1996 (3) TMI 6 - SC - Income Tax

Cash payments to employees for allowances not perquisites under Income-tax Act

The Court held that cash payments made by an assessee to employees for house rent allowance, conveyance allowance, and medical reimbursement do not ... Scope of section 40(a)(v) regarding perquisites and expenditure - scope of section 40A(5) regarding perquisites and salary limits - meaning of 'perquisite' and benefits or amenities - cash payments versus provision of perquisites - payment by the employer of an employee's obligation to a third partyScope of section 40(a)(v) regarding perquisites and expenditure - cash payments versus provision of perquisites - meaning of 'perquisite' and benefits or amenities - Cash payments made by an assessee directly to its employees are within the mischief of section 40(a)(v) or not. - HELD THAT: - Section 40(a)(v) applies to 'any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite' to an employee. The Court held that the language of the sub-clause contemplates expenditure that effects the provision of a benefit, amenity or perquisite and is not apt to include mere cash payments made directly to the employee. The qualifying phrase 'whether convertible into money or not' indicates that non-monetary benefits provided by the employer fall within the provision, but does not convert unconditional cash payments to the employee into 'perquisites' under the sub-clause. Where the employer itself provides the amenity (for example, rent-free accommodation or payment to a third party on behalf of the employee), the expenditure falls within the sub-clause; by contrast, handing over cash to the employee so that the employee procures the benefit does not, on the language of section 40(a)(v), amount to expenditure directed to the provision of a perquisite.Cash payments by the assessee to employees do not fall within the ambit of section 40(a)(v); they are to be treated as salary and not as perquisites for the purposes of that provision.Scope of section 40A(5) regarding perquisites and salary limits - cash payments versus provision of perquisites - payment by the employer of an employee's obligation to a third party - Cash payments made by an assessee directly to its employees are within the mischief of section 40A(5)(a)(ii) or not. - HELD THAT: - Section 40A(5) is structurally wider than section 40(a)(v) but, in material respects, similar in dealing with expenditures that result in payment of salary or in provision of perquisites. The definition of 'perquisite' in Explanation 2 to section 40A(5) encompasses benefits, amenities and payments by the assessee of obligations of the employee to third parties; however, the Court found that, similar to section 40(a)(v), the statutory language of section 40A(5)(a)(ii) does not bring within its mischief unconditional cash payments made directly to employees. The provisions do capture payments made by the employer to third parties on account of employee obligations (which are treated as perquisites), but not direct cash disbursements to the employee intended to enable the employee to procure a benefit.Cash payments by the assessee to employees do not fall within the ambit of section 40A(5)(a)(ii); such payments are to be treated as salary (subject to any separate limits in the provision) and not as perquisites under that sub-section.Final Conclusion: The Supreme Court held that cash payments made by an assessee directly to employees do not constitute 'perquisites' within the meaning of section 40(a)(v) or section 40A(5)(a)(ii); payments by an employer to third parties on account of employee obligations may, however, be captured as perquisites. The appeals are dismissed. Issues Involved:1. Whether cash payments made by an assessee to its employees fall within the mischief of section 40(a)(v) and section 40A(5) of the Income-tax Act.Detailed Analysis:Issue 1: Applicability of Section 40(a)(v)Section 40(a)(v) was introduced by the Finance Act, 1968, effective from April 1, 1969, to limit deductible expenditures incurred by assessees in providing benefits, amenities, or perquisites to higher-paid employees. The provision limits deductions to one-fifth of the salary or Rs. 1,000 per month, whichever is less. It includes expenditures on assets used by employees and payments for obligations otherwise payable by employees. The section was omitted by the Finance (No. 2) Act, 1971, which introduced section 40A(5) with similar restrictions but broader scope.Issue 2: Applicability of Section 40A(5)Section 40A(5) replaced section 40(a)(v) and imposed restrictions on expenditures related to employee salaries and perquisites. Sub-section (5)(a)(i) limits salary-related expenditures exceeding Rs. 5,000 per month, while sub-section (5)(a)(ii) restricts perquisite-related expenditures to 20% of the salary or Rs. 1,000 per month, whichever is less. The term 'perquisite' includes benefits, amenities, and payments for obligations otherwise payable by employees.Case Analysis: Civil Appeal No. 5946 of 1994In this case, the assessee, a limited company, made cash payments to employees for house rent allowance, conveyance allowance, and medical reimbursement during the assessment year 1982-83. The Income-tax Officer disallowed these payments under section 40A(5). The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal upheld the assessee's contention that cash payments are not 'perquisites' under section 40A(5). The Delhi High Court rejected the Revenue's application under section 256(2), leading to this appeal.Case Analysis: Civil Appeal No. 2215 of 1978This appeal concerns the assessment year 1971-72 and the applicability of section 40(a)(v). The Bombay High Court rejected the Revenue's application under section 256(2) regarding whether cash payments to directors should be considered 'perquisites.' The Supreme Court granted leave due to conflicting High Court opinions.Judgment Analysis:The Court examined the language of section 40(a)(v) and section 40A(5), focusing on whether cash payments fall within their ambit. The Court noted that section 40(a)(v) limits deductions for expenditures providing benefits, amenities, or perquisites, whether convertible into money or not. However, cash payments directly to employees do not fall within this definition, as they are treated as salary, not perquisites.Similarly, section 40A(5) includes structural changes but is materially similar to section 40(a)(v). The term 'perquisite' in section 40A(5) includes benefits, amenities, and payments for obligations otherwise payable by employees. However, cash payments to employees are not considered perquisites under this section either.Conclusion:The Court concluded that cash payments made by an assessee to employees do not fall within the ambit of section 40(a)(v) or section 40A(5)(a)(ii). The Court disagreed with the Kerala High Court's opinion in Commonwealth Trust Ltd. and agreed with other High Courts, including those in Karnataka, Delhi, Calcutta, Bombay, Andhra Pradesh, Madras, and Gujarat.Final Decision:The appeals were dismissed, affirming that cash payments to employees are not 'perquisites' under sections 40(a)(v) and 40A(5) of the Income-tax Act. No costs were awarded.