1. This is an assessee's appeal against the order of the Commissioner (Appeals)-II, Madras, dated 26-4-1989 and it relates to the assessment year 1986-87. The sole question involved in this appeal is whether the amount of Rs. 2,54,994 spent by the assessee-company towards the medical expenses, foreign travel, living and incidental expenses during the seven weeks stay of Shri A.M.M. Arunachalam, an employee of the assessee company, in United Kingdom is admissible as business expenditure.
2. The facts leading to the present appeal may be briefly stated as follows. The assessee is a non-industrial company, in which the public are not substantially interested. It provides consultancy, computer services, transit fiat accommodation and executive mess services, etc.
to its group companies and others. From the information furnished the following appear to be the same group of companies to which the assessee belongs:- The assessee-company was formed on 10-7-1972 and basically it was a service oriented company. One Shri A.M.M. Arunachalam has been working as adviser of the assessee-company being appointed under the terms of the appointment letter dated 17-1-1971. The terms of appointment as well as copy of the appointment letter dated 17-1-1971 were furnished.
The terms of appointment revealed that a sum of Rs. 4,250 is payable towards monthly salary, Rs. 450 per month towards engagement of a private servant; to be provided with medical facility both for him and for his wife, which is available under the assessee-company's medical insurance scheme. In addition the company is obliged to reimburse Shri Arunachalam the actuals incurred towards medical expenses for him and his wife, which are not reimbursed by the insurance company subject to Rs. 4,500 per annum. Besides Shri Arunachalam is to be provided with a car together with a driver for private purposes. Further the assessee-company has to pay club subscription on his behalf for two clubs and also the assessee-company had to reimburse the entertainment expenses incurred by Shri Arunachalam in connection with the business of the company.
3. The biodata of Shri Arunachalam was furnished, which contained on a printed paperbook. He was chairman of board of directors of at least four companies, viz., Murugappa group, Tube Investment of India Ltd., Carborandum Universal Ltd. and South Asian Financial Exchange Ltd. So also he was the deputy chairman among the board of directors to M/s.
Ashok Leyland Ltd. and M/s. CWS (India) Ltd. He was director in three companies, namely, ICI Ltd., Southern Energy Development Corporation (P.) Ltd. and Universal Cables Ltd. There are several other positions which he had held and we have extracted only some of his positions.
4. In the accounting year relevant to the assessment year 1986-87 Shri Arunachalam developed heart problem. Smt. Lalitha Kameswaran, retired professor of medicines and Supdt. of Royapettah Hospital, Madras, who was the consultant physician, recommended that a by-pass operation should be conducted on Shri Arunachalam and she advised that the said operation should be done in the United Kingdom, since no adequate facilities were available in India. [The Board of Directors of the assessee-company passed a resolution dated 3-4-1985 unanimously resolving to meet the full expenditure for the by-pass surgery as well as the treatment in U.K. of Shri Arunachalam, since the company is said to have been receiving his valuable advices from time to time for the benefit of group companies.] The board of directors further resolved to incur an expenditure of Rs. 1.84 lakhs in foreign currency and also bear the travelling expenses of Shri Arunachalam. The resolution was passed by circulation and out of five directors. four directors only subscribed their signatures. It is explained on behalf of the assessee that the fifth director Shri Venkatachalam was away from India and therefore he was not able to subscribe his signature. It was stated that under the provisions of Section 289 of the Indian Companies Act, 1956 a resolution is deemed to have been passed when majority of the directors signed the resolution. The break-up of the total expenditure estimated by it towards medical expenses, stay expenses and travel expenses of Shri Arunachalam, his wife and one attendant from India to U.K. and back is as under:- It is stated that the performance of by-pass surgery was preceded by investigations and the actual by-pass surgery was performed by Professor Donald Ross at National