I.T.A. NO.272/KB OF 1995-96 VS I.T.A. NO.272/KB OF 1995-96
1997 PTD (Trib.) 125
[Income-tax Appellate Tribunal Pakistan]
Present: Muhammad Mujibullah Siddiqui, Chairman, S.M. Sibtain, Accountant Member and Khawaja Farooq Saeed, Judicial Member
I.T.A. No. 272/KB of 1995-96, decided on 30/07/1996.
Income Tax Ordinance (XXXI of 1979)---
----Ss.16(2)(b) & 24(i)---Income Tax Rules, 1982, Rr.3, 17 ,& 18---C. B. R. Circular No. 10 of 1990, dated 4-12-1990-.--Perquisites---Expenditure incurred by assessee on the medical care of its employees falls within the definition of "perquisite" given under S.16(2)(b) of the Income Tax Ordinance, 1979 hence part of the expenditure envisaged under S.24(1) of the said Ordinance and admissible deduction.---
The provisions of law, relating to treatment of perquisites, allowances and other benefits, given by an employer to its employees, in the hands of employer, are different from the provisions of law relating to the treatment of such perquisites allowances and other benefits received by the employees from their employer, in the hands of the employee.
While the provision of section, 24, clause (i) of the Income Tax Ordinance deals with extent to which the expenditure incurred by an employee for providing perquisites, allowances and other benefits to its employees is to be allowed as it's business expenditure, the provisions of section 16 of the Ordinance and Rules 3 to 18 of the Income Tax Rules, 1982 deal with the extent to which such perquisites, allowances and other benefits received by an employee are exempt from tax in the hands of the employee. However, the fact remains that expenditure incurred by the employer for providing, inter alia, the medical treatment to the employees and to, their entitled dependents is covered by the definition of perquisites.
The terms 'perquisite', 'employer' and the "employee" have the same meaning, in each situation, as in subsection (2) of section 16. The exceptions to these meanings for the purposes of clause (i) of section 24 of the Ordinance are provided in Explanation (iii) to clause (i) supra and the C.B.R. Circular 16.
Considering the fact that the medical expenses covered by Rule 17 of the Income Tax Rules, 1982 are envisaged as part of perquisite, allowances and benefits, there can be no controversy that in determining the amount of expenditure, in excess of 50% of the salary of employee under clause (i) of section 24 of the Ordinance, the expenditure incurred on medical expenses of the employees shall be included in the aforesaid amount
1979 PTD (Trib.) 35 dissented from.
Rule 17 of Income Tax Rules, 1982 clearly provides that any amount payable to the employee by way of hospitalization or medical expenses is a perquisite but exempted from tax in the hands of employees to the extent of the actual expenditure incurred by the employee.
The expenditure incurred by the assessee on the medical care of its employees falls within the definition of "perquisites" provided under clause (b) of subsection (2) of section, 16 of the Income Tax Ordinance, 1979, hence part of the expenditure envisaged under clause (i) of section 24 of the Ordinance.
ITA No. 1794/KB of 1994-95 examined.
CIT v. National and Grindlays Bank Ltd. (1984) 145 ITR 457 and Indian Leaf Tobacco Development Co. Ltd. v. CIT (1982) 137 ITR 827 ref.
Ather Saeed for Appellant.
Shaheen Aziz Niazi, D.R. for Respondent.
Date of hearing: 26th March, 1996.
ORDER
This Full Bench of the Tribunal has been constituted to resolve the difference of opinion in the findings of various Division Benches of this Tribunal on the point if the amount spent by an assessee on medical care of its employees and the entitled dependants falls within the definition of perquisites provided under section 16(2)(b) read with section 24(i) of the Income-tax Ordinance, 1979 or not. The point to controversy arose in the
2. A Division Bench of this Tribunal while deciding the above question in I. T. A. No. 1794/KB of 1994-95 (Assessment year 1993-94) dated 13-6-1995 has found no substance in the plea of learned counsel of the appellant that the reimbursement of medical expenses incurred on medical care of employees and their entitled dependants represent the actual expenses reimbursed to the employees and such reimbursements do not fall under the head perquisites. It has been held in the decision ibid that the amount of medical allowance paid to the employees has been included in the computation of excess perquisites inadmissible under section 24(i) and that the reimbursement of medical bills does form part of perquisites and benefit derived by the employees by virtue of their employment and is a lot a part of salary of an employee. ?????
