ORDER
N.V. Balasubramanian, J.
1. The assessee is a domestic company and it is classified as a trading company for the purposes of taxation. The ITO, in the course of assessment proceedings for the asst. yr. 1976-77 noticed that the assessee had made payments by way of remuneration to its chairman, its directors and other employees. The payments so made were like rates and taxes, maintenance of buildings and other vehicles owned by the assessee-company, salary paid to the watchmen and personal accident insurance premium. He also noticed that the depreciation was claimed by the assessee in respect of assets used by the directors. He, therefore, treated these expenditures and allowances as perquisites under the provisions of s. 40(c)/40A(5) of the IT Act, 1961 (hereinafter referred to as the 'Act'), and found that the total remuneration and perquisites exceeded the statutory limit for allowance prescribed under those provisions. The ITO, therefore, restricted the allowance to the ceiling limit laid down under the provisions of s. 40(c)/40A(5) of the Act and disallowed the excess amount which amounted to Rs. 1,09,482. The ITO also disallowed a sum of Rs. 5,000 out of the expenditure captioned under the head, 'sales promotion expenses' and another sum of Rs. 4,367 out of the miscellaneous expenditure representing the entertainment expenditure.
2. The assessee preferred an appeal to the CIT(A) against the order of assessment. The CIT(A) held that the expenditure like rates and taxes, building maintenance expenditure, insurance, depreciation of buildings, salary to watchmen, maintenance expenditure including depreciation, rent paid by the company for the property on lease, electricity charges and personal accident insurance cannot be classified as perquisites and hence, he held that those items could not form part of perquisites and cannot be disallowed under the provisions of s. 40(c)/40A(5) of the Act. In so far as the additions made towards the entertainment expenditure are concerned, the CIT(A), following a decision of this Court in CIT vs . Karuppaswamy Nadar & Sons : [1979]120ITR140(Mad) , held that the expenditure on refreshment to customers cannot be treated as entertainment expenditure and should not have been disallowed. In this view of the matter, the CIT(A) allowed the appeal preferred by the assessee.
3. The Department preferred an appeal before the Tribunal. The Tribunal following its earlier order in ITA No. 1033(Mad)/75-76, dt. 14th February, 1978, held that the expenditure incurred by the assessee by way of payment of wages, rates and taxes, etc. cannot be regarded as perquisite and cannot be subjected to the ceilings prescribed under s. 40(c)/40A(5) of the Act. In so far as the expenditure incurred towards personal accident insurance premium is concerned, the Tribunal following a decision of Delhi High Court in CIT vs . Vinay Bharat Ram : [1981]129ITR128(Delhi) , held that the premium paid by the assessee on accident policy of employees is not a perquisite in the hands of employees/directors. In so far as the sum of Rs. 5,000 which was disallowed on the ground of entertainment expenditure is concerned, the Tribunal held that it cannot be characterised as entertainment expenditure. In so far as the other amount of Rs. 4,367 incurred towards the supply of refreshment to customers is concerned, the Tribunal followed a decision of this Court in CIT vs. Karuppaswamy Nadar & Sons (supra) and held that the expenditure cannot be regarded as entertainment expenditure. Aggrieved by the order of the Tribunal, the Department has sought reference on the following two questions of law and the Tribunal has stated a case and referred the following questions of law for the opinion of this Court.
'1. Whether, on the facts and in the circumstances of the case, the expenses like rates and taxes paid in respect of the buildings and vehicles owned by the company, salary paid to the watchman, maintenance of vehicles and depreciation thereon and personal accident insurance premium payment cannot be treated as perquisites for purposes of disallowance under s. 40(c)/40A(5) of the IT Act, 1961, and hence, the disallowance made on the basis of these expenses as forming part of perquisites should be deleted
2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,000 disallowed under the head, 'sales promotion expenses' and another sum of Rs. 4,367 under the head, 'miscellaneous expenses' would not come under entertainment expenditure and, therefore, no disallowance therefor was needed ?'
