of Income Tax, Bombay City-III, Bombay Vs. British Bank of Middle East
 Insc 442 (30
Bharucha, Y.K. Sabharwal & Ashok Bhan Y.K. Sabharwal, J.
is a non-resident banking company. In respect of assessment years 1975-76 and
1976-77 the assessing officer, for the purpose of working of the disallowance
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 of Income-tax
(Appeals) held that the value of perquisite of free cars provided to the
employees is 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. Britannia Industries Co. Limited
(135 ITR 35).
instance of the Revenue, the question that was referred to the High Court for
its opinion was as follows:
on the facts and in the circumstances, and on a correct 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 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 ITR
Revenue is in appeal before this court on grant of leave.
question for determination is 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, 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 invoked 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 expenditure to be
disallowed to an employer- assessee under Section 40A(5).
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 assessee. That has been followed by some High Courts, including Bombay
High Court. According to this opinion, for determining 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.
40A(5) and Rule 3, to the extent relevant and as those provisions stood at the
material time, read as under:
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 relating to the
computation of income under the head `Profits and gains of business or
Where the assessee,-
any expenditure which results directly or indirectly in the payment of any
salary to an employee or a former employee, or
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
clause (b), so much of such expenditure or allowance as is in excess of the
limit specified in respect thereof in clause (c) shall not be allowed as a
that where the assessee is a company, so much of the aggregate of-
expenditure and allowance referred to in sub-clauses (i) and (ii) of this
expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c)
of section 40.
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:.........
The limits referred to in clause (a) are the following, namely:- ......
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 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 .....
2.-In this sub- section,-.....
accommodation provided to the employee by the assessee ;
concession in the matter of rent respecting any accommodation provided to the
employee by the assessee ;
benefit or amenity granted or provided free of cost or at concessional rate to
the employee by the assessee ;
by the assessee of any sum in respect of any obligation which, but for such
payment, would have been payable by the employee; and
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.
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 shall be determined in
accordance with the following clauses, namely :-....
The value of a motor car provided by the employer for use by the assessee
exclusively for his private or personal purposes shall be determined as the sum
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) 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:
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 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 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 the basis provided in the Table below:
Value of perquisite per calendar month 1 2 3 Where the h.p. rating of the car
does not exceed 16 or the cubic capacity of the engine does not exceed 1.88 litres
Where the h.p. rating of the car exceeds 16 or the cubic capacity of the engine
exceeds 1.88 litres 1.Where the motor car is owned or hired by the employer and
all the expenses on maintenance and running are met or reimbursed to the assessee
by the employer. Rs.300 Rs.400
Where the motor car is owned or hired by the employer but the expenses on
maintenance and running for the assessee's private or personal purposes are met
by the assessee.
that where a chauffeur is also provided to run the motor car, the value of the
perquisite as calculated in accordance with this Table shall be increased by a
sum of Rs.150 per month:
where one or more motor cars are owned or hired by the employer of the assessee
and the assessee is allowed the use of such 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 purposes:
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
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 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 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:
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 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 answered the
question in favour of the assessee following its earlier decision in the case
of Geoffrey Manners. In the said 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 applying the
same for valuing the perquisites 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 the Calcutta High Court in the
case of Britannia Industries Ltd.
Commissioner of Income Tax v. Rajesh Textiles Mills Ltd. (173 ITR 179) the
Gujarat High Court has analyzed 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 point of view of their
deductibility from the income of the employer under the head "Profit and
Gain of business or profession".
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 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.
Rule 3 was erroneously invoked for determining the deduction of expenditure in
the assessment of assessee- employer.
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 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".
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 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.
employees and directors, and if paid, the employer would not be able to claim
the entire 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. It
contemplates the deduction of actual expenditure or on estimate basis where the
details of the actual expenditure are not furnished.
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.
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 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.
is no anomaly in applying Section 40A(5) while making assessment of the assessee-employer
and it will 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.
parting we wish to place on record our sincere gratitude for the valuable
assistance rendered by Mr. B. Sen, Senior Advocate who readily acceded to our
request to assist the court as an amicus curiae since the respondent did not
appear in the matter despite being served.
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.
Bhan) August 30, 2001.