(a) Income-tax---

----Deduction---Gratuity---Admissibility---Only amount which is admissible under the head "gratuity" is the one which is transferred to the gratuity fund trust by the assessee---Remaining amount under the head of gratuity, if any, has to be added back to the total income of the assessee.

(b) Income-tax---

----Deduction---Golden shake hand ---Deduction---Admissibility---Addition--- Apportionment of expenses on account of golden shake hand is not sustainable in law ---Addition made by the Assessing Officer was ordered to be deleted with a direction to the Assessing Officer to allow entire accounts of golden shake hand as claimed.

(c) Income-tax---

----Deduction---Perquisite---Amount paid by assessee to employees under a Provincial law cannot be treated as perquisite but had to be included in salary.

(d) Income-tax---

----Deduction---Perquisites---Excess perquisites---Washing allowance and uniform allowance paid by assessee has to be treated as excess perquisites.

(e) Income-tax---

----Deduction---Perquisite---Ex gratia incentive---Whether excess perquisite are part of salary.

(f) Income-tax---

----Perquisite---Medical reimbursement has to be treated as perquisite.

1996 PTD (Trib.) 100 fol.

Zia H. Rizvi for Respondent (in I.T.A. No.5977/LB of 1996).

Shafqat Mahmood, D.R. for Appellant (in I.T.A. No.5977/LB of 1996).

Zia H. Rizvi for Respondent (in I.T.A. No.6591).

Shafqat Mahmood, D.R. for Appellant (in I.T.A. No.6591/LB of 1996).

Date of hearing: 20th December, 1997.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). ---The above cross appeals at the instance of assessee (hereinafter referred to as the appellant) and department (hereinafter referred to as the respondent) are directed against the order dated 3-7-1996 relating to the assessment year 1993-94.

2. Heard Mr. Zia H. Rizvi, learned representative for the appellant and Mr. Shafqat Mehmood, learned D.R. for the respondent. We will take up the appeal at the instance of assessee first.

3. The first objection raised on behalf of the appellant is to the insufficient relief allowed in respect of the claim on account of gratuity. A perusal of the assessment order shows that the assessee, a public limited company, added the amount of Rs.29,19,572 to the net profit as per profit and loss account which was initially debited to the profit and loss account and thereafter deducted the amount of Rs.2,11,68,461 on account of gratuity paid to the employees. A perusal of assessment order further shows that M/s. Gharibwal Cement Limited was previously in public sector and the management of the company was transferred to private sector with effect from 26-9-1992. The assessing officer called upon appellant to furnish details regarding the gratuity indicating assessment year, gratuity charged to the profit and loss account and added in the computation chart, gratuity payment claimed as deduction/expense in the computation chart and gratuity allowed by the department. The assessing officer specifically confronted the appellant on the following points:

"Contribution to gratuity fund trust by the company, debited to profit and loss account on accrual basis amounts to Rs.29,19,572, whereas payment to the employees by the gratuity fund trust routed through the company amounts to Rs.2,11,68,461. It means that gratuity fund paid is more than the gratuity approved, by an amount of Rs.1,82,48,889. Since the excess amount of gratuity was paid to the employees out of earnings of the gratuity fund trust, which is a separate entity from the company, claim of deduction for this expenditure by the company to the extent of Rs.1,82,48,889 amounts to concealment of income or furnishing of inaccurate particulars of income in terms of section 111(2)(b)."