3. On the other hand another Division Bench of this Tribunal while deciding I.T.A. No.1221/KB of 1993-94 = 1979 PTD (Trib.) 35 (Assessment Year 1991-92) in the appellant's own case has found substance in the plea that such reimbursement does not represent expenditure resulting directly or indirectly in any benefit or amenity to the employees. Reliance has been placed, in support of the plea, on the ratio of decisions in C.I.T..v. National and Grindlays Bank Ltd. (1984) 145 I.T.R. 457 and Indian Leaf Tobacco Development Co. Ltd. v. C.I.T. (1982) 137 I.T.R.-827. The finding of the learned Bench is reproduced hereunder:
"We have heard both the parties and have also gone through the case-law quoted above and we find ourselves more in agreement with the views of learned A.R. In this connection we find support from the following observations of Mr. Palkhivala which are contained at page 419 of his famous book "The Law and Practice of Income Tax" (Eighth Edition):
?These clauses should be construed, not literally and merely grammatically, but fairly and liberally. They should not and cannot be construed as a tax on pure humanitarianism--and, in the present day, medical facilities and reimbursement of medical expenses should be treated as pure humanitarianism of which the income-tax law takes no account. So construed, such facilities and reimbursement cannot be treated as a 'benefit or amenity' within sub-clause (iii), any more than sports facilities or concessional meal during working hours. What can be taxed under sub-clause (iv) is that expenditure which the employee would voluntarily incur on his own even if payments were not to be made by the employer. In most cases where huge expenditure is incurred, e.g. on hospitalization of an employee or on .his trip abroad for medical treatment, the employee on his own would not incur such expenditure if the employers were not prepared to meet it. In many 'cases, the employee would just let nature do the healing and would not incur any significant expenditure even in respect of ordinary ailments. The payment by the employer in respect of such expenditure cannot be taken as a perquisite and taxed in the hands of the employee. As a matter of fact, this is one type of perquisite which no employee would desire to have occasion to enjoy.?
Further we have noticed that medical expenses of Ministers and Government employees are also reimbursed by the Government but neither such employees ever offer such benefit for taxation nor the Income tax Department has ever made any attempt to treat them as perquisite, as has been done in the instant case. We, therefore, hold that reimbursement of medical expenses does not constitute a perquisite under the Income Tax Ordinance. "
4. Earlier another D.B. of this Tribunal, placing reliance upon the decision of the House of Lords in Owen v. Pook (Inspector of Taxes) (1969) 74 I.T.R. 147 while deciding I.T.A. No. 1178/KB of 1980-81 (Assessment Year 1978-79) dated 4-4-1988 in the case of a Public Sector Bank, has held:
"We are now required to examine whether house rent and conveyance allowance were rightly held to be perquisites by learned A.A.C. or not? In answering this question, we have with advantage relied on a well recognized principle laid down in the House of Lords decision, Owen v. Pook (Inspector of Taxes) (1969) 74 I.T.R. 147. In this case, it was held that a perquisite is something which arises by reason of a personal advantage but the word perquisite' would not apply to mere reimbursement of necessary disbursement. In other words, if a certain allowance was given and was subsequently reimbursed, it will not fall under the definition of perquisite. On the other hand, if a personal advantage is received by the recipient, then to that extent, the allowance would be covered by the word 'perquisite'. On applying this test to the facts of the case before us, we have been left in no manner of doubt that house rent and conveyance allowance were given by the assessee to its employees by way of reimbursement. Therefore, on the ratio of decision in (1969) 74 I.T.R. 147, payments on account of house rent and conveyance allowance are not covered by the word 'perquisite'. On account of this finding, the following decisions cited by learned D.R. in support of the fact that house rent and conveyance allowance were perquisites, have been rendered in? applicable:---
(i) ??????? 1979 PTD (Trib.) 27.??
(ii) ?????? C.I.T. v. Rev. J.C. Manry (sic).
(iii) ????? C.I.T. v. S.G. Pgnatale, Gujrat (sic).
(iv) ????? 1988 PTD (Trib.) 155.
(v) ?????? I.T.A. Nos.2528--2530 of 1965-66, dated 28-9-1966.
(vi) ????? I.T.R. 1976 page 813.?
(vii) ???? (1984) 49 Tax 198 (High Court, Karachi).
