1992 (8) TMI 41 - HC - Income Tax

Court ruling favors assessee on bonus payments & loan repayment, but Revenue wins on listing fees, rental income, & depreciation.

The court ruled in favor of the assessee regarding bonus payments and the loan agreement repayment period. However, the Revenue prevailed on the issues of ... Benefit, amenity or perquisite whether convertible into money or not - distinction between salary/remuneration and perquisite - cash payment to employee not being a perquisite for section 40 disallowance - proviso excluding certain expenditure from computation under section 40 - agreement providing repayment during a period of not less than seven years - listing fees as expenditure laid out wholly and exclusively for business - income from house property versus profits and gains of business or profession - depreciation under section 32 read with section 38(2) where asset not exclusively used for businessBenefit, amenity or perquisite whether convertible into money or not - distinction between salary/remuneration and perquisite - cash payment to employee not being a perquisite for section 40 disallowance - Whether bonus payments in cash to employees drawing more than Rs.7,500 per annum constituted 'benefit, amenity or perquisite' such as to attract disallowance under section 40(c)(iii) (AY 1968-69) or section 40(a)(v) (AYs 1969-70 to 1971-72). - HELD THAT: - The court reviewed the statutory language, the 1964 amendment (which removed 'remuneration' and added 'whether convertible into money or not'), and a preponderance of High Court decisions. It accepted the view that the phrase 'whether convertible into money or not' confines the provision to non-monetary benefits and that cash payments made directly to employees are not perquisites within the meaning of the impugned clauses. The court rejected the Full Bench of Kerala's contrary approach, held that 'salary' in the statutory context cannot be unrealistically restricted so as to exclude payments like bonus, and observed that cash bonus paid as appreciation or incentive is treated by judicial precedent as part of remuneration rather than a perquisite. Consequently the Tribunal was correct in allowing the deductions.Payments of bonus in cash to the employees were not 'benefit, amenity or perquisite' for the purposes of section 40(c)(iii) (AY 1968-69) and section 40(a)(v) (AYs 1969-70 to 1971-72); questions 1 and 3 answered in favour of the assessee.Agreement providing repayment during a period of not less than seven years - in pari materia: rule 1 (Companies (Profits) Surtax Act) and rule 19A(3)(b) - Whether the bank loan in question was repayable over a period of not less than seven years so as to qualify for the exclusion in computing capital for relief under section 80J (as constrained by rule 19A(3)(b)). - HELD THAT: - The court found the question concluded by a prior Division Bench decision in New India Industries Ltd. v. CIT where the same agreement and correspondence were construed. Noting that the language of rule 19A(3)(b) is in pari materia with the earlier rule considered by the Division Bench, the court followed that decision and held that the agreement provided for repayment over not less than seven years. Reliance on subsequent Supreme Court authority was unnecessary because the matter was no longer res integra before this court.The Tribunal was right in holding that the loan agreement provided for repayment during a period of not less than seven years; question 2 answered in favour of the assessee.Listing fees as expenditure laid out wholly and exclusively for business - tax administration circulars as relevant to allowability of business expenditure - Whether the listing fees paid to the stock exchange for getting the assessee's shares listed were laid out wholly and exclusively for the purposes of the assessee's business and therefore deductible. - HELD THAT: - A relevant Circular of the Central Board of Direct Taxes (F. No. 10/67-65 IT(A-1) dated 26-8-1965), which treats annual listing fees as expenses laid out wholly and exclusively for business and thus admissible under section 37(1), was not brought to the Tribunal's or lower authorities' notice. Because the circular was not considered below, the court declined to answer the reference and indicated that the Tribunal should have the matter re-examined in the light of that circular.Question not answered; matter left for fresh consideration in light of the Board's circular (reference declined).Income from house property versus profits and gains of business or profession - character of asset and user to determine appropriate head of income - Whether rent income from Building No. 2 (part of factory premises let to a third party) was chargeable under the head 'Income from house property' or under 'Profits and gains of business or profession'. - HELD THAT: - Applying Supreme Court and High Court authorities, the court reiterated that classification depends on facts and the character/user of the asset. Commercial assets (e.g., plant/machinery) let out while retaining commercial character produce business income; buildings/land capable of other uses more readily attract 'house property' treatment when the asset is exploited as an owner for rent or when the business has ceased to use the asset as a commercial asset. Here, on cessation of the assessee's business activity the building was leased to earn rent and the transaction was not ancillary to carrying on the assessee's business. The Tribunal's conclusion that the rental income was 'income from house property' was held correct.Rental income from Building No. 2 is assessable under 'Income from house property'; question 5 answered in favour of the Revenue.Depreciation under section 32 read with section 38(2) where asset not exclusively used for business - exclusive user requirement for allowance of depreciation - Whether, if the rent income were held to be income from house property, the assessee was nevertheless entitled to claim depreciation on the building under section 32, or alternatively whether section 32 read with section 38(2) permits depreciation where the asset is not exclusively used for business. - HELD THAT: - Section 32 permits depreciation only where the asset is owned by the assessee and 'used