4. The reply was submitted on behalf of appellant to the effect that details have already been furnished. The assessing officer observed that explanation furnished on behalf of assessee was not satisfactory and further observed that the claim of payment of gratuity, to the employees as expense to the extent of Rs.1,55,57,884 squarely falls within the definition of concealment for the reason that it was paid out of funds transferred from general provident fund trust which consisted of the claims of gratuity allowed in the earlier years. The assessing officer further held that the payment of gratuity to the employees to the extent of Rs.1,55,57,884 does not amount to incurring of an expenditure because it was not paid by the appellant on its own behalf but from the gratuity fund trust and, therefore, he added this amount back to the total income of assessee. The assessing officer further held that the remaining amount of Rs.56,10,577 out of the total claim of Rs.2,11,68,461 was also partly admissible. The assessing officer observed that the amount of gratuity allowed as expense by the department plus gratuity received on transfer of employees from other units exceeds the amount paid to the employees and the gratuity fund trust by Rs.36,54,137 and the actual expenditure during the previous years inclusive of amount received on transfer of employees amounts to Rs.36,69,051. After adding the amount paid to the employees transferred to other units the total claim works out to Rs.57,88,343. After deduction of Rs.36,69,051 from Rs.57,88,343 the admissible expense comes to Rs.21,19,292. The assessing officer, therefore, allowed gratuity expense at Rs.21,19,292 and added back the balance amount of Rs.34,91,285 to the total income. Thus, the total addition made to the total income under the head gratuity was at Rs.1,90,49,169. The assessee/appellant assailed the above additions in first appeal. The appellant filed very lengthy written arguments before the learned C.I.T. (A) and it appears that the learned C.I.T.(A) was over owed with the length of written arguments which contained mostly irrelevant discussion and was very confusing. The learned C.I.T.(A) gave very sketchy finding as under:

"The assessing officer while finalizing the assessment for the assessment year 1993-94 which is under appeal has wrongly mentioned that appellant has been allowed gratuity expenses by the department for assessment year 1983-84 at Rs.48,26,151. In fact only Rs.53,080 were allowed as mentioned above. Thus difference arrives at same figure of Rs.47,73,071. This amount has to be allowed to the appellant Accordingly the addition as mentioned above to the extent of Rs.1,90,49,169 is reduced to Rs.1,42,76,098.

5. During the course of arguments before us we asked learned counsel for the appellant and its Accountant Mr. Ayub Malik to show as to how much amount has been paid to the employees directly from the company's fund. After very lengthy arguments and perusal of record it transpired that the assessee company appellant actually paid an amount of Rs.29,19,572 only out of its funds to the gratuity fund trust in the assessment year under appeal. No other amount was paid out of income of the assessee company for the assessment year 1993-94 and the gratuity was paid to the employees out of the gratuity fund trust which had the accumulated claims allowed in the earlier years plus the interest earned on the investments. Thus, Mr. Zia H. Rizvi, Advocate and Mr. Ayub Malik, Accountant of the assessee company conceded that the only expenditure which was made out of the income of the assessee company for the assessment year 1993-94 was Rs.29,19,572 which was entered in the books to have been transferred to the gratuity trust fund account. Thus, we found that the assessing officer as well as learned C.I.T.(A) did not examine the issue in the right perspective. The assessing officer allowed expenses on account of gratuity at Rs.21,19,292 only against admissible claim of Rs.29,19,572 while the learned C.I.T.(A) reduced the addition from Rs.1,90,49,169 to Rs.1,42,76,096 and thereby allowed excessive relief. Although the department has preferred cross appeal but no objection was raised to the direction of learned C.I.T.(A) in respect of the gratuity expense, therefore, we served a notice of enhancement on the learned counsel for the appellant while hearing appeal at Lahore on 13-12-1997. The learned counsel for the appellant sought time for submitting his arguments on the issue. The time was allowed and the hearing was adjourned to 20-12-1997. On the adjourned date the appeal was heard at Karachi and as already observed the learned counsel for the appellant as well as Accountant conceded after consultation of record and arguments that the only amount which is admissible under the head gratuity is Rs.29,19,572 which was transferred to the gratuity fund trust. In the above circumstances we direct that out of the total claim of Rs.2,11,68,461 under the head gratuity the claim should be allowed to the extent of Rs.29,19,572 only and the remaining amount should be added back to the total income of appellant.

6. The second objection raised on behalf of appellant is to the addition under the head golden shake-hand. The appellant claimed an expense of Rs.4,14,33,000 on account of voluntary .retirement to the employees on privatization of the company and taking over of management in the private sector, in accordance with the scheme approved by the Government in the form of golden shake hand. Full details of the payment made was furnished and the assessing officer observed that income-tax was also deducted at source in accordance with the rules and the amount was deposited in the Government Treasury, copies whereof were also furnished. The assessing officer initially confronted the appellant with his view that the expenditure was capital in nature and not allowable under the law. The assessing officer ultimately held that the effect of expenses was enduring in nature, and thus, the same was amortized over a period of three years. He, therefore, accepted the claim to the extent of 1/3rd of the total amount paid to the employees on retirement and deferred the 2/3rd to be allowed in subsequent years. Thus, expenses was allowed at Rs.1,38,11,000 while the amount of Rs.2,76,22,000 was added back to the total income. It was contended before the 18arned C.I.T.(A) that the expenditure is totally related to the year under consideration and, therefore, no apportionment of expenses could be made. The learned C.I.T.(A) after reproducing the lengthy arguments in his order disposed of the issue with the observation that the action of assessing officer in accepting claim to the extent of 1/3rd out of total compensation and deferring balance 2/3rd to be allowed in subsequent years is in order.

