1. This is an appeal by the assessee-company for assessment year 1988-89 and it arose out of the CIT (Appeals)-XIV, Mumbai, dated 8-2-1990. There are five grounds in all. The first ground, having six sub-grounds, deals with disallowances made under section 40A(5)/40(c).
The second ground is directed against disallowance of 15% of expenses on seminars, conferences, etc., as entertainment expenses under section 37(2A) of the Act. The third ground relates to disallowance of interest of Rs. 7,08,000. The fourth ground relates to rejection of the claim of the assessee-company for depreciation @ 30% as against general rate allowed on electrical installation. The 5th ground relates to rejection of the assessee-company's contention that 'road' should be treated as 'plant'. Let us deal with them in seriatim.
2. When the matter was posted for hearing on 18-9-1996, none appeared for the assessee, though the notice was sent through the Departmental Representative and though it was served against the assessee on 21-8-1996 as per the acknowledgement filed in this Tribunal and kept on record. As this is an old appeal of 1990 and since very many adjournments were already passed and since there is no representation whatsoever for and on behalf of the assessee, though it was served with notice for the hearing on 18-9-1996, there is no other go left with this Tribunal except to take up the matter and decide it on merits.
3. We have heard Smt. Geeta Subramanian, the ld. Departmental Representative. However, written submissions were found to have been filed on behalf of the assessee-company by its General Manager - Accounts, Shri N.P. Upadhyay. The appeal relates to assessment year 1988-89 for which the previous year ended by 31-12-1987. The assessee-company has got three divisions, one for manufacture of rubber chemicals, second for the manufacture of pesticides and third for the manufacture of pharmaceutical items. For computation of total income, the assessee-company offered for taxation a total sum of Rs. 9,87,788 under section 40A(5)/40(c) towards disallowance. While working out the disallowance, the directors of the company have been considered under section 40(c) and not under section 40A(5). This stand of the assessee was not accepted by the Assessing Officer. He held that the directors of the assessee-company are also employees and, therefore, the disallowance is to be worked out under section 40A(5) and not under section 40(c). The Assessing Officer found further that the medical expenses allowed to various employees, the HRA, flat maintenance charges & servant allowance have not been taken into consideration and disallowance was not correctly worked out taking those items correctly into consideration. Therefore, the Assessing Officer asked for the revised working of disallowance. In the revised working, the assessee-company revised the working of disallowance to Rs. 15,16,542.
However, in this working also, the Assessing Officer found that the perquisite value of car and driver provided to the employees has not been worked out correctly. The Assessing Officer held that rule 3 cannot be made applicable to the assessee-company for working out the value of perquisites of car and driver and, therefore, he treated Rs. 3 lakhs as perquisite value of car and driver available to the employees of the assessee-company. Thus, he added Rs. 3 lacs to the revised disallowance offered by the assessee itself at Rs. 15,16,542 and worked out the disallowance at Rs. 17,69,892. The Assessing Officer held that this disallowance is in addition to the disallowance of Rs. 2,95,072 which was worked out in the case of directors treating their case also under section 40A(5). The Assessing Officer found that the directors have been provided with the benefit of foreign travailing with family.
However, the foreign travelling expenses with family have not been included in the above disallowance of Rs. 2,95,072. The Assessing Officer held that as these expenses are not towards LTC, these are to be included in the above disallowance and the amount which should be included was Rs. 1,83,000. Thus, he made a total disallowance under section 40A(5) to the extent of Rs. 22,47,877 and added it to the total income of the assessee-company.
4. Aggrieved against the assessment order dated 22-9-1989 passed by the Dy. Commr. of Income-tax, Spl. Rg. 23, Mumbai, under section 143(3), the assessee went in appeal before the CIT (Appeals). It was contended before him that medical expenses reimbursed to the employees were wrongly disallowed. Purporting to follow the order for assessment year 1987-88 in the assessee's own case by the first appellate authority, the learned CIT(A) held that the medical reimbursement is to be treated as part of salary. The matter is now concluded by the Hon'ble Supreme Court by its judgment delivered in the case of CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. [1996] 219 ITR 644/85 Taxman 381.
