COMMISSIONER OF INCOME TAX, BOMBAY CITY-III, BOMBAYversusBRITISH BANK OF MIDDLE EAST

 COMMISSIONER OF INCOME TAX, BOMBAY CITY-111, BOMBAY                            A
                                     v.
                  BRITISH BANK OF MIDDLE EAST

                           AUGUST 30, 2001

   [S.P. BHARUCHA, Y.K. SABHARWAL AND ASHOK BHAN, JJ.]                          B

      Income Tax Act, I96l!Income Tax Rules, I962-Section 40A(5)/Rule
3(c)-Free cars provided by employer to employees for private use where
actual expenditure is not ascertainable-Perquisite value-Amount of
disa/lowance under the Section in the hands of employer-Applicability.of the    C
Rule in fixing the disal/owance-Held, Rule 3(c) is applicable to determine
income fi"om sa/alJ' in the hands of employee-As regards the employer,
perquisite value for disallowance should be estimated under Section 40A(5).

       In respect of respondent-assessee, for assessment years 1975-76 and      D
1976-77 Revenue estimated the value of perqu,isite of free cars provided to
the employees at 50% of the actual expenses of running and maintenance of
cars and disallowed the same under Section 40A(5) of the Income Tax Act,
1961. On appeal by the assessee, CIT (Appeals) hell~ that the value of the
perquisite should be fixed as per Rule 3(c) of the Income Tax Rules, 1962
and the same value should be considered for the purpose of making the           E
disallowance under Section 40A(5) of the Act. On appeal by Revenue, Tribunal
upheld the order of the CIT (Appeals) relying on the decision of the Calcutta
High Court in the case Commissioner of Income Tax, West Bengal v. Britannia
Industries Co. limited, [135 ITR 35 (Cal)). On reference by Revenue, the High
Court held in favour of the Revenue relying on the decision in Geoffrey         F
Manners & Co. ltd. v. Commissioner of Income Tax, (221 ITR 695 (Born))'.

         In appeal to this Court, Revenue contended that Rule 3 of the In~ome
Tax Rules, 1962 can be invoked only for computing the value of perquisite in
hands of employee as income from salary; that Rule 3 is not applicable for
determining the amount of expenditure to be disallowed to employer-assessee G
under Section 40A(5) of the Act; and that where the actual expenditure
incurred by an employer on providing the facility "of a car to the employee
for private use is not ascertainable, the disallowance under section 40A(5)
should be worked out on estimated basis.

                                    323
                                                                                H
    324                       SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A         Allowing the appeal, the Court

           HELD : 1.1. Section 40A(5) of the Income Tax Act, 1961 and Rule 3 of
    the Income Tax Rules, 1962 deal with different situations and different set of
    assessees-one dealing with the employer-assessee and the other the employee-
    assessee. Rule 3 deals with valuation for the purposes of computing the income
B   of the employees chargeable under the head "Salaries" whereas Section 40A(5)
    deals with computation of the income under the head "Profits and Gains of
    business or profession". The object of enacting Section 40A(5) was to
    discourage the assessees from incurring expenditure which resulted directly
    or ind!rectly in the provision of any benefit, amenity or perquisite to their
C   employees beyond a particular limit and any expenditure incurred beyond
    the prescribed limit was liable to be disallowed. The said provision constitutes
    a composite scheme and the purpose of prescribing a ceiling on expenditure
    in connection with directors and employees is to discourage the employer from
    paying excessive salaries, remuneration, perquisites etc. to its employees and
    directors, and if paid, the employer would not be able to claim the entire
D   expenditure as deduction. It will be able to claim deduction of expenditure
    upto the ceiling limit provided in the said section. This provision was enacted
    to curb extravagant expenditure. It does not contemplate deduction of notional
    value of perquisite assessed in the hands of employees. In contemplates the
    deduction of actual expenditure or on estimate basis where the details of the
E   actual expenditure are not furnished. [331-D-G]