4. Mr. S. V. Subramanian, learned senior counsel, appearing for the Department submitted that the expenses like rates and taxes paid by the assessee-company in respect of the building and vehicles owned by the company are perquisites. He submitted that the salary paid to the watchmen is also a perquisite. The maintenance expenses of the vehicles and depreciation allowance on the vehicles, according to the learned senior counsel, are also subject to the ceiling limit prescribed under s. 40(c)/40A(5) of the Act. In so far as the personal accident insurance premium payment is concerned, learned senior counsel submitted that it is for the benefit of the employees and hence, it should be treated as perquisite for the purpose of disallowance under s. 40(c)/40A(5) of the Act. In so far as the entertainment expenditure is concerned, he submitted that the expenditure incurred towards sales promotion included provision for lunch, coffee or other refreshments to the participants, and hence, these should be treated as entertainment expenditure. In so far as the other sum of Rs. 4,367 is concerned, learned senior counsel submitted that the expenditure towards the supply of refreshment to customers should also be regarded as entertainment expenditure and in view of the retrospective amendment made by the Finance Act, 1983 by the insertion of the Expln. 2 to s. 37(2A) of the Act w.e.f. 1st April, 1976, the above two sums should be regarded as entertainment expenditure.
5. Mr. S. A. Balasubramanian, learned counsel for the assessee, submitted that when the assessee-company paid rates and taxes in respect of buildings and vehicles owned by the company, it was discharging its statutory obligation and hence, those amounts cannot be regarded as perquisites. He strongly placed reliance on a decision of the Calcutta High Court in CIT vs. Orient Paper & Industries Ltd. : [1994]207ITR589(Cal) , and submitted that that sum cannot be regarded as a perquisite. He also submitted that the same ratio would apply to the expenditure incurred on the maintenance of vehicles owned by the assessee-company. In respect of the accident insurance premium, he submitted that the accident insurance premium cannot be regarded as perquisite. In so far as the salary paid to watchmen is concerned, Mr. Balasubramanian has not seriously disputed the position that it should be regarded as perquisite for the purpose of disallowance under s. 40(c)/40A(5) of the IT Act, 1961. In so far as the payments made towards the personal accident insurance premium is concerned, he submitted that the directors and the employees of assessee-company do not derive any benefit by such payment and the personal accident insurance premium is paid by the assessee-company for its own benefit. He relied upon the decision of Delhi High Court in CIT vs. Vinay Bharat Ram (supra), and submitted that on the basis of the decision of the Delhi High Court, the premium paid cannot be regarded as perquisite. In so far as the depreciation of allowances is concerned, he fairly submitted that the decision of the Supreme Court in CWS (India) Ltd. vs. CIT : [1994]208ITR649(SC) , would govern the case. As regards the second question, it was fairly conceded by the learned counsel for the assessee-company that the assessment involved is for the year 1976-77 and in view of the retrospective amendment made by Expln. 2 to s. 37(2)(a) of the Act by Finance Act, 1983, w.e.f. 1st April, 1976, the expenditure should be regarded as entertainment expenditure and the decision of the Supreme Court in CIT vs. Patel Brothers & Co. Ltd. & Ors. : [1995]215ITR165(SC) , would govern the case.
6. It is now necessary to consider the item of details of expenditure, which are the subject-matter of the disallowance prescribed under s. 40(c)/40A(5) of the IT Act, 1961. It is not in dispute that the provisions of s. 40(c)/40A(5) of the Act would apply to the facts and there is no material difference, in so far as the applicability of the said sections is concerned, to the facts of the case.
