1. This is an appeal filed by the assessee against the order dated 30-3-1989 of the learned Commissioner of Income-tax, Jaipur for the assessment year 1984-85 passed under section 263 of the Income-tax Act, 1961.
2. Late Shri R.K. Golcha, Individual, was the Managing Director of M/s Udaipur Mineral Development Syndicate (P.) Ltd. (UMDS for short) from which he derived salary. He also derived share income from M/s Golcha Theatre and had own mining business carried on under the name and style of M/s Kolyath Mines. He died on 27-7-1990 after filing the present appeal before the Tribunal and the present four assessees are his legal representatives. Late Shri R.K. Golcha was reimbursed medical expenses amounting to Rs. 1,51,190 by his company UMDS. This amount was not taxed by the ITO in the assessment order dated 13-1-1987 passed under section 143(3) of the IT Act, 1961.
3. The learned Commissioner, therefore, being prima facie of the view that the said assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue since the aforesaid amount was not included in the assessee's income as perquisite under section 17 of the Income-tax Act, he served the assessee with a notice dated 15-3-1989 under section 263. In reply to this notice the written explanation dated 27-3-1989 of the assessee was that as a Managing Director, he attended the work of the company with the result that there was tremendous increase in the working and efficiency on account of his hard labour and that he was the driving force of the company. It was said that the assessee had to go to USA for medical check up and to undergo bypass surgery, if necessary as desired by the company, and that the reimbursement made by the company of these medical expenses was a voluntary act on grounds of commercial expediency. However, the learned Commissioner took the view that under section 17 of the Income-tax Act, 1961 provision of free medical facilities or reimbursement of medical expenses by an employer was treated as a perquisite in the hands of the employee. In this connection reliance was placed by him on the Circular No. 445, dated 31-12-1985 of the CBDT which inter alia said that reimbursement of medical expenses actually incurred in India by the employer on an employee including Managers/Directors was not to be treated as perquisite provided the expenditure was incurred on medical treatment in a recognised public hospital in India. Finding that in the assessee's case the medical expenses related to a hospital in Houston USA, he found that the medical expenses were not admissible and were clearly includible in the income of the assessee as a perquisite under section 17.
4. On behalf of the assessee, firstly, Shri Ranka pointed out that the reimbursement of this amount by the company was the subject-matter of assessment in the hands of the company also for the assessment year 1984-85 when the Tribunal vide its order dated 27-12-1991 in IT Appeal No. 558/JP/89 had held that this amount was an allowable business expenditure. He submitted that the assessee had given an application to the Reserve Bank of India on 22-6-1983 for release of foreign exchange on the basis of which permission was issued by the R.B.I, on 29-6-1983 whereafter he gave foreign exchange utilisation report dated 15-11-1983 to the RBI and subsequently letter dated 13-12-1983 was also written to them. Shri Ranka pointed out that the company had passed a resolution for sanctioning reimbursement of medical expenses and that the expenses, which were duly vouched were reimbursed by the company. He also argued that if the medical expenditure was that of the company it could not be treated to be an expenditure of the assessee and that the burden of proving that this reimbursement constituted the assessee's income was on the department. He reiterated the submission made on behalf of the assessee before the learned Commissioner of Income-tax that the amount in question was not treatable as a perquisite under section 17. He also pointed out that the assessee had furnished the terms of appointment of the late assessee, the resolution of the company regarding medical treatment, material in support of para 5 of the assessee's written submissions before the learned Commissioner of Income-tax, copy of the application made to the RBI, RBI sanction and report sent to the RBI for utilisation of foreign exchange as required by the Tribunal vide order sheet entry dated 3-2-1992. Shri Ranka also argued that the assessment order could neither be treated as erroneous nor as prejudicial to the interests of the revenue. He also relied upon the decision of the Bombay High Court in Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758. On the other hand, on behalf of the Department Shri S.K. Kundra, the learned Senior Departmental Representative strongly relied upon the order of the learned Commissioner of Income-tax. He argued that since the late assessee became Managing Director with effect from 1-1-1980, he had the heart ailment prior to it and could not be said to have contracted it after his appointment. He submitted that it was not a professional hazard and that there was no direct nexus between the assessee's medical check up in USA and the business of the company. He submitted that the amount in question was a perquisite in terms of section 17(2)(III)(C) and section 17(2)(iv) of the IT Act, 1961. He also argued that the application for grant of foreign exchange was made by the late assessee and not by the company. Reference was also made by him to the Circular, dated 31 -12-1985 of the CBDT. He pointed out that the fact that the amount had been allowed in the hands of the company by the Tribunal was not material so far as the case of the assessee was concerned. Reliance was also placed by him on the following decisions:-- 5. We have considered the rival submissions as also the decision referred to above. Late Shri R.K. Golcha, was appointed as the Managing Director of UMDS vide resolution dated 31-12-1979 with effect from 1-1-1980. Prior to that he was the Director of the Company. It is not under dispute that late R.K. Golcha made an application dated 22-6-1983 to the RBI on 25-6-1983 for release of foreign exchange to enable him to go to USA for medical treatment for coronary heart disease. He had gone to consult Dr. Colley of the Cardio Vasculer Associates, Texas Heart Institute Houston (Texas) USA with his wife Smt. Asha Golcha. He remained there from 15-8-1983 to 20-8-1983 when tests were carried out.
