Subramonian Poti, Actg. C.J.
1. A Division Bench of this court referred this case to the Full Bench since the revenue pressed for an examination of the correctness of the decisions of several High Courts in India on the construction of Section 40(a)(v) of the I.T. Act and the Division Bench thought it appropriate that the question be examined by a Full Bench.
2. The two references arise out of the same order of the Income-tax Appellate Tribunal, Cochin Bench. One of the references is at the instanceof the Commissioner of Income-tax and the other at the instance of the assessee. These arise from the order of the Tribunal disposing of the appeal for the assessment year 1971-72.
3. The assessee is a limited company. The company had considerable properties at Calicut and Mangalore. These were in the possession of the assessee from 1920 onwards. The assessee had claimed depreciation for the factory buildings and this had been allowed in the previous years. During the accounting year 1970-71, some properties were sold. The assessee showed capital gains, computing the capital gains on the land and the capital gains on the factory buildings separately. The question of capital gains on the land is not relevant for the purpose of these references. The references concern only capital gains on the buildings. The sale price in respect of Calicut Weaving Factory was Rs. 20,000. The original value of the building was Rs. 10,000 and there was an additional expenditure of Rs. 979. Depreciation had been allowed on the value of the buildings in the earlier years. The assessee showed a capital loss of Rs. 78 on the sale of the buildings at Calicut. This was by revaluing the buildings as on January 1, 1954. The stand taken by the assessee was that it had the option under Section 55(b) of the I.T. Act either to adopt the written down value of the building or the value of the building as on January 1, 1954, and it chose the latter. It is on this basis that the assessee showed a loss of Rs. 78. The ITO took the view that the assessee does not have the right to substitute the value as on January 1, 1954, because the assets were depreciable assets, that Section 50(1) was a special provision in respect of depreciable assets and the provision allowing the option was not applicable to such depreciable assets. The ITO substituted the original value and arrived at a capital gain of Rs. 9,021.
4. The Mangalore buildings were sold for Rs. 2,25,000. The original cost as adjusted came to Rs. 76,680. In the case of these buildings also, depreciation had been claimed and allowed in the previous years. Here again the assessee revalued the buildings as on January 1, 1954, and on that basis showed the capital gains at Rs. 44,713. The ITO held, as in the case of Calicut buildings, that it was not open to the assessee to opt for the value as on January 1, 1954, in respect of the depreciable assets. He deducted the original cost of acquisition and arrived at a capital gain of Rs. 1,46,320 in respect of the said buildings. The AAC agreed with the ITO and held that the assessee did not have the right to substitute the value as on January 1, 1954, in respect of a depreciable asset. The assessee appealed to the Tribunal, On this question no ground was taken by the assessee but he filed an additional ground and that was admitted. The Tribunal also held the view that in respect of depreciable assets the assessee did not have the right to substitute the value as on January 1, 1954. It is from this that the following question arose and was consequently referred ;
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee did not have the right of substituting the market value as on January 1, 1954, in respect of the depreciable assets ?'
5. Now, we will consider the question referred at the instance of the Commissioner of Income-tax. One of the employees of the assessee-company was one Mr. Thomas. He had been allowed annual house rent allowance of Rs. 1,800. The ITO treated this as part of the perquisites allowed to the employee. His salary was Rs. 11,400 for the year. Besides this, he had been allowed a sum of Rs. 840 as servant's salary and fuel and lighting expenses reimbursement of Rs. 900. The total of the house rent allowance, servant's salary allowance and reimbursement of fuel and lighting expenses was Rs. 3,540 and that was treated as perquisites. Since the salary was only Rs. 11,400, any excess over l/5th of the salary as perquisites was to be disallowed under Section 40(a)(v) of the Act. 1/5th of Rs. 11,400 was only Rs. 2,280. The excess of Rs. 1,260 was, therefore, disallowed by the ITO. The AAC deleted the addition by way of such disallowance. But by mistake he mentioned the sum as Rs. 1,800. The Tribunal, on appeal, held that house rent allowance should not be treated as part of perquisites. Consequently, the addition made was deleted. The question that arises from this at the instance of the Commissioner of Income-tax is:
'Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in deleting Rs. 1,260 towards house rent under Section 40(a)(v) of the Income-tax Act, 1961 ?'
