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TMI Blog1996 (3) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 3 available at page 2 of the paper book as follows : " 1. Whether the Income-tax Appellate Tribunal is right in holding that the assessee is not entitled to the deduction of the entire expenditure incurred, namely, the fee and expenses paid to auditors and legal adviser, in connection with the amalgamation of the company ? 2. Whether the Income-tax Appellate Tribunal is right in holding that the reimbursement of medical expenses by the assessee to the employees will be an expenditure subject to ceiling under section 40A(5) of the Income-tax Act ? " The facts necessary for a decision on the questions referred for our answer are as follows : The assessee is an Indian company. It owned rubber, cardamom and tea estates. The assessee-company was formed under a scheme of arrangement and amalgamation approved by this court by order dated April 4, 1979. This was formed to take over the assets and undertaking in India of Malayalam Plantations Ltd., U. K. Formerly, it was a sterling company and the foreign participation was reduced to be in conformity with the foreign exchange regulation and the Indian company took over all the businesses. This taking over of the business of the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and then extracted a portion of the order of the Commissioner of Income-tax (Appeals) which distinguished two decisions of the Madras High Court and then straightaway entered a finding to the effect that the expenses incurred were capital expenses and not eligible for deduction. The Income-tax Appellate Tribunal then observed that the Commissioner of Income-tax (Appeals) was of the view that the expenditure was connected with the items mentioned in section 35D(2)(a), (b) and (c), that he confirmed the order of the Income-tax Officer to the effect that the assessee was entitled to 1/10th of the amount and then held that they do not see any reason to interfere with that. Regarding the question of disallowance of 1/3rd of the expenditure and depreciation on the cars under section 40A(5) of the Income-tax Act, 1961, the Appellate Tribunal noted the fact that these cars had been used by the employees for their personal use also and observed that the same issue had been considered by the Tribunal in the case of the assessee for the year 1979-80 in I. T. As. Nos. 447 and 525/(Coch) of 1983 and also considered the submission made on behalf of the assessee that the perquisite value for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act, 1961, and rule 3(c)(ii) of the Income-tax Rules, 1962, were enacted and observed that the scope of these two provisions are distinct and different. It was observed that section 40A(5) is intended to effectively check the extravagant expenditure by the employer. On the other hand, rule 3(c)(ii) of the Rules is a provision bringing to tax the amount or perquisites actually received by an employee. The taxability of such amounts in the hands of the employee cannot ordinarily be a criterion for the deductibility of the said amount in the hands of the employer. It was also observed that the perspective with which the provisions of the Act and the provisions in the Rules should be viewed are different. These are matters for a detailed and in-depth consideration as a result of which alone, a proper conclusion can be arrived at. After making the above observations, this court declined to answer the question. Instead, this court took the view that the Income-tax Appellate Tribunal has not considered the matter in the above perspective and further observed that the conclusion arrived at by the Tribunal is totally unsatisfactory and perfunctory. Accordingly, this court direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) [1996] 220 ITR 611 (Ker), we hold that the Income-tax Appellate Tribunal was not justified in holding that the reimbursement of the medical expenses by the assessee to the employees will be an expenditure subject to ceiling under section 40A(5) of the Act and that the assessee is entitled to the said deduction. Now, coming to question No. 1 referred at the instance of the assessee, we have already set out the relevant facts necessary for consideration of the issue as to whether the assessee is not entitled to the deduction of the entire expenses incurred, namely, the fees and expenses paid to auditors and legal advisers in connection with the amalgamation of the company. We have seen that the Income-tax Appellate Tribunal has noted the relevant facts in paragraph 6 of its order in the following terms: " Formerly it was a sterling company and the foreign participation was reduced to be in conformity with the foreign exchange regulation and the Indian company took over all the business. There was a scheme of amalgamation between the two companies. " Though the Income-tax Appellate Tribunal has referred to the scheme of amalgamation, it has not taken pains to see the same to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the scheme as approved by this court and pointed out by learned counsel for the assessee. We do not propose to discuss the matter at length, for, according to us, it is the concern of the Tribunal to consider the scheme and the order passed by this court and to arrive at the conclusion as to whether the expenses in question are incurred in the formation of the company or otherwise. As we have already pointed out, the Income-tax Appellate Tribunal has not considered the said question at all with reference to the principles governing the matter laid down by the Supreme Court and by this court, except to hold that the expenses incurred are of a capital nature. In this connection, it will be advantageous to refer to the decision of this court by judgment dated February 20, 1996, rendered in I. T. Rs. Nos. 2 to 5 of 1991--CIT v. Polyformalin (P.) Ltd. [1996] 221 ITR 276. In that case, the question involved was as to whether the royalty payment provided with reference to the turnover in consideration of the transfer of technical knowhow was of revenue nature or capital nature. In that context, this court referred to the decisions of the Supreme Court in M. K. Brothers Pvt. Ltd. v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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