C.W.S. (INDIA) LIMITEDversusTHE COMMISSIONER OF INCOME TAX

     I




                              C.W.S. (INDIA) LIMITED                                         A
•,                                       v.
                        THE COMMISSIONER OF INCOME TAX

                                        MARCH 1,1994

                   (B.P. JEEVAA REDDY AND B.L. HANSARIA, JJ.)                                B

               Income tax Act, 1961: Sections 40{c)(iii), 40(a)(v) & 40A(5)-Section
         40(a)(v) in force upto 31-3-1972:-Section 40A(5) substituted with effect from
         1.4.1972-lnterpretation of the provisiort-Amenities or perquisites to
         employees beyond a particular limit-Disallowance of-Whether valid.                  c
               Intepretation of Statutes: Objects of all the rules of interpretation is to
         give effect to the object of the enactment having regard to the language
         useiJ-lntepretation not a mechanical exercise.

               Section 40(a)(v) of the Income tax Act, 1961 was in force till                D
         31.3.1972. It was substituted by Section 40A(S) with effect from 1.4.1972.
 •       Both provisions were substantially similar. The two provisions were In
         force successively form April 1,1963 to March 31,1989. These provisions
         were enacted with a view to discourage the assessees from Incurring
         expenditure which resulted directly or lmdirectly In the provision of any
         benefit, amenity or perquisite to their employees beyond a particular llmlL         E
         Any expenditure beyond the prescribed llmite was disallowed.

               In the present appeals, such disallow were challenged, raising ques·
         tions relatlug to the interpretation of Section 40(11)(v)

               Dismissing the appeals, this Court                                            F

               HELD: 1.1. While literary construction may be the general rule in
         construing taxing enactments, it d0t:• not mean that It should be adopted
         even if it leads to a discriminatory or incongrous result. Interpretation of
         statutes cannot be a mechanical exercise. Object of all the rules of inter·
                                                                                             G
         pretatlon is tb give effect to the object of the enactment having regard to
         the language used. (254-E)

               1.2. Section 40(a){v) of the Income tax Act, 1961 is only and 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           H
                                               247
                                                                                       I



    248                     SUPREME COlJRT Rl'POHIS                (1994)2 S.C.R.

A employee for his own purposes or benefit, within the net or 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). The consequence of accepting the
    assessee's interpretation would be that while tile ceiling un expenditure
    would apply to a certain case, no such ceiling would apply to certain other
B
    cases. The consequence would not only be discriminatory but also very
    incongruous, almost absurd. In principle, there is no distinction between
    the two cases or the two situations, as they may be called. Mere use of the
    word 'such" should not have the effect of driving the court to place an
    interpretation upon the said clause which is not only discriminatory but
c   is highly incongrous. [254-A-D]

           Commissioner of Income-tux, Kera/a-I v. Travancore Tea Estates Co.
    Ltd., 122 I.T.R. 557, approved.

          Commissioner of Income- Tax v. Forbes, Ewart and Figgies(P) Ltd., 138
D   I.T.R.1, disapproved.

          Maxwell's 'Interpretation of Statutes' (12th Edn.), referred to.

          2. So far as Section 40A(5) is concerned, controversy does not and
    cannot arise for the reason that the second part of clause (ii) in sub-section
E
    (5) does not use the words "such employee" but uses the words "an
    employee". It is not without signigificance that while substantially repeating.
    the provision in Section 40(a)(v) in Section 40A(5)(a)(ii), the Parliament
    bas taken care to substitute the word "such' with the word "an". [255-F]

F         3. Both Sections 40(a) (v) and 40(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. [255-H; 256-A]

G          4. In respect of the other question urged viz. that amount expended
    on repairs is not includible in the expenditure referred to in Sections
    4ll(a)(v) and 40A(5)(a)(ii), it does not appear from the order of the High
    Court that the said question was either referred to it or was answered by '
    it. Therefore, this Court declines to go into the said question. However, in
H   respe<'l of this question the relevant appeals shall subsist and shall be
I


                    C.W.S. LTD. v. C.1.T. (JEEVAN REDDY,J.]                 249

    heard along with pending Civil Appeal No. 8168 of1988 (Industrial Cbemi· A
    cals v. Commissioner of Income tax). [256-A·B)

            CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 677-82 of
    1987.

