Citibank N.A. Vs. Commissioner of Income-tax - Court Judgment

S.H. Kapadia, J.

1. By order dated October 9, 1991, the Tribunal has referred to this court, common questions of law under Section 256(1) of the Income-tax Act, 1961, for our opinion.

2. The following two questions have been referred to us at the instance of the assessee :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the interest received by the bank on the sale of Government securities held by it is assessable to tax as 'income from business' and not as 'interest on securities' ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the discount on treasury bills is assessable as 'income from business' and not as 'interest on securities' ?'

Answers :

In this reference, we are concerned with the assessment year 1981-82. In the present case, there is no evidence on record to indicate the nature of the Government securities. There are dated Government securities and there are securities which are not dated. In the present case, no material is placed before us regarding the type of Government securities. In the circumstances, we cannot apply the ratio of the judgment of this court in the case of American Express International Banking Corporation v. CIT : [2002]258ITR601(Bom) , as contended by the Department.

3. In the circumstances, we do not see any reason to distinguish the facts of this case from the facts in the case of Citibank v. CIT decided on June 10, 1998, vide Income-tax Reference No. 197 of 1984. Accordingly, we answer both the above questions, on the facts of this case, in the affirmative, i.e., in favour of the assessee and against the Department.

4. At the instance of the Revenue, the following four questions have been referred to us by the Tribunal for our opinion. The said questions are as follows :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred on repairs and maintenance of flats owned by the assessee and used for the residence of employees is not perquisite within the meaning of Section 40A(5) of the Income-tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred by way of payment of ground rent, rates and taxes and society's charges in respect of the premises owned by the assessee and used for the purpose of residence of employees is not to be taken into account for the purpose of disallowance under Section 40A(5) of the Income-tax Act ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of Section 40A(5) should be applied only on that part of the expenditure by way of salaries and perquisites, etc., apportioned under the head 'Profits and gains of business or profession' and not in respect of such expenditure apportioned under the head 'Interest on securities' ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that while apportioning the expenses deductible from 'interest on securities' in the case of the banking company in terms of Section 20(1)(i), the expenses admissible under the provisions of Sections 30, 31, 35 (sic) and 37 of the Act will not be subject to restrictions imposed under Sections 40A(3) (sic), 40A(5) and 44C of the Income-tax Act ?'

Arguments on questions Nos. (1) and (2) raised by the Department :

With regard to questions Nos. (1) and (2), referred to us at the instance of the Department and quoted hereinabove, Mr. R. V. Desai, learned senior counsel appearing on behalf of the Department, contended that in this case, expenditure was incurred by the assessee on repairs and maintenance of flats owned by the assessee and used for the residence of employees. He contended that such expenditure constituted perquisite. In this connection, he relied upon the judgment of the Bombay High Court in the case of Lubrizol India Ltd. v. CIT [1991] 187 ITR 25. He contended that Section 40A(5)(a)(ii) is in two parts. He contended that we are not concerned with the first part. He contended, however, that the second part of the said sub-section stipulates that where an assessee incurs any expenditure in respect of any of its assets used by its employee then the expenditure incurred by the assessee is covered by the second part of Section 40A(5)(a)(ii). He contradistinguished the second part with the first part, which applies only if the expenditure results in any perquisite to the employee.

5. On the other hand, Mr. Mistry learned counsel appearing on behalf of the assessee, argued that Section 40A(5)(a)(ii) is in three parts. That, it refers to expenditure which results in perquisites to the employee; that it also refers to expenditure incurred by the assessee on its assets and lastly, it refers to allowances in respect of the assets owned by the assessee, but used by the employee for his own purposes or benefit. He contended, therefore, that Section 40A(5)(a)(ii) refers to three items, viz., perquisites, expenditure on the assets of the employer-assessee and allowances in respect of the assets. He, however, contended that question No. (1) expressly refers only to perquisite and not to expenditure on the assets. He further contended that similarly, question No. (2) quoted hereinabove refers to payment of ground rent, taxes and society charges in respect of the premises owned by the assessee and, therefore, he contended that each question needs to be separately answered and each question needs to be answered looking to its contents. Coming to question No. (1), he contended that the ratio of the judgment of the Bombay High Court in Lubrizol India Ltd.'s case [1991] 187 ITR 25 was not applicable because in that matter, the issue was concerning expenditure on the asset and in that matter, the question was not concerning perquisites under Section 40A(5)(a)(ii). He further contended that in that matter the only issue was whether the second part of Section 40A(5)(a)(ii) was attracted to the expenditure involved qua the assets. In the circumstances, he contended that the judgment in Lubrizol India Ltd.'s case [1991] 187 ITR 25 did not apply. He contended that, on the other hand, in our case, what is impugned is perquisite.

