Actual expenditure under perquisite disallowance, overseas employee relief, and bonus-share costs as revenue expenditure.

For section 40(c)(iii), the ceiling is applied to the employer's actual expenditure that results in a benefit, amenity or perquisite, not merely to the perquisite's value in the employee's hands. The second proviso is read to cover overseas employees whose income is not chargeable under the head "Salaries" in India, so the disallowance does not apply to them. On expenditure classification, fees for enhancement of capital are capital expenditure, while legal and incidental expenses connected with bonus-share issues, including the proportionate registrar fee allocated to those shares, are revenue expenditure and allowable.

---

---

Issues: (i) Whether, for section 40(c)(iii), the ceiling is to be applied to the actual expenditure incurred by the employer or to the value of the benefit, amenity or perquisite in the hands of the employee; (ii) whether the disallowance provision in section 40(c)(iii) applies to employees in overseas branches whose income is not chargeable under the head "Salaries" in India; (iii) whether expenditure incurred for enhancement of capital and expenditure connected with issue of bonus shares and splitting of shares, including legal expenses and a proportionate fee paid to the Registrar of Companies, is capital or revenue in nature.

Issue (i): Whether, for section 40(c)(iii), the ceiling is to be applied to the actual expenditure incurred by the employer or to the value of the benefit, amenity or perquisite in the hands of the employee.

Analysis: The statutory language makes the disallowance depend on "any expenditure incurred" which results directly or indirectly in the provision of a benefit, amenity or perquisite, if such expenditure exceeds one-fifth of the salary payable. The expression "such expenditure" refers back to the employer's actual expenditure and not to a notional value of the perquisite in the employee's hands. The valuation rules governing salary taxability do not control the computation under this provision in every case.

Conclusion: The actual expenditure incurred by the employer is to be taken into account, not merely the value of the perquisite in the employee's hands. The answer is against the assessee.

Issue (ii): Whether the disallowance provision in section 40(c)(iii) applies to employees in overseas branches whose income is not chargeable under the head "Salaries" in India.

Analysis: The second proviso exempts expenditure resulting in benefits or perquisites to an employee whose income chargeable under the head "Salaries" is Rs. 7,500 or less. The phrase is capable of including a nil amount, and the provision does not require that some positive amount must first be chargeable under that head. In the interest of uniform construction, the Court followed the view that a nil chargeable salary falls within the proviso.

Conclusion: The disallowance under section 40(c)(iii) does not apply to such overseas employees. The answer is in favour of the assessee.

Issue (iii): Whether expenditure incurred for enhancement of capital and expenditure connected with issue of bonus shares and splitting of shares, including legal expenses and a proportionate fee paid to the Registrar of Companies, is capital or revenue in nature.

Analysis: Fees paid for enhancement of capital are part of the cost of bringing in capital and are capital in character. By contrast, printing, stationery, postage, telegrams and legal expenses incurred in connection with the issue of bonus shares are incidental business expenses and do not create an enduring asset. The proportionate fee allocated to bonus shares was also treated consistently with the bonus-share related expenditure and not as a capital outlay.

Conclusion: The fee paid for enhancement of capital is capital expenditure and not allowable, but the bonus-share related expenses, including legal expenses and the proportionate fee allocated by the Tribunal, are revenue expenditure and allowable. The answer is partly in favour of the assessee and partly in favour of the Revenue.

Final Conclusion: The reference was answered by sustaining the disallowance on the perquisite-valuation point and on the capital-enhancement fee, while upholding the assessee's claim on the overseas-employee proviso and on bonus-share related revenue expenses.

Ratio Decidendi: For section 40(c)(iii), the relevant ceiling is applied to the employer's actual expenditure that results in a benefit or perquisite, while the second proviso includes cases where no salary is chargeable under the head "Salaries"; expenditure directly connected with raising capital is capital in nature, but ordinary expenses incurred in connection with bonus-share distribution may remain revenue expenditure.

---