           1.2. The employer has incurred the expenditure on the car and should
    be able to provide its figures. If he cannot, it is fair that the expenditure should
    be assessed on a realistic basis and not on the basis of Rule 3 which applies
    qua the employees, who cannot provide the figures of actual expenditure since
F   it is not he who has incurred it. [331-H; 332-AJ

         1.3. Section 40A(5) of the Act was enacted to provide for a ceiling on
  expenditure on employees. The object of Rule 3 is to give relief to the
  employees. Applying Rule 3 for the purpose of determining the deduction in
  relation to the assessment of the employer would be doing violence to and
G ignoring the legislative intent evident in Section 40A(5) of the Act. There is
  no anomaly in applying Section 40A(5) while making assessment of the
  assesee-employer and it will clearly be wrong to apply Rule 3. That cannot
  be done in the teeth of the language of the Section. [332-B-C[

          Commissioner of Income Tax v. Rajesh Textiles Mills Ltd, 1173 ITR 179
H (Guj)J, approved.
      C.l.T. v. BRITISH BANK OF MIDDLE EAST [Y.K. SABHARWAL, J.]        325
      Commissioner of Income Tax, West Bengal v. Britannia Industries Co.       A
Limited, 1135 ITR 35 (Cal)] and Geoffrey Manners & Co. Ltd v. Commissioner
of Income Tax, 1221 ITR 695 (Born)], overruled.

     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 95 of 1998.

      From the Judgment and Order dated 21.3 .97 of the Bombay High Court       B
in I.TR. No. 305/88 in R.A. No. 115-116/Bom/1983.

     Harish N. Salve, Solicitor General and R.P. Bhatt, K.C. Kaushik, Nikhil
Sakhardande, Rajiv Nanda, B.V. Bairam Das and Ms. Sushma Suri for the
Appellant.
                                                                                c
     B. Sen (A.C.) for the Respondent

     The Judgment of the Court was delivered by

      Y.K. SABHARWAL, J. The assessee is a non-resident banking D
company. In respect of assessment years I975-76 and 1976-77 the assessing
officer, for the purpose of working of the disal!owance under Section 40A(5)
of the Income Tax Act, 1961, estimated the value of the perquisite of free
cars provided to the employees at 50% of the expenses of running and
maintenance of the cars. On appeal the Commissioner oflncome-tax (Appeals)
held that the value of perquisite of free cars provided to the employees is E
fixed by Rule 3(c) of the Income-Tax Rules, 1962 and the same value should
be taken to be the value of the perquisite of the free cars provided to the
employees for the purpose of making the disallowance under Section 40A(5).
In further appeal the Income-Tax Appellate Tribunal upheld the order of
Commissioner of Income-tax (Appeals), in view of the decision of Calcutta
High Court in the case of Commissioner of Income-tax, West Bengal v. F
Britannia Industries Co. Limited, (135 !TR 35).

     At the instance of the Revenue, the question that was referred to the
High Court for its opinion was as follows:

       "Whether, on the facts and in the circumstances, and on a correct
                                                                                G
       interpretation of Section 40A(5) of the Income Tax Act, 1961 and
       Rule 3(c) of the Income Tax Rules, 1962, the Appellate Tribunal was
       justified in law in holding that the value of the free car provided to
       the employees for the purpose of working out the disallowance case
       of the employer i.e. the assessee company should be the same as          H
    326                      SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A           prescribed by Rule 3(c) of the Income Tax Rules, 1962 in the case
            of the employee.?"

          The High Court by impugned judgment and order answered the question
    in favour of the assessee, relying upon its earlier decision in the case of
    Geoffrey Manners and Co. Ltd. v. Commissioner of Income-tax, (221 !TR
B   695).

          The Revenue is in appeal before this court on grant of leave.

          The question for determination is that where the actual expenditure
    incurred by an employer on providing the facility of a car to the employee
C   for private use is not ascertainable, is the disallowance under Section 40A(5)
    to be worked out on an estimated basis or by following the provision of Rule
    3. According to Revenue, Rule 3 has no applicability since that rule can be
    invokd for computing the value of perquisite in the context of income of the
    employee from salary and has no relevance .for determining the amount of
D   expenditure to be disallowed to an employer-assessee under Section 40A(5).

