Employee-occupied bungalow expenses and related depreciation are includible in the section 40A(5) disallowance computation.

Expenditure on bungalows occupied by employees for their own benefit, together with depreciation attributable to those buildings, was held to be includible in computing the statutory disallowance under section 40A(5) of the Income-tax Act, 1961. The Kerala HC followed the earlier Full Bench view and subsequent decisions, treating such maintenance costs and depreciation as part of the expenditure falling within the disallowance ceiling. On that basis, the disallowance was upheld and the issue was decided in favour of the Revenue.

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Issues: Whether, for the purpose of disallowance under section 40(a)(v) / section 40A(5) of the Income-tax Act, 1961, the expenditure incurred on maintenance of bungalows occupied by employees for their own benefit and the depreciation allowance on such buildings could be taken into account.

Analysis: The question turned on whether the cost of maintaining employee-occupied buildings and the depreciation attributable to those buildings formed part of the expenditure liable to be disallowed within the statutory ceiling. The Court followed the earlier Full Bench view and subsequent decisions, holding that such expenditure and depreciation in respect of buildings used by employees for their own purposes were properly includible for computing the disallowance under section 40A(5).

Conclusion: The reference was answered in the affirmative. The disallowance was held to be correctly made, and the issue was decided in favour of the Revenue and against the assessee.

Ratio Decidendi: Expenditure on employee-occupied buildings and the related depreciation allowance are includible while computing the statutory disallowance under section 40A(5) of the Income-tax Act, 1961.

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