Interpreting the provisions of section 40A(5)(a)(ii) the Hon'ble Supreme Court held the following at page 653 :- "On a consideration of both the points of view, we are inclined to agree with the submission of learned counsel for the assessees. The language employed in the sub-clause is not capable of taking within its ambit cash payments made to the employees by the assessee. These cash payments will, of course, be treated as salary paid to the employees and will be subject to the limits/ceiling, if any, in that behalf. But they cannot be brought within the purview of the words "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite" - more so because of the Following words "whether convertible into money or not"." Hence, we have to hold that the cash payments made by the assessee towards medical reimbursements do form part of the salary paid to the employees and will be subject to the limits/ceilings, if any, in that behalf. The order of the CIT(A) is accordingly upheld on this point.
5. Under this ground, the rejection of the assessee's contention regarding valuation of perquisite for car for the purpose of disallowance under section 40A(5)/40(c) is attacked as illegal. Now, the matter is concluded by the decision of the Bombay High Court in Bombay Burmah Trading Corpn. Ltd. v. CIT[1984] 145 ITR 793/[1983] 12 Taxman 178. In the headnote of the decision, the following is found at pages 793-94 :- "Section 40(c)(iii) clearly provides that where any expenditure by a company results in the provision of any benefit or amenity or perquisite to its employee, if such expenditure exceeds 1/5th of the salary of the employee, then such excess shall not be allowed. In order to disallow an expenditure incurred by a company in the provision of any benefit, amenity or perquisite to an employee under the provisions of section 40(c)(iii) of the Income-tax Act, 1961, it is not necessary that the value of the perquisite or amenity in the hands of the employees computed in accordance with the relevant rules must exceed 1/5th of the salary. It is the entire expenditure incurred by the employer that has to be taken into account." Following the Bombay High Court decision, we have to order that the disallowance has to be worked out accordingly.
6. The Assessing Officer has taken into consideration the actual house rent allowance paid, flat maintenance expenses and servant's allowance while computing the disallowance under section 40A(5). The CIT(A) confirmed it the matter is now settled by the following decisions :- (i) CIT v. Toshiba Anand Lamps Ltd. [1984] 145 ITR 563/13 Taxman 392 (Ker.).
(iv) C.W.S. (India) Ltd. v. CIT[1994] 208 ITR 649/73 Taxman 174 (SC), etc.
Regarding house rent allowance, the Hon'ble Kerala High Court in Toshiba Anand Lamps Ltd.'s case (supra) held that house rent allowance is a part of salary and not a perquisite or amenity. In that case, the facts were that the assessee-company paid a sum of Rs. 80,000 as remuneration to its Mg. Director, who was an employee of the company, during assessment years 1972-73 and 1973-74. He was paid a remuneration of Rs. 80,000, the components of which are the following :Rs. 60,000 : by way of salary.Rs. 15,000 : as house rent allowance.Rs. 5,000 : by way of payments relating to electricity, gas, etc.
The question was whether the excess of Rs. 5,000 p.m. was liable to be disallowed under section 40A(5)(c)(i). In that case, before the Tribunal it was contended that house rent allowance should not be considered as part of salary. The Tribunal observed that in that case HRA was a perquisite and held that 20% of the salary subject to a maximum of Rs. 12,000 could be granted as allowance and restricted the disallowance of Rs. 8,000. On a reference, the Hon'ble Kerala High Court held that the payment of Rs. 80,000 would come within the exclusive definition of 'salary'. The reasons given for their decision are as under :- "What had been given was not rent-free accommodation nor any concession in the matter of rent respecting any accommodation provided to the employee. The payment, being one related to the house rent accommodation, but not coming within clauses (i) and (ii) of clause (b) of Explanation 2 to section 40A(5), cannot be brought within clause (iii). The words "granted or provided free of cost or at concessional rate to the employee by the assessee" gave an indication as to the meaning which had to be assigned to the term "benefit" or "amenity". House rent allowance or the payments in respect of electricity and gas, cannot be termed as "benefit" granted or provided free of cost or at concessional rate as that word is understood in the scheme of the taxing enactment, nor can it answer to the description of a payment of a sum in respect of any obligation which, but for such payment, would have been payable by the employee.