The report dated 15-11-1983 given by late Shri Golcha to the RBI shows that Dr. Colley did not find it necessary to do open heart surgery and instead he had directed him to consult some good medical practitioner in India who could prescribe suitable medicines, although he did advise some exercises. That report also states that on the advice of Dr.
Colley, late Shri Golcha fixed up appointment with Dr. Parvaz Ahmed, M.D. of Brooklyn, New York who was a famous cardiologist. He was consulted on 29-8-1983 and was advised some more tests. Dr. Robert I.Hamby was also consulted. The details of the expenses incurred were submitted by the assessee to M/s UMDS along with the Bill. UMDS wrote to the late assessee on 24-2-1989 to the following effect: As a Managing Director you have been attending the work of our company day and night and always kept yourself engrossed in the affairs and working of our company. There had been tremendous increase in the working and efficiency of our company on account of hard labour done by you for the past several years. Our company had progressed tremendously on account of remarkable services rendered by you and the hard work done by you at the cost of your health. Our company in order to keep you in good state of health, as a measure of commercial expediency, in order to maintain good and harmonious relations with you to improve relations with other employees and as a measure of staff welfare requested you to undergo the surgery. A sum of Rs. 1,51,190 was spent on medical treatment and same was reimbursed to you by way of staff welfare expenses.
However, the income-tax officer... disallowed the said expenditure by assessment order dated 4-3-1987 after holding the said expenditure as your personal expenditure. Being aggrieved we preferred appeal but unfortunately the Commissioner (Appeals) ' by order dated 18-1-1989 rejected our claim and sustained the disallowance. On the above facts though we had requested you to undergo the medical treatment and had a source to reimburse the medical expenses but on account of its disallowance we hereby request you to repay the amount at your convenience. We are sure you shall not mind this letter and shall try to repay the amount at your own convenience.
In the order dated 27-12-1991 in the case of M/s UMDS (supra) the following observations were made by the Tribunal in para 62 :-- 62. The rival submissions as also the decisions referred to above have been duly considered. The expenses were incurred on hotel, air tickets of the M.D. and Smt. Asha Golcha as also for medical bills of Houston, Brooklyn, daily expenses of both and local conveyance and gifts to hospital staff etc. Shri R.K. Golcha was the MD and the incurring of the expenses had been authorised by the company so that his services were continued to be available. He had to undergo the open heart surgery. It was thus an authorised expenditure for reasons of business and commercial expediency and the expenses were reimbursed by the company. Having regard to the facts, they could not have been treated as personal expenses of Shri Golcha. Shri Golcha had approached the assessee for reimbursement and the expenditure was duly vouched. It is needless to mention that Shri Golcha also needed the attention of Smt. Asha Golcha. The consistent view taken by the High Courts is that the reimbursement of medical expenses of employee is not treatable as a perquisite. In case of Shri Karamchand Thapar (supra), expenditure incurred to fly the dead body of the Company's chairman had been held to be an allowable business expenditure which was considered incidental to business. We are, therefore, of the view that these expenses are allowable on facts, there being no decision to the contrary.
The finding given there was that the incurring of the expenses had been authorised by the company so that his services were continued to be available. In the case of Lachhman Dass (supra) the facts were different. The assessees who were employees in certain companies suffered certain losses of movable assets in Pakistan at the time of partition of the country. On their application, the companies sanctioned certain payments to compensate those losses. On those facts it was held that those payments were made on personal grounds and that there was no element of remuneration for services in those payments. In fact, the observation made was that any payment, merely because it is made by an employer to an employee will not fall under section 17(3)(ii). This decision, therefore, does not assist the Department.