Hospital, London. Shri Arunachalam had taken the treatment in U.K. for seven weeks from April 1985 to end of May 1985. Shri Arunachalam proceeded to U.K. for his medical treatment along with his wife Smt. A.R. Lakshmi and also one of his relatives Smt. Valli Alagappan. The total amount for which the Reserve Bank's permission was obtained was Rs. 2,57.875 which includes the release of foreign exchange of 8320 and U.S. $ 5150, both put together equivalent to Rs. 1.84 lakhs. It is stated that the actual expenditure incurred was only Rs. 2,54,994 and the whole of such expenditure was incurred by the assessee-company. It is significant to note that Shri Arunachalam did not solicit any financial help from the assessee-company. During the assessment proceedings for the assessment year 1986-87 the sum of Rs. 2,54,994 was claimed as deductible expenditure for the assessee-company. It was claimed that the assessee-company incurred this expenditure during the course of its business. The Assistant Commissioner disallowed the entire expenses by giving the following reasonings: (1) The expenditure was for a non-business purpose as there was no contractual liability to incur the expenditure in terms of the letter of appointment dated 17-1-1981. As per the letter of appointment the maximum amount payable to Shri Arunachalam towards medical expenses not reimbursed by the insurance company was only Rs. 4,500 per annum. (2) The letter was a gratuitous payment not covered by letter of appointment. Shri Arunachalam did not solicit any reimbursement from the company for his medical treatment. (3) Shri Arunachalam is an employee of the company and the expenditure in question is disallowable in any case under the provisions of Section 40A(5) as the value of the other perquisites provided to him, viz., rent-free accommodation, car and club subscription by themselves exceeded 1/5th of his salary during the year. It was contended before him on behalf of the assessee that the expenditure was incurred on the basis of the board resolution passed on 3-4-1985 resolving to meet the expenditure in full as the company has been receiving the valuable services of Shri Arunachalam from time to time for the benefit of group companies. It was a business expenditure of the assessee-company. It was also contended that this and other business expenses of the assessee-company were recovered from the group companies which were availing the services of the assessee-company and therefore in effect the assessee had not met the expenditure. The Assistant Commissioner further held that Shri Arunaehalam is being paid remuneration and perquisities for the services rendered by him to the assessee. The expenditure is not covered by the terms of appointment with the company and therefore it was incurred for a non-business purpose. It was also laid out or expanded wholly and exclusively for the purpose of the assessee's business. The expenditure was a gratuitous payment as it is not covered by the letter of appointment and Shri Arunachalam did not also solicit any reimbursement from the assessee. As regards the contention that this expenditure was ultimately recovered from the group companies it was stated by the Assistant Commissioner at para 4.7: 'This is only a method adopted by the assessee to arrive at the selling price of its services chargeable to the group companies availing its services, just as any other businessman will take into account all his expenses - direct and indirect - besides profit margin to arrive at the selling price of his products." The Assistant Commissioner felt that it cannot be argued that the assessee had not incurred this expenditure and on the above grounds he disallowed the expenditure of Rs. 2,54,994. Ultimately as against the nil total income returned under the income- tax return dated 22-9-1984 filed for the assessment year 1986-87 the Assistant Commissioner determined the total income of the asseessee at Rs. 5,11,340, which includes the expenses incurred on Shri Arunachalam for treatment in U.K., which was added back as part of the total income of the assessee.
5. Aggrieved against the addback of Rs. 2,54,994 the assessee-company went in appeal before the Commissioner (Appeals)-II, Madras. The Commissioner (Appeals) by his impugned order dated 26-4-1989 confirmed the order of the Income-tax Officer holding that the payment was ex gratia payment and does not justify by business needs of the appellant nor it was even contemplated in the terms of appointment of Shri Arunachalam.
