Subramonian Poti, Actg. C.J.
1. Excepting in the last of the cases, the assessee in all the cases is the same. The reference in I.T.R. No. 76 of 1978 concerns the year 1971-72 and that in I.T.R. No. 103 of 1980 also concerns the same year and the same assessee. Two different questions have been referred in these two references. In respect of the same assessee there is a reference of the same two questions for the assessment year 1970-71 in I.T.R No. 44 of 1979, In I.T.R. Nos. 79 to 82 of 1978, similar questions are referred. We say 'similar' because the provision of the I.T. Act referred to in the latter cases is that substituted for the earlier provision, though materially not very different. In I.T.R. No. 87 of 1978, in which the assessment concerns a different assessee, the same questions as in I.T.R. Nos. 79 to 82 of 1978 have been raised in relation to the year 1974-75.
2. The two questions referred to this court in I.T.R. No. 44 of 1979 are :
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the entire expenses on the cars used by the directors could not be considered under Section 40(a)(v) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case and on an interpretation of Section 40(a)(v) of the Income-tax Act, 1961, the Tribunal is right in law allowing the expenses incurred for the maintenance of the buildings '
2. In I.T.R. No. 76 of 1978, the question referred is this :
' Whether, on the facts and in the circumstances of the case and on an interpretation of Section 40(a)(v) of the I.T. Act, 1961, the Tribunal is right in law in allowing the expenses incurred for the upkeep of the building '
3. This is substantially question No. 2 in I.T.R. No. 44 of 1979. In I.T.R. No. 103 of 1980, there is a separate reference because the Tribunal declined to refer the question and, on this court directing such reference, it was independently referred. The question so referred is identical with question No. 1 in I.T.R. No. 44 of 1979.
4. Section 40(a)(v) was omitted by the Finance Act of 1971, with effect from April 1, 1972. Section 40A(5), which substantially covers the same subject-matter, came into force with effect from April 1, 1972. The other references which are for the years subsequent to 1971-72, therefore, refer to Section 40A(5). The two questions raised there, corresponding to the questions raised in I.T.R. No. 44 of 1979, are :
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the entire expenses incurred bythe assessee on the car used by the director could not he considered Under Section 40A(5) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case and on an interpretation of Section 40A(5) of the Income-tax, 1961, the Tribunal is right in law in allowing the expenses incurred for the maintenance of the buildings '
5. Since the correctness of the decision of this court in CIT v. Travancore Tea Estates Company Ltd., : [1980]122ITR557(Ker) was doubted by a Division Bench of this court, the case was referred to a Full Bench and that is how the matter is now before us.
6. The assessee in all but the last of the cases is a private limited company, M/s. Forbes, Ewart & Figgis Private Ltd. The assessee in the last of the cases is a limited company, M/s. Harrison & Crossfield Limited, Cochin. M/s. Forbes, Ewart & Figgis Private Ltd. fin short M/s. Forbes) owns 3 cars and two bungalows. The bungalows are given to the directors for occupation, free of rent. Maintenance expenses had been incurred by the company in respect of these buildings. The cars of the company were being used by the directors for their personal purposes too. Expenses have been incurred on the cars. The total expenses on the cars together with depreciation amounted to Rs. 22,192 in the case of the car used by one of the directors, Mr. Thomas, and Rs. 15,597 in the case of the car used by another director, Mr. Patridge. We are stating the facts with reference to I.T.R. No. 76 of 1978, for the year 1971-72. It may not be necessary to state the facts in the other cases, for, this is illustrative of the other cases.
7. While completing the assessment the ITO disallowed 1/6th of the carexpenses as not pertaining to business. He did not apply the provisionsof Section 40(a)(v) of the Act at that time. When this was brought to the noticeof the ITO by the audit note, the assessment was reopened. In the reassessment proceedings the entire expenses on the motor cars and thebuildings were considered as falling under Section 40(a)(v) and, therefore, thepermissible expenditure in this behalf was limited to Rs. 12,000. Suchdisallowance was confirmed in appeal. The Appellate Tribunal found thatthe vehicles were used also for the personal purposes of the directors.But, at the same time, the Tribunal found that the cars had not beenexclusively used for the personal purposes of the directors. Part of theexpenses on the cars was, therefore, found to be for the purpose of business. The Tribunal fixed 2/3rd of the total expenses, as for the purposeof business, and 1/3rd as for personal purposes. Therefore, it held thatonly 1/3rd of such expenses on the cars could be considered for the purpose of Section 40(a)(v) of the Act.
