S.B.MAJMUDAR, J. -
(1.)AT the instance of the Revenue, the following questions have been referred by the Tribunal for our
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the AAC was justified in valuing car perquisites in respect of the car given by the assessees for use to its two directors at Rs. 6,000 under S. 40A(5)(a)(ii) of the IT Act, 1961, and in deleting the addition of Rs. 33,809 out of the total addition of Rs. 39,809 being the actual expenditure incurred by the assessee on account of the motor car given by the assessee for use to its two directors ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the perquisites in respect of the furnished accommodation given by the assessee to its managing directors should be worked out on the basis of the relevant provisions of r. 3 of IT Rules, 1962 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in disallowing the amount of Rs. 39,300 being the actual expenditure incurred by the assessee in maintenance of residential accommodation for managing directors as perquisites under S. 40A(5) of the Act ? 4. Whether the expenditure of Rs. 2,810 being the value of canteen coupons to guests and technicians is disallowable under S. 37(2B) of the IT Act, 1961 ? "
(2.)THE facts leading to this reference may be noted at the outset. The assessee is a textile mill. The year of assessment is 1972 73. So far as question No. 1 is concerned, the ITO noted that the
assessee company had spent an amount of Rs. 39,809 towards expenditure on motor cars given to
its managing directors for their use at Bombay. He had disallowed this amount under the provision
of S. 40A(5) of the IT Act, 1961 (" the Act " for short), being the actual expenditure incurred by the
assessee on this car plus depreciation. In appeal, the AAC, following the decision of the Tribunal in
an earlier case, held that the disallowance may be confined to Rs. 6,000 only. In appeal, before the
Tribunal, at the instance of the Revenue, it was urged that the entire amount should be disallowed.
The Tribunal, however, following a previous decision in the case of Rohit Mills Co. Ltd. in I.T.A. No.
125/Ahd/1976/77 decided on May 24, 1977, held that the AAC was justified in valuing the perquisites in the light of the provisions of r. 3 of the IT Rules in preference to the actual
So far as referred questions Nos. 2 and 3 are concerned, the relevant facts are as under. The assessee company gave furnished accommodation to the managing directors at Bombay. In the
relevant year, the actual expenditure of the assessee in that connection was Rs. 39,300. The ITO
considered this amount as perquisite and disallowed the same under S. 40A(5) of the Act. In
appeal, the AAC held that 12 1/2per cent of the total remuneration of the directors should be
considered as perquisites for the purpose of disallowance under S. 40A(5) of the Act. The Tribunal,
in appeal, for the reasons recorded in the order, held that the perquisites in respect of the
furnished accommodation should be worked out on the basis of the relevant provisions of r. 3 of
the IT Rules as applicable to the asst. year 1972 73.
3. We need not mention the facts relating to question No. .4 as the learned advocate for the Revenue at the time of hearing of this reference stated that he does not press the said question for
our opinion. We, therefore, do not examine the said question treating it to be as not pressed.
(3.)THE aforesaid resume of facts indicates that the main dispute between the parties centres round the interpretation of the relevant provisions of S. 40A(5) of the Act. The said provisions which held
the field at the relevant time, therefore, are required to be noted at the outset. The said provisions
along with other relevant provisions read as under :
" 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession'. (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b) of this sub section, and the ITO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : Provided that the provisions of this sub section shall not apply in the case of an assessee being a company in respect of any expenditure to which sub clause. (i) of cl. (c) of S. 40 applies. (b) The persons referred to in cl. (a) are the following, namely: (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual ; ...... (5)(a) Where the assessee (i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of cl. (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in cl. (c) shall not be allowed as a deduction : Provided that where the assessee is a company, so much of the aggregate of (a) the expenditure and allowance referred to in sub cls. (i) and (ii) of this clause; and (b) the expenditure and allowance referred to in sub cls. (i) and (ii) of cl. (c) of S. 40, in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of seventy two thousand rupees, shall in no case be allowed as a deduction: ...... (c) The limits referred to in cl. (a) are the following, namely: ... (ii) in respect of the aggregate of the expenditure and the allowance referred to in sub cl. (ii) of cl. (a), one fifth of the amount of the salary payable to the employee or an amount calculated at the (i) where the assessee is an individual any relative of the assessee ; (ii) whether the assessee is a company, firm, association of persons or HUF any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member ; rate of one thousand rupees for each month or part thereof comprised in the period of employment in India of the employee during the previous year, whichever is less. Explanation 1. The provisions of this sub section shall apply notwithstanding that any amount not to be allowed under this sub section is included in the total income of the employee or, as the case may be, the former employee. Explanation 2. In this sub section (a) 'salary' has the meaning assigned to it in cl. (1) r/w cl. (3) of S. 17 subject to the following modifications, namely: (1) in the said cl. (1), the word 'perquisites' occurring in sub cl. (iv) and the whole of sub cl. (vii) shall be omitted; (2) in the said cl. (3), the references to ' assessee ' shall be construed as references to 'employee or former employee ' and the references to 'his employer or former employer' and 'an employer or a former employer' shall be construed as references to ' the assessee'; (b) perquisite means (i) rent free accommodation provided to the employee by the assessee; (ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee (iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee ; (iv) payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee; and (v) payment by the assessee of any sum, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity. "