Limit on allowance in respect of benefit, amenity or perquisite under clause (c) (iii)/clause (a)(v) - Reimbursement of certain expenses/payments whether form part of perquisite to be restricted to one-fifth of salary - Income Tax - 80/1972

Circular No. 80 Dated 4/3/1972 Limit on allowance in respect of benefit, amenity or perquisite under clause (c) (iii)/clause (a)(v) - Reimbursement of certain expenses/payments whether form part of perquisite to be restricted to one-fifth of salary 1. Under section 40(c)(iii), any expenditure incurred by a company after February 29, 1964, which results directly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee) would be admissible as a deduction in computing the company's income, only to the extent of one-fifth of the amount of salary payable to the employee. Section 40(c)(iii) was replaced by section 40(a)(v) with effect from assessment year 1969-70 and was applicable to all assessee-employers, not restricted to companies only. 2. The question for consideration is whether the benefits given to the employees in the form of provision of medical facilities or reimbursement of medical expenses, electricity, gas, gardener, rent-free accommodation, motorcar and bonus or commission should form part of the "salary" or whether they fall in the category of "perquisite, amenity or benefit". For the purpose of section 40(c)(iii)/40(a)(v), the term "salary" has to be taken as per the definition given in rule 2(h) of Part A of the Fourth Schedule. According to the definition, the term "salary" includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites. 3. All payments in the form of benefits or amenities such as reimbursement of medical expenses, provision of electricity, water, gas at the residence of employees, payment of club bills of employees, provision of domestic servants, gardeners, etc., would be part of "perquisite" which would be restricted to one-fifth in the assessment of the employer. The list of perquisites given above is only illustrative and by no means exhaustive. 4. As regards the payment of bonus, the Board are advised that the payment of bonus will be treated as salary in the following types of cases : a. payment of bonus made under a service agreement between the employer and the employee ; b. bonus paid pursuant to requirement of the Payment of Bonus Act, 1965; in such a case the service agreement may be treated to have been modified to that extent; c. where the bonus is paid in accordance with the decision of a trade association which is binding on its members; and d. bonus paid under an award by a Labour Tribunal where the award is binding on the employer and the employees. If the bonus is paid gratuitously without there being any legal or contractual obligation, the payment is in the nature of a perquisite and has, among other perquisites, to be linked to one-fifth of the salary for allowance under section 40(c)(iii)/40(a)(v). As regards payment of commission to the employees the question whether it form part of "salary" or "perquisite" has to be decided on the facts of each case. If the terms and conditions of service are such that commission ispaid not as a bounty or benefit but is paid as part and parcel of the remuneration for services rendered by the employee, such payment may partake of the nature of salary rather than as a benefit or perquisite. If, however, on the terms and conditions of service either there is no obligation for the employer to pay the commission or it is a matter purely in the discretion of the employer, such payment should be treated as a benefit by way of addition to salary rather than in lieu of salary. [These instructions are issued in supersession of the Board's Circular No. 62 [F. No. 13A/ 103/69-IT (A-II)], dated 29-6-1971 [Annex I] and in modification of the Board's Circular No. 32 [F. No. 10/93/68-IT (A-II)], dated 29-10-1969 [Annex II] and may please be brought to the notice of all the Income-tax Officers working in your charge.] Circular : No. 80 [F. No. 13A/103/69-IT(A-II)], dated 4-3-1972. ANNEX I - CIRCULAR NO. 62, DATED 29-6-1971 Reference is invited to Circular No. 32 issued by the Board on 29-10-1969 [printed here as Annex II] and Departmental Circular No. 30-D(LVIII-34), dated 7-11-1966. [printed here as Annex III] The Board are advised that the instructions contained therein are not in conformity with the provisions of law. Accordingly, Circular No. 32, dated 29-10-1969 and Departmental Circular No. 30-D of 1966, dated 7-11-1966 are hereby withdrawn with immediate effect. The above instructions may please be brought to the notice of the assessing officers without delay. ANNEX II - CIRCULAR NO. 32, DATED 29-10-1969 1. Reference is invited to Departmental Circular No. 30-D of 1966 [printed here as Annex III] issued by the Board on November 7, 1966. 2. Under section 40(c)(iii), now section 40(a)(v), any expenditure which results, directly or indirectly, in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) shall be admissible as a deduction in the computation of the assessee-company's total income only to the extent of one-fifth of the amount of the salary payable to the employee. 3. A question has been raised whether bonus or commission paid to the employee should also be included in the value of "any benefit or amenity or perquisite" for the purpose of limiting the deduction to one-fifth of the salary as explained above. 4. The matter has been examined and it has been decided that salary, dearness allowance, bonus, commission or any other cash allowance payable to the employee in terms of his contract of service, would be regarded as salary under section 17(3) (ii) and not as "benefit or amenity" for the purposes of section 40(c)(iii)/40(a)(v). Further, only those cash payments would be covered by the expression "perquisites, amenities and benefits" which are paid to the employee voluntarily and gratuitously and not in terms of the specific provisions of his contract of employment. In other words, the employee concerned should not have been in a position to enforce the payment of these amounts in a court of law. ANNEX III - CIRCULAR NO. 30-D (LVIII-34), DATED 7-11-1966 1. Under section 40(c)(iii), any expenditure incurred by a company after February 29, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee) shall be admissible as a deduction in computing the company's income only to the extent of one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date. A question has been raised whether monetary payments made by a company to its employees by way of reimbursement of medical expenses, commission and bonus should be included in the value of "any benefit or amenity or perquisite" for the purpose of limiting the deduction thereof to one-fifth of the salary as per the above section. 2. So far as the reimbursement of medical expenses is concerned, it will clearly be a benefit or amenity or perquisite to be included in the value of perquisites for the purpose of limiting the permissible deduction to one-fifth of the salary. As regards payment by way of commission and bonus, however, the question of including these payments as "benefit, amenity or perquisite" will depend upon the facts of each case. Where bonus and commission are paid as apart of the employee's regular salary as agreed to between the company and the employee in terms of his contract of service, they should be treated as part of the employee's remuneration and not as perquisites. For example, if an employee is appointed on a fixed monthly remuneration of Rs. 1,000 plus a commission of 1 per cent on sales, the commission being part of his remuneration, will not be a benefit, amenity or perquisite but will be regarded as remuneration. In such cases, the bonus or commission paid will not be included in the quantum of perquisites for the purpose of limiting the amount to one-fifth of the salary under section 40(c)(iii), but, on the other hand, where commission or bonus is paid, not as a part of the regular remuneration agreed to beforehand, but voluntarily and gratuitously and the payment is of casual nature, then it will have to be regarded as a perquisite for the purposes of section 40(c)(iii). 3. It may be noted, however, that the term "salary" for the purposes of section 40(c)(iii) has been defined by Explanation 2 thereof and means salary as defined in rule 2(h) in Part A of the Fourth Schedule. Under this definition, "salary" includes dearness allowance if the terms of the employment so provide, but excludes all other allowances and perquisites. The definition of "salary" in section 17(1) is not, therefore, applicable for the purposes of section 40(c)(iii).