8. Considering 'the expenditure on bungalows occupied by the directorsfree of rent, the Tribunal held that such expenditure did not fall underSection 40(a)(v). It was of the view that the employees should have derivedsome benefit from such expenditure. Inasmuch as the case was foundnot to fall within Section 40(a)(v)/ Section 40A(5), it was held that there was noreason to apply Section 40(a)(v) to the case. At the instance of the Commissioner of Income-tax the two questions said to arise from the orders ofthe Tribunal have been referred. The first of the questions concern theexpenses on the cars. According to the Revenue, even though the carsare used only partly for the personal benefit of the directors, the entireexpenses on the cars should fall within the scope of Section 40(a)(v) with theconsequence that the limit on the permissible expenditure must apply tothe whole of such expenses. The other question concerns the expenses onthe buildings. According to the Revenue, the case squarely falls withinthe scope of Section 40(a)(v) and, therefore, the limit on permissible expenditureshould have been taken into account by the Tribunal.
9. We have to consider Section 40(a)(v) of the I.T. Act in the matter of the assessments for the years 1970-71 and 1971-72 and the corresponding new provision in Section 40A(5) for the subsequent years. Prior to the omission of the clause by Finance (No. 2) Act of 1971 with effect from April 1, 1972, Section 40(a)(v) of the I.T. Act, as it then stood, read thus:
' 40. (a) in the case of any assessee--...
(v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of 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 his employment during the previous year, whichever is less :
Provided that in computing the aforesaid expenditure or allowance, the following shall not be taken into account, namely :--
(a) any payment by way of gratuity ;
(b) the value of any travel concession or assistance referred to in Clause (5) of Section 10 ;
(c) passage moneys or the value of any free or concessional passagereferred to in Sub-clause (i) of Clause (6) of Section 10 ;
(d) any payment of tax referred to in Sub-clause (vii) of Clause (6)of Section 10;
(e) any sum referred to in Sub-clause (vii) of Clause (i) of Section 17 ;
(f) any sum referred to in Sub-clause (v) of Clause (2) of Section 17 ;
(g) the amount of any compensation referred to in Sub-clause (i) or any payment referred to in Sub-clause (ii) of Clause (3) of Section 17 ;
(h) any payment referred to in Clause (iv) or Clause (v) of Sub-section (1) of Section 36; and
(i) any expenditure referred to in Clause (ix) of Sub-section (1) of Section 36 :Provided further that nothing in this Sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head ' Salaries ' is seven thousand five hundred rupees or less. Explanation 1.--The provisions of this sub-clause shall apply notwithstanding that any amount not to be allowed under this sub-clause is included in the total income of the employee.
Explanation 2.--In this sub-clause, the word 'salary ' shall have the meaning assigned to it in Clause (h) of Rule 2 of Part A of the Fourth Schedule. '
10. After the Finance Act of 1971 brought about the change, the new provision in Section 40A(5) reads thus :
' 40A(5). (a) Where the assessee-
(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or
(ii) 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 deduction :
Provided that where the assessee is a company, so much of the 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) and (ii) of Clause (c) of Section 40,
in 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:
Provided further that in computing the expenditure referred to in Sub-clause (i) or the expenditure or allowance referred to in Sub-clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely:--
(i) the value of any travel concession or assistance referred to in Clause (5) of Section 10 ;
(ii) passage moneys or the value of any free or concessional passage referred to in Sub-clause (i) of Clause (6) of Section 10 ;
(iii) any payment referred to in Clause (iv) or Clause (v) of Sub-section (1) of Section 36 ;
(iv) any expenditure referred to in Clause (ix) of Sub-section (1) of Section 36.
