1994 (3) TMI 1 - SC - Income Tax

Section 40A(5) ceiling applies to allowances including depreciation under section 40(a)(v), aligning with section 40(c)(iii) intent

C.W.S. (India), Periakaramalai Tea And Produce Co. Limited Versus Commissioner of Income-Tax

The SC held that section 40(a)(v) is an expanded version of section 40(c)(iii) and that the statutory ceiling under section 40A(5) applies to allowances, ... Interpretation of section 40(a)(v) as well as section 40A(5) - applicability of ceiling u/s 40A(5) to perquisites given for use to employees for his own purpose or benefit - depreciation allowance - HELD THAT:- It may be noticed that section 40(a)(v) is only an expanded version of section 40(c)(iii). The idea was to bring the allowances in respect of the assets owned by the assessee, which assets are used by its employee for his own purposes or benefit, within the net of ceiling. Section 40(c)(iii) did not cover such allowances and this was sought to be remedied. The idea was certainly not to bring about a different treatment of two situations in section 40(a)(v) referred to as clauses (i) and (ii) in this judgment. The consequence of accepting the assessee's interpretation would be that while the ceiling on expenditure would apply to a case falling under clause (i), no such ceiling would apply to a case falling under clause (ii) unless the employee governed by clause (ii) is also provided a benefit, amenity or perquisite falling under clause (i). The consequence would not only be discriminatory but also very incongruous, almost absurd. In principle, there is no distinction between the two cases or two situations, as they may be called. We are satisfied that the mere use of the word 'such' in clause (ii) should not have the effect of driving the court to place an interpretation upon the said clauses which is not only discriminatory but is highly incongruous. Sri G. B. Pai, learned counsel for the appellant-assessee, submitted that in the case of taxing enactments, literal construction should be adopted and that the courts should not try to mould or twist the language of the enactment for achieving the supposed intention of Parliament. While we agree that literal construction may be the general rule in construing taxing enactments, it does riot mean that it should be adopted even if it leads to a discriminatory or incongruous result. The intention of Parliament in enacting section 40(a)(v) can be gleaned from the memorandum explaining the provisions of the Finance Bill, 1968, which sets out the object behind this clause. So far as section 40A(5) is concerned, the aforesaid controversy does not and cannot arise for the reason that the second part of clause (ii) in sub-section (5) does not use the words 'such employee' but uses the words 'an employee'. It is not without significance that while substantially repeating the provision in section 40(a)(v) in section 40A(5)(a)(ii), Parliament has taken care to substitute the word 'such' with the word 'an'. Both section 40(a)(v) and section 40A(5)(a)(ii) speak of 'any allowance in respect of any assets of the assessee used by an employee'. The asset may be a building, a car, a refrigerator or an air-conditioner or any other asset. The allowance in respect of such assets certainly means and includes depreciation allowance on such assets. Issues Involved:1. Interpretation of section 40(a)(v) and section 40A(5) of the Income-tax Act, 1961.2. Applicability of the ceiling limit prescribed in section 40(a)(v) to expenditures incurred by the assessee.3. Inclusion of depreciation allowance and repair expenses under the term 'allowance' in section 40(a)(v) and section 40A(5).Detailed Analysis:1. Interpretation of section 40(a)(v) and section 40A(5) of the Income-tax Act, 1961:The judgment addresses the interpretation of section 40(a)(v) and section 40A(5) of the Income-tax Act, 1961. Section 40(a)(v) was in force until March 31, 1972, after which section 40A(5) came into effect. Both provisions aimed to limit the expenditure incurred by assessees that resulted in benefits, amenities, or perquisites to employees. The main controversy was whether the ceiling limit applied to expenditures related to assets used by employees for their own purposes or benefits.2. Applicability of the ceiling limit prescribed in section 40(a)(v) to expenditures incurred by the assessee:The court examined the contention that the ceiling limit prescribed in section 40(a)(v) did not apply to expenditures related to assets used by employees unless the employee also received a benefit, amenity, or perquisite. The court disagreed with this interpretation, stating that the intention of Parliament was to apply the ceiling limit to both situations mentioned in section 40(a)(v): (i) benefits, amenities, or perquisites provided to employees, and (ii) expenditures related to assets used by employees. The court emphasized that a literal interpretation leading to discriminatory or incongruous results should be avoided. The Full Bench of the Kerala High Court's interpretation, which applied the ceiling limit to both situations, was upheld.3. Inclusion of depreciation allowance and repair expenses under the term 'allowance' in section 40(a)(v) and section 40A(5):The court addressed two additional contentions raised by the assessee: (i) whether the term 'allowance' included depreciation allowance, and (ii) whether repair expenses were includible in the expenditure referred to in the provisions. The court held that the term 'allowance' in section 40(a)(v) and section 40A(5) included depreciation allowance, as the language of the provisions clearly encompassed any allowance in respect of assets used by employees. However, the court declined to address the issue of repair expenses, as it was not raised or answered by the High Court.Separate Judgments:The judgment also mentioned Civil Appeals Nos. 5018 to 5021 of 1991, where the first question was answered against the assessee based on the Full Bench decision in CIT v. Forbes, Ewart and Figgis (P.) Ltd. The second question in these appeals was referred to a three-judge Bench and was to be heard along with Civil Appeal No. 816 of 1988 (Industrial Chemicals v. CIT).Conclusion:The appeals, except for Civil Appeals Nos. 5018 to 5021 of 1991, were dismissed. The latter appeals were dismissed concerning the first question but were to subsist and be heard regarding the second question. No costs were awarded.