1986 (8) TMI 100 - AT - Income Tax

Issues Involved:

1. Disallowance of medical expenses reimbursement as part of employees' salaries.
2. Treatment of club subscriptions paid by the company as perquisites.
3. Allowability of penalty levied by customs authorities.
4. Disallowance of share issue expenses as capital expenditure.

Detailed Analysis:

Issue 1: Disallowance of Medical Expenses Reimbursement as Part of Employees' Salaries

The Income Tax Officer (ITO) disallowed Rs. 81,802 under section 40A(5)(a)(i) and Rs. 64,391 under section 40A(5)(a)(ii) of the Income-tax Act, 1961, by treating the medical expenses reimbursed by the assessee-company to its employees as part of their salaries. The Commissioner (Appeals) disagreed, stating that cash payments cannot be treated as perquisites and relied on the Tribunal Bombay's order in the case of Glaxo Laboratories (India) Ltd. v. Second ITO. However, the Tribunal noted that the ITO's treatment was in conformity with the Tribunal Bombay, Special Bench decision in Blackie & Sons (India) Ltd. v. ITO, and thus vacated the Commissioner (Appeals)'s order, restoring the ITO's decision.

Issue 2: Treatment of Club Subscriptions Paid by the Company as Perquisites

The ITO treated club subscriptions paid by the assessee-company for its employees' memberships as perquisites. The Commissioner (Appeals) accepted the assessee's contention that these subscriptions were not perquisites and deleted Rs. 3,226. However, the Tribunal held that payment of club subscriptions by the employer for employees' obligations constitutes perquisites under clause (b) of Explanation 2 to section 40A(5). The Tribunal vacated the Commissioner (Appeals)'s order and restored the ITO's decision.

Issue 3: Allowability of Penalty Levied by Customs Authorities

A penalty of Rs. 2,000 was levied by customs authorities, but details of the offense were not provided. The Commissioner (Appeals) allowed the penalty, considering it a technical default, referencing similar Tribunal decisions for assessment years 1973-74 and 1979-80. However, the Tribunal referred to the Bombay High Court decision in T. Khemchand Tejoomal v. CIT, which held that penalties for importing goods not conforming to specifications are not allowable deductions. Consequently, the Tribunal vacated the Commissioner (Appeals)'s order and restored the ITO's disallowance of the penalty.

Issue 4: Disallowance of Share Issue Expenses as Capital Expenditure

The ITO disallowed Rs. 8,07,624 as share issue expenses, stating they were not of a current nature and not incurred to earn income. The Commissioner (Appeals) allowed the expenses, following the Tribunal's order in ITO v. Godfrey Philips (I) Ltd. However, the Tribunal examined the facts and noted that the expenses were incurred for expanding the capital base of the assessee-company. The Tribunal referred to various High Court and Supreme Court decisions, including Bombay Burmah Trading Corpn. Ltd. v. CIT, which held that expenses related to raising capital are capital expenditures. The Tribunal concluded that the share issue expenses were capital expenditures and vacated the Commissioner (Appeals)'s order, restoring the ITO's disallowance.

Conclusion:

The Tribunal allowed the revenue's appeal, restoring the ITO's decisions on all four grounds.

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