(b) Nothing in Clause (a) shall apply to any expenditure or allowance in relation to-
(i) any employee in respect of any period of his employment outside India;
(ii) any employee being an individual referred to in Sub-clause (vii) or Sub-clause (viia) of Clause (6) of Section 10 in respect of any period during which he is entitled to the exemption under Sub-clause (vii) or, as the case may be, Sub-clause (viia) aforesaid ;
(iii) any employee whose income chargeable under the head ' Salaries ' is seven thousand and five hundred rupees or less.'
11. Section 40A(5)(a) could be understood only with reference to Clause (c) which prescribes the limits. Clause (c) of Section 40A(5) reads thus :
' 40A. (5)(c) The limits referred to in Clause (a) are the following, namely :--
(i) in respect of the expenditure referred to in Sub-clause (i) of Clause (a), in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees :
Provided that where the expenditure is incurred on payment of any salary to an employee or a former employee engaged in scientific research during any one or more of the three years immediately preceding the commencement of the business and such expenditure is deemed under the Explanation to Clause (i) of Sub-section (1) of Section 35 to have been laid out or expended in the previous year in which the business is commenced, the limit referred to in this sub-clause shall, in relation to the previous year in which the business is commenced, be an amount calculated at the rate of five thousand rupees for each month or part thereof comprised inthe period of his employment in India during the previous year in which such business is commenced and in the period of his employment in India during which he was engaged in scientific research during the three years immediately preceding that previous year ; (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 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 1.--The provisions of this Sub-section shall apply notwithstanding that any amount not to be allowed under this Sub-section is included in the total income of the employee or, as the case may be, the former employee.
Explanation 2.--In this sub-section,--
(a) ' salary ' has the meaning assigned to it in Clause (1) read with Clause (3) of Section 17, subject to the following modifications, namely :--
(1) in the said Clause (i), the word ' perquisites' occurring in Sub-clause (iv) and the whole of Sub-clause (vii) shall be omitted;(2) in the said Clause (3), the references to ' assessee ' shall be construed as references to ' employee or former employee ' and the references to ' his employer or former employer ' and ' an employer or a former employer ' shall be construed as references to ' the assessee ' ;
(b) 'perquisite' means-
(i) rent-free accommodation provided to the employee by the assessee ;
(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 ;
(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 superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity.'
12. The definition of 'perquisite ' in Expln. 2(b) of this clause is relevant as that applies to the term 'perquisite ' in Section 40A(5)(a)(ii).
13. Sections 30 - 37 of the I.T. Act deal with the permissible deductions relevant for the purpose of ascertaining the net income of the assessee. Section 37(1) takes in all expenditure, not particularly describedin Sections 30 - 36 and Section 80VV, which are laid out or expended wholly and exclusively for the purpose of the business or profession if such expenses are not of a capital nature. Such expenses are to be deducted in computing the income chargeable under the head 'Profits and gains of business or profession '. Normally, the salary paid to the employees, the money value of perquisites given to them and other benefits extended to them would be deductible as amounts expended for the business. But evidently with a view to check the offer of extravagant benefits or perquisites to employees, a ceiling limit is prescribed as the permissible expenditure on such account. If the company extends more benefits than so permitted, though the financial commitment in that behalf may have been laid out for the benefit of business, that would not be deductible as expense, in determining the net income. Such limit has been prescribed in respect of, (1) any expenditure which results directly or indirectly in the provision of any benefit, amenity or perquisites to an employee, (2) any expenditure or allowance in respect of any asset of the assessee used by such employee either wholly or partly for his own purpose or benefit. The limit as it stood prior to April 1, 1972, was 1/5th of the amount of salary payable to the employee or an amount calculated at Rs. 1,000 for each month, whichever was less. That means, on any account, it should not exceed Rs. 12,000 in an year and if it so exceeds, such excess will not be deducted as expenditure of the assessee though in fact the assessee had expended the same either as perquisites of the employee or by way of expenditure on an asset of the assessee used by the employee wholly or partly for the personal purpose of the employee.