(viii)? ??? C.I.T. Madras v. C. Kulandaiveju Konar (deceased).
(ix) ????? ?I.T.As. Nos.877 and 878(KB)/77-78, dated 29-8-1978: (1979 PTD (Trib.) 27).
The assessee claimed a sum of Rs.5,55,385 on account of medical allowance paid to its employees. Since this amount was merely an reimbursement of expenditure incurred by the employees on the medical treatment of selves and their families, it could not be said to be a perquisite in view of the principle laid down by the House of Lords in Owen v. Pook (Inspector of Taxes) (1969) 74 I.T.R. 147. Therefore, by agreeing with the finding of learned A.A.C., the amount claimed by the assessee is held to be not a perquisite".
5. The learned counsel of the appellant, Mr. Ather Saeed submits that firstly this Tribunal vide its decision ibid, in appellant's own case for assessment year 1991-92, has held that the medical expenses incurred by the appellant on treatment of its employees and their entitled dependents does not constitute a perquisite under the I.T. Ordinance. Secondly, he submits that the expenditure is incurred to keep the employees and their dependents physically fit so that they may perform the duties of their office efficiently. It is purely business expenditure because it is commercially expedient to keep the employees physically and mentally fit to perform their duties. It, therefore, is covered by exemption granted under clause (39) of the Second Schedule to the I.T. Ordinance. Thirdly he submits that it is in the nature of exclusions from the term "perquisites: enumerated in C. B. R. Circular No. 16 of 1990 dated December 4, 1990.
6. We have given our careful consideration to the decision and submissions supra. At the outset, we find it necessary to record that the provisions of law, relating to treatment of perquisites, allowances and other benefits, given by an employer to its employees, in the hands of employer are different from the provisions of law relating to the treatment of such perquisites, allowances and other benefits received by the employees from their employer, in the hands of the employee. We, therefore, would like to reproduce hereunder the relevant provisions of the Income Tax Ordinance, 1979 as applicable to the employer as well as the employee in the assessment year under appeal:
Section 24. Deductions not admissible.--Nothing contained in section 23 shall be so construed as to authorise the allowance or deduction of---
(i) any expenditure incurred -by an assessee on the provision of perquisites (allowances) or other benefits to any employee, in excess of (fifty) per cent. of his salary excluding perquisites (allowances or other benefits).
Explanation.--As used in this clause--
(ii)??????? "perquisite", "employee" and "employer" have the same meaning as in subsection (2) of section 16; and
(iii)?????? "other benefits" does not include employer's contribution to a recognized provident fund or an approved superannuation or gratuity fund.
Section 16. Salary.(l) The following incomes shall be chargeable under the head "Salary", namely:---
(a)??????? any salary due to the assessee from an employer in the income year,????? whether paid or not; and
(b)??????? any salary (including arrears (or advances) of salary) paid to the assessee in the income year by an employer:
Provided that where any salary is included in the total income on the basis that it has become due to an assessee, it shall not be Included again on the basis that it is paid.
(2)??????? For the purposes of subsection (1),--
(a)??????? "salary" includes--
(i)???????? any wages;
(ii)??????? any annuity, pension or gratuity;
(iii)?????? any fees, commissions, allowances, perquisites or profits in lieu of, or in addition to, salary or wages;
(b)??????? "perquisite" includes--
(i)???????? the value of rent-free accommodation;
(ii)??????? the value of any concession in the matter of rent respecting any accommodation;
(iii)?????? any sum payable by the employer, whether directly or indirectly, to effect an insurance on the life of, or to effect a contract for any annuity for the benefit of, the assessee, or his spouse or any dependent child;
(iv)?????? value of any benefit provided free of cost or at a concessional
(v)??????? any sum paid by an employer in respect of any obligation of an employee;
C. B. R. Circular No. 16 of 1990 dated December 4, 1990:
"It has been brought to the notice of the Board that amounts paid under the following heads are being treated as perquisites, allowances or other benefits within the purview of section 24(i) of the Income Tax Ordinance, 1979:---
(a)??????? Overtime
(b)??????? Leave encashment.
(c)??????? Contributions towards social security under the Provincial Employees' Social Security Ordinance, 1965.
(d)??????? Contribution towards employees' old-age benefits under the Employees' Old-Age Benefits Act, 1976.
(e)??????? Contribution towards education cess under the Workers' Children (Education) Ordinance, 1972 and Workers' Children (Education) Act, 1988.
