Case Note & Summary
This is a reference under Section 256(1) of the Income Tax Act, 1961, arising from the order of the Income Tax Appellate Tribunal in ITA No.5873/Bom/86 and ITA 6060/Bom/86, relating to the assessment year 1983-84. The applicant-assessee, M/s. Mather & Platt (I) Ltd., and the respondent-Department filed separate reference applications. The Tribunal drew up a statement of case seeking the opinion of the Bombay High Court on six questions. The first question was whether expenses incurred by the employee after reaching the place of destination including stay expenses were to be treated as disallowance under Section 39 read with Rule 60. The second question was whether reimbursement of medical expenses forms part of salary/remuneration for computing disallowance under Section 40(c). The third question was whether for quantifying disallowance under Section 40(c), expenditure incurred by the company towards personal use of motor cars provided to directors should be considered instead of the perquisite value as per Rule 3. The fourth question was whether rent of Rs.16,91,250/- was to be treated as capital expenditure. The fifth question was whether depreciation allowable under Section 32 should be at the rates prescribed by the Income Tax Rules as amended with effect from 2.4.1983. The sixth question was not fully extracted in the text. The Court, after hearing arguments, answered the questions as follows: Question (i) was answered in the affirmative, in favor of the Revenue, holding that the Tribunal was right. Question (ii) was answered in the affirmative, in favor of the Revenue, holding that medical reimbursement forms part of salary. Question (iii) was answered in the affirmative, in favor of the Revenue, holding that actual expenditure incurred by the company should be considered. Question (iv) was answered in the affirmative, in favor of the Revenue, holding that the rent was capital expenditure. Question (v) was answered in the negative, in favor of the assessee, holding that depreciation should be allowed at the amended rates. The Court directed the parties accordingly.
Headnote
A) Income Tax - Disallowance of Employee Travel Expenses - Section 39 read with Rule 60 - The Tribunal held that expenses incurred by the employee after reaching the place of destination including stay expenses are to be treated as disallowance under Section 39 read with Rule 60. The Court examined the scope of Section 39 and Rule 60 and upheld the Tribunal's view that such expenses are not allowable as business expenditure. (Paras 1-10) B) Income Tax - Medical Reimbursement as Salary - Section 40(c) - The Tribunal held that reimbursement of medical expenses forms part of salary/remuneration for computing disallowance under Section 40(c). The Court agreed, noting that medical reimbursement is a perquisite and thus part of remuneration. (Paras 11-15) C) Income Tax - Perquisite Valuation for Motor Cars - Section 40(c) read with Rule 3 - The Tribunal held that for quantifying disallowance under Section 40(c), the actual expenditure incurred by the company towards personal use of motor cars provided to directors should be considered, not the perquisite value as per Rule 3. The Court upheld this, stating that Section 40(c) refers to expenditure incurred by the company, not the perquisite value in the hands of the employee. (Paras 16-20) D) Income Tax - Rent as Capital Expenditure - Section 37 - The Tribunal held that rent of Rs.16,91,250/- was capital expenditure as the assessee acquired a capital asset thereby, disallowing the entire amount claimed as revenue expenditure. The Court affirmed, finding that the payment was for acquisition of a long-term benefit. (Paras 21-25) E) Income Tax - Depreciation Rates - Section 32 - The Tribunal held that depreciation allowable under Section 32 should not be at the rates prescribed by the Income Tax Rules as amended with effect from 2.4.1983. The Court reversed this, holding that depreciation must be allowed at the rates in force during the relevant assessment year, i.e., as amended. (Paras 26-30)
Issue of Consideration
Whether expenses incurred by employee after reaching destination including stay expenses are disallowable under Section 39 read with Rule 60; whether reimbursement of medical expenses forms part of salary for disallowance under Section 40(c); whether for quantifying disallowance under Section 40(c) expenditure incurred by company towards personal use of motor cars provided to directors should be considered instead of perquisite value under Rule 3; whether rent of Rs.16,91,250/- was capital expenditure; whether depreciation under Section 32 should be at rates as amended from 2.4.1983.
Final Decision
The Court answered the questions as follows: (i) Affirmed the Tribunal's view that expenses incurred by the employee after reaching destination including stay expenses are disallowable under Section 39 read with Rule 60. (ii) Affirmed that reimbursement of medical expenses forms part of salary for disallowance under Section 40(c). (iii) Affirmed that for quantifying disallowance under Section 40(c), the actual expenditure incurred by the company towards personal use of motor cars provided to directors should be considered, not the perquisite value under Rule 3. (iv) Affirmed that the rent of Rs.16,91,250/- was capital expenditure. (v) Reversed the Tribunal's view and held that depreciation under Section 32 should be allowed at the rates prescribed by the Income Tax Rules as amended with effect from 2.4.1983.
Law Points
- Section 39 read with Rule 60 of Income Tax Rules
- 1962
- Section 40(c) of Income Tax Act
- 1961
- Section 32 of Income Tax Act
- Capital vs Revenue Expenditure
- Perquisite Valuation under Rule 3
