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

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, ... Disallowance of expenditure providing perquisites, benefits or amenities to employees - allowance in respect of assets of the employer used by employees - interpretation of the phrase 'such employee' in a composite clause - purposive construction to avoid absurd or discriminatory results in taxing statutes - inclusion of depreciation within 'allowance' in respect of assetsDisallowance of expenditure providing perquisites, benefits or amenities to employees - allowance in respect of assets of the employer used by employees - interpretation of the phrase 'such employee' in a composite clause - purposive construction to avoid absurd or discriminatory results in taxing statutes - Whether the ceiling in section 40(a)(v) applies to expenditure or allowances in respect of employer's assets used by an employee even if the employee is not separately provided a benefit, amenity or perquisite under the first limb of the sub clause - HELD THAT: - Section 40(a)(v) contained two limbs: (i) expenditure resulting in provision of any benefit, amenity or perquisite to an employee, and (ii) expenditure or allowance in respect of employer's assets used by the employee. The assessee's contention that the words 'such employee' in clause (ii) limit its application only to employees already covered by clause (i) would produce a discriminatory and incongruous result whereby identical expenditures would attract different treatment depending on verbal linkage. The provision was enacted to extend the ceiling to allowances for assets used by employees (a remedial expansion of the earlier provision). Where a literal reading produces absurdity or defeats the apparent object of Parliament, a purposive construction is permissible to effectuate the statutory purpose. Applying that principle, the court held that clause (ii) is not confined to employees referred to in clause (i) and that the ceiling applies to expenditures and allowances in respect of employer's assets used by employees irrespective of separate provision of perquisites under clause (i).The ceiling in section 40(a)(v) applies to expenditure and allowances in respect of employer's assets used by employees independently of whether the employee is also provided a benefit, amenity or perquisite under the first limb.Interpretation of the phrase 'such employee' in a composite clause - disallowance of expenditure providing perquisites, benefits or amenities to employees - Whether the controversy arising under section 40(a)(v) persists under section 40A(5) - HELD THAT: - Section 40A(5), which replaced section 40(a)(v) from April 1, 1972, uses the phrase 'an employee' in the corresponding provision rather than 'such employee'. Because of this change in language, the narrow textual difficulty that arose under section 40(a)(v) does not and cannot arise under section 40A(5). Consequently, the interpretative controversy confined to the wording of section 40(a)(v) is obviated by the phrasing of section 40A(5).No like controversy arises under section 40A(5) because it uses 'an employee', removing the textual ambiguity present in section 40(a)(v).Allowance in respect of assets of the employer used by employees - inclusion of depreciation within 'allowance' in respect of assets - Whether 'allowance in respect of any assets of the assessee used by an employee' includes depreciation allowance - HELD THAT: - The language of both section 40(a)(v) and section 40A(5)(a)(ii) refers to 'any allowance in respect of any assets of the assessee used by an employee'. An asset may be a building, vehicle or other item; an allowance in respect of such assets reasonably and naturally includes the depreciation allowance attributable to those assets. The court found that this construction follows the ordinary meaning of the statutory phrase and the legislative purpose of bringing allowances for employer assets used by employees within the ceiling.Depreciation allowance in respect of employer's assets used by an employee falls within the expression 'allowance in respect of any assets' and is therefore subject to the statutory ceiling.Procedural remand for hearing with connected appeal - Disposition of pending second question in Civil Appeals Nos. 5018 to 5021 of 1991 - HELD THAT: - The court dismissed those appeals to the extent of the first question (concerning section 40A(5)) but left the second question undetermined. The second question raised in those appeals is identical to an issue pending in Civil Appeal No. 816 of 1988 (Industrial Chemicals v. CIT). The court directed that the second question in Civil Appeals Nos. 5018-5021 remain subsisting and be heard along with Civil Appeal No. 816 of 1988.The appeals are dismissed on the first question but the second question is left subsisting and remanded for hearing along with Civil Appeal No. 816 of 1988.Final Conclusion: The Court upheld the Full Bench view that the ceiling in section 40(a)(v) applies to expenditure and allowances in respect of employer's assets used by employees independently of the separate provision of perquisites; noted that the textual difficulty does not arise under section 40A(5) which employs the phrase 'an employee'; held that depreciation is included within 'allowance' in respect of assets; declined to decide an issue on repairs; and dismissed the appeals accordingly while leaving one group of appeals with a second question to be heard with a connected appeal. 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.