           On the point in issue, there is divergence of opinion between the High
    Courts. The opinion of Calcutta High Court which is earliest in point of time
    is in favour of the ass.essee. That has been followed by some High Courts,
    including Bombay High Court. According to this opinion, for determining
E   the amount of expenditure under Section 40A(5), Rule 3 can be invoked. The
    contrary opinion, which is in favour of the Revenue has been expressed by
    the High Court of Gujarat and that has also been followed by some other
    High Courts, including Madras High Court. Which of these opinions lays
    down the correct law is the question before us.

F         Section 40A(5) and Rule 3, to the extent relevant and as those provisions
    stood at the material time, read as under:

           "40A. Expenses or payments not deductible in certain circumstances.-
           (!) The provisions of this section shall have effect notwithstanding
           anything to the contrary contained in any other provision of this Act
G          relating to the computation of income under the head 'Profits and
           gains of business or profession' ....

                (5) (a) Where the assessee,

                (i) incurs any expenditure which results directly or indirectly in
H           the payment of any salary to an employee or a former employee, or
C.I.T. v. BRITISH BANK OF MIDDLE EAST [Y.K. SABHARWAL, J.]           327
 (ii) incurs any expenditure which results directly or indirectly in the A
 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,
                                                                             B
     then, subject to the provisions of clause (b), so much of such
 expenditure or a1Iowa11ce as is in excess of the limit specified in
 respect thereof in clause (c) shall not be allowed as a deduction :

    Provided that where the assessee is a company, so much of the C
 aggregate of-

    (a) the expenditure and allowance referred to in sub-clauses (i)
 and (ii) of this clause; and

    (b) the expenditure and allowance referred to in sub-clauses (i)         D
 and (ii) of clause (c) of section 40.

      In respect of an employee or a former employee, being a di~ector
 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:......... E

     (c) The limits referred to in clause (a) are the following, namely:-


     (ii) in respect of the aggregate of the expenditure and the allowance
 referred to in sub-clause (ii) of clause (a), one-fifth of the amount of    F
 the salary payable to the employee or an amount calculated at the 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 2.-ln this sub-section,-.....                               G
 (b) 'perquisite' means,-

     (i) rent-free accommodation provided to the employee by the
 assessee;
                                                                             H
    328                     SUPREME COURT REPORTS (2001] SUPP. 2 S.C.R.

A               (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 ;

B               (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
C           superannuation fund, to effect an assurance on the life of the employee
            or to effect a contract for an annuity.

          Rule 3. Valuation of perquisites.-For the purpose of computing the
    income chargeable under the head 'Salaries' the value of the perquisites (not
    provided for by way of monetary payment to the assessee) mentioned below
D   shall be determined in accordance with the following clauses, namely :-

          (c) (i) The value of a motor car provided by the employer for use by
    the assessee exclusively for his private or personal purposes shall be detennined
    as the sum actually expended by the employer on the maintenance and running
    of the motor car during the relevant previous year (including remuneration,
E   if any, paid by the employer to the chauffeur) and, where the motor car is
    owned by the employer, as the     ' aggregate of such sum and the amount
    representing the normal wear and tear of the motor car:

         (ii) the value of a motor car provided by the employer for use by the
  assessee partly in the performance of his duties and partly for his private or
F personal purposes shall be determined to be a sum equal to that part of the
  amount actually expended by the employer on the maintenance and running
  of the motor car during the relevant previous year (including remuneration,
  if any, paid by the employer to the chauffeur) which can reasonably be
  attributed to the user of the motor car by the assessee for his private or
G personal purposes or, where the motor car is owned by the employer, the
  aggregate of such sum and a sum equal to that part of the amount representing
  the normal wear and tear of the motor car which can reasonably be attributed
  to the user of the motor car by the assessee for his private or personal
  purposes; so, however, that where a determination on the basis mentioned
  above presents difficulty, the value of the perquisite may be determined on
H the basis provided in the Table below:
      C.I.T. v. BRITISH BANK OF MIDDLE EAST [Y.K. SABHARWAL, J.]            329
                                     TABLE                                          A
                   Value of perquisite per calendar month

