1981 (3) TMI 15 - HC - Income Tax

Court rules in favor of assessee regarding premium on medical insurance policies & salary recoveries

The court ruled in favor of the assessee on both issues. The premium paid for medical insurance policies on employees' lives did not result in any ... Benefit, Amenity Or Perquisite To Employee Issues Involved:1. Whether the premium paid by the assessee to Nursing Home Benefit Association for medical insurance policies on employees' lives resulted in any benefit, amenity, or perquisite under section 40(c)(iii) of the Income-tax Act, 1961.2. Whether the amount of salary payable to employees should be reduced by recoveries from managed companies when computing disallowable amounts under section 40(c)(iii).Issue-Wise Detailed Analysis:Issue 1: Medical Insurance Premium as Benefit, Amenity, or PerquisiteThe first issue concerns whether the premium paid by the assessee to Nursing Home Benefit Association for medical insurance policies on the individual lives of employees resulted in any benefit, amenity, or perquisite under section 40(c)(iii) of the Income-tax Act, 1961.The assessee-company was contractually obligated to reimburse the medical expenses of its employees. To mitigate potential heavy expenditures, the company took out medical insurance policies, paying premiums ranging from Rs. 150 to Rs. 510 per year per employee. The Income Tax Officer (ITO) treated these premiums as expenditures resulting in benefits or perquisites to employees, thus disallowable under section 40(c)(iii). However, the Appellate Assistant Commissioner (AAC) accepted the assessee's view that the premiums did not result in any such benefit or perquisite.The Tribunal supported the assessee's contention, stating that the insurance policy was taken to minimize the company's liability and did not confer any direct or indirect benefit to the employees. The Tribunal noted that employees' right to claim reimbursement continued irrespective of the insurance policy, and any reimbursement received from the insurance company was treated as the company's money, not the employees'. Therefore, the premiums paid did not constitute a benefit or perquisite under section 40(c)(iii).The court upheld the Tribunal's view, emphasizing that the insurance policy was primarily for the company's benefit to safeguard its liability and did not confer any right or benefit to the employees. The court referred to precedents, including the Supreme Court's observation in CIT v. L. W. Russel, that a perquisite implies a right conferred on the employee, which was not the case here.Conclusion: The premium paid for medical insurance did not result in a benefit, amenity, or perquisite to the employees under section 40(c)(iii). The first question was answered in the negative, in favor of the assessee.Issue 2: Salary Payable and Recoveries from Managed CompaniesThe second issue addresses whether the salary payable to employees should be reduced by recoveries from managed companies when computing disallowable amounts under section 40(c)(iii).The assessee-company, acting as the managing agent for other companies, had centralized working with common employees. It initially debited the entire salary to its account but subsequently debited the managed companies for the services rendered by these employees, claiming only the net amount as expenditure under section 37.The ITO calculated the disallowable amount under section 40(c)(iii) based on the gross salary, rejecting the assessee's claim that it should be based on the net salary after recoveries. The AAC, however, accepted the assessee's contention, which the Tribunal upheld.The court noted that section 40(c)(iii) should be strictly construed, as it curtails allowable expenditure under sections 30 to 39. The court emphasized that only the net amount claimed as expenditure, after adjustments for recoveries, should be considered for disallowance purposes.Conclusion: The salary payable should be reduced by recoveries from managed companies when computing disallowable amounts under section 40(c)(iii). The second question was answered in the affirmative, in favor of the assessee.Final Judgment:Both issues were resolved in favor of the assessee. The premium paid for medical insurance did not constitute a benefit or perquisite under section 40(c)(iii), and the salary payable should be reduced by recoveries from managed companies for computing disallowable amounts. Each party was ordered to bear its own costs.