Commissioner of Income Tax vs Yorkshire Insurance Co. Ltd.

Bharucha, J.—This is a reference u/s 256(1) of the Income Tax Act, 1961. The only question posed is referred at the instance of the Revenue. It reads thus :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that bonus and depreciation on the flat provided to the director of the assessee-company is not a perquisite u/s 40(a)(v) of the Income Tax Act, 1961 ?"

It will be noticed that the question raises about the bonus and about the depreciation on a flat. The issue of bonus is in regard to the assessment year 1971-72. Counsel are agreed that in view of the judgment of this court in Commissioner of Income Tax, Bombay City-II Vs. Indokem Private Ltd., , it must be held that the Tribunal was right in holding that bonus is not a perquisite u/s 40(a)(v) of the Income Tax Act, 1961.

The question regarding the depreciation on a flat arises in connection with the assessment year 1970-71, the previous year whereof ended on December 31, 1969. The said flat was rented by the assessee and was given for use to its director, one Barker-Bennet. The rent in the sum of Rs. 6,876 was paid by the assessee in respect of the said flat and a sum of Rs. 1,890 was recovered in this behalf form the said director. The Income Tax Officer added back an amount of Rs. 9,018 on account of depreciation on the said flat claimed by the assessee on the ground that that sum fell within the ambit of the expression "perquisite". On appeal, the Appellate Assistant Commissioner held that the depreciation on the said flat occupied by the said director could not be brought within the expression "perquisite". On appeal by the Revenue, the Income Tax Appellate Tribunal upheld the Appellate Assistant Commissioner''s order.

Section 40 of the Income Tax, 1961, in so far as it is relevant to the case before us, says that :

"40 Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ''Profits and gains of business or profession.

(a) in the case of any assessee....

(v)....... any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of salary payable to the employee, or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year, whichever is less."

Mr. Jetly, learned counsel for the Revenue, submitted that the assessee was, under the aforesaid provision, not entitled to depreciation allowance in respect of the said flat used by the said director to the extent therein provided. In his submission, the word "allowance" in section 40(a)(v) of the Income Tax Act, 1961, covered depreciation allowance u/s 32 thereof. He referred also to rule 5 of the Income Tax Rules in this behalf.

Mr. Jetly brought to our attention the judgment of a Full Bench of the Kerala High Court in Commissioner of Income Tax Vs. Forbes, Ewart and Figgis (P.) Ltd. and Harrison and Crossfield Ltd., . The Kerala High Court considered the ambit of section 40(a)(v) of the Income Tax Act, 1961, in the context of expenditure incurred upon cars used by the assessee''s directors and upon the maintenance of buildings given to the directors for occupation free of rent. The Full Bench construed the words "incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit" to mean "incurs directly or indirectly in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit to the extent of such purpose or benefit." The Full Bench went on to note that the second part of the provisions of section 40(a)(v) referred not only to any expenditure but also to any allowance in respect of any asset of the assessee used by its employee and held that, as the provisions stood, it was not only expenditure that would be affected by the ceiling limit prescribed but also allowances such as depreciation allowance.

Mr. Munim, learned counsel for the assessee, argued that depreciation allowance was not included within the ambit of section 40(a)(v) of the Income Tax Act, 1961. In his submission, the word "allowance" therein only meant such allowance as was given by an assessee to its employee. He drew our attention to the fact that in sub-section(5) of section 40A, which replaced section 40, the words used were "where the assessee... is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit". In Mr. Munim''s submission, the fact that such words were not employed in section 40(a)(v) indicated that the word "allowance" therein was not to be taken to mean an allowance to which an assessee was entitled in respect of an asset used by its employee.

We are not impressed by Mr. Munim''s argument. Section 40 of the Income Tax Act, 1961, commences with the words "Notwithstanding anything to the contrary in sections 30 to 39". This takes in section 32 which deals with depreciation. Section 32 provides that in respect of depreciation of, inter alia, buildings owned by an assessee and used for the purposes of its business, a deduction on account of depreciation on account of depreciation is, therefore, an allowance. The words of section 40(a)(v) indicate that what shall not not be deducted in computing income chargeable under the head of profits and gains of business and profession in the case of any assessee shall be, inter alia, any allowance in respect of assets of the assessee used by an employee. There is nothing in those words which can lead to the conclusion that an allowance in the form of a deduction for depreciation is not within the ambit of section 40(a)(v).

Mr. Munim next submitted that the provision of section 40(a)(v) of the Income Tax Act, 1961, apply only to those assets of the assessee which were used by its employee free of charge. Inasmuch as, in the instant case, some part of the rent had been recovered by the assessee from its said director, an allowance for depreciation in respect of the said flat was not covered thereby.

Mr. Munim drew our attention to the Memorandum explaining the provision of the Finance Bill, 1968. The object of the incorporation of section 40(a)(v) in the Income Tax Act, 1961, is said to be "to bring within the purview of the limit any expenditure or allowance admissible to the employer in respect of any assets provided by him to the employee to the employer in respect of any assets provided by him to the employee free of charge or on a concessional basis. Thus, where an employer has provided residential accommodation or household equipment such as frigidaires, air conditioners, etc., owned by him, to his employees free off charge, any expenditure in providing perquisites, benefits or amenities to employees". (See [1968] 67 ITR 87). Mr. Munim laid stress on the fact that in the latter portion quoted above, assets provided to an employee free of charge were set out.

The earlier portion of what is quoted above sets out the objective of the provisions of section 40(a)(v) of the Income Tax Act, 1961, which is to bring within the purview of the limit any expenditure or allowance admissible to the employer in respect of assets provided by him to the employee free of charge or on a concessional basis. The latter part of what is quoted merely furnishes an example.

There is nothing in section 40(a)(v) of the Income Tax Act, 1961, itself or in the Memorandum explaining its provisions which can induce us to hold that it applies only to those assets which are provided by an assessee to its employee free of charge.

Mr. Munim then drew our attention to the fact that disallowance of depreciation on the said flat u/s 40(a)(v) of the Income Tax Act, 1961, would have to be calculated only to the extent of the benefit derived therefrom by the said director. He pointed out that this is what the Full Bench of the Kerala High Court had held. There can be no dispute as to this. The plain words so indicate. The Tribunal shall have to determine to what extent, u/s 40(a)(v), depreciation allowed in respect of the said flat should be added back.

The question is answered thus :

In regard to bonus, the Tribunal was right in holding that it was not a perquisite u/s 40(a)(v) of the Income Tax Act, 1961. In regard to depreciation on the said flat provided to the said director the tribunal ought to have held that it could be allowed only to the extent it was not covered by the provisions of section 40(a)(v) of the Income Tax Act, 1961.

The assessee shall pay to the Revenue the costs of the reference.