7. Sec. 40A(5) of the Act was introduced by the Finance (No. 2) Act, 1971, w.e.f. 1st April, 1972. Under s. 40A of the Act, whether the assessee incurred any expense, which results directly or indirectly in the provisions of any perquisites (whether convertible into money or not) to an employee or incurred directly or indirectly any expense or it is entitled to any allowance in respect of any assets of the assessee used by the employee either wholly or partly for the purpose of the benefit, then, subject to the provisions of cl. (b) the expenditure incurred would be subject to the ceiling provided under cl. (c) of s. 40A(5) of the Act. The expression 'perquisite' is defined in Expln. 2 to s. 40A(5) of the Act. It is clear that on the terms of s. 40(c)/40A(5) of the Act the expenses incurred by the assessee-company by way of payments of rates and taxes paid in respect of the buildings and vehicles owned by the company cannot be said to be for the benefit of the director or its employee. The company has paid the rates on the buildings or has paid the taxes on the buildings and vehicles of its own as the owner of the assets and the payments were made not for the benefit of the director/employees, but to fulfil the statutory obligation imposed upon the company by the relevant statute. Hence, it cannot be said that there is a benefit or perquisite, which was obtained by the director/employee in the discharge of the statutory obligation by the company to the statutory authorities. The company, irrespective of the fact whether building was in occupation of the director or employee or not, or irrespective of the fact that vehicle was used by the director or employee or not, has to pay the taxes imposed upon it and from the fact that it has paid the taxes or rates, on the assets in occupation of the director, it cannot be said that a benefit or amenity was provided by the company to its employees or the director. Hence, the first item cannot be regarded as a perquisite or benefit to the employees or the director, the payments cannot be the subject-matter of disallowance under the provision of s. 40(c)/40A(5) of the Act. A similar question came up for consideration before the Calcutta High Court in CIT vs. Orient Paper & Industries Ltd. (supra), wherein the Calcutta High Court has held that whether the assessee-company had in any case, to maintain its 'property, irrespective of whether it let its employee to occupy the property free of rent or at a concessional rent, and from the mere fact of the occupation of the premises, no benefit or amenity could be said to enure to its employee. Calcutta High Court also held that the beneficiary is the company and payment of municipal taxes or repairs to the premises is not perquisite for the purpose of determining the quantum of disallowances as prescribed under s. 40A(5) of the Act. Following the decision of Calcutta High Court, we also hold that the expenditure incurred by the assessee by way of payment of municipal taxes or taxes paid in respect of vehicle owned by the assessee-company cannot be taken into account for the purpose of disallowance prescribed under s. 40(c)/40A(5) of the Act. No doubt, learned senior counsel appearing on behalf of the Department relied upon an unreported decision of this Court in TC Nos. 271 of 1982 and 170 of 1983, dt. 16th March, 1995. But, it is seen that there is no discussion on this point.
8. Regarding the second item, namely, salary paid to the watchmen, it is not seriously disputed by the learned counsel for the assessee-company that the salary paid to the watchmen is a perquisite and the same would be subject-matter of consideration under the provisions of s. 40(c)/40A(5) of the Act.
9. Regarding the third item, maintenance of vehicles, the Tribunal held that the expenditure incurred by the assessee for the maintenance of the vehicles cannot be regarded as perquisite and cannot be taken into account for disallowance on the score that the expenditure incurred by the assessee for the maintenance of the vehicle would stand on the same footing as that of the payment by an assessee-company towards the taxes on the buildings or the vehicles. The expenditure incurred by the company towards the maintenance of the car is to make the vehicle fit and keep it in running condition, and by incurring such an expenditure, it cannot be said that there is any benefit, or perquisite provided to the employee or director by the assessee-company. The assessee-company has to incur the expenditure towards the maintenance of the vehicle irrespective of the fact, whether the employee or its director uses the vehicle or not. We are of the view that there is no benefit or amenity to the employee, but the ultimate beneficiary of the expenses is the company itself and the Calcutta High Court has also taken the similar view in CIT vs. Orient Paper & Industries Ltd. (supra) wherein the Calcutta High Court held that there is no benefit or amenity to enure to its employee by maintaining the property in good condition. Hence, we hold that the expenditure is not disallowable under s. 40(c)/40A(5) of the Act.
