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Issues Involved:
1. Disallowance of cash payments as perquisites under Section 40A(5) of the Income-tax Act, 1961. 2. Entitlement to weighted deduction for royalty payments to foreign collaborators under Section 35B of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance of Cash Payments as Perquisites under Section 40A(5): The primary issue was whether cash payments made by the employer to employees should be treated as perquisites under Section 40A(5) of the Income-tax Act, 1961. The assessee, a public limited company, claimed deductions for cash allowances given to employees for residential rent, car usage, and medical expenses. Both the Income-tax Officer and the Appellate Assistant Commissioner disallowed these claims, treating them as perquisites under Section 40A(5). However, the Tribunal held that these cash allowances should not be considered perquisites. The court referred to multiple judicial pronouncements, including the Kerala High Court's decision in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 [FB], which discussed the interpretation of "salary" and "perquisites" under Section 40(a)(v), the predecessor to Section 40A(5). The Kerala High Court noted that "salary" includes dearness allowance but excludes other allowances and perquisites. The court emphasized that the term "benefit, amenity or perquisite" should not be narrowly interpreted to exclude cash payments, as this would defeat the purpose of Section 40A(5), which aims to limit the employer's deductible expenses. The court also considered the Delhi High Court's judgment in CIT v. Shriram Refrigeration Industries Ltd. [1992] 197 ITR 431, which supported the view that cash payments do not constitute perquisites under Section 40A(5). The consensus among various High Courts, including Calcutta, Bombay, Andhra Pradesh, and Karnataka, was that cash allowances paid to employees do not fall under the definition of perquisites. The court concluded that cash payments made by the employer to employees by way of reimbursement do not fall under sub-clauses (i) to (v) of Explanation 2(b) to Section 40A(5). Therefore, such payments cannot be regarded as perquisites, and the Tribunal was correct in deleting the disallowance. 2. Entitlement to Weighted Deduction for Royalty Payments under Section 35B: The second issue was whether the royalty paid to foreign collaborators for export sales was entitled to a weighted deduction under Section 35B of the Income-tax Act, 1961. The assessee claimed this deduction for the assessment year 1973-74, but the Income-tax Officer and the Appellate Assistant Commissioner disallowed it. The court examined whether the royalty payment fell under any of the specified items in Section 35B(1)(b), which include expenses on advertisement, publicity, market research, distribution, and other activities for promoting sales outside India. The court found that the royalty payment did not meet these criteria, as it was not incurred wholly and exclusively for any of the specified purposes. The court concluded that the Tribunal erred in holding that the royalty payment was entitled to a weighted deduction under Section 35B. The expenses did not qualify under any of the specified items in Section 35B(1)(b), and therefore, the deduction was not warranted. Conclusion: 1. The Tribunal was right in deleting the disallowance of Rs. 60,718 for the assessment year 1972-73 and Rs. 1,70,800 for the assessment year 1973-74, as the cash payments should not be treated as perquisites under Section 40A(5). 2. The Tribunal erred in holding that the royalty paid to foreign collaborators was entitled to a weighted deduction under Section 35B, as the expenditure did not meet the specified criteria. The court answered the two questions accordingly, with no costs awarded.
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