COMMISSIONER OF INCOME-TAX, CENTRAL ZONE `C', KARACHI VS ALGEMENCE BANK OF NEITHERLAND, KARACHI, 1992 PTD-KARACHI-HIGH-COURT-SINDH 1161 (1992)

(a) Income Tax Rules, 1922---

--R.39---Rule 39 related to tax payable by an assessee under the head "Salaries"--- Individual employees could take advantage of R.39, in respect of their own assessment.

(b) Income Tax Act (XI of 1922)---

----S.10(4)(d)---Perquisites---Without there being a nexus between the expenses incurred by an employee and leis official duties in the course of his employment, payment for medical expenses would be "perquisites" or "benefits" mentioned in S.10(4)(d) of the Act.

Pook v. Oven 45 Tax Cases 571; Commissioner of Income Tax v. D.R. Phatak (1975) 99 ITR 14; Commissioner of Income Tax v. Kanan Devan Hills Produce Co. Ltd. (1979) 119ITR 431 and Indian Leaf Tobacco Development Company v. Commissioner of Income Tax (1982) 137 ITR 82,7 ref.

Nasrullah Awan for the Applicant.

Ibrahim Pishori for Respondent.

Date of hearing: 13th November, 199L

JUDGMENT

NASIR ASLAM ZAHID, J: --On the application of the Department under section 66(1) of the now repealed Income Tax Act, 1922 in respect of the assessment year 1971-72 of the respondent-assessee, M/s. Algemence Bank, Netherland, Karachi, the Income Tax Appellate Tribunal has referred the following question for our opinion:---

"Whether in the facts and circumstances of the case the Tribunal was right in holding that the amount paid to the, employees as reimbursement en account of medical bills was not a perquisite for purposes of section 10(4)(d)?"

2. The relevant provisions of the Income-tax, law are sub sections'(1), (2) (xvi) and (4)(d) of section 10 of the Repealed Income Tax Act, 1922 and Rule 39 of the Income Tax Rules, 1922. These provisions are reproduced, here:---

10. Subject to the provisions of this Act, the -tax shall be payable by an assessee under the head, profits and gains of business,, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him. .

(2) Subject to the provisions of this Act such profits or gains shall be computed after making the following allowances, namely:----

..

(xvi) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation:-------------------------------------------

(4) Nothing in clause (ix) or clause (xvi) of subsection (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains; and nothing in clause (xvi) of subsection (2) shall be deemed to authorise:---

(a) ..................................................

(b) ..................................................

(bb) ..................................................

(c)..................................................

(d) any allowance in respect of so much of expenditure incurred by an assessee to the provision of perquisites or other benefits to any employee as exceeds thirty per cent of the salary of such employee:---

"Rule 39.

(1) For the purpose of assessment under section 7 of the Act, the allowances, annuities, benefits and perquisites specified in column 2 of the Schedule annexed hereto shall, to the extent indicated in column 3 hereof be deemed to be the income of an assessee and shall be included in his total income:--

THE SCHEDULE

3. While framing the assessment for the year in question, the Income Tax Officer disallowed certain sums being excess perquisites under section 10(4)(d) of the Income Tax Act. In the present Reference Application, the question requiring our consideration relates to a sum of Rs.8,353 paid to their employees by the assessee Bank as medical expenses. In appeal, the Appellate Assistant Commissioner of Income-tax, deleted the aforesaid addition of Rs.8,353 and the Appellate Order was confirmed by the Income-tax Appellate Tribunal on the ground that the employees were paid actual amount of medical expenses and as such the same could not be called "perquisite" under Rule 39. As observed on the application of the Department, the aforesaid question, that is, whether in the facts and circumstances of the case the Tribunal was right in holding that the amount paid to the employees as reimbursement on the ground of medical bills was not a perquisite for purposes of section 10(4)(d) has been referred by the Tribunal for our opinion.