14. The provision of a car and the provision of a rent-free accommodation may respectively call for attention to the car so provided or the building in which the employee is accommodated resulting in an expenditure by the assessee. The car may have to be repaired. The house may have to be maintained and kept in good order. Those would be cases of expenditure on assets of the assessee used by the employees. It is on this approach that the ITO sought to apply Section 40(a)(v) so as to restrict the deductible expenditure of the assessee on this account to the ceiling limit prescribed. The Tribunal found that the provision would apply, but limited the amount to be reckoned for the purpose of Section 40(a)(v) to 1/3rd in respect of the car expenses since that was the only amount in respect of which there was dispute. According to the Revenue, when once an asset is used for the personal benefit or purpose of an assessee, all expenses incurred by an assessee on such asset falls plainly within the language of Section 40(a)(v), after the-amendment under Section 40A(5), irrespective of whether the asset is used only partially for personal purposes and for that reason the limit of Rs. 12,000 or 20 per cent., whichever is less, must be applied insuch a case to the entire expenses of the car and not to 1/3rd. We will consider this question first, one of the two main questions calling for answer in those cases.
15. As we have indicated, Section 40(a)(v), as also Section 40A(5), contemplate expenditure in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit. That the car is used partly by the employee for his own purpose is admitted. It is not wholly used for such purpose. The assessee incurs expenditure directly in respect of such car belonging to the assessee. That car is used by the employee. Therefore, according to the Revenue, the plain language of the section indicates that the entire expenditure incurred on the car is to be subject to the ceiling specified in the provision and not 1/3rd only. May be the use of the car for business purpose may be estimated at 2/3rd. But according to the Revenue it is not only the estimated part of the use for personal purposes in regard to the car that would be relevant in the context of the language of the concerned provision. We have to notice that but for the provision in Section 40(a)(v) and Section 40A(5), the expenditure incurred on the car provided for the employee would have been a permissible item of deduction. The purpose of the provision is to cut down on what otherwise would be admissible and to limit it to a specified sum. Despite the fact that the expenditure is such as is laid out wholly or exclusively for the purpose of the business, it may be necessary to limit the permissible deduction as in the case of the salary to an employee. May be that a company honestly pays a salary of Rs. 10,000 to an employee considering the services of that employee and in the normal course that should fall within Sections 30 - 37 of the Act and ought to be deducted in determining the net income. Section 40A(5)(c) limits such salary deductible as expenses to Rs. 5,000 a month, which means that if salary is paid in excess that will not be reckoned in determining the net income of the assessee. It will not he deductible as an item of permissible expenses. Same is the idea with regard to perquisites provided. This is also the case with expenses on the assets of the assessee used by the employee if such use includes personal use also. The restriction on the limit can be only in regard to the personal use and not in regard to the use of the vehicle for business purposes. The object of the restriction provision is to fix a ceiling limit only in respect of the remuneration to the employees or value of benefit to them in some form or other and not in respect of the expenditure incurred for the purpose of business. The words ' 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' must be read and understood as 'incurs directly or indirectly in respect of any assets of the assessee used by an employee either whollyor partly for his own purpose or benefit to the extent of such purpose or benefit'. This is implied in the very scheme of the Act. Instances where courts arc called upon to read statutory provisions in their true setting so as to assimilate the true meaning are many and this is one such. If the provision is read differently, giving more emphasis to a strictly literal reading, that will yield anomalous results. For instance, if an asset of an assessee is used almost entirely for business purposes, though to an insignificant extent for the personal purpose of the employee, almost the entire expenses incurred really for the business would be an inadmissible item of deduction except to the extent of the ceiling limit permissible. Regard being had to the object of the provision it is evident that the control is on the amount expended on the asset which is used by the employee for his benefit to the extent he uses it for his personal purposes. If the use by him is 1/3rd as in this case it is only the 1/3rd of the expenses that would call for application of the limit as rightly held by the Income-tax Tribunal. The position is the same as regards Section 40A(5) as well as Section 40(a)(v). Hence, question No. 1 in all cases other than I.T.R. No. 76 of 1978 (in I.T.R. No. 76 of 1978 there is only one question and that is the second question dealt with in this judgment), is answered in favour of the assessee and against the Revenue.