                                      2                             3
                             Where the h.p. rating of    Where the h.p. rating of
                             the car does not exceed    the car exceeds 16 or the   B
                             16 or the cubic capacity   cubic capacity of the
                             of the engine does not     engine exceeds 1.88
                             exceed 1.88 litres.        litres
I. Where the motor car is         Rs. 300                     Rs. 400
owned or hired by the                                                               c
employer and all the
expenses              on
maintenance and running
are met or reimbursed to
the assessee by the
employer.
                                                                                    D

2. Where the motor car             Rs. JOO                    Rs. 150
is owned or hired by the
employer but the
expenses               on                                                           E
maintenance and running
for the assessee's private
or personal purposes are
met by the assessee.


             Provided that where a chauffeur is also provided to run the motor
                                                                                    F
        car, the value of the perquisite as calculated in accordance with this
        Table shall be increased by a sum of Rs.150 per month:

            (iii) where one or more motur cars are owned or hired by the
        employer of the assessee and the assessee is allowed the use of such        G
        motor car, or all or any of such motor cars (otherwise than wholly
        and exclusively in the performance of his duties), an amount calculated
        in accordance with the Table under sub-clause (ii) and the proviso
        thereto, as if the assessee had been provided one motor car for use
        partly in the performance of his duties and partly for his private or
        personal purpose~:                                                          H
    330                      SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A               Provided that where two or more motor cars are allowed to be so
            used and the h.p. rating of any one of such motor cars exceeds 16 or
            the cubic capacity of the engine of any one of such motor cars exceeds
            1.88 litres, the assessee shall be deemed to have been provided by the
            employer with one motor car of h.p. rating exceeding 16 :

B               Provided further that where two or more motor cars are allowed
            to be so used and a chauffeur is also provided to run any such motor
            car, the value of the perquisite as so calculated shall be increased by
            a sum of Rs.150 per month : ..... "

          In Britannia Industries Ltd., the Calcutta High Court held that there
C cannot be two different standards for assessment in respect of the employee
  and the employer and it would lead to a very anomalous situation if the value
  of the perquisite of the car provided by the assessee company to the employees
  was taken at one figure for the purpose of assessment of the employees under
  the head "salaries" and was taken at a different figures for the purpose of
D working out a ceiling in the hands of the assessee company, which was the
  employer. It said that, "it is also equitable that what the payer gives is what
  the receiver receives". It accordingly said:

            " ... we hold that if the value of the perquisite of the car provided by
            the company to its employees is to be taken in the hands of the
E           employees for the purpose of assessment of the employees under the
            head 'Income from salaries' at Rs. 150 per month, the same value
            should be taken in the hands of the assessee-company which is the
            employer for the purpose of working out the ceiling under s.40( c)(iii)."