6. Mr. Mistry further contended on behalf of the assessee that the court should answer the questions as framed by the Tribunal. He contended that question No. (1), raised at the instance of the Department, is very specific, viz., whether the expenditure incurred on repairs and maintenance of flats owned by the assessee represented perquisites in the hands of the employee under Section 40A(5)(a)(ii), whereas question No. (2), as framed by the Tribunal was--whether the expenditure incurred by way of ground rent, taxes and society charges in respect of the premises owned by the assessee came under disallowance under Section 40A(5)(a)(ii). On question No. (2) it was urged by Mr. Mistry that the expenses by way of municipal taxes, society charges, rent did not come under Section 40A(5)(a)(ii) as such an expenditure was not in respect of the assets of the assessee used by an employee. Mr. Mistry contended that the expenses such as rent, municipal taxes, maintenance charges do not fall under Section 40A(5)(a)(ii) as they are not an expenditure in respect of the assets of the assessee.

Findings on questions Nos. (1) and (2) raised by the Department :

These two questions are being jointly decided. Briefly, the assessee has objected to the following two items being considered for disallowance under Section 40A(5) of the Act. They are expenditure on repairs and maintenance of premises owned or taken on lease by the assessee-bank and let out to the employees and, secondly, ground rent, rates and taxes and society charges in respect of owned accommodation given to the employees. Section 40A(5)(a)(ii) states that where the assessee incurs expenditure, which results in the provision of any perquisite to an employee or incurs any expenditure in respect of any assets of the assessee used by the employee for his own benefit, then so much of such expenditure, as is in excess of the limit specified, shall not be allowed as a deduction. If one reads Section 40A(5)(a)(ii), the emphasis is on the word 'expenditure'. There could be expenditure which results in providing perquisite to an employee, there could also be an expenditure in respect of any assets of the assessee used by an employee for his own benefit.

7. Sub-section (5) was inserted in Section 40A by the Finance (No. 2) Act, 1971, with effect from April 1, 1972. It imposes a limit on deductible amount of expenditure, which is incurred in respect of an asset let out to an employee or which is incurred by way of perquisite to the employee. Therefore, if one keeps the underlying object in mind, it is evident that Section 40A(5)(a)(ii) controls the expenditure on the asset, which is used by the employee for his own benefit. This is also clear from the first proviso to Section 40A(5)(a), where a ceiling is imposed on the expenditure in respect of an asset used by the employee for his own benefit. Therefore, Section 40A(5) deals with ascertainment of actual expenditure incurred by the assessee. Under this section, the value of perquisite is absent. For the purpose of disallowance under Section 40A(5), the value of perquisite is not relevant because while finding out the expenses actually incurred by the employer on certain amenities made available to the employees, the cost of such amenities, as incurred by the employer, can easily be ascertained on factual basis. Therefore, while construing Section 40A(5), the emphasis is on the employer-assessee and not on the employee as in the case of Rule 3, which is completely ruled out so far as Section 40A(5) is concerned. This is the precise ratio of the judgment of the Bombay High Court in the case of Lubrizol India Ltd. v. CIT [1991] 187 ITR 25.

8. For the aforestated reasons, we hold that the total expenditure incurred by the assessee, including repairs and maintenance of accommodation, ground rent, municipal taxes and society charges, will have to be taken into account for the purposes of disallowance under Section 40A(5) of the Act. In view of the judgment of the Bombay High Court in Lubrizol India Ltd.'s case [1991] 187 ITR 25, it is not necessary for us to discuss the judgments of the other High Courts.

9. Accordingly, we answer questions Nos. (1) and (2) in the negative, i.e., in favour of the Department and against the assessee.

