1989 (7) TMI 3 - HC - Income Tax

Summary

Issues:
Interpretation of section 40A(5) of the Income-tax Act, 1961 regarding the inclusion of perquisite for employees based on the sale of company's motor cars at a concessional rate.

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1977-78, involving the question of whether the Tribunal was justified in deleting Rs. 43,700 added by the Income-tax Officer under section 40A(5) of the Act on the sale of the assessee-company's motor cars to its employees at a concessional rate. The Income-tax Officer had added the difference between the fair market value and the purchase price of the cars as a perquisite under section 40A(5). However, the Commissioner of Income-tax (Appeals) and the Tribunal held that no expenditure was incurred by the company directly or indirectly in providing any perquisite to the employees, thus disallowing the addition under section 40A(5).

The court analyzed the provisions of section 40A(5) which apply when the assessee incurs expenditure resulting in the provision of a perquisite to an employee. It was emphasized that for section 40A(5) to apply, the assessee must incur an expenditure during the relevant year that directly or indirectly provides a perquisite. In this case, as the motor cars were sold at their written down value without any additional expenditure incurred during the relevant year, the essential condition for the application of section 40A(5) was not satisfied.

The judgment cited precedents from other High Courts to support the interpretation of section 40A(5). It referenced a case where the court held that charging a discounted price did not constitute an expenditure, similar to the present case where selling old cars at written down value did not involve any expenditure resulting in a perquisite. The court also referred to a case where advancing loans at a concessional rate of interest was not considered as incurring expenditure for the purpose of section 40A(5).

Ultimately, the court answered the reference question in the affirmative and in favor of the assessee, concluding that section 40A(5) did not apply in the given scenario due to the absence of any expenditure incurred by the assessee resulting in the provision of a perquisite to the employees. The judgment was agreed upon by both judges, and no costs were awarded.

This analysis provides a detailed understanding of the judgment's interpretation of section 40A(5) of the Income-tax Act, 1961, and the application of relevant legal principles based on precedents from other High Courts.