     .     From the Judgment and Order dated 13.9.85 of the Kerala High            B
    . Court in I.T.R. Nos. 55-60 of 1982.

                                       WITH
•
            C.A. Nos. 493-98/84, 487-92/84, 50180·21/91 and 4614-16/93.
                                                                                   c
          From the Judgment and Order dated 2.6.81, 11.9.91, 7.12.89 and
    27.1.89 of the Kerala High Court in I.T.R. Nos. 76, 79 to 82178, 44n9, O.P.
    Nos. 9261-62, 9329-34/89, and I.T.R. Nos. 376-77/85 and O.P. No. 3373 of
    1988-S.

          GB. Pai, R.F. Nariman, Mrs. A.K. Verma, D.N. Mishra, (for Mis D
    J.B.D. & Co.), S. Balakrishnan, M.K.D. Namboodry, KJ. John and Joseph
    Joy for the Appellants

          K.N. Shulda, Dr. K.P. Bhatnagar, T.V. Ratnam for B. Krishna Prasad
    for the Respondent.
                                                                                   E
            The Judgment of the Court was delivered by

            B.P. JEEVAN REDDY, J. CIVIL APPEAL NOS. 493-98 OF 1984.

           A common question arises in this batch of appeals. It pertains to the
     interpretation of Section 40(a)(v) as well as Section 40A(5) of the Income F
     Tax Act. Upto March 31, 1972, Section 40A(5) came into force and from
     April 1, 1972, Section 40A(5) came into force in its place. Both the
     provision were substantially similar. Indeed, Section 40(a)(v) was preceded
     by Section 40(c)(iii) which was, of course, applicable only to companies
     and not to other assessees.                                                 G
           Section 40 (c)(iii) introduced by Finance Act, 1973 with effect from
     April 1, 1963, as substituted by Finance Act, 1964, read as follows:

               "40. Amounts not deductible: Notwithstanding anything to the con-
               trary in Sections 30 to 38, the following amounts shall not be H
    250                  SUPREME COURT REPORTS                    [1994] 2 S.C.R.

A           deducted in computing the income chargeable under the head
            "profits and gains of business of profession"--

            (c) in the case of any co.mpany--

            "(iii) any expenditure incurred after the 29th day of February, 1964
B           which results directly or indirectly in the provision of any benefit
            or amenity or perquisite, whether convertiable into money or ntJt,
            to an employee (including any sum paid by the company in respect
            of an obligation which but for such payment would bave been
            payable by such employee), to the extent such expenditure exceeds
            one-fifth of the amount of salary payble to the employee for any
c           period of his employment after the aforesaid date:

                Provided that in computing the aforesaid expenditure any pay-
            ment by way of gratuity or the value of any travel concession or
            assistance referred to in clause (5) of section 10 or passage moneys
D           or the value of any free or concessional passage referred to in
            sub-clause(i) of clause (6) of that section or any sum referred to
            in clause (viii) of sub- section (i) of section 17 or in clause (v) of
            sub-section (2) of that section or the amount of any compensation
            referred to in clause (i) or any payment referred to in clause (ii)
            of sub- section (3) of that section or any payment referred to in
E           clause (iv) or clause (v) of sub section 1 of section 36 shall not be
            taken into account."

