1993 (4) TMI 64 - HC - Income Tax

Court Rules Cash Allowances Not Perquisites; Capital Gain Computation: Nil Consideration Prevents Double Taxation.

The court held that cash allowances given to employees should not be treated as 'perquisites' for disallowance under section 40A(5) of the Income-tax Act, ... Perquisite, Perquisite To Employees, Rule Against Double Taxation Issues Involved:1. Whether cash allowances given to employees should be treated as 'perquisites' for the purpose of disallowance u/s 40A(5) of the Income-tax Act, 1961.2. Whether the short-term capital loss on redemption of preference shares should be computed by considering the proceeds received as 'nil' since the same had been considered as dividend u/s 2(22) of the Income-tax Act.Summary:Issue 1: Cash Allowances as 'Perquisites'The Tribunal held that cash allowances given to employees should not be treated as 'perquisites' for the purpose of disallowance u/s 40A(5) of the Income-tax Act, 1961. This position is covered by the decision in CIT v. Indokem P. Ltd. [1981] 132 ITR 125. Consequently, the court answered this issue in the affirmative, in favor of the assessee and against the Revenue.Issue 2: Computation of Short-term Capital LossThe dispute pertains to the computation of capital gain on the redemption of preference shares. The assessee purchased preference shares and incurred additional expenses on transfer fees and stamp charges. Upon redemption, the entire amount received was treated as dividend u/s 2(22) of the Act and included in the total income of the assessee. The assessee claimed a short-term capital loss based on the cost of acquisition minus the amount received, which was treated as dividend, resulting in a 'nil' consideration for the redemption.The Income-tax Officer disagreed, treating the entire amount received as consideration for the transfer, leading to a minimal capital loss. The Appellate Assistant Commissioner and the Tribunal upheld the assessee's view that the proceeds received on redemption should be considered 'nil' since they were already treated as dividend u/s 2(22).The court examined whether the consideration for the transfer should be reduced by the amount deemed as dividend. It concluded that the Revenue cannot treat the same receipt both as dividend and as consideration for the transfer of a capital asset. The court emphasized that once an amount is treated as dividend, it cannot be considered again for capital gain computation, as this would result in double taxation, which is impermissible.The court also referred to section 46(2) of the Act, which supports the view that the consideration for the purpose of capital gain computation should be reduced by the amount assessed as dividend. The court rejected the Revenue's argument that the deeming provision of section 2(22) should not affect the computation of capital gains.In conclusion, the court answered the second question in the affirmative, in favor of the assessee and against the Revenue, holding that the consideration for the purpose of capital gain computation should be 'nil' when the entire amount received on redemption is treated as dividend.