for the purposes of the business or profession'. Section 38(2) restricts deductions to a fair proportionate part where the asset is not exclusively used for business. The building was let out and used by a third party for its business; the assessee did not use it for its own business purposes. Therefore the requirement of 'use for the purposes of business' is not satisfied and depreciation is not allowable; even if treated as business income, section 38(2) would limit or preclude depreciation for the portion not exclusively used for business. The Tribunal's invocation of section 32 read with section 38(2) to deny depreciation was held correct.No depreciation allowable on the building let out; question 6 (reframed) answered in favour of the Revenue.Final Conclusion: The court upheld the Tribunal on (i) treating cash bonus payments to employees as not being 'benefit, amenity or perquisite' under section 40(c)(iii)/40(a)(v) (in favour of the assessee), (ii) holding that the bank loan agreement provided for repayment over not less than seven years (in favour of the assessee), (iii) holding that rent from Building No. 2 is income from house property and that no depreciation is allowable on the portion let out under section 32 read with section 38(2) (in favour of the Revenue); the question on allowability of listing fees was left unanswered and remitted for fresh consideration in light of the Board's circular. Issues Involved:1. Whether bonus payments in excess of 20% of salary are considered benefits, amenities, or perquisites under sections 40(c)(iii) and 40(a)(v) of the Income-tax Act, 1961.2. Whether the loan agreement provided for repayment over a period of not less than seven years for the purposes of section 80J.3. Whether the expenditure on listing fees for shares is deductible as business expenditure.4. Whether rental income from a factory building should be classified under 'Income from house property' or 'Profits and gains of business.'5. Whether depreciation is allowable on the factory building rented out.Detailed Analysis:1. Bonus Payments as Benefits, Amenities, or Perquisites:For the assessment years 1968-69 to 1971-72, the main issue was whether bonus payments exceeding 20% of the salary to employees earning more than Rs. 7,500 annually could be considered as benefits, amenities, or perquisites under sections 40(c)(iii) and 40(a)(v) of the Income-tax Act, 1961. The Income-tax Officer disallowed these payments, but the Appellate Assistant Commissioner and the Tribunal ruled in favor of the assessee, stating that the bonus was part of remuneration and not a perquisite. The court upheld this view, emphasizing that the legislative intent behind the amendments to section 40(c)(iii) and the introduction of section 40(a)(v) was to exclude cash emoluments from the definitions of benefits, amenities, or perquisites. The court relied on several precedents, including CIT v. Kanan Devan Hills Produce Co. Ltd., CIT v. Mysore Commercial Union Ltd., and CIT v. Indokem Pvt. Ltd., which supported the view that cash payments like bonuses do not fall under perquisites. Thus, the court answered questions 1 and 3 in the affirmative, favoring the assessee.2. Loan Agreement Repayment Period:The second issue pertained to whether a loan of Rs. 25 lakhs taken by the assessee was repayable over a period of not less than seven years, which is a requirement under section 80J. The Income-tax Officer excluded this loan from the capital computation, but the Tribunal followed a previous decision in New India Industries Ltd. v. CIT, which concluded that the loan agreement did provide for a repayment period of not less than seven years. The court upheld the Tribunal's decision, answering question 2 in the affirmative, in favor of the assessee.3. Expenditure on Listing Fees:For the assessment years 1970-71 and 1971-72, the assessee claimed a deduction for listing fees paid to the stock exchange. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal disallowed this deduction, stating that it was not incurred wholly and exclusively for business purposes. However, the court noted that a relevant circular from the Central Board of Direct Taxes, which considered such expenses as business expenditure, was not brought to the attention of the lower authorities. Consequently, the court declined to answer question 4 and suggested that the matter be re-examined in light of the circular.4. Classification of Rental Income:The court examined whether the rental income from a factory building leased to M/s. Agfa Gevaert India Ltd. should be classified under 'Income from house property' or 'Profits and gains of business.' The Tribunal had ruled that it should be classified as 'Income from house property,' and the court agreed. The court emphasized that the building was not used as a commercial asset by the assessee but was leased out to generate rental income, which aligns with the classification under 'Income from house property.' The court referred to several precedents, including CEPT v. Shri Lakshmi Silk Mills Ltd. and CIT v. National Mills Co. Ltd., to support its decision. Thus, the court answered questions 5 and 6 in the affirmative, favoring the Revenue.5. Depreciation on Rented Factory Building:Finally, the court addressed whether the assessee was entitled to claim depreciation on the factory building rented out. The court ruled that since the building was not used for the assessee's business, it did not qualify for depreciation under section 32. Even if it were considered a business asset, section 38(2) would restrict the depreciation to a fair proportionate part, which the Income-tax Officer had already determined. The court found that the Tribunal's decision was correct and did not support the assessee's claim for depreciation. Thus, the court answered questions 5 and 6 in the affirmative, in favor of the Revenue.Conclusion:The court ruled in favor of the assessee on the issues of bonus payments and loan agreement repayment period but favored the Revenue on the issues of listing fees expenditure, classification of rental income, and depreciation on the rented factory building. The court declined to answer the question regarding listing fees expenditure and suggested re-examination in light of the relevant circular.