The term "amenity" has gathered a wide meaning particularly with the growth of industrial jurisprudence. Whatever be the amplitude of that term as generally understood, the amounts paid by the assessee to its managing director as house rent allowance, and payments relating to electricity, gas, etc., could not be treated as amenities in the scheme of the I.T. Act." Therefore, following the Kerala High Court decision, we hold that house rent allowance should be considered as part of salary but not as amenity or perquisite provided to the employee which is disallowable under section 40A(5). The disallowance must be worked out with reference to the overall ceiling of salary allowed to the employees.
7. The amount of expenditure incurred by the assessee-company towards flat maintenance for the purpose disallowance under section 40A(5) was attacked as illegal in this ground. The contention of the assessee was that by incurring expenditure on flat maintenance no amenity whatsoever accrues to the employees and, therefore, it should not be considered for the purpose of determining the ceiling under section 40A(5). The said contention was not found favour with by the Bombay High Court in the decision reported in Lubrizol India Ltd.'s case (supra). In the said decision, the Bombay High Court held that the expenditure incurred on repairs of the assessee's own flats and the flats taken by it on lease and used by its employees for residence is to be considered for disallowance under section 40A(5) of the Income-tax Act, 1961. They followed the decision of the Kerala High Court in, CIT v. Forbes, Ewart Figgis (P.) Ltd. [1982] 138 ITR 1/[1981] 7 Taxman 32 (FB). Thus, in a case where the flat belongs to the company but which was allotted to the employee for his residence or in a case where the company takes itself a flat on rent and gives it to the employee on rent, if any expenditures incurred for maintenance of such a flat, the same should be considered for disallowance under section 40A(5). In this connection, we may refer to C.W.S. (India) Ltd.'s case (supra), etc., which provides authoritative reason for arriving at such a conclusion.
At page 650, a part of the head-note would give the ratio of the decision as follows :- "The ceiling provided in section 40(a)(v) of the Income-tax Act, 1961, applies even to expenditure in relation to an employee using the assets of the assessee-employer for his own purpose or benefit (contemplated by the second part of the provision), even if the employee is not in receipt of any benefit, amenity or perquisite resulting from any expenditure incurred by the assessee within the meaning of the first part. The use of the expression "such employee" in the second part of section 40(a)(v) does not have the effect that for the application of the ceiling in relation to assets of the assessee used by an employee the employee must be one who is in receipt of any benefit, amenity or Perquisite resulting from any expenditure incurred by the assessee within the meaning of the first part.
Literal construction may be the general rule in construing taxing enactments, but that does not mean that it should be adopted even if it leads to a discriminatory or incongruous result. When a literal interpretation leads to an absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament and to avoid absurdity." The Hon'ble Supreme Court affirmed the Kerala High Court decision in Forbes, Ewart & Figgis (P.) Ltd.'s case (supra). Therefore, even though the expenditure incurred for maintenance of flat did not result in any amenity having been provided to the assessee, still the expenditure incurred for the maintenance of flat should be disallowed under the provisions of section 40A(5).
8. The contention of the assessee was that servant allowance paid to employees should not be considered for the purpose of disallowance under section 40A(5). This point is directly covered against the assessee by the order of this Tribunal in the assessee's own case for assessment year 1983-84 in I.T.A. No. 683 (Bom.)/88 dated 26-11-1991 vide para-9 thereof. In the appeal of the assessee relating to the assessment year 1983-84, the assessee's contention that the perquisite value as computed in the hands of the assessee for purposes of assessment should only be taken into consideration for the purpose of working out the disallowance under section 40A(5) was rejected by the CIT (Appeals) following the Bombay High Court's decision in Bombay Burmah Trading Corpn. Ltd.'s case (supra). He held that the whole of the expenditure incurred towards servant's salary should be taken into consideration for the purpose of disallowance under section 40A(5) and not the mere perquisite value of such an amenity provided in the hands of the employee. The Tribunal found the reasoning of the ld. CIT(A) quite legal and felt worthy to be upheld in view of the Bombay High Court's decision in Bombay Burmah Trading Corpn. Ltd.'s case (supra).
Therefore, for the same reasons, we hold likewise for the assessment year 1988-89.