6. We will first consider the question referred at the instance of the assessee. Under Section 45(1) of the Act, any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax as it is deemed to be the income of the previous year in which the transfer took place. In the case of the assessee, the transfer of the buildings at Calicut and those of Mangalore took place during the relevant accounting year. The provision concerning the mode of computation is in Section 48 of the Act. It is to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the following amounts: (1) Amount of expenditure incurred in connection with the transfer, and (2) the cost of acquisition of the capital asset and the cost of any improvements thereon. There is no dispute as to the full value of the consideration received. There is also no dispute about the expenditure incurred for such transfer. The cost of acquisition had to be deducted. The question before us is what exactly is the 'cost of acquisition' in this case.
7. We may refer to Section 49 in this context. That deals With cost of acquisition with reference to certain modes of acquisition such as gift, will,succession, inheritance or devolution. We need not enumerate the cases which fall within Section 49, for, it is agreed that this case does not fall within Section 49 of the Act. The cost of acquisition is denned in Section 55(2) of the Act. That reads:
'(2) For the purposes of Sections 48 and 49, 'cost of acquisition', in relation to a capital asset,--
(i) where the capital asset became the property of the assessee before the 1st day of January, 1964, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1964, at the option of the assessee;
(ii) where the capital asset became the property of the assessee by any of the modes specified in Sub-section (1) of Section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1964, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1964, at the option of the assessee;
(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head 'Capital gains' in respect of that asset under Section 46, means the fair market value of the asset on the date of distribution ;.....
(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on-
(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,
(b) the conversion of any shares of the company into stock,
(c) the reconversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of smaller amount, or
(e) the conversion of one kind of shares of the company into another kind,
means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.'
8. We have particularly to notice that the 'cost of acquisition' as defined in Section 55(2) is 'for the purposes of Sections 48 and 49' only. As the I.T. Act stood during the relevant assessment year in place of the date 1st January, 1964, the date was 1st January, 1954, and for the purposes of the case here that is the date which is relevant. It is evident that in a case falling within Sections 48 and 49, the assessee had an option to adopt either the fair market value of the asset as on January 1, 1954, or the cost of acquisitionof the asset to the assessee. If it was more advantageous to him to adopt the value as on January 1, 1954, he was free to do so. It is this option that is sought to be exercised by the assessee in this case. We have already indicated that the definition of 'cost of acquisition' in Section 55(2) which enables an assessee to exercise the option is for the purpose of Sections 48 and and 49 only. To these sections we have adverted and we have pointed out that Section 49 has no application here. Now, we may have to advert to Section 50 of the Act which is a special provision concerning the determination of capital gains in regard to depreciable assets. Section 50, as it stood during the relevant assessment year, read thus :
'50. Where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (XI of 1922), or any Act repealed by that Act, or under executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force, the provisions of Sections 48 and 49 shall be subject to the following modifications :--
(1) The written down value, as defined in Clause (6) of Section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.
(2) Where under any provision of Section 49, read with Sub-section (2) of Section 55, the fair market value of the asset on the 1st day of January, 1954, is to be taken into account at the option of the assessee, then the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset on the said date, as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted.'
