1988 (1) TMI 103 - AT - Income Tax

Medical expense reimbursements over Rs. 5000/year = taxable perquisites

The Tribunal upheld the Commissioner of Income Tax's order that reimbursement of medical expenses exceeding Rs. 5000 per annum should be treated as ... Revisional powers under section 263 - limitation for exercise of revisional jurisdiction - reimbursement of medical expenses as perquisite - binding effect of CBDT circulars issued under section 119 - beneficial construction of executive circulars and prospective operation - examination of genuineness of expenditure by assessing officerRevisional powers under section 263 - limitation for exercise of revisional jurisdiction - Validity of the Commissioner's order under section 263 dated 18-12-1986 as regards limitation. - HELD THAT: - The Tribunal upheld the Revenue's submission that, by reason of the Taxation Laws (Amendment) Act, 1984 (effective from 1-10-1984), the period of limitation for passing an order under section 263 is two years from the end of the financial year in which the assessment was made, extending the limitation in the present case to 31-3-1987. Since the assessments for the years under consideration were completed on 31-8-1984, the Commissioner's order dated 18-12-1986 was within the extended limitation period. The Tribunal relied on its earlier detailed consideration in N. Mahalingam and found no infirmity on the ground of limitation. [Paras 4, 5]The Commissioner's order dated 18-12-1986 was within time and not barred by limitation.Reimbursement of medical expenses as perquisite - binding effect of CBDT circulars issued under section 119 - beneficial construction of executive circulars and prospective operation - examination of genuineness of expenditure by assessing officer - Whether the Commissioner was justified in treating employer reimbursements in excess of Rs. 5,000 as perquisites for AYs 1983-84 and 1984-85, and whether the CBDT Circular dated 31-12-1985 (Circular No. 445) could be applied to those years. - HELD THAT: - The Tribunal analysed the sequence of CBDT circulars: Circular No. 336 (16-4-1982) limiting non-taxable reimbursement to one month's salary, Circular No. 376 (6-1-1984) reducing the threshold to Rs. 5,000 (with effect from AY 1984-85), and Circular No. 445 (31-12-1985) widening the concession by excluding reimbursement actually incurred in recognised public hospitals from being treated as perquisites, but expressly declaring that its clarifications would come into force from AY 1986-87. The Tribunal applied the settled principle from K. P. Varghese that beneficial CBDT circulars are binding on revenue officers, but also held that where a circular confers a benefit and specifies prospective operation, the technical legal effect is prospective from the stated assessment year. Consequently, on a strict legal construction the Commissioner was justified in invoking section 263 to restrict the non-taxable allowance to the maximum then permissible (Rs. 5,000) for AYs 1983-84 and 1984-85. Recognising the hardship which the Board itself acknowledged in Circular No. 445, the Tribunal observed that equitable/sympathetic consideration could be given by the Department if an application is made and the assessee satisfies authorities that the expenditure falls within the terms of the 31-12-1985 Circular; the genuineness of the expenditure must be examined by the assessing officer. [Paras 6, 7, 8]The Commissioner was entitled to treat amounts in excess of Rs. 5,000 as perquisites for AYs 1983-84 and 1984-85; however, the Tribunal urged that the Department may sympathetically consider relief on application if the assessee proves the expenditure falls within the terms of Circular No. 445 and the assessing officer verifies genuineness.Final Conclusion: The appeals are dismissed: the revisional order of the Commissioner under section 263 was held timely and correctly limited the non-taxable reimbursement to the ceiling then applicable, although the Tribunal invited sympathetic consideration by the Department under the terms of CBDT Circular No. 445 if the assessee applies and establishes that the expenditure meets the Circular's conditions. Issues Involved1. Assessability of reimbursement of medical expenses as perquisites for the assessment years 1983-84 and 1984-85.2. Validity of the Commissioner's assumption of jurisdiction under section 263.3. Limitation period for passing the order under section 263.Detailed Analysis1. Assessability of Reimbursement of Medical Expenses as PerquisitesThe primary issue was whether the reimbursement of medical expenses for the treatment of the assessee's wife should be treated as perquisites under section 17 of the Income-tax Act for the assessment years 1983-84 and 1984-85. The Commissioner of Income Tax (CIT) noted that the amounts received by the assessee exceeded the permissible limit of Rs. 5000 per annum as per Circular No. 376, dated January 6, 1984, and thus, the excess amounts should be considered as perquisites. The assessee argued that according to the Circular dated December 31, 1985, such reimbursements should not be treated as perquisites if incurred in recognized hospitals. However, the Tribunal upheld the CIT's order, stating that the benefits of the 1985 Circular were applicable only from the assessment year 1986-87 onwards. The Tribunal emphasized that the earlier Circulars, which allowed a maximum exemption of Rs. 5000, were applicable for the relevant assessment years.2. Validity of the Commissioner's Assumption of Jurisdiction under Section 263The assessee contended that the CIT's assumption of jurisdiction under section 263 was erroneous because the medical reimbursements should not be treated as perquisites. The Tribunal, however, upheld the CIT's jurisdiction, stating that the CIT was correct in invoking section 263 to revise the assessment orders. The Tribunal noted that the CIT had the authority to modify the assessments to include the excess medical reimbursements as perquisites, as per the prevailing Circulars applicable to the relevant assessment years.3. Limitation Period for Passing the Order under Section 263The assessee argued that the CIT's order dated December 18, 1986, was barred by limitation since the assessment orders were passed on August 31, 1984, and the limitation period ended on August 31, 1986. However, the Tribunal clarified that due to the amendment brought by the Taxation Laws (Amendment) Act, 1984, effective from October 1, 1984, the limitation period was extended to two years from the end of the financial year in which the assessment was made. Therefore, the CIT's order was within the permissible time limit, as the limitation period expired on March 31, 1987.ConclusionThe Tribunal concluded that the CIT's order was valid and within the limitation period. The reimbursement of medical expenses exceeding Rs. 5000 per annum should be treated as perquisites for the assessment years 1983-84 and 1984-85, as per the applicable Circulars. The Tribunal expressed a hope that the department should consider the assessee's case sympathetically if an application for relief is made, considering the hardship highlighted by the Circular dated December 31, 1985. The appeals were dismissed.