Commissioner of Income Tax vs Kores India Private Ltd.

S.K. Desai, J.—This is a reference at the instance of the Revenue and the Income Tax Appellate Tribunal, Bombay Bench "D", has referred to us the following two questions for our consideration :

"(1) Whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the cash payments made by the assessee-company to its employees in the form of car allowance, ex gratia payments, insurance premium, house rent allowance, etc., are not covered by the expression ''benefit or amenity or perquisite, whether convertible into money or not'' occurring in section 40(c)(ii) of the Income Tax Act, 1961, and thereby directing recomputation of the disallowance made by the Income Tax Officer under that section ?

(2) On the facts and in the circumstances of the case, whether the Tribunal was correct in law in holding that for computing the disallowance u/s 40(c)(iii) of the Income Tax Act, 1961, the following emoluments paid to the employees have to be taken into account as part of ''salary'' (a) bonus, (b) commission, (c) allowance and special allowances, (d) prizes, and (e) ex gratia payments ?"

A few facts may be stated.

We are concerned with the assessment years 1967-68 and 1968-69. The assessee-company is a manufacturer of carbon paper, typewriter ribbons, etc. The dispute relating to the disallowance u/s 40(c)(iii) of the Income Tax Act, 1961, as it was in force in the relevant years. The statutory provisions have been extracted in paragraph 2 of the statement of case and need not be repeated here. In the assessment for the year 1967-68, the Income Tax Officer disallowed Rs. 13,689 being part of payments made to six employees on the footing that these constituted excess over 1/5th of salary. The details are to be found in paragraph 3 of the statement of case. In the assessment for the year 1968-69, there were 125 employees in all, in whose cases there was similar disallowance. The total amount disallowed came to Rs. 5,16,085. On appeal before the Appellate Assistant Commissioner, the assessee contended that the house rent allowance, ex gratia payment, motor car allowance and insurance should not be considered as expenditure or perquisite for the purposes of section 40(c)(iii)/section 40(c)(v). The Appellate Assistant Commissioner accepted the assessee''s contention. The Department appealed to the Tribunal. The contentions advanced before the Tribunal and the conclusions of the Tribunal are indicated in paragraphs 5 and 6 of the statements of case. It would be sufficient for our purposes to observe that on both the points canvassed by the departmental representative, the Tribunal found in favour of the assessee. Aggrieved by the said decision of the Tribunal, reference was ought or and made.

As far as question No. (1) is concerned, Shri Jetley, for the Revenue, has very fairly stated that it is concluded against the Revenue by the decision in Commissioner of Income Tax, Bombay City-II Vs. Indokem Private Ltd., . In accordance with the said decision, we answer the said question in the affirmative and in favour of the assessee.

As far as question No. (2) is concerned, the Tribunal''s approach is indicated in the following passage :

"In the absence of any specific definition of the word ''salary'' in section 40(c), one has to construe the said expression in the manner understood in the commercial world and we consider that the Appellate Assistant Commissioner has acted rightly in understanding it in that sense. We may also add that even in the contract of service, apart from basic salary, dearness allowance, bonus and several allowances have been set up as being payable to the employee, thereby showing that the parties understood all these payments as coming within the scope of salary to the employee. We would, therefore, confirm his direction in this regard also."

In our opinion, the Tribunal has adopted a proper and reasonable approach and there is no warrant for considering "salary" in a restricted or unrealistic manner. All these were payments or rewards given to the employees for work done by them or in appreciation of good work done which had brought profit and prosperity to the company, and the aim was to induce them to do such good work in future. As far as bonus to the employees is concerned, the Madras High Court in Commissioner of Income Tax Vs. India Radiators Ltd., , has taken an identical position. We do not think that the questioned serves any elaborate discussion. Accordingly, we answer this question also in the affirmative and in favour of the assessee.

The parties will, however, bear their own costs of the reference.