9. It may be seen from a reading of this provision that this section is of application to a case where a capital asset is an asset in respect of which deduction on account of depreciation has been obtained by the assessee in any previous year. In the case before us, the assessee had obtained a deduction on account of depreciation in the previous years. In that event, Section 50 provides that the provisions of Sections 48 and 49 shall be subject to the modifications indicated in Clauses (1) and (2). Section 49 having no application here and only Section 48 -having application, that alone has to be read subject to Clause (1). Clause (2) applies to a case to which Section 49 applies. So, that again has no application to this case. That means that in the case of the assessee the provision in Section 48 has to be read subject to the modification that the written down value as defined in Clause (6) of Section 43 of the asset as adjusted shall be taken as the cost of acquisition of the asset. Hence, though Section 55(2) gives an option to an assessee to choose one of the two values as the cost of acquisition for the purpose of Section 48, in a case to which Section 50 applies, Section 48 had to be read subject to the modification and, consequently, theoption would not be available. The cost of acquisition would have to be taken in such a case as the written down value as denned in Clause (6) of Section 43. That is what the ITO did. That, according to us, is the correct approach.
10. We are not impressed with the contention of the learned counsel for the assessee that since the definition of 'cost of acquisition' in Section 55(2) will apply for the purpose of Section 48 and this is a case to which Section 48 would so apply, Section 55(2) must govern despite Section 50 of the Act. That would be to render Section 50 inoperative. We do not see why we should resort to such a construction. While the option contemplated under Section 55(2) of the Act will be available in every case where capital gains is determined in accordance with Section 48, that would not be the case where what is applicable is not Section 48 as such but Section 48 as modified by Section 50. The special provision must necessarily operate in such a case so as to render the option under Section 55(2) unavailable and also to equate the cost of acquisition in such a case with the written down value as defined in Clause (6) of Section 43. The same view has been taken by the Allahabad High Court in CIT v. Upper Doab Sugar Mills : [1979]116ITR240(All) , with which decision we agree. The Allahabad High Court followed the said decision in the later decision in Prime Products Pvt. Ltd. v. CIT : [1979]116ITR473(All) .
11. Now, we come to the next question. That question turns on what exactly the term 'benefit or amenity or perquisite' means. We are concerned with Section 40(a)(v) of the Act as it stood during the assessment year 1971-72. With effect from April 1, 1972, Clause (a)(v) stood omitted and the provision is now re-enacted with modifications in Section 40A(5) inserted by the Finance (No. 2) Act of 1971. Asit stood at the relevant time, Section 40(a)(v) read :
'40. Notwithstanding anything to the contrary in Sections 30 - 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',-- .
(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 passage referred to in Sub-clause (i) of Clause (6) of Section 10;
(d) any payment of tax referred to in Sub-clause (vii) or sub- Clause (viia) of Clause (6) of Section 10 ;
(e) any sum referred to in Sub-clause (vii) of Clause (1) 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) pr 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'.
Explanation 2 makes it clear that the word 'salary' is to be understood in the light of the definition in Clause (h) of Rule 2 of Part A of the Fourth Schedule. That definition reads thus :
'2. Definitions.--In this Part, unless the context otherwise requires,--.........
(h) 'salary' includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.'