4. We heard the arguments of Mr: Nasrullah Awan, learned counsel for the Department and Mr. Ibrahim Pishori, learned counsel for the assessee. Relevant part of the orders of the Appellant Assistant Commissioner and the Income Tax Appellate Tribunal are reproduced here:---

Order, dated 5-11-1974 of the Appellant Assistant Commissioner.---

"The assessing officer observed that an amount of Rs.11;923 has been paid by the bank on account of the medical expenses of the officers out of which Rs.8,065 have been paid to the Pakistani officers and the balance to the foreigners and as the other perquisites or benefits granted to the Pakistani Officers, exceeded the prescribed limit, he disallowed the entire amount of Rs.8,065. Besides he also disallowed Rs.288 in respect of medical expenses of Funke for the same reasons as in respect of Pakistani employees. In this way he made total addition of Rs.8,353. The authorised representative agreed that the entire expenses represent the actual reimbursement of the medical bills and as such nothing could be added towards excess perquisites under section 10(4)(d) of the Act in view of para 10 of Rule 39 made under section 59 of the Act. The contention of the authorised representative is found correct and the amount of Rs.8,353 is hereby deleted."

Order, dated 12-9-1977 of the Income Tax Appellate Tribunal.---"The Appellate Assistant Commissioner deleted the addition as it had been made against paragraph 10 of Rule 39 of the Income Tax Rules. The Income Tax Officer could add back only if claim had been made by the employee in excess of the actual expense. In the instant case, the employees had been paid the actual and hence could not be called a perquisite. Therefore the departmental appeal must fail on this ground too."

5. In our view both appellate authorities erred in basing their decision against the Department on para 10 of Rule 39 of the Income Tax Rules which rule was not relevant. Rule 39 (reproduced above) says so expressly that it applies for the purposes of assessment under section 7 of the Act. A reference to section 7 of the Act shows that its provisions relate to tax payable by an assessee under the head "salaries". Here the assessment under consideration is that of the employer under section 10 of the Act and not of its foreign or Pakistani employees. Individual employees could take advantage of rule 39 in respect of their own assessments.

6. The case of the assessee comes within the mischief of section 10(4)(d) of the Income Tax Act, 1922, which provides that nothing in clause (xvi) of subsection (2) of the section 4 of the Act shall be deemed to authorise any allowance in respect of so much of the expenditure incurred by an assessee on the provision of perquisites or other benefits to any employee as exceeds. 30% of the salary of such employee. Applying this provision, the Income Tax Offices added back a sum of Rs.8,353 being in excess of the prescribed limit of 30%.

7. Mr. Ibrahim Pishori, learned counsel for the assessee had relied on the following four reported judgments in support of his proposition that the question had been decided correctly by the Income Tax Appellate Authorities and the add back by the Income Tax Officer was not legal:---

(i) Pook v. Oven.---45 Tax Cases 571.

This is a decision of the House of Lords where it was held that the sums paid to the respondent (assessee), a medical practitioner, in respect of travelling expenses incurred by him wholly, necessarily and exclusively in the performance of his duties on receipt of calls from the hospital where he was working, being reimbursements of actual expenses, were not part of his emoluments. Neither the facts nor the decision in this decision have any relevance to the question raised in the present reference.

(ii) Commissioner of Income Tax v. D.R. Phatak.---(1975) 99 Income Tax Reports 14.

In this case from Bombay High Court; the assessee, a government servant posted at Bombay, claimed exemption under section 10(14) of the Indian Income Tax Act, 1961, in respect of the compensatory (city) allowance received by him. .

It was held by the Bombay High Court as follows:---

(a) The payment of compensatory (city) allowance by the Government was neither an emolument nor fee nor profits but was a reimbursement of personal expenses required by a Government servant to be incurred on account of his living at a particular place and it was not a perquisite within the meaning of section 17(2) of the Act of 1961;

(b) The actual amount received by the Government servant as compensatory (city) allowance was much less than what he ordinarily spent by reason of his posting at a particular place. Therefore, such expenses were wholly, exclusively and necessarily incurred in the performance of the duties.

This decision is also not relevant. What has to be emphasised here that in the present reference we are dealing with an assessment under section 10 and not under section 7 of the Income Tax Act, 1922 and that there is a specific provision in section 10(4)(d) which fixes the limit of 30%.