(f)???????? Expenditure incurred on maintaining canteens under the West Pakistan Canteen Rules, 1959.
(g)??????? Expenditure incurred on maintaining fair price shops under the Punjab Fair Price Shops (Factories) Ordinance, 1971.
2. The matter has been considered in the Board and it is clarified that "overtime" and "leave encashment" fall within the ambit of "salary" being the remuneration or compensation for services rendered by an employee. Whereas overtime payment is made for the extra work done by an employee in addition to this normal duties, leave encashment is the amount paid in lieu of foregoing the entitlement of leave and for performing duties during the leave period. These two payments are, therefore, direct consideration or price for the job performed by an employee and, therefore, should not be considered inadmissible for the purposes of clause (i) of section 24 of the Income Tax Ordinance, 1979.
3. As regards compulsory contributions towards social security, employees' old-age benefits and education cess, it may be noted that such contribution made in pursuance of various statutes are mandatory for the employer. The employee receives no direct benefit from the employer who is also not in a position to regulate or adjust such payments to his advantage. Similarly, expenditure incurred on the maintenance of fair price shops and canteens cannot be treated as a perquisite or benefit if such facilities are made available to the employees in accordance with the mandatory provisions of labour laws."
I.T. Rules, 1982:
3. Valuation of perquisites, allowances, benefits.--(1) For the purpose of computing the income chargeable under the head "Salary", the value of perquisites, allowances and benefits includible in the said income shall be determined in accordance with the provisions of rule 4 to rule 18, wherever is applicable.
17. Medical expenses.--Where any amount is payable to the employee by way of hospitalization or medical expenses, the amount, if any, by which the sum receivable by him exceeds the actual expenditure incurred by him shall be included in his income.
18. Other benefits.--Where any benefit or annuity not covered by the provisions of rule 4 to rule 16 is provided to the employee, the members of his household or his dependents,. there shall be included in his income an amount equal to the amount which would have been expended by the employee in obtaining such benefit or annuity from an independent source in the same or near locality, had it not been so provided, as reduced by the amount, if any, expended wholly, necessarily and exclusively in the performance of the duties of the office held by him or actually paid by him in cash.
7. Thus it is evident that while the provision of section 24, clause (i) of the I.T. Ordinance deals with extent to which the expenditure incurred by an employee for providing perquisites, allowances and other benefits to its employees is to be allowed as its business expenditure, the provisions of section 16 of the Ordinance and Rules 3 to 18 of the I.T. Rules, 1982 deal with the extent to which such perquisites, allowances and other benefits received by an employee are exempt from tax in the hands of the employee. However, the fact remains that expenditure incurred by the employer for providing, inter alia, the medical treatment to the employees and to their entitled dependents is covered by the definition of perquisites.
8. The terms "perquisite", "employer" and the "employee" have the same meaning, in each situation, as in subsection, (2) of the section 16. The exceptions to these meanings for the purposes of clause (i) of section 24 of the Ordinance are provided in Explanation (iii) to clause (i) supra and the C.B.R. Circular 16 supra.
9. Considering the fact that the medical expenses covered by Rule 17 of the I.T. Rules are envisaged as part of perquisite, allowances and benefits, we have no doubt in our mind that there can be no controversy that in determining the amount of expenditure in excess of 50% of the salary of employee under clause (i) of section 24 of the Ordinance, the expenditure incurred on medical expenses of the employees shall be included in the aforesaid amount.
10. Now, we shall revert to the decisions of this Tribunal ibid, that are contrary to our finding in para. 9 supra.
11. Regarding the support found by the learned Division Bench, deciding I.T.A. No.1221/KB of 1993-94 (para. 3 page 2, supra). On the observations of Mr. Palkhiwala, we find the observations are merely the expression of his own views of which, in his own words, "the income tax law takes no account". Further, we find that the observations of the learned Division Bench regarding medical expenses of Ministers and Government servants at page 3 supra are in the context of taxability of the value of such benefits in the hands of the employees and the learned Bench could not, justifiably, conclude therefrom that the reimbursement of medical expenses does not constitute a perquisite under the Income Tax Ordinance. We are afraid we cannot subscribe to this view of the learned Bench because it is contrary to clear provisions of sub-clauses (iv) and (v) of clause (b) of subsection (2) of section 16, reproduced at page 7 supra. Rule 17 of I.T. Rules 1982 clearly provides that any amount payable to the employee by way of hospitalization or medical expenses is a perquisite but exempted from tax in the hands of employees to the extent of the actual expenditure incurred by the employee.