6. In the second appeal preferred before this Tribunal we have heard Shri R.V. Easwaran, the learned counsel for the assessee and Shri S.Sankaralingam, the learned departmental representative. It is contended that firstly the direct incurring of the expenditure towards the medical treatment of Shri Arunachalam by the assessee-company cannot be considered to be a perquisite and cannot be disallowed under Section 40A(5) on the ground that the total perquisites paid to Shri Arunachalam already exceeded 1/5th of his salary. In support of the contention that cash payment or reimbursement does not amount to payment of perquisite the following case laws were cited: 1. Indian Leaf Tobacco Development Co. Ltd. v. CIT [1982] 137 ITR 827 (Cal.) 4. CIT v. Alkali & Chemical Corporation of India Ltd. [1986] 158 ITR 58 (Cal.) The Madras High Court in Manjushree Plantations Ltd. 's case (supra) held that in order to term a payment as a perquisite, it had to be a payment other than a cash payment in pursuance of a contract of service. In National & Grindlays Bank Ltd. 's case (supra) it was held as per the headnote of the decision at page 458 as follows: "Cash payments on account of reimbursement of medical expenses of the employees cannot be included in the value of the benefit, amenity or perquisite for the purpose of disallowance in excess of the limits laid down under Section 40(c)(iii) or Section 40(a)(v) of the Income-tax Act 1961." One of the points at question referred to the Calcutta High Court in that case was whether the cash payments on account of reimbursement of medical expenses of the employees could not be included in the value of benefit, amenity or perquisite for the purpose of disallowance in excess of the limits laid down under Section 40(c)(iii) or Section 40(a)(v) of the Income- tax Act, 1961. Their Lordships of the Calcutta High Court followed the earlier decision of the Calcutta High Court in Indian Leaf Tobacco Development Co. Ltd. 's case (supra) in support of the decision quoted above. It may generally be stated that the same ratio is laid down in all the decisions cited on behalf of the assessee, the list of which is already given above. In view of the consistent decisions of all the High Courts it is to be held that the expenditure incurred by the assessee directly towards the medical expenses as well as the treatment and also towards travel expenses of Shri Arunachalam and his two attendants cannot be considered to be a perquisite paid to Shri Arunachalam and therefore the excess of the perquisite cannot be disallowed under Section 40A(5) or 40(c)(iii).
7. It is next contended that the Board's resolution dated 3-4-1985 had the propensity to amend the terms of appointment and the company had undertaken to defray all the medical expenses, stay expenses and tour expenses of Shri Arunachalam and because a specific sum was also undertaken to be spent under the resolution of the board which is already extracted above, to the extent provided in the board's resolution the terms of appointment of Shri Arunachalam should be deemed to stand amended. In support of this proposition that the expenses were incurred for valid business purposes the learned counsel for the assessee relied on the following decisions.
8. In CIT v. Supreme Motors (P.) Ltd. [1972] 84 ITR 1 (Delhi) the chairman of the assessee-company died while he was on a tour for inspection. Certain expenses were incurred by the assessee to charter a plane to have the mortal remains of the chairman back. The question was whether it was incidental to business. At page 5 of the decision the argument of the Revenue and the decision of the High Court are noted as follows: "It was argued on behalf of the revenue that the moment the deceased died his interest in the business of the assessee came to an end and his dead body could not have been sent back to Jodhpur by the assessee for carrying on its business. It is too narrow a view of the expression 'for the purpose of the business". By his death the deceased may have lost all interest in the business of the company but the business of the company was still being carried on and the expenditure incurred by the assessee for carrying the dead body of the deceased being the liability of the company which was incidental to the business of the company, this liability had to be discharged. The expenditure was, therefore, incidental to the carrying on of the business of the company and its commercial capacity has to be adjudged from the point of view of the assessee itself and not by the revenue.
9. To the same effect is the decision of the Calcutta High Court in CIT v. Karam Chand Thapar & Bros. (P.) Ltd. [1986] 157 ITR 212. In that case also the expenditure was incurred for bringing back the dead body of the chairman of the board when the death of the chairman took place while he was on business tour.