16. Now, we will come to the other question concerning expenditure incurred on the buildings. That question also concerns the interpretation of Section 40(a)(v) for the years 1970-71 and 1971-72 and the interpretation of Section 40A(5) of the Act for the other years. The expenses incurred for the maintenance of the buildings (the term 'upkeep' is used in place of maintenance in I.T.R. No. 76 of 1978, but it is agreed that this docs not make any difference) were considered by the Tribunal as not falling within either of the two limbs in Section 40(a)(v) or Section 40A(5) of the Act. Since there is some difference between the sections and the approach to the interpretation also is different in respect of the two provisions, we will consider each of them separately. We will first take up the provision in Section 40(a)(v) of the Act.
17. According to the Revenue the expenses by way of maintenance on buildings belonging to an assessee occupied by an employee as rent-free accommodation may not fall within the first limb of Section 40(a)(v) but it will fall within the second limb of that sub-section. No doubt, the provision of rent-free accommodation is a benefit or amenity or perquisite. But it is said for the Revenue that the expenses on the maintenance of the building is an expense on the building and, therefore, it is not an amenity or perquisite to an employee. According to the Revenue that will fall within the latter limb because it is an expenditure in respect of an asset of the assessee used by the employee. Such use is partly for the benefitof the employee. On an earlier occasion, a similar plea arose for consideration by this court in the decision in CIT v. Travancore Tea Estates Co. Ltd., : [1980]122ITR557(Ker) . A Division Bench of this court noticed that the second part of the second limb of the provision in Section 40(a)(v) uses the expression 'such employee'. While the first part deals with any expenditure resulting in the provision of any benefit, or amenity or perquisite to an employee, the second part refers to expenditure on any asset of the assessee used by 'such' employee. The court read the term 'such' as referring to an employee who satisfies the earlier part of the provision, namely, one who by reason of such expenditure is provided with any benefit or amenity or perquisite. The learned Chief Justice Sri Gopalan Nambiyar, speaking for the Bench, said thus. (p. 560) :
' As the Tribunal pointed out, the significant part of the provision is the expression 'such' which qualifies the word 'employee'. In the context and according to the rules of grammar this can only refer to the employee who has been described earlier. We should, therefore, turn to the earlier description of the employee. That we get in the earlier part of the section as an employee who enjoys the benefit of an expenditure which results directly or indirectly in the provision of any benefit or amenity or, perquisite whether convertible into money or not. The question then is : whether the expenses on the upkeep of buildings would satisfy the provision in Section 40(a)(v) of the Act; or, in other words, whether the expenses on the upkeep of the buildings would result directly or indirectly in the provision of any benefit or amenity or perquisite to the employee. The Tribunal held that it would not and we think that, in the circumstances, the Tribunal was correct. The second type of expenses provided for in the section, is expenses in respect of any assets of the assessee used by such employee. In relation to this second type of expenses, again, we think the view taken, by the Tribunal was correct. The Tribunal was of the opinion that the asset over which certain expenses had been incurred by the assessee should be used by the employee. The employee referred to in the earlier part of the section has been stigmatised with respect to one requirement, i. E., that he should have been the beneficiary of the expenditure or he should have derived an amenity or perquisite from the expenditure. Neither, of those stands satisfied, with respect to the expenses on the maintenance of the buildings. It does not, therefore, fall under the section. This was the view taken by the Tribunal and we think the Tribunal was right. We answer the question referred in the affirmative, i. e., in favour of the assessee and against the Revenue.'
18. In the view that the Division Bench took even if any expenditure was incurred on a building of the assessee used by an employee the limit prescribed in Section 40(a)(v) would not arise for application unless it was fur-ther shown that the employee had been the beneficiary of the expenditure or he had obtained the benefit or an amenity or perquisite from the expenditure. A Division Bench of this court, before which this case came up. earlier, doubted the correctness of this approach and that is how the case is before us.
