1978 (7) TMI 58 - HC - Income Tax

Deduction of overseas, managing and transport allowances and scope of 'benefit' under section 40(c)(iii) excluding direct cash payments

Construction of the expression benefit, amenity or perquisite in section 40(c)(iii) excludes direct cash paid to an employee in ordinary meaning; the ... Benefit or amenity or perquisite - provision of any benefit or amenity or perquisite whether convertible into money or not - distinction between cash allowances and benefits in kind - payments by the company in respect of any obligation which but for such payment would have been payable by the employee - deductibility of salary-related expenditure under business provisionsBenefit or amenity or perquisite - whether convertible into money or not - distinction between cash allowances and benefits in kind - Whether 'overseas allowance' and 'managing allowance' fall within the expression 'benefit or amenity or perquisite' in clause (c)(iii) of section 40 for assessment year 1966-67. - HELD THAT: - The court held that, in ordinary meaning and in the context of the statutory language as amended in 1964, the phrase 'which results directly or indirectly in the provision of any benefit or amenity or perquisite whether convertible into money or not' excludes cash paid directly to an employee. The 1964 amendment deleted 'remuneration' from sub-clause (iii) and introduced the qualifying phrase, indicating a legislative distinction between cash remuneration and benefits in kind. The qualifying phrase does not grammatically or properly attach only to 'perquisite' but to the whole series 'benefit or amenity or perquisite'. The mischief of the provision is directed at expenditure which provides benefits or amenities in kind or payments made by the company to meet obligations of the employee (i.e., benefits convertible into money by meeting employee obligations), not direct cash allowances paid to employees. Authorities construing similar words in other statutes were held inapposite where context differs. On these grounds the court answered the reference in favour of the assessee.The Tribunal was correct; overseas allowance and managing allowance do not fall within 'benefit or amenity or perquisite' in clause (c)(iii) and the allowance claimed for 1966-67 is allowable.Benefit or amenity or perquisite - payments by the company in respect of any obligation which but for such payment would have been payable by the employee - deductibility of salary-related expenditure under business provisions - Whether overseas allowance, managing allowance, devaluation allowance and transport allowance fall within the expression 'benefit or amenity or perquisite' in clause (c)(iii) of section 40 for assessment year 1967-68. - HELD THAT: - Applying the same construction, the court held that the allowances claimed (including transport allowance) are not caught by the phrase 'benefit or amenity or perquisite' as envisaged by clause (c)(iii) because the sub-clause is aimed at benefits or amenities in kind or company payments made to discharge employee obligations. The court specifically observed that the transport allowance claimed is covered by the scheme of clause (c)(iii) in a manner that permits the deduction claimed by the assessee. Therefore, for the reasons given in the earlier issue and this additional observation regarding transport allowance, the Tribunal's conclusion was affirmed and the deductions allowed.The Tribunal was correct; the stated allowances for 1967-68 (including transport allowance) do not fall within 'benefit or amenity or perquisite' in clause (c)(iii) and the allowances claimed are allowable.Final Conclusion: Both references are answered in the affirmative in favour of the assessee: the Tribunal correctly held that the specified allowances for assessment years 1966-67 and 1967-68 did not fall within the expression 'benefit or amenity or perquisite' in clause (c)(iii) and the deductions claimed are allowable. Issues Involved:1. Whether 'overseas allowance' and 'managing allowance' fall within the expressions 'benefit', 'amenity', or 'perquisite' u/s 40(c)(iii) of the I.T. Act, 1961 for the assessment year 1966-67.2. Whether 'overseas allowance', 'managing allowance', 'devaluation allowance', and 'transport allowance' fall within the expressions 'benefit', 'amenity', or 'perquisite' u/s 40(c)(iii) of the I.T. Act, 1961 for the assessment year 1967-68.Summary:Issue 1: Overseas and Managing Allowance (Assessment Year 1966-67)The assessee, M/s. Kanan Devan Hills Produce Company Ltd., claimed deductions for 'overseas allowance' and 'managing allowance' paid to employees, arguing these did not constitute 'benefit', 'amenity', or 'perquisite' u/s 40(c)(iii) of the I.T. Act, 1961. The ITO disallowed 40% of these amounts. The AAC and the Tribunal upheld the assessee's contention, leading to the revenue's appeal. The High Court held that cash payments directly to employees do not fall within the expressions 'benefit', 'amenity', or 'perquisite' as there is no question of convertibility to money. The deletion of 'remuneration' from the section by the Finance Act, 1964, reinforced this interpretation. The court answered the question in the affirmative, favoring the assessee.Issue 2: Overseas, Managing, Devaluation, and Transport Allowance (Assessment Year 1967-68)For the assessment year 1967-68, the assessee claimed deductions for 'overseas allowance', 'managing allowance', 'devaluation allowance', and 'transport allowance'. The ITO disallowed these claims, but the AAC and the Tribunal ruled in favor of the assessee. The High Court reiterated its stance that direct cash payments do not fall within the expressions 'benefit', 'amenity', or 'perquisite'. Additionally, the court noted that the deduction claimed for 'transport allowance' is covered by s. 40(c)(iii) itself. The court answered the question in the affirmative, favoring the assessee.Conclusion:The High Court concluded that direct cash payments to employees do not constitute 'benefit', 'amenity', or 'perquisite' u/s 40(c)(iii) of the I.T. Act, 1961. Both questions for the respective assessment years were answered in the affirmative, in favor of the assessee. There was no order as to costs.