10. Similar view is also taken by the Gujarat High Court in Cullulose Products of India Ltd. vs. CIT (1996) 218 ITR 490, wherein Gujarat High Court has held that where there is no direct benefit or amenity available to the director or employee, the provision of the s. 40 are not attracted. The Court held that where there is an indirect benefit, it cannot be said that the company has incurred any expenditure which resulted in any benefit or amenity to the director. The Gujarat High Court was dealing with the case of the expenditure incurred in respect of telephones installed in residences of managing director and employee, and in the absence of a finding that telephones had been installed to give benefit or amenity to managing director or employees, the Gujarat High Court held that the expenses incurred by the assessee in providing the telephone could not be disallowed under s. 40(c)/40A(5) of the Act.
11. Mr. S. A. Balasubramanian, learned senior counsel appearing for the assessee relied upon a decision of Bombay High Court in the case of CIT vs. Chase Bright Steel Ltd. : [1989]177ITR124(Bom) , and submitted that the expenditure on repairs would fall under s. 30 of the Act and therefore, the ceiling limit prescribed under s. 40(c)/40A(5) of the Act does not apply. We are of the view that the decision of the Bombay High Court, has no application as the provisions of s. 40(c)/40A(5) of the Act have overriding effect over the provisions of s. 30 or 32 of the IT Act.
12. Regarding the fourth item, depreciation allowance, it is conceded by the learned counsel appearing for the assessee-company that in so far as the depreciation allowance is concerned, the decision of the Supreme Court in CWS (India) Ltd. vs. CIT (supra) would govern the case. The Supreme Court in that case has held that the expression, 'allowance' in s. 40(a)(v) and s. 40A(5)(ii) takes in depreciation allowance and the ceiling on expenditure provided under these provisions applies also to depreciation allowance on all assets belonging to the employer-assessee used by an employee. Following the decision of the Supreme Court, we hold that the Tribunal was not correct in holding that the allowance is not subject to the ceiling provided under s. 40(c)/40A(5) of the Act.
13. Regarding the personal accident insurance premium payment is concerned, the Delhi High Court in CIT vs. Vinay Bharat Ram (supra) has held that the premium paid by the company on accident policy cannot be regarded as perquisite to the employee. Here also, there is no benefit to the employee, but the ultimate beneficiary in the event of an accident taking place is the company itself. Since there is no benefit or amenity granted or provided to the employee, the payment of personal accident insurance premium cannot be subject to the ceiling limit provided under s. 40(c)/40A(5) of the Act. Hence, we answer the first question referred to us, in the affirmative and against the Department in so far as the expenditure incurred towards rates and taxes paid in respect of the buildings and vehicles owned by the company, maintenance of vehicles and personal accident insurance premium is concerned and in so far as the other expenses like salary paid to watchmen and depreciation allowance granted by the company are concerned, they are answered in the negative and in favour of the Department.
14. In so far as the second question is concerned, it is conceded by the learned counsel appearing on behalf of the assessee that the sum of Rs. 5,000 which was included under the head, 'Sales promotion expenses' was incurred for the supply of refreshment to customers. The other expenditure of Rs. 4,367 is also found to have been incurred for the benefit of customers and hence, both the items are liable to be treated as entertainment expenditure and in view of the decision of the Supreme Court in CIT vs. Patel Brothers & Co. Ltd. (supra) and Expln. 2 to s. 37(2A) of the Act which was inserted by the Finance Act, 1983, w.e.f. April, 1976, we are of the view that the Tribunal was not correct in holding that the sum of Rs. 5,000 disallowed under the head, 'sales promotion expenses' and another sum of Rs. 4,367 under the head, 'miscellaneous expenses' would not be regarded as entertainment expenditure. Accordingly, we answer the second question referred to us in the negative and in favour of the Department.