19. The second part of the provision in Section 40(a)(v) refers not only to any expenditure but also allowance in respect of any asset of the assessee used by the employee. As the provision stands it is not only the expenditure that will be affected by the ceiling limit prescribed but also allowances such as the depreciation allowance. Taking a case where an assessee claims depreciation allowance in respect of a building belonging to him and occupied by an employee partly for his own benefit let us see how the ceiling provision and the permissible limit of the allowance could operate in such a case. The section would read 'in the case of any assessee any allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or business shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession' to the extent such allowance exceeds 1/5th of the amount of 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 his employment during the previous year, whichever is less'. It means that the allowance in respect of assets used by the employee will be limited along with other items of expenditure which may fall within the same provision to the ceiling limit. The allowance is in respect of assets of the assessee. The construction of the term ''such employee', to mean an employee who is the beneficiary or who obtains an amenity or perquisite by reason of the expenditure referred to in the latter limb of the provision, will be inapplicable to a case when the ceiling limit is not applied to any expenditure but to an allowance. In otherwords, it will be evident that the meaning given to the word 'suchemployee' as referring to an employee who falls within the first limb ofthis provision will be found to be inappropriate if the term 'allowance'occurring in the second part of the provision is noticed. Evidently thathas not been noticed by the Division Bench.
20. It may be useful to refer to the history of the relevant provision. The provision in Section 40(a)(v) as it stood immediately prior to the omission of the provision by Finance (No. 2) Act of 1971 had been re-enacted with modification in that form by the Finance Act, 1968, with effect from April 1, 1969. Prior to that, the provision, as it stood, took in only cases contemplated in the first limb of the provision in Section 40(a)(v). In the memorandum explaining the provisions of the Finance Bill, 1968, the object ofthe incorporation of Section 40(a)(v) in the form in which it appeared in the Act by reason of the Finance Act, 1968, is explained thus :
' Expenditure on providing perquisites, benefits or amenities to higher paid employees in business and professions.--In the case of companies, the deductible amount of expenditure incurred by them in providing perquisites, benefits or amenities (subject to certain exceptions) to their higher paid employees is at present limited to 20 per cent, of the basic salary of each employee. It is proposed to extend this provision to non-corporate employers also and to bring within the purview of the limit any expenditure or allowance admissible to the employer in respect of any assets provided by him to the employee free of charge or on a concessional basis. Thus, where an employer has provided residential accommodation or household equipment such as frigidaires, air conditioners, etc., owned by him, to his employees free of charge, any expenditure incurred by the employer on the maintenance of these assets or any depreciation allowance admissible to him in respect thereof will also be brought within the purview of the limit over the deductible amount of expenditure in providing perquisites, benefits or amenities to employees. Further, it is proposed to lay down an alternative monetary limit of Rs. 1,000 per month for each employee over the deductible amount of expenditure incurred by the employer in providing perquisites, benefits or amenities to his higher paid employees. The proposed provision is sought to be made effective for and from the assessment year 1969-70.' (vide [1968] 67 ITR 87).
The object being thus quite clear, to say that, merely because of the use of the word ' such ', the expenditure referred to in the second limb of Section 40(a)(v) should be an expenditure of the nature falling within the first part of the limb, may not be logical. There is a further argument for the Revenue that an expenditure on an asset of the assessee used by the employee will never fall within the first part of the provision because it will be an expenditure not by way of providing any benefit or amenity or perquisite to the employee but only an expenditure on an amenity provided to the employee. It is, therefore, said that the construction resorted to by the Division Bench is in any view wrong. There is considerable force in this contention. As we have pointed out, the legislative history indicates that the express purpose of incorporation of the second limb was to rope in cases such as the one before us, namely, cases where the employer providing residential accommodation or household equipment, etc., to the employees free of charge incurs expenditure in the maintenance of these assets or earns depreciation allowance in respect thereof and that is also sought to be brought within the purview of the limit of deductible expenditure. As we have already indicated, the construction put on the term 'such', so as to relate the latter part of the clause to the earlierpart of the provision will be quite inappropriate and inapplicable in the case of an allowance. So, such a construction would not be rational.
