1996 (3) TMI 6 - SC - Income Tax

Payments in cash to its employees on account of house rent allowance, conveyance allowance and medical reimbursement - assessee s contention that cash payments cannot be treated as perquisites for the purpose of and within the meaning of section 40A(5), is accepted - held that payments made in cash by an assessee to its employees are not comes u/s 40(a)(v) & 40A(5)

Summary

Issues Involved:
1. Whether cash payments made by an assessee to its employees fall within the mischief of section 40(a)(v) and section 40A(5) of the Income-tax Act.

Detailed Analysis:

Issue 1: Applicability of Section 40(a)(v)
Section 40(a)(v) was introduced by the Finance Act, 1968, effective from April 1, 1969, to limit deductible expenditures incurred by assessees in providing benefits, amenities, or perquisites to higher-paid employees. The provision limits deductions to one-fifth of the salary or Rs. 1,000 per month, whichever is less. It includes expenditures on assets used by employees and payments for obligations otherwise payable by employees. The section was omitted by the Finance (No. 2) Act, 1971, which introduced section 40A(5) with similar restrictions but broader scope.

Issue 2: Applicability of Section 40A(5)
Section 40A(5) replaced section 40(a)(v) and imposed restrictions on expenditures related to employee salaries and perquisites. Sub-section (5)(a)(i) limits salary-related expenditures exceeding Rs. 5,000 per month, while sub-section (5)(a)(ii) restricts perquisite-related expenditures to 20% of the salary or Rs. 1,000 per month, whichever is less. The term "perquisite" includes benefits, amenities, and payments for obligations otherwise payable by employees.

Case Analysis: Civil Appeal No. 5946 of 1994
In this case, the assessee, a limited company, made cash payments to employees for house rent allowance, conveyance allowance, and medical reimbursement during the assessment year 1982-83. The Income-tax Officer disallowed these payments under section 40A(5). The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal upheld the assessee's contention that cash payments are not "perquisites" under section 40A(5). The Delhi High Court rejected the Revenue's application under section 256(2), leading to this appeal.

Case Analysis: Civil Appeal No. 2215 of 1978
This appeal concerns the assessment year 1971-72 and the applicability of section 40(a)(v). The Bombay High Court rejected the Revenue's application under section 256(2) regarding whether cash payments to directors should be considered "perquisites." The Supreme Court granted leave due to conflicting High Court opinions.

Judgment Analysis:
The Court examined the language of section 40(a)(v) and section 40A(5), focusing on whether cash payments fall within their ambit. The Court noted that section 40(a)(v) limits deductions for expenditures providing benefits, amenities, or perquisites, whether convertible into money or not. However, cash payments directly to employees do not fall within this definition, as they are treated as salary, not perquisites.

Similarly, section 40A(5) includes structural changes but is materially similar to section 40(a)(v). The term "perquisite" in section 40A(5) includes benefits, amenities, and payments for obligations otherwise payable by employees. However, cash payments to employees are not considered perquisites under this section either.

Conclusion:
The Court concluded that cash payments made by an assessee to employees do not fall within the ambit of section 40(a)(v) or section 40A(5)(a)(ii). The Court disagreed with the Kerala High Court's opinion in Commonwealth Trust Ltd. and agreed with other High Courts, including those in Karnataka, Delhi, Calcutta, Bombay, Andhra Pradesh, Madras, and Gujarat.

Final Decision:
The appeals were dismissed, affirming that cash payments to employees are not "perquisites" under sections 40(a)(v) and 40A(5) of the Income-tax Act. No costs were awarded.