(iii) Commissioner of Income Tax v. Kanan Devan Hills Produce Co. Ltd.--(1979) 119 Income Tax Reports 431.

In this decision by the Calcutta High Court, while considering clause C (iii) of section 40 of the Indian Income Tax Act, 1961, it was held that the amounts paid as "overseas allowance", "managing allowance" and "transport allowance" to the employees of the assessee company did not fall within the expression "benefit"; "amenity" or "perquisite" within the meaning of section 40(c)(iii) of the Act of 1961 and were deductible in computing the business profits of the assessee-company.

This decision also does not help the case of the respondent.

(iv) Indian Leaf Tobacco Development Company v. Commissioner of Income Tax (1982) 137 Income Tax Reports 827.

This is a decision of the Calcutta High Court and, according to Mr. Ibrahim Pishori, learned counsel for the assessee; this decision fully supports his contention. One of the questions under consideration in this case was whether the Income Tax Tribunal in that case was justified in holding that the monetary payments made by the assessee company to its employees for reimbursement of medical expenses incurred by the employees did not represent expenditures resulting directly or indirectly in the provisions of any benefit or amenity or perquisite. The Tribunal agreed with the assessee's contention that the expenses incurred by the assessee company of reimbursement of medical expenses of the employees could not be treated as a perquisite of the employee for the purposes of making a disallowance under section 40-A(5) of the Indian Income-tax Act, 1961. This view of the Tribunal was confirmed by the Calcutta High Court in the above judgment.

With respect we are unable to agree with the view taken by the Calcutta High Court. It cannot be argued that payments by the assessee to its employees towards reimbursement of the medical expenses incurred by the employees are not in the nature of perquisites or benefits to the employees. An artificial distinction cannot be made between a medical allowance where a fixed sum is given to the employee and a facility whereby actual medical expenses incurred by an employee are reimbursed by the employer to contend that the former is a perquisite and the latter is not.

8. It had been contended by Mr. Ibrahim Pishori that payment for medical expenses actually incurred by the employees cannot be termed as "perquisites" or "benefits" to come within the mischief of section 10(4)(d) of the Income Tax Act, 1922. The Appellate Assistant Commissioner in deleting the add back of Rs. 8,353 relied solely on rule 39 of the Income Tax Rules which rule has been found to be inapplicable. The Income Tax Appellate Tribunal also relied upon this rule. In addition the Tribunal held:---

"In the instant case the employees had been paid the actual and hence could not be called a perquisite."

As observed, it had been contended that as payments had been made by the assessee to its employees to reimburse medical expenses incurred by them at actual such payments can neither be "perquisites" nor "benefits" but are business expenses to reimburse the employees. We could appreciate the position where some expense is incurred by an employee in the performance of his duties with his employer in which case reimbursement of such expense by the employer would apparently fall outside the definition of "perquisites" or "benefits". But medical expenses incurred by the employee cannot be treated as expenses incurred in .the performance of his duties so as to take the reimbursement of such expenses outside the definition of "perquisites" or "benefits".'

In our view, without there being a nexus between the expenses incurred by an employee and his official duties in the course of his employment, payment for such expenses will be "perquisites" or "benefits" mentioned in section 10(4)(d) of the Income Tax Act, 1922. As observed, in some of the judgments cited by Mr. Ibrahim Pishori, to take the medical expenses outside the definition of "perquisites" or "benefits", it had to be shown that such expenses were "wholly, exclusively and necessarily incurred in the performance of the duties." It has not been the case of the assessee company that the expenses incurred by its employees for medical treatment were expenses wholly, exclusively or necessarily incurred in the course of the performance of their duties by the employees.

9. In our view the Income Tax Officer had correctly disallowed the aforesaid sum of Rs.8,353 being excess perquisites under section 10(4)(d) of the Income Tax Act. In the circumstances, the answer to the question referred to us is in the negative.

There will be no order as to costs.

M.BA./C-272/KReference answered.