No doubt the use of the term ' such ' is inappropriate in the strictly grammatical sense. But courts are not always to be guided by the strict grammatical sense of an expression. Courts called upon to construe statutes must read and understand the language of the statute in a sense that harmonises with the subject treated and the object which the Legislature would have had in view in enacting that provision. Too much emphasis on a strict grammatical construction may sometimes lead to a wrong understanding of a clause and result in construction which may defeat the object of the provision or may lead to anomalous results. The best instance is the case before us. Though in a very strictly grammatical sense 'such' may be taken as relating to that which follows what precedes and, therefore, there may be a nexus with the earlier part, it is evident that, so construed, the latter part which relates to 'expenditure' as well as 'allowance' cannot be read intelligibly with regard to allowance. That itself is sufficient to alert one to the need to have a closer look at the provision and to notice the legislative intent in enacting the provision. The scheme and the setting of an Act, the purpose and object sought to be achieved by the provision in question, its context and historical background may all be relevant in understanding the section, in such circumstances. That is why we have referred to the objects of the provision in question as evident from the memorandum, to which we have made reference earlier. We may in this context advert to a passage in State of U.P. v. C. Tobit, : 1958CriLJ809 , approving the approach on this question by Maxwell on the Interpretation of Statutes 10th Edn., p. 52. The court said thus (p. 416):
' It is well settled that 'the words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view. Their meaning is found not so much in a strictly grammatical or etymological propriety of language, nor even in its popular use, as in the subject or in the occasion on which they are used, and the object to be attained'. ' Before we close the discussion on this question we may have to notice that the provision when it was re-enacted materially in the same form in Section 40A(5) omitted the word 'such', so much so the ambiguity by reason of the use of the term 'such' in the section may not arise for notice as the provision stands after April 1, 1972. It would not be out of place to refer to the subsequent enactment or subsequent modification of a provision for the purpose of understanding the meaning of the Act. TheLegislature departs from the language it had used earlier. If there be any ambiguity in the provision as it stood earlier, the departure cannot be said to be without significance, 'As early as in Attorney-General v. Clarkson, [1900] 1 QB 156 (CA), the law was stated that subsequent legislation on the, same subject may be looked into in order to see that the proper construction is put on an earlier Act where the earlier Act was ambiguous. As observed by Lord Sterndale M.R. in Cape Brandy Syndicate v. IRC, [1921] 2 KB 403 (CA), referring to Attorney-General v. Clarkson, [1900] 1 QB 156, it is not as if the subsequent legislation if it proceeds upon an erroneous construction of previous legislation would alter the previous legislation, but ' if there be any ambiguity in the earlier legislation then the subsequent legislation may fix the proper interpretation which is to be put upon the earlier '.
21. The above discussion necessarily leads us to hold, with great respect, that the approach in CIT v. Travancore Tea Estates Co. Ltd., : [1980]122ITR557(Ker) , to the construction of Section 40(a)(v) is wrong. The learned judges of the Division Bench seem to have placed too much emphasis on the term ' such ' in Section 40(a)(v) of the Act qualifying the word ' employee ', so much so that they came to the conclusion that according to the rules of grammar the reference can only be to an employee described earlier. Naturally, they turned to the description of employee in the earlier part of the section and applied it. For reasons stated earlier in this judgment, this approach is not justified.
22. There can be no scope for any ambiguity in regard to the meaning of the corresponding provision as it stands in Section 40A(5) after that was incorporated with effect from April 1, 1972. As we indicated earlier, there is no reference to 'such employee' in that section. That provision contemplates disallowance of deduction in excess of the specified limit where the assessee 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 purpose or benefit. The use of the expression 'an employee' in Section 40A(5)(a)(ii) makes the matter clear beyond doubt. Therefore, the answer in respect of cases arising for the assessment years 1972-73 and later years presents no difficulty.
23. In the light of the above discussion, our answer to question No. 2, in I.T.R. 44 of 1979, which concerns the section as it stood prior to April 1, 1972 and to similar questions in the other cases, is in favour of the Revenue and against the assessees. The Tribunal was not right in law in allowing the expenses incurred for the maintenance of the buildings beyond the limit specified in Section 40(a)(v) of the Act for the period when that provision was in force and the corresponding limit specified in Section 40A(5) of the Act for the years when that section was in force.
24. In the result, question, No. 2, in all cases other than I.T.R. No. 103 of 1980, where there is only one question, is answered in the negative, that is, against the assessee and in favour of the Revenue.
25. All the references are answered as above.
26. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench, as required under Section 200(a) of the I.T. Act.