          By Finance Act, 1968, sub-clause (iii) in clause (c) of Section 40 was
    deleted and in its place sub-clause (v) was introduced in clause (a) of
F   Section 40. As introduced by the said Finance Act, the sub-clause read as
    follows:

            "40. Amounts not deductible: Notwithstanding anything to the
            contrary in sections 30 to 38, the following amounts shall be
            deducted in computing the income chargeable under the head
G           "profits and gains of business of profession'' -

            (a) in the case of any assessee-

            (v) any expenditure which results directly or inderectly in the
            provision of any benifit or amenity or perquisite, whether convert-
H           ible into money or not, to an employee (including any sum paid
                 C.W.S. LID. v. C.i.T. (JEEVAN REDDY, J.]                  251

         by the assessee in respect of any obligation which but for such A
         payment would have been payable by such employee) or any
         expenditure or allowance in respect of any assets of the assessee
         used by such employee either wholly or partly for his own purposes
       · or benefit, to the extent such expenditure or allowance exceeds
         one-fifth of the amount or salary payable to the employee, or an B
         amount calculated at the rate of one thousand rupees for each
         month or p;rrt thereof comprised in the peziod of his employment
         during the previous year, whichever is Jes•,'

                                                         (Emphasis supplied)

         (Provisos (1) & (2) and Explanations (1) and (2) - omitted as            C
         unnecessary).

       This sub-clause is applicable to all assessees including companies. By
virtue of the first proviso, this clause does not apply where the income
chargeable under the head "salaries" of the employee concerned is Rs.7,500        D
or less. Explanation (II) says that the word "salary' in this clause shall have
the meaning assigned to it in Rule 2(h) of Part-A of the Fourth Schedule
to the Act.

    · With effect from April 1, 1972, Section 40A(5) was introduced in
substitntion of Section 40(a)(v). As introduced by Finance Act, 1971, it          E
read as follows:

         '40A. Expenses or payments not deductible in certain circumstan-
         ces:-
         (S)(a) Where the assessee-
                                                                                  F
         (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 inderectly in
         the provision of any perquisite (whether convertible into money or G
         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 clause {b),
         so much or such expenditure or allowance as is in excess or the
         limit specified in respect thereof in clause (c) shall not be allowed H
                                                                                   '
    252                   SUPREME COURT REPORTS                  (1994) 2 S.C.R.

A           as a deduction:

            Provisos (1) and (2) - (omitted as unnecessary).

            Clauses (b) and (c) - (omitted as unoecessary).

B            Explanations (1) and (2) - (omitted as unnecessary)."

          The sub-section has been amended later in certain respects, but it is
    not necessary to notice them for the purpose of these cases. The sub-sec-
    tion has been omitted altogether by Direct Tax Law (Amendment) Act,
    1987 with effect from April 1.1989.
c         The provision aforesaid, which were in force successively from April
    1, 1963 to March 31, 1989, were enacted with a view to discourage the
    assessees from incurring expenditure which resulted directly or indirectly
    in the provision of any benefit, amenity or perquisite to their employees
    beyond a particular limit. Any expenditure incurred beyond the prescribed
D   limit was disallowed. The first and the main controversy in these appeals
    pertains to the interpretation of &ection 40(a)(v), to which we maY now
    turn.

           The main limb of clause (v) spoke of two situations, viz., (i)where
    an assessee incurred any expenditure which resulted directly or indirectly
E   in the porvision of any benefit or amenity or perquisite whether convertible
    into money or not, to an employee (including any sum paid by the assessee
    in respect or any obligation which but for such payment would have been
    payable by such employee); and (ii) any expenditure incurred by an
    assessee in respect of any assets belonging to it and any allowance in
F   respect of such assets, which were used by 'such employee' either wholly
    or partly for his own purposes or benefit. We shall refer to them hereafter
    as clauses (i) and (ii) for the sake of convenient reference. To both the
    above situations, the ceiling prescribed in the clause applied, the ceiling
    being lJ5th of the amount of the salary payable to the employee or an
    amount calculated @ one thousand rupees for each month, whichever was
G   less. (The first proviso stated that certain items shall not be taken into
    account in camputiog the expenditure and allowance referred to in the
    main limb of the clause). It may be noticed that the two situations, which
    we have set out in the preceding paragraph as (i) and (ii), are linked by
    the word "or".                                                                     t

H         The contention of the assessees, which was accepted by the Division
                         C.W.S. LTD. v. C.l.T. [JEEVAN REDDY).]                    253