10. It is also argued that the expenditure incurred would not assume the nature of profit in lieu of salary within the meaning of Section 17(3)(ii) of the Income-tax Act. In support of this contention the learned counsel for the assessee Shri Easwaran filed before us the decision of the Delhi High Court in Lachhman Dass v. CIT [1980] 124 ITR 706. In that case what happened was that the assessee had suffered certain loss of movable assets in Pakistan at the time of partition and the loss was to the extent of Rs. 15,430. He made a request to his employer to compensate him therefor and it was in partial grant of this request the employer gave him a sum of Rs. 9,500. The question was whether this payment of Rs. 9,500 should be considered as profit in lieu of salary. The Delhi High Court held as per the headnote of the decision as follows: "Held, that the payments made to the assessees had no relation to the services rendered by them as employees but were merely payments sanctioned by the employers to compensate them for the personal losses they had suffered. They were, therefore, payments made on personal grounds and there was no element of remuneration for services in these payments. The payments received by the assessees did not fall under Section 17(3)(ii) and were not taxable in their hands.
However, the question considered by the Delhi High Court was whether such payments are taxable in the hands of the employees. But that is not the question which is before us now in this case. We are concerned with the question whether the expenditure incurred towards medical expenses and foreign tour expenses can be allowed as business expenditure. The learned departmental representative contended that this cannot be allowed as business expenditure since there was no contractual obligation to incur the said expenditure and hence it should not be allowed in the hands of the assessee-company. Reliance was placed upon the decision of the Full Bench of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19. The Kerala High Court in the said decision held the following: "Evidently, the object of Sub-clause (v) of Section 40(a) is to persuade the employer to set a limit on the extent of the benefits of any kind that could be extended to an employee by an employer. The statute itself lays down the permissible limit of deduction in respect of salary and that would be incomplete unless a permissible limit of deduction is laid down in respect of other benefits that are extended to an employee. Though the words 'whether convertible into money or not' may at first sight appear to indicate that whatever is not convertible into money stands excluded from the scope of the term 'benefit, amenity or perquisite', that need not necessarily be so. The expression 'benefit, amenity or perquisite' may take in benefits in kind and in service and may take in also cash.
If undue emphasis is given to the words 'whether convertible into money or not' and a restricted meaning is assigned to the term 'benefit, amenity or perquisite", that would mean that any cash allowance paid by the employer to an employee of any sum whatsoever will be entitled to deduction despite Section 40(a)(v). Such a construction is irrational defeating the very purpose of Section 40(a)(v). Hence, where an employee of the assessee is in receipt of house-rent allowance, such an allowance would be covered by Section 40(a)(v)." However, it is significant to note that the Kerala High Court specifically dissented from the Madras High Court decision in the case of Manjushree Plantations Ltd.'s case (Supra) and therefore for the reason that it had taken a different view than thatx)f the Madras High Court which is binding against this Tribunal, we cannot follow the ratio of the Kerala High Court.
11. There are certain decisions picked up by us about the allowability of the expenditure incurred by an assessee in connection with the medical expenses of its employee directors. The decisions are the following: (1) Carlton Hotel (P.) Ltd. v. CIT [1974] 94 ITR 311 (All.) : In this case the assessee, which is a company claimed expenditure of Rs. 1,500 incurred by it on the medical treatment of its chairman.
The expenditure was authorised by the resolution of the company. The Tribunal disallowed the claim on the ground that there was no rule or regulation of the company regarding the payment of medical expenses of its staff. Ultimately the Allahabad High Court held that the chairman was not a member of the staff but was a director of the company. The chairman was only drawing an honorarium of Rs. 100 per month. In the circumstances the Tribunal was not justified in disallowing the sum of Rs. 1,500 claimed by the assessee as an expenditure.