In the case of S.S.M. Lingappan (supra) no doubt it was held that there is a distinction between the approach to be made in the case of disallowance of expenditure in the hands of the company on the ground of excessive or unreasonable expenditure and in the case of assessment as perquisite in the hands of the recipient of the benefit. However, we find that provision of ordinary medical facilities to an employee or the reimbursement of such medical expenses to the employees after they are incurred are not taxed. In fact, though the Board's Circular No.445, dated 31-12-1985 (referred to in the order of the Commissioner and relied upon on behalf of the learned Departmental Representative) refers to expenditure incurred on medical treatment in a recognised public hospital in India and, therefore, the assessee's case could not be said to be covered by that Circular, but the fact remains that in principle the Board did accept that reimbursement of medical expenses such as operation fee, hospitalisation charges and cost of medicines, tests etc. actually incurred by the employer on an employee including the Managers/Directors and his family members were not to be treated as perquisites. In fact, in the case of Mehboob Productions (P.) Ltd. (supra) the Managing Director of the assessee-company went to USA with his wife to attend the function for the Awards by the Academy of Arts and Sciences, Hollywood. While he was in the USA, M suffered a serious heart attack for which he had to be hospitalised and expenditure was incurred in connection with his illness. After his return to India, the Board of Directors of that company passed a resolution to the effect that the entire expenditure on M's treatment should be borne by the assessee and debited to its account. The Tribunal in that case held that the expenses in excess of those which would have been normally incurred in India should be allowed as a deduction to the assessee and on a rough and ready basis. Such expenses in India were estimated by the Tribunal at l/3rd of the expenses in USA and accordingly the Tribunal upheld the disallowance of l/3rd of the medical expenses. On these facts, the High Court held that the Tribunal having accepted that it was on the principle of commercial expediency that the company had resolved to reimburse the medical expenses to the Director who was the driving force of the company, it was not open to the Tribunal to disallow a portion thereof, that the assessee was entitled to the expenses in their entirety. Having regard to the facts before us, we are therefore, of the view that the reimbursement made by the company to the assessee was on grounds of commercial expediency or as staff welfare expenses. Having regard to the wordings of section 17(2)(iii)(c), the expression "the value of any benefit or amenity granted or provided free of cost..."could not apply to reimbursement in cash of the medical expenses. The benefit or perquisite could not be money itself or cash payment. The reimbursement of medical expenditure of the Managing Director by the company was not an expenditure by the company which resulted directly or indirectly in the provision of any benefit or amenity or perquisite. So far as section 17(2)(iv) is concerned, it refers to "any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee" would also not be attracted in the present case because the question of any obligation did not arise in this case. A perusal of the assessment order dated 13-1-1987 does not show that the matter of reimbursement of the medical expenses was enquired into by the ITO. A copy of the computation of income or the return of income filed by the assessee, was also not placed by any of the parties on the paper book.
The impugned order of the learned Commissioner does not say that due enquiries were not made by the ITO on this point The copy of the notice under section 263 has also not been placed by any of the parties on the paper book and, therefore, it cannot be said whether the want of enquiries on this point was made as a ground of assuming jurisdiction under section 263. But even if for the sake of argument we were not to go into this aspect and were to hold that the assumption of jurisdiction by the learned Commissioner of Income-tax under section 263 was proper on account of want of enquiry on the part of the ITO on this point, the fact remains that so far as the merits of the case are concerned, the learned Commissioner was not right in taking the view that the amount of Rs. 1,51,190 was treatable as a perquisite in the hands of the assessee in terms of section 17 of the IT Act, 1961. The fact that the company had earlier asked the late assessee to pay the amounts was obviously in view of the fact that the assessing authority as well as the first appellate authority had turned down the company's claim that the amount of Rs. 1,51,190 was a business expenditure in its hands. That point loses its importance since ultimately the view which the Tribunal took in the company's case was that the said amount was an allowable business expenditure which was incidental to business. Even if a view were to be taken that the consideration of the amount in the hands of the company was no bar, to the consideration of the taxability of the reimbursement of the amount in the hands of the late assessee, we are of the view that the amount was not treatable as a perquisite in his hands. Therefore the order of the learned Commissioner of Income-tax under section 263 on merits, cannot be upheld and has to be quashed. We hold accordingly.