7. We have asked the learned D.R. if there is any provision in the income Tax Ordinance, 1979 dealing with the amortization of expenses to which he has candidly replied in negative. We have further asked him to show any law under which the expense can be apportioned and he has again stated that there is no such law in the Income Tax Ordinance, 1979. In the above circumstances it is held that the apportionment of the expenses is not sustainable in law and consequently the addition stands deleted. The assessing officer is directed to allow the entire claim on account of golden shake hand as claimed.

8.The third objection raised on behalf of appellant is to the confirmation of addition made under section 24(i) of the Income Tax Ordinance on account of excess perquisites. A perusal of the assessment order shows that according to assessing officer, details of salaries, wages and benefits regarding cost of sales, administrative and general expenses and selling expenses amounting to Rs.11,57,69,000 showed that expenditure incurred by the appellant on the provisions of perquisites, allowance or other benefits paid to the employees was in excess of 50% of their salaries which attracted the provisions of section 24(1) of the Income-tax Ordinance, 1979. The assessing officer further observed that the total addition regarding excess perquisites and benefits liable to be added comes to Rs.1,43,37,248 Rs.20,79,852 and Rs.40,480 under the head cost of sales, administrative and general expenses and selling respectively amounting to Rs.1,64,56,980, The assessing officer has given details which are as follows.

9. The appellant was duly confronted who submitted following explanation:

"Salaries, allowances, perquisites or benefits have been paid to the employees as per past practice of the company and company's expenditure on this account has never been found fault with. The salaries, allowances, wages and benefits have always been allowedin the past. The inference drawn by your kind honour is neither correct nor proper. The provisions of section 24(i) are not at all attracted in this case because the perquisites, benefits and facilities provided to the employees are made available to them in accordance with the various mandatory provisions of labour laws.

Allowances like Punjab Special Allowance and other fall within the ambit of salary. Entertainment, personal staff salary and medical re imbursement and Hospital expenses are not paid without actually having been incurred by the employees. The expenditure on these accounts is re-imbursed to the employees on the basis of actual expenditure incurred. Washing allowance is paid to uniformed staff for actual expenditure incurred on washing of their uniforms Expenditure -on uniforms is incurred on account of providing the uniforms to the employees who are required to wear uniforms while on duty. Stipend is paid to the employees children for Education. Subsidy is the expenditure incurred by the company on provisions of various items through fair price shop to the employees. Transport week end facility and other benefits too are not any direct benefit to the employees from employer. The company is not in a position to regulate or adjust such payment/expenditure to its advantage. These are collective, general and essential expenses incurred by assessee company on over all basis for the purposes of the business of the company. These cannot be termed as perquisites or benefits by am standard or on any basis."

10. The assessing officer held that explanation was not convincing for the reason that various allowances mentioned in the explanation constitute part of salary as provided under definition under section 24 of the Income Tax Ordinance, 1979. He further observed that considering the fact that assessee has already added an amount of Rs.58,355 in respect of excess perquisites the addition to the total income was made at Rs.1,63,98,625. The learned C.I.T.(A) confirmed the treatment.

11. Mr. Zia H. Rizvi, learned counsel for the appellant has submitted that Punjab Special Allowance has been paid in pursuance of "the Punjab Employees Special Allowance Payment Act, 1988" Sections 3, 4, 5 and 6 whereof read as follows:

"3. Every employee whose wages, in respect of his employment on or after the 1st day of May, 1988 does not exceed one thousand four hundred and fifty rupees shall with effect from the said date be paid by his employer a Special Allowance.

(a)equal to fifty rupees per month, if his wages do not exceed one thousand four hundred and fifty rupees; or

(b)at such rate as, together with his wages, makes a total of one thousand and five hundred rupees per month if his wages are more than one thousand four hundred and fifty rupees.