(2) In India United Mills Ltd. v. CIT [1975] 98 ITR 426 (Bom.). the assessee- company received a letter from Bombay Hospital Trust, whereby the trust offered its services for medical aid to the clerical staff of the assessee- company on certain terms. It was suggested that the assessee-company would be entitled to send the members of its clerical staff for medical, surgical or any other treatment in the hospital. The members of the clerical staff drawing a sum of less than Rs. 200 per month as salary would be admitted to the direct paying class of the hospital free of charge and members drawing less than Rs. 200 per month would be admitted to free class and the hospital undertook to reserve and provide a number of beds for the purpose. It was suggested that the assessee-company should pay to the hospital trust every year an amount equal to one anna from every Rs. 100 of the total of its turnover. The board of directors of the assessee-company by its resolution dated 3-1-1951 accepted this offer and pursuant to this arrangement the company paid Rs. 55,956 for 1951 besides making a provision tor Rs. 16,595 and for 1953 they made a payment of Rs. 1,20,910 representing payment for two years, viz., for 1952 Rs. 57,562 and for 1953 Rs. 63,348. For the assessment year 1952-53 the assessee-company claimed a deduction of Rs. 72,551 and for the assessment year 1954-55 it had claimed a deduction of Rs. 1,20,910. The Income-tax Officer, as well as the Appellate Assistant Commissioner and the Tribunal also disallowed the claim for deduction. The Bombay High Court, however, allowed the same for the following reasoning found at page 440: "In the first place the assessee-company itself could have incurred the expenditure for providing medical facilities to its own staff and had that been done the expenditure incurred on that account would have been allowed as permissible deduction; but instead of doing that the offer which was received from the Bombay Hospital Trust was sanctioned by the assessee-company....Thirdly, the medical treatment included expert treatment at the hands of competent honorary doctors attached to the Bombay Hospital. It cannot, therefore, be said that the payments made by the assessee-company to the Bombay Hospital Trust under the aforesaid arrangement were excessive.
12. The last of the decisions is again a Bombay High Court decision in Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758. The facts as well as the decision thereon are correctly found stated at page 759 as a part of the headnote of the decision: "M, a director of the assessee-company, proceeded to the USA, with his wife to attend the function for the awards by the Academy of Arts and Sciences, Hollywood, Mother India being one of the foreign films nominated by the Academy.
While he was in the USA, Msuffered a serious heart attack, for which he had to be hospitalised and an aggregate expenditure of Rs. 33,667 was incurred in connection with his illness. After his return to India, the board of directors of the assessee- company, at its meeting held on 1 -5-1985 passed a resolution to the effect that the entire expenditure on Ms treatment should be borne by the company and debited to its account. In the assessment for the assessment year 1959-60, the assessee claimed the hospital expenditure of Rs. 33,667 on the treatment of M as a deduction in determining its profit for the assessment year." The Income-tax Officer as well as the Appellate Assistant Commissioner rejected the claim for deduction. The Tribunal upheld the disallowance up to 1/3rd of the claim. The Bombay High Court ultimately held: "In view of the facts and conclusions arrived at by the Tribunal regarding the basis on which the resolution was passed by the company, the entire amount of medical expenses occasioned by M's illness which were borne by the assessee-company pursuant to the resolution, should be allowed as a deduction on the footing that the decision to reimburse was taken on the principle of commercial expediency and that no part of such expenses was held to be not proved or arbitrarily excessive or unreasonable." The case before us appears to be very near to the facts of the case dealt with by the Bombay High Court in Mehboob Productions (P.) Ltd.'s case (supra). In our opinion the board of directors of the assessee-company agreed to bear all the expenditure for surgery, treatment, stay as well as tour expenses of Shri Arunachalam on the ground that he had tendered valuable advices to the assessee-company which benefited all the group companies. No part of the expenditure can be stated to be unproved or excessive. Since the Assistant Commissioner himself did not question the reasonableness of the expenditure incurred, the only question is whether the said expenditure can be allowed to the assessee-company as having been incurred during the course of its business. The three decisions cited by us would certainly support the contention of the assessee and humbly following the same we hold that the whole of the expenditure of Rs. 2,54,994 should be allowed as a valid business expenditure in the hands of the assessee under Section 37 of the Income-tax Act.
13. In view of our decision the further question that the amount of Rs. 2,54,994 was already recovered as part of the service charges of Rs. 66,10,000 charged from the group companies and therefore it should be considered as expenditure not incurred at all need not be considered.