         Bench of the Kerala High Court in Commissioner of Income-Tux, Kera/a-I A
         v. Travancore Tea Estates Co. Ltd., 122 l.T.R. 557 but rejected by the Full
         Bench in Commissioner of Income-Tax v. Forbes, Ewart and Piggies (P)
        Ltd., 138 l.T.R.1 is this: an employee using the assets of the assessee-
        employer for his own purposes and benfit falls within clause (ii); to such
        employee, the ceiling prescribed in clause (v) does not apply unless he is
        also in receipt of any benefit, amenity or perquisite mentioned in clause B
        (i); this is for the reason that clause (ii) uses the expression "such employee"
        which can only mean an employee referred to in clause (i). Therefore,
•.
        unless an employee is in receipt of any benefit, amenity or perquisite
        resulting from any expenditure incurred by the assessee within the meaning
        of clause (i), the ceiling prescribed in clause (v) will not apply to the
        expenditure incurred by the assessee over an asset - or to an allowance
                                                                                          c
        claimed by the assessee in respect of an asset - used by the employee for
        his own benefit within the meaning or clause (ii). The argument is built
        exclusively upon the words 'such employee' in clause (ii).

                We find it difficnlt to agree with the learned counsel for the asses-     D
         sees. The first thing to be noticed is that or the two clauses in sub-clause
'        (v), clause (i) was already there in Section 40(c)(iii). If an asset belonging
         to the assessee - say, for example, a furnished house - was placed in
         possession and enjoyment of its employee and it was being maintained by
         the assessee, there conld be little doubt that any expenditure incurred on
         such asset/house was subject to the ceiling prescribed therein. Similarly, if    E
         a house taken on rent by the assessee was furnished by the assessee and
        put in possession and enjoyment of its employee, the expenditure incurred
        in that behalf would equally have been .subject to the ceiling in Section
        40(c)(iii). Suppose, in another case, a house owned by the assessee (fur-
.       nished and maintained by the assessee) is similarly placed in possession
        and enjoyment of the employee and the assessee took on rent an air-con-           F
        ditioner and installed in the said house, the whole expenditure would have
        been subject to the ceiling in Section 40(c)(iii). Now, the question is
        whether the Parliament intended differently when it put in Section 40(a)(v)
        in the place of Section 40 (c)(iii). In this connection , it may be noted that
        Section 40(a)(v) was in force from April 1, 1%9 to March 31, 1972 only            G
        and that Section 40A(5) which came into force with effect from April 1,
        1972 [in place of Section 40(a)(v)] does not admit of any such controversy
    \   in view of the fact that it uses the words 'an employee' in the corresponding
        clause. Controversy .is limited only to Section 40(a)(v) and only because of
        the ·use of the words 'such employee'.
                                                                                          H
                                                                                     !
                                                                                     '


    254                   SUPREME COURT REPORTS                   [1994] 2 S.C.R.

A          Now, 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
B   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,
C   amenity or perquisite falling under clause (i). The consequence would not
    only be discriminatory but also very incongruous, almost absurd. In prin-
    ciple, there is no distinction between the two cases or two situations, as
    they may be called. We are satified that the mere use of the word 'such"
    in clause (ii) should not have the effect of driving the court to place an
D   interpretation upon the said clause which is not only discriminatory but is
    highly incongruous. Sri G.B. Pai; learned counsel for the respondent-asses-
    see, submitted that in case of trucing enactments, literary 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 the
    Parliament. While we agree that literary construction may be the gereral
E   rule in construing trucing enactments, it does not mean that it should be
    adopted even if it leads to a discriminatory or inoongruous result. Inter-
    pretation of statutes cannot be a mechanical exercise. Object of all the rules
    of interpretation is to give effect to the object of the enactment having
    regard to the language used. The intention of the Parliament in enacting
F   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. The Full Bench of the Kerala High Court has set out the memoran-
    dum in the judgment under appeal. In this connection, we may refer to the
    well-recognised rule of interpretation of statutes that where a literal inter-
    pretation leads to absurd or unintended result, the language of the statute
G   can be modified to accord with the intention of Parliament and to avoid
    absurdity. The following passage from Maxwell's 'Interpretation of Statutes'
    (12th Edn.) may usefully be quoted:
                                                                                         /