4.Every employee whose wages, in respect of his employment on or after the 1st day of July, 1988 does not exceed one thousand three hundred and fifty rupees shall, with effect from the said date, in addition to the Special Allowance under section 3, be paid by his employer a Special allowance---

(a)equal to one hundred rupees per month, if his wages do not exceed one thousand three hundred and fifty rupees; or

(b)at such rate as, together with his wages, makes a total of one thousand and five hundred rupees per month if his wages are more than one thousand three hundred and fifty rupees."

5. Every employer shall be responsible for the payment of the Special Allowance required to be paid under this Act.

6.The Special Allowance shall be paid alongwith wages in accordance with any custom, usage, practice or law applicable to the undertaking.

12. The learned D.R. has conceded that the amount having been paid under the provincial law is not to be treated as perquisite and has to be included in salary, and we direct accordingly He has next contended that the washing allowance and uniform allowance should also be treated as part of salary but has ultimately conceded that it has been rightly included m excess perquisites In view of the concession made by Mr. Zia Rizvi no interference is required on our part. He has next submitted that the amount paid under the head ex-gratin incentive has been wrongly included in the excess perquisites and that it should be treated as part of salary. He has stated that no amount has been paid as ex-gratin and if the assessing officer finds any such amount he can include the same in the excess perquisites. Mr. Zia Rizvi submitted that the entire amount has been paid on account of incentive bonus and, therefore, same treatment should be given to it as given to the bonus which has been included by the assessing officer himself in the salary. In support of his contention that the amount paid under the head incentive is actually a bonus, he has produced a letter, dated December 30, 1993 from General Manager, F & A to General Manager Gharibwal Cement Limited. It contains that, "the Management is pleased to approve incentive bonus for the half year ended 31st December, 1993 to all the employees of the company. The incentive bonus has been approved in consideration of achieving first half' year's budgetary production. The management expects the similar spirit in the second half year. The incentive bonus shall be equal to one month's basic salary as on 31-12-1993 plus Rs.300 to all the permanent employees who were on the present pay Roll. " It appears that Mr. Zia Rizvi had due to' inadvertence produced the letter in respect of incentive bonus for the period not relevant to the assessment year 1993-94. The Income year for the assessment year 1993-94 is ending 30th of June, 1993 the letter has been produced in respect of half year ending 31st of December, 1993, meaning thereby that it is for the period 1-7-1993 to 31st December, 1993 which is relevant for the assessment year 1994-95. However, in the interest of justice we give an opportunity to the assessee to produce similar document if available with the appellant before the assessing officer within three months of receiving of this order and if any such document is produced before the assessing officer the incentive bonus should be treated as part of salary in the same manner as bonus has been treated as part of salary. Mr. Zia has further submitted that medical reimbursement should not be treated as part of perquisites. The point in issue already stands decided against the assessee by a Division Bench of this Tribunal vide judgment reported as (1996) PTD (Trib.) 100 and, therefore, the contention is not accepted.

13. The issue relating to the excess perquisites stand disposed of in the terms of finding above.

14. The last objection is to the disallowances in the profit and loss account. Mr. Zia has not pressed the objection and consequently the additions as maintained by the learned C.I.T. (A) in the profit and loss account are hereby upheld.

15. The appeal at the instance of assessee stands disposed of as above.

16. This brings us to the appeal at the instance of department. The firs objection raised on behalf of the department is to the deletion of additions under the head cement surcharge and service charges. The learned D.R. has conceded that the issue already stands decided by the Tribunal against the department in other cases. A perusal of the assessment order also shows that the department accepted the claims up to the assessment year 1991-92. As the issue already stands decided against the department, therefore, no interference is required on our part and the impugned finding of learned C.I.T.(A) is hereby maintained.

17. The next objection raised on behalf of the department is to the reduction allowed by the learned C.I.T. (A) in the additions under the heads travelling and conveyance, rent, rate and taxes and miscellaneous expenses. A perusal of the assessment order and the first appellate order shows that the learned C.I.T.(A) reduced the addition which were found excessive. In the assessment order the specific items of unverifiable nature to the extent of disallowance were not cited and, therefore, it is held that the learned C.I.T.(A) has rightly reduced the additions to which no exception can be taken.

18. The appeal at the instance of department stands dismissed.

M.B.A./514/Trib. Order accordingly.