2001 (8) TMI 12 - SC - Income Tax

Non-resident banking company - Whether on a correct interpretation of section 40A(5) and rule 3(c), the Tribunal was justified in law in holding that the value of the free car provided to the employees for the purpose of working out the disallowance in the case of the employer, i.e., the assessee-company should be the same as prescribed by rule 3(c) in the case of the employee - Held, no - revenue's appeal is allowed

Issues Involved:
1. Applicability of Rule 3(c) of the Income-tax Rules, 1962, for determining the value of perquisites for disallowance under Section 40A(5) of the Income-tax Act, 1961.
2. Divergence of opinions between High Courts regarding the interpretation of Section 40A(5) and Rule 3(c).

Issue-wise Detailed Analysis:

1. Applicability of Rule 3(c) for Disallowance under Section 40A(5):

The primary issue for determination was whether the disallowance under Section 40A(5) of the Income-tax Act, 1961, should be worked out on an estimated basis or by following the provision of Rule 3(c) of the Income-tax Rules, 1962, when the actual expenditure incurred by an employer on providing a car to the employee for private use is not ascertainable.

The Revenue contended that Rule 3(c) is not applicable for determining the amount of expenditure to be disallowed to an employer-assessee under Section 40A(5). Rule 3(c) is meant for computing the value of perquisites in the context of the employee's income from salary and has no relevance for the employer's expenditure disallowance.

The court noted that Section 40A(5) and Rule 3 deal with different situations and different sets of assessees. Section 40A(5) pertains to the computation of income under the head "Profits and gains of business or profession" for the employer, while Rule 3 pertains to the valuation of perquisites for computing the income of employees under the head "Salaries."

The object of Section 40A(5) is to discourage employers from incurring excessive expenditure on benefits, amenities, or perquisites for employees beyond a specified limit. This provision aims to curb extravagant expenditure by imposing a ceiling on such expenses, ensuring that any expenditure beyond the prescribed limit is disallowed.

The court emphasized that the employer should provide the actual expenditure figures incurred on the car. If the employer cannot provide these details, the expenditure should be assessed on a realistic basis, not on the basis of Rule 3, which applies to employees who cannot furnish the actual expenditure figures as they did not incur it.

2. Divergence of Opinions between High Courts:

The court acknowledged the divergence of opinions between various High Courts on this issue. The Calcutta High Court, in the case of CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35, held that the value of the perquisite of a car provided by the employer to the employee should be the same for both the employer and the employee to avoid an anomalous situation. This opinion was followed by the Bombay High Court in Geoffrey Manners and Co. Ltd. v. CIT [1996] 221 ITR 695.

Conversely, the Gujarat High Court in CIT v. Rajesh Textile Mills Ltd. [1988] 173 ITR 179, held that the computation of monetary benefit of perquisites in the hands of employees is different from the computation of expenses incurred by the employer-assessee for deductibility under "Profits and gains of business or profession." The Gujarat High Court distinguished the general observations made in the Britannia Industries case, asserting that Rule 3 was erroneously invoked for determining the deduction of expenditure in the assessment of the employer.

The Supreme Court concluded that the opinions of the Calcutta and Bombay High Courts did not properly consider that Section 40A(5) and Rule 3 operate in different fields and apply to different sets of assessees. Applying Rule 3 for determining the deduction in the employer's assessment ignores the legislative intent of Section 40A(5), which aims to impose a ceiling on excessive expenditure by employers.

Conclusion:

The Supreme Court set aside the impugned judgment and order of the Bombay High Court, allowing the appeal in favor of the Revenue. The question was answered in the negative, indicating that Rule 3(c) should not be applied for determining the disallowance under Section 40A(5) in the employer's assessment. The court expressed gratitude to Mr. B. Sen, senior advocate, for his assistance as amicus curiae. No costs were awarded.

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