            '1. MODIFICATION OF THE LANGUAGE TO MEET THE
H           INTENTION.
'
                    C.W.S. Lill. v. C.I.T. [JEEVAN REDDY,J.]                   255

             Where the language of the statute, in its ordinary meaning and A
             grammatical construction, leads to a manifest contradiction of the
             apparent purpose of the enactment, or to some inconvenience or
             absurdity which can hardly have been intended, a construction may
             be put upon it which modifies the meaning of the words and even
             the structure of the sentence. This may be done by departing from B
             the rules of grammar, by giving an unusual meaning to particular
             words, or by rejecting them altogether, on the ground that the
             legislature could not possibly have intended what its words signify,
             and that the modifications made are mere corrections of careless
             language and really give the true meaning. Where the main object
             and intention of a statute are clear, it must not be reduced to a C
             nullity by the draftsman's unskilfulness or ignorance of the law,
             except in a case of necessity, or the absolute intractability of the
             language used. Lord Reid has said that he prefers to see a mistake
             on· the part of the draftsman in doing his revision rather than a
             deliberate attempt to introduce an irrational ruie: 'canons of con- D
             struction are not so rigid as to prevent a realistic solution.'

          We are, therefore, of the opinon that the Full Bench of the Kerala
    High Court was right in taking the view it did on this aspect and we agree
    with it
                                                                                      E
          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 withourt significance that while substantially repeat-
    ing the provision in Secticn40(a)(v) in Section 40A(5)(a)(ii), the Parlia-        F
    ment has taken care to substitute the word "such" with the word "an".

          Sri R.F. Nariman, learned counsel appearing for the assessee in Civil
    Appeal No. 4614-5 of 1993 raised two other contentions viz,. (i) the
    expression "allowance' in Section 40(a)(v) and Section 40A(5)(a)(ii) does
    not take in depreciation allowance; and (ii) that the amount expended on G
    repairs is not includible in the expenditu:e referred to in the said
~   provisions. So far as the first contention is concerned, it appears to be in
    the teeth of the language employed. 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 H
                                                                                    I


    256                   SUPREME COURT REPORTS                   [1994] 2 S.C.R.

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. So far as 'econd question urged by the learne6 counsel is
    concerned, it does not appear from the order of the High Court that the
    said question was either referred to it or was answered by it. We, therefore,
    decline to go into the said question.
B
    Civil Appeal Nos. 5018-21 of 1991:

        Sri Balakrishnan, learned counsel for the assessee in these appeals,
  stated that of the two questions referred in these matters, the first question
C was answered by the High Court against the assessee following the Full
  Bench decision in Commissioner of Income Tax v. Forbes Ewart and Figgies
  Pvt. Ltd. He says that the decision of this court on the said que.;tion in the
  connected appeals would govern the first question. But so far as the second
  question is concerned, he submitted that similar question arising in other
  cases have already been referred to a three-Judge Bench. Coonse~ says
D that those matters are still pending before this court. In view of the opinion
  expressed by us on the interpretation of Section 40(a)(v) and in view of the
  further circumstance that there is no room for such controversy in the light
  of the language used in Section 40A(5) ,the appeals are dismissed to the
  extent of first question. So far as the second question is concerned, the
E appeals shall subsist and shall be heard alongwith Civil Appeal No.8168 of
  1988 (Industrial Chemicals v. Commissioner of lllcome Tax), which appeal
  we are told involves a question identical to the second question arising in
  these appeals.

            For the above reasons, all the appeals except Civil Appeal Nos.5018-
F 21 of 1991 are dismissed. No costs.
        Civil Appeal Nos. 5018-21 of 1991 'are dismissed to the extent of first
  question [relating to Section 40A(5)] but shall subsist with respect to the
  second question and shall be heard 1i!ong with Civil Appeal No.8168 of
G 1988 (Industrial Chemicals v. Commissioner of Income Tax).

     G.N.                                                      Appeal dismissed.