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Issues Involved:
1. Whether the payment of Rs. 1,53,675 made to the Textile Commissioner was a business expenditure allowable to the assessee. 2. Whether the medical benefits given to the employees could be treated as perquisites for the purposes of section 40A(5). Detailed Analysis: Issue 1: Payment to the Textile Commissioner The first issue concerns the payment of Rs. 1,53,675 made by the assessee to the Textile Commissioner under the provisions of clause 21C(1)(b) or clause 27 of the Cotton Textiles (Control) Order, 1948. The Income-tax Officer (ITO) initially disallowed this payment, treating it as a penalty. However, the Appellate Assistant Commissioner (AAC) allowed the payment as a deductible business expenditure. The Tribunal upheld the AAC's decision, following its earlier ruling on a similar matter. The High Court noted that this issue is covered by the decision in Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298, where it was held that payments made under section 21C(1)(b) of the Cotton Textiles (Control) Order, 1948, are deductible expenses. The court observed that such payments are an incident of the production of cloth and are not penalties for infraction of the law. Therefore, the High Court answered the first question in the affirmative, in favor of the assessee and against the revenue. Issue 2: Medical Benefits as Perquisites The second issue pertains to whether the medical benefits provided to the employees could be treated as perquisites under section 40A(5). The ITO had disallowed Rs. 3,554, treating it as excess perquisites. The AAC confirmed this view. However, the Tribunal accepted the assessee's contention that medical benefits should not be treated as perquisites and directed recalculating the perquisites after excluding the medical expenses. The High Court examined the relevant provisions of the Income-tax Act, particularly section 40A(5) and its first proviso. The court noted that section 40A(5)(a) provides for limits on permissible deductions for expenditures resulting in salary or perquisites to employees. The first proviso to section 40A(5)(a) sets an aggregate ceiling of Rs. 72,000 for companies in respect of expenditures on certain employees, including directors and their relatives. The court observed that even if the medical benefits were considered perquisites, they would still fall within the permissible limit of Rs. 72,000 as provided by the first proviso to section 40A(5)(a). The court emphasized that the first proviso carves out a special scheme for permissible deductions, distinct from the general scheme under section 40A(5)(c), and applies to companies expending on a select group of employees. The High Court concluded that the first proviso to section 40A(5)(a) would apply to the facts of the case, making the second question academic. The court left it to the Tribunal to work out the effect of the first proviso in light of the judgment's observations. Conclusion: - Issue 1: The payment of Rs. 1,53,675 to the Textile Commissioner is a deductible business expenditure. - Issue 2: The medical benefits, even if considered perquisites, fall within the permissible limit of Rs. 72,000 under the first proviso to section 40A(5)(a), making the second question academic. The Tribunal is directed to apply the first proviso in recalculating the permissible deductions.
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