1991 (9) TMI 137 - AT - Income Tax

Summary

Issues Involved:
1. Admissibility of medical, travel, and incidental expenses as business expenditure.
2. Whether the expenditure qualifies as a perquisite under section 40A(5).
3. Validity of the Board's resolution to amend terms of appointment.
4. Whether the expenditure qualifies as profit in lieu of salary under section 17(3)(ii).
5. Applicability of precedents and case laws.

Issue-wise Detailed Analysis:

1. Admissibility of medical, travel, and incidental expenses as business expenditure:
The primary issue in this appeal was whether the amount of Rs. 2,54,994 spent by the assessee-company towards the medical expenses, foreign travel, living, and incidental expenses during the seven-week stay of an employee in the United Kingdom is admissible as business expenditure. The Tribunal considered the facts that the employee, who was a key adviser to the company, required a by-pass surgery recommended by a consultant physician. The Board of Directors passed a resolution to meet the full expenditure for the surgery and related expenses, justifying it based on the valuable services rendered by the employee. The Tribunal concluded that the expenditure was incurred during the course of its business and should be allowed as a valid business expenditure under section 37 of the Income-tax Act.

2. Whether the expenditure qualifies as a perquisite under section 40A(5):
The Tribunal addressed the contention that the direct incurring of medical expenses by the assessee-company cannot be considered a perquisite and thus cannot be disallowed under section 40A(5). Citing several case laws, including Indian Leaf Tobacco Development Co. Ltd. v. CIT and CIT v. Warner Hindustan Ltd., the Tribunal noted that cash payments or reimbursements do not amount to payment of perquisites. Consequently, the excess of the perquisite cannot be disallowed under section 40A(5) or 40(c)(iii).

3. Validity of the Board's resolution to amend terms of appointment:
The Tribunal examined the argument that the Board's resolution dated 3-4-1985 had the propensity to amend the terms of appointment, thereby obliging the company to defray all medical, stay, and tour expenses of the employee. The Tribunal supported this view, stating that the resolution effectively amended the terms of appointment to include these expenses. The Tribunal relied on the decision in CIT v. Supreme Motors (P.) Ltd., where expenses incurred for bringing back the chairman's mortal remains were considered incidental to the business.

4. Whether the expenditure qualifies as profit in lieu of salary under section 17(3)(ii):
The Tribunal considered the argument that the expenditure incurred would not assume the nature of profit in lieu of salary within the meaning of section 17(3)(ii). The Tribunal referenced the decision in Lachhman Dass v. CIT, where compensation for personal losses was not considered profit in lieu of salary. However, the Tribunal noted that the primary question was whether the expenditure could be allowed as business expenditure, not its taxability in the hands of the employee.

5. Applicability of precedents and case laws:
The Tribunal reviewed various precedents and case laws, including decisions from the Allahabad High Court in Carlton Hotel (P.) Ltd. v. CIT and the Bombay High Court in India United Mills Ltd. v. CIT and Mehboob Productions (P.) Ltd. v. CIT. These cases supported the contention that medical expenses incurred for employees could be allowed as business expenditure. The Tribunal concluded that the expenditure incurred by the assessee-company was reasonable, unproved, and not excessive, and thus allowed the entire amount as a valid business expenditure.

Conclusion:
The Tribunal allowed the appeal, holding that the entire expenditure of Rs. 2,54,994 should be allowed as a valid business expenditure in the hands of the assessee under section 37 of the Income-tax Act. The Tribunal did not consider the further question of whether the amount was already recovered as part of the service charges from group companies, as it was rendered unnecessary by their decision.