9. The constitutional validity of sections 40A(5) and 40(c) was attacked. Since this Tribunal is the creature of the Income-tax Act, the constitutionality or otherwise cannot be dealt with by it and hence this ground is to be rejected.
10. From the order of the Assessing Officer, it would appear that the total expenses incurred by the assessee company towards holding seminars and conferences were Rs. 84,833. Out of the total, 15% of the expenditure was disallowed as entertainment expenditure on estimate basis. That means he has disallowed Rs. 34,833 and allowed only Rs. 50,000 as deduction. Purporting to follow the appellate order in the assessee's own case for the immediately preceding year dated 12-12-1989, the ld CIT(A) held that the claim of the assessee cannot be accepted as it was conceded that the issue had been decided against the assessee in the immediately preceding year's appeal, since no material had been shown to distinguish the issue in this year either on fact or on law. In the assessee's paper book, the assessee has provided the earlier order of this Tribunal dated 26-11-1991 in ITA No. 683 (Bom.)/88 in the assessee's own case. In that order, this issue was found covered by paras 14 & 15. In para-15 of the order referred to above, it is stated that for assessment year 1982-83 also a similar disallowance of 15% out of total expenditure incurred on seminars and conferences was upheld by the Tribunal by its order dated 1-9-1989 in ITA No. 3959/Bom/85. Hence, following the above view already expressed in two assessment years, we hold that the disallowance of 15% is to be upheld.11. In this ground, the constitutionality of section 37(2A) is questioned. This ground cannot be entertained by us since we are not entitled to deal with constitutionality of a provision under the I.T.Act. Hence, this ground is rejected.
12. Under this ground, the disallowance of interest of Rs. 7,08,000 is attacked. The interest paid under the provisions of the Act of Rs. 7,08,000 was claimed as deduction by the assessee and it was disallowed by the Assessing Officer at the time of making the assessment. The disallowance of interest was upheld by the CIT(A) by simply stating that the assessee was not able to furnish any acceptable argument or authority before him against this disallowance of Rs. 7,08,000. The position remains the same even before this Tribunal. At least, the statement of facts filed before the CIT(A) was not filed by the assessee wherefrom we can gather the case of the assessee with regard to this disallowance. However, since not even an argument is forthcoming in this regard, we cannot appreciate what is the contention of the assessee in this regard and how the stand taken by the Assessing Officer and CIT(A) is wrong. Income-tax payable or paid by an assessee cannot be allowed as a deduction. In our view, the same holds good even with regard to payment of interest under the Act. Therefore, the disallowance is quite justified. Hence, this ground is rejected.
13. The assessee claimed depreciation at 30% on electrical installations, whereas the Assessing Officer allowed only depreciation at general rates. The short depreciation granted was made an issue in the appeal before the CIT(A). The ld. CIT(A), in his impugned order, stated that no acceptable argument or authority has been shown to prove any infirmity in the Assessing Officer's order and hence he did not accept the contention of the assessee in his impugned orders. This issue is decided against the assessee by Bombay Bench 'B' of the Tribunal in assessment year 1984-85 with the following reasoning :- "32. The next ground in the assessee's appeal relates to the claim of depreciation @ 30% in respect of electrical installation to boiler. The Department has allowed depreciation at 15% in respect of this item. According to the assessee, depreciation at 30% is to be allowed. The assessee has not filed full details of the assets disputed by the Department as not entitled to depreciation at 30%.
Under these circumstances, we confirm the order of the CIT(A) on the issue." In this year also, the situation remains the same and the particulars of the assets, according to which the assessee is entitled for depreciation of 30%, are not provided for either before the lower authorities or before this Tribunal. Hence, the disallowance of the higher claim of depreciation is rightly rejected by the lower authorities. We confirm the disallowance.
14. The assessee's contention was that 'road' should be treated as 'plant'. This issue was decided against the assessee in assessment year 1984-85 in ITA No. 3758 (Bom.)/88 by the order of the Tribunal dated 26-3-1992 at para-33. According to the recent Supreme Court decision, 'roads' were not considered to be 'plants'. Therefore, this ground also is rejected.
15. In the result, since all the grounds are rejected, the whole appeal is dismissed.