Coming to the reliance placed by another learned Division Bench of the Tribunal, deciding I.T.A. No. 1178/KB of 1980-81 (para. 4, page 3 supra), upon the decision of the House of Lords in Owen v. Pook (Inspector of Taxes) (1969) 74 ITR 147, we find that the facts in this case are that the taxpayer carried on practice as a general medical practitioner in Fishguard. He also held two part-time appointments with the South Wales Hospital Management Committee as obstetrician and anesthetist at a hospital in Haverfordwest, 15 miles from Fishguard. Under those appointments the taxpayer was on standby duty at certain specified times, to deal with emergency cases at the hospital, and at such times was required to be accessible by telephone. On receipt of a telephone call from the hospital the taxpayer gave instructions to the hospital staff, and then either advised and awaited a further report or set out immediately for the hospital. His responsibility for a patient began as soon as he received a telephone call, but not every such call resulted in his going to the hospital. Under the terms of his appointment, the hospital management committee paid the taxpayer's travelling expenses at a fixed rate per mile for journeys between Fishguard and the hospital up to a single journey of 10 miles. The taxpayer bore the cost of the additional five miles. The taxpayer sought to deduct the whole cost of travelling incurred, which for 1962-63 was ₤150, and for 1963-64, ₤123. He appealed to the general commissioners against assessments to income-tax under Schedule E on those amounts, and his appeal was allowed on the grounds that the expenses were incurred "wholly, exclusively and necessarily" in the performance of his duties under the appointments and deductible under rule 7 of Schedule 9 to the Income Tax Act, 1952. Stamp J., allowing an appeal by the Inspector, held that the expenses were not incurred ex-necessitate the taxpayer's office but were personal to the taxpayer himself since he chose to live 15 miles away from the hospital and therefore rule 7 did not apply. The Court of Appeal affirmed Stamp J.'s decision and also held that a mileage allowance payable to a holder of an office, whether the expense was actually incurred or not, was properly to be regarded as part of the holder's emoluments. On the taxpayer's appeal: House of Lords held by majority opinion that the travelling allowance paid by the hospital committee was reimbursement for actual expenditure and it was not an emolument of the taxpayer's office or employment and did not fall to be charged. On examination of facts involved in the Owen v. Pook we find that the correct facts were not placed before the learned Division Bench and, therefore, the learned Division Bench was incorrectly persuaded to place reliance on the ratio of decision which was distinguishable on facts and law. Firstly the decision in the Owen v. Pook relates to the question of taxability of an allowance in the hands of the employee and secondly it is held that the allowance received by the employee is wholly and necessarily incurred in the course of performance of his duty. On the contrary, firstly, the appellants in the instant appeal as well as in the appeals decided by the other two Division Benches ibid are employers and secondly, the amounts reimbursed by them to their employees are on account of the medical expenses incurred by them on their personal treatment as well as on the medical treatment of their
Accordingly, we find that the expenditure incurred by the appellant, on the medical care of its employees falls within the definition of "perquisites" given under clause (b) of subsection (2) of section, 16 of the Income Tax Ordinance, 1979, hence part of the expenditure envisaged under clause (i) of section 24 of the Ordinance.
The other objection in this appeal is to the application of section, 80-C of the Income-tax Ordinance, 1979. Mr. Athar Saeed has raised various objections to the application of section 80-C in the grounds of appeal but during the course of arguments before us his sole objection was that section, 80-C is an invalid piece of legislation and is ultra vires the Constitution of Pakistan. Mr. Athar Saeed has been pointed out that the Income Tax Appellate Tribunal is not vested with the jurisdiction of declaring any provision of the Income-tax Ordinance as ultra vires and the jurisdiction is exclusively vested in the superior Courts. Mr. Athar Saeed has conceded to this legal proposition. The objection to the application of section 80-C is, therefore, repelled and the finding of the learned two officers below in this behalf is hereby maintained.
Consequent to above findings we hereby confirm the impugned order of the learned C.I.T.(A).
The appeal stands dismissed accordingly.
M.B.A../271/ T??????????????????????????????????????????????????????????????????????????????????? Appeal dismissed