Sukhjit Starch and Chemicals Ltd. vs Commissioner of Income Tax

N.K. Aggarwal, J.—The following questions have been referred for opinion by the Income Tax Appellate Tribunal, Amritsar, u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the disallowance of Rs. 6,561 made u/s 40(c) of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reimbursement of medical expenses is a benefit or amenity within the meaning of sections 40(c) and 40A(5) of the Income Tax Act, 1961 ?"

The facts relevant to the questions may be briefly stated hereinafter :

The assessee-company was engaged in the manufacture of starch and its derivatives. The accounting year ended on December 31, 1977, relevant to the assessment year 1978-79, on which the assessment was made by the Assessing Officer. The assessee-company had made certain payments by way of salary, medical expenses, commission and had also provided certain benefits and amenities by way of rent-free accommodation and provision of furniture and fixtures to its managing director, Shri B.K. Sardana. The said managing director died in the month of September, 1977. The total amount paid to Shri B.K. Sardana, including medical expenses amounting to Rs. 6,885, during the previous year relevant to the assessment year 1978-79 was to the tune of Rs. 63,131. The Assessing Officer excluded the sum of Rs. 2,570 paid on account of the Employees'' Provident Fund from the aggregate amount of Rs. 63,131 and thereafter allowed the amount admissible u/s 40(c) of the Act at Rs. 54,000 at the rate of Rs. 6,000 per month for the total period of employment spread over nine months during the previous year. The excess payment amounting to Rs. 6,561 was disallowed, being in excess of the limit laid down in Section 40(c) of the Act.

The assessee challenged the inclusion of the amount paid by the assessee-company to its managing director by way of reimbursement of medical expenses while working out the disallowance u/s 40(c) of the Act and succeeded. The Revenue took the matter before the Appellate Tribunal against the assessee''s plea in respect of the exclusion of the medical expenses and succeeded. The Appellate Tribunal took the view that medical reimbursement was in the nature of benefit or amenity provided by the company to the director.

The term "perquisite" came to be examined by the Supreme Court in Commissioner of Income Tax, Bombay Vs. M/s. Indian Engineering and Commercial Corporation Pvt. Ltd., . There, certain money was paid in cash to the directors in addition to their salary, by way of commission at a percentage on the sales. The Tribunal held that the commission was not a "perquisite". The view taken by the Tribunal was upheld.

There is a direct decision now available from the Supreme Court on the question of medical reimbursement. It has been held in Commissioner of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., that cash payments made to the employees by an assessee cannot be brought within the purview of the words "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite"--more so because of the following words "whether convertible into money or not". There were two questions before the Supreme Court, one arising from the order of the Delhi High Court and the other against an order of the Bombay High Court. The question in appeal preferred against the order of the Delhi High Court referred to the payments in cash of the house rent allowance, conveyance allowance and medical reimbursement. The question arising in the appeal preferred against the order of the Bombay High Court related to the cash payments made by the assessee to its directors by way of house rent allowance, conveyance allowance, furniture allowance, etc.

Since the controversy stands finally settled that the reimbursement of medical expenses by the company to the director was not in the nature of a "perquisite", both the questions are answered in the negative and in favour of the assessee.