          The Bombay High Court in the judgment and order under appeal has
F answered the question in favour of the assessee following its earlier decision
  in the case of Geoffrey Manners. In the sai.d decision, the High Court held
  that though Rule 3 has been framed for determination of the value of a motor
  car provided by the employer to the employee for the purpose of computing
  the income chargeable under the head "Salaries", there is nothing wrong in
G applying the same for valuing the rerquisites for the purpose of computing
  the disallowance under Section 40A(5) of the Act because the rule has been
  framed by the Central Board of Revenue with a view to get over the difficulties
  that might arise in determining the value of the perquisite in respect of the
  use of the car owned and maintained by the employer of the employees. As
  already noticed, the Bombay High Court followed the opinion expressed by
H the Calcutta High Court in the case of Britannia Industries Ltd.
      C.l.T. v. BRITISH BANK OF MIDDLE EAST [Y.K. SABHARWAL, J.]           331
       In Commissioner of Income Tax v. Rajesh Textiles Mills Ltd. (173 ITR A
179) the Gujarat High Court has analised the legal position for coming to the
conclusion that the computation of monetary benefit of perquisites in the
hands of the employees has to be on an entirely different footing and concerns
entirely a different topic and the head of income as compared to the
computation of expenses actually incurred by the employer-assessee from the B
point of view of their deductibility from the income of the employer under
the head "Profit and Gain of business or profession". Dealing with the decision
in the case of Britannia Industries Ltd., the Gujarat High Court attempted to
distinguish it on facts and said that the general observations in that decision
were made on an entirely different statute scheme as compared to the one
with which that court was concerned. Those general observations of the C
Calcutta High Court were that there cannot be any two different standards for
assessment in respect of employee and employer. We, however, do not think
that the observations made in Calcutta case were on consideration of different
scheme or there was any distinction on facts. There, Rule 3 was erroneously
invoked for determining the deduction of expenditure in the assessment of
assessee-employer.                                                              D

       It has to be borne in mind that Section 40A(5) and Rule 3 deal with
different situations and different set of assessees - one dealing with the
employer-assessee and the other the employee-assessee. Rule 3 deals with
valuation for the purposes of computing the income of the employees               E
chargeable under the head "Salaries" whereas Section 40A(5) deals with
computation of the income under the head "Profits and Gains of business or
profession". The object of enacting Section 40A(5) was 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 and any expenditure incurred beyond the prescribed limit       F
was liable to be disallowed. The said provision constitutes a composite scheme
and the purpose of prescribing a ceiling on expenditure in connection with
directors and employees is to discourage the employer from paying excessive
salaries, remuneration, perquisites etc. to its employees and directors, and if
paid, the employer would not be able to claim the entire expenditure as           G
deduction. It will be able to claim deduction of expenditure upto the ceiling
limit provided in the said section. This provision was enacted to curb
extravagant expenditure. It does not contemplate deduction of notional value
of perquisite assessed in the hands of employees. It contemplates the deduction
of actual expenditure or on estimate basis where the details of the actual
expenditure are not furnished.                                                    H
    332                     SUPREME COURT REPORTS [2001) SUPP. 2 S.C.R.

A           The employer has incurred the expenditure on the car and should be
    able to provide its figures. If he cannot, it is fair that the expenditure should
    be assessed in a realistic basis and not on the basis of Rule 3 which applies
    qua the employee, who cannot provide the figures of actual expenditure since
    it is not he who has incurred it.

B          The High Courts of Calcutta and Bombay have not properly considered
    that Section 40A(5) and Rule 3 operate in different fields and apply to different
    set of assessees. The provision of the Act was enacted to provide for ceiling
    on expenditure on employees. The object of the rule is to give relief to the
    employees. Applying Rule 3 for the purpose of determining the deduction in
C   relation to the assessment of the employer would be doing violence to and
    ignoring the legislative intent evident in Section 40A(5). The question is not
    whether there is anything wrong in applying Rule 3 or any anomalous situation
    arising on account of determining different values of the same perquisite in
    the hand of employee or employer-assessee. There is no anomaly in applying
    Section 40A(5) while making assessment of the assessee-employer and it will
D   clearly be wrong to apply Rule 3. That cannot be done in the teeth of the
     language of the section. In our opinion the law has been correctly laid down
    by Gujarat High Court and not by the Calcutta and Bombay High Courts.

          Before parting we wish to place on record our sincere gratitude for the
    valuable assistance rendered by Mr. B. Sen, Senior Advocate who readily
E   acceded to our request to assist the court as an amicus curiae since the
    respondent did not appear in the matter despite being served. In the conclusion,
    setting aside the impugned judgment and order of the High Court, we allow
    the appeal and answer the question in the negative in favour of the Revenue.
    No costs.
F
    B.S.                                                           Appeal allowed.