Arguments on questions Nos. (3) and (4) raised by the Department :

On behalf of the Department it has been argued that a banking company earns income, which is chargeable to tax under different heads. That, in the course of carrying on its business, a banking company has to make investments in Government securities. That, while the income earned by it has to be allocated under proper heads with reference to different sources, the expenditure is common and, therefore, when a banking company earns income, which falls under the head 'Profits and gains from business' and also under the head 'Interest on securities' of the Central or State Government, the expenditure to earn the income under both the heads is common and since the expenditure is common, Section 40A(5) should be applied to the total expenditure.

10. On the other hand, it was argued on behalf of the assessee that Section 40A puts a cap on expenses incurred to earn business income and in the circumstances, the Department is wrong in putting that cap on the total expense. This is the basic controversy in this case.

Findings on questions Nos. (3) and (4) raised by the Department :

Questions Nos. (3) and (4) deal with a common topic of interpretation of Section 20(1)(i), as it stood at the relevant time. For the sake of convenience, Section 20(1)(i) is quoted hereinbelow :

'20. Deductions from interest on securities in the case of banking company, --(1) In the case of a banking company- (i) the sum to be regarded as a sum reasonably expended for the purpose referred to in Clause (i) of Section 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the provisions of Sections 30, 31, 36 and 37 (other than Clauses (iii), (vi), (vii) and (viia) of Sub-section (1) of Section 36) the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to income-tax under Section 18 bear to the gross receipts of the company from all sources which are included in the profit and loss account of the company ;'

11. In this case, we are concerned with the assessment year 1981-82. This section has been omitted with effect from April 1, 1989.

12. In order to understand the above quoted arguments advanced by the parties, the following facts are required to be noted. The assessee is a banking company. In the course of its business, it has to make investments in Government securities. The income earned by it has to be allocated for tax purposes under proper heads with reference to different sources. However, the expenditure is common. Therefore, Section 20(1)(i), quoted above, enacted a rule to apportion the common expenditure allowable under Sections 30, 31, 36 and 37 into two heads, viz., expenses allowable under Section 19(i) for the purpose of realising 'interest on securities' and expenses allowable for other types of banking business in proportion to the income earned under the respective heads.

13. In other words, the amount allowable under Section 19(i) had to be calculated as per the following formula

Receipt from interest on securities

Aggregate of expenses X ______________________________________

Gross receipts by banking company

14. According to the Department, Section 40A(5) imposes a ceiling for allowance of a particular type of expenditure and that ceiling was not only applicable to the provisions of Section 40A, but it was also applicable to Section 20(1)(i) because under Section 20(1)(i), an artificial rule of apportionment is contemplated under which the Department is required to apportion the common expenditure allowable under Sections 30, 31, 36 and 37 into two heads, viz., that, which is allowable under Section 19(i) to realise interest on securities and expenditure allowable for other types of banking business in proportion to the income earned under the respective heads. According to the Department, since Section 37 forms an integral part of apportionment of expenditure under Section 20(1)(i)/ Section 40A(5) is automatically attracted. We do not find any merit in the case of the Department. Section 40A refers to expenses/payments not deductible in certain circumstances. Section 40A(1) declares that the provisions of Section 40A shall have effect, notwithstanding anything to the contrary in Section 28 to Section 44D (which includes Sections 36 and 37). Therefore, the provisions of Section 40A have an overriding effect over the provisions of any other section by providing that Section 40A will have effect, notwithstanding anything to the contrary contained in any other provisions relating to computation of income under the head 'Profits and gains of business'. In view of Section 40A having an overriding effect, and since Section 40A deals with expenses not deductible under certain circumstances, and since Section 40A(5) provides for disallowance of expenditure beyond a particular limit, that section operates as a complete code by itself and, therefore, it cannot be read into Section 20(1)(i). The underlying idea behind the Department's case is to restrict the aggregate of expenses under the above formula. However, as stated above, Section 40A(5) is a part of Section 40A and Section 40A has an overriding effect in the matter of computation of income under the head 'Profits and gains of business'. Therefore, Section 40A cannot be read into Section 20(1)(i) merely because Section 20(1)(i) refers to apportionment of common expenditure allowable, inter alia, under Sections 36 and 37.

15. For the aforestated reasons, we answer questions Nos. (3) and (4) quoted hereinabove in the affirmative, i.e., in favour of the assessee and against the Department.

16. Accordingly, the reference is disposed of. No order as to costs.

17. Consequently, no order on Notice of Motion Nos. 2354 of 1994, 2355 of 1994 and 2356 of 1994.