12. The definition indicates that salary would include dearness allowance (if the terms of employment so provide), but all other allowances and perquisites stand excluded from the scope of the term 'Salary'. This gives a very, clear concept of what is salary as defined in the Fourth Schedule. This definition is incorporated in Section 40(a)(v) by reason of Expln. 2. Therefore, when the Sub-clause uses the term 'Salary' it has to be understoodas excluding all allowances and perquisites other than dearness allowance. We find that the Sub-clause uses the term 'benefit, amenity or perquisite'' as opposed to salary evidently indicating that these together will exhaust what an employee obtains in return for his service. Evidently the object of Section 40(a)(v) is to persuade the employer to set a limit on the extent of the benefits of any kind that could be extended to any employee by an employer. Of course any employer is free to provide his employee with the salary agreed upon and also allowances, perquisites and such amenities as the parties may choose to stipulate by way of terms of employment. Though these will be expenses falling within Section 37(1) of the I.T. Act as expenditure incurred wholly for the purpose of the business, the employer's claim for deduction is subject to the limit specified in Section 40(a)(v). This is so in order that the taxable profits may not be siphoned off. If the benefit, amenity or perquisite exceeds one-fifth of the salary or Rs. 1,000 per mensem, whichever is less such excess over the one-fifth would not be treated as deductible expenditure with the result that despite such payment the assessee will have to pay tax on it. That will effectively deter an assessee from paying anything in excess of one-fifth of the salary by way of benefits, perquisites and amenities, the object being that it is not. possible to conceive any category of benefit--the term 'benefit' is used in a wider sense--accruing to an employee other than the salary outside the scope of the term 'benefit, amenity or perquisite'. It is evident, that the enumeration of benefit, amenity and perquisite is intended to cover exhaustively all that an employee may get in any form other than his salary. In other words, between salary on the one hand and benefit, amenity or perquisite on the other whatever an employee would get from his employer in cash or kind or services must stand exhausted. It may not be necessary to consider whether an allowance paid by way of house rent allowance falls within the term 'perquisite'. It is sufficient for the purpose of this case to consider whether it would fall within the scope of the term 'benefit, amenity or perquisite', since, if it does, Section 40(a)(v) would operate to restrict the claim for deduction in respect thereof. It is in that context and particularly keeping in mind the object of the provision that we have indicated that what the law purports to do is to limit what an employer can claim by way of deduction on account of payment to his employee by way of benefit, again in the extended sense of that term.
13. The only question before us is whether despite the very clear indication by reason of the context of the provision in Section 40(a)(v) that the term 'benefit, amenity or perquisite' must exhaust all advantages that an employee gets other than his salary, should a different meaning be given to this term because of the words 'whether convertible into money or not' following it. It is seen to have been argued, and successfully, insome cases that the words 'whether convertible into money or not' reflect on the nature of 'benefit, amenity or perquisite'. Such a qualification is said to be inappropriate in the case of a cash benefit. In other words, cash cannot be qualified by the term 'whether convertible into money or not' and, therefore, whatever may be the natural meaning of the term 'benefit, amenity or perquisite', any advantage in terms of money which may fall normally within anyone of these three must stand excluded. We notice that this argument succeeded before the Karnataka High Court in CIT v. Mysore Commercial Union Ltd. : [1980]126ITR340(KAR) , before the Calcutta High Court in CIT v. Kanan Devan Hills Produce Co. Ltd. : [1979]119ITR431(Cal) and before the Madras High Court in CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150. Though reference is made by the counsel for the assessee to the decision of the Madras High Court in CIT v. G. Venkataraman [1978] 111 ITR 444 that could easily be explained because the language of the section which the court considered in that case was materially different from what we are dealing with here.
14. We don't see any reason to give undue emphasis to the words 'whether convertible into money or not' so as to give a very restricted meaning to the term 'benefit, amenity or perquisite', a meaning which would not serve the evident purpose of the section. We say so because 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) because restriction is limited only to non-cash advantage given to the employee. Such a construction appears to us to be quite irrational defeating the very purpose of prescribing the limit under Section 40(a)(v) so as to dissuade an employer from paying unduly large sums by way of benefit, amenity or perquisite. 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 are not convertible into money stand excluded from the scope of the term 'benefit, amenity or perquisite', that need not necessarily be so. The term 'benefit, amenity or perquisite' may take in any benefits in kind and in service and may take in also cash. 'Whether convertible into money or not' need not quality the whole range. It only means that it is immaterial whether the benefit, perquisite or amenity may or may not be convertible into money. That would be immaterial. According to us, this would be the proper reading of the section.
15. In the result, we answer the question referred at the instance of the assessee in the affirmative and the question referred at the instance of theCommissioner in the negative. That means that both the questions are answered in favour of the revenue and against the assessee.
16. A copy of the judgment under the seal of the High Court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench, as required under Section 260(1) of the Act.