perquisite subject to the ceiling under section 40A(5), thus favoring the assessee on this point.