(a) Income-tax---

----Business, expenditure---Perquisites---Expenditure on provision of car provided to employees for their personal use---Is includible in the value of perquisites---Value of all perquisites including car not to exceed one-fifth of salary paid to employee---Medical reimbursement not includible in value of perquisites---Indian Income Tax Act, 1961, S.40 A(5).

Expenditure on the provision of a car to an employee is includible in the value of perquisites for the purposes of section 40A(5) of the Income Tax Act, 1961. The value of all perquisites including the facility of car provided to an employee is not to exceed 1 /5th of the salary paid to him as laid down in section 40A(5) of the Act. The aggregate value of all perquisites is liable to be disallowed to the extent it exceeds the amount equivalent to 1/5th of the salary. The amount of medical reimbursement is, however, not includible in the perquisites.

(b) Income Tax--

---Depreciation---Depreciation neither sought nor claimed by assessee-- Assessing Officer not required to allow depreciation---Indian Income Tax Act, 1961, S.32

Where depreciation is neither sought for nor claimed by .the assessee, the Assessing Officer is not required to allow depreciation under section 32 of the Income Tax Act, 1961.

BECO Engineering Co. Ltd. v. CIT (1984) 148 ITR 478 (P&H) and CIT v. Friends Corporation (1989) 180 ITR 334 (P&H) fol.

(c) Income Tax--

----Capital or revenue expenditure---Loan raised in foreign currency for purchase of machinery from abroad---Loss occurring in repayment of loan due to payment of extra amount towards cost of machine due to fluctuation in exchange rate---Is capital expenditure.

The loss occurring in the repayment of loan raised in foreign currency for purchase of machinery from abroad, due to payment of extra amount towards the cost of the machine due to fluctuation in the exchange rate, is capital expenditure.

CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar.); CIT v. South India Viscose Ltd. (1979) 120 ITR 451 (Mad.); CIT v. Elgi Rubber Products Ltd. (1996) 219 ITR 109 (Mad.); CIT v. Rohit Mills Ltd. (1996) 219 ITR 228 (Guj.) and Hindustan Machine Tools Ltd. (No.3) v. CIT (1989) 175 ITR 220 (Kar.) fol.

CIT V. Nuchem Plastics Ltd. (1989) 179 ITR 196 (P & H) ref.

M. S. Jain, Senior Advocate with Adarsh Jain and S.K. Hiraji for the Assessee.

R. P. Sawhney, Senior Advocate with S. K. Shrama for the Commissioner.

JUDGMENT

N. K. AGRAWAL, J.---The following questions of law have been referred by the Income-tax Appellate Tribunal (for short "the Tribunal"), under section 256(1) of the Income Tax Act, 1961 (for short, "the Act"):

(i) At the instance of the Department:

"Whether the Tribunal was right in holding that for working out the amount to be disallowed under section 40A(5) the amount taxes in the hands of the employees on account of the perquisite should be considered instead of the amount of actual expenditure incurred by the assessee for providing car to the employees?"

(ii) At the instance of the assessee:

"(1) Whether the Tribunal was right in law in holding that the Income tax Officer had no option but to compute and allow the depreciation to the assessee in this year?

(2) Whether, on the facts and the circumstances of the case, the Tribunal misdirected itself in considering Rs.5, 400 as the perquisite value for the car used by the executives of the company under section 40A(5)?

(3) Whether, on the facts and in the circumstances of the case, the loss of Rs.66, 698 due to fluctuation in foreign exchange rate at the time of repayment of foreign currency loan should be treated as capital expenditure?"

The assessee-company was engaged in the business of manufacture and sale of machine tools at its head office at Ballabhgarh and was running a rolling mill foundry unit and machine tools unit at its branch at Batala. A return for the assessment year 1977-78 (accounting year ending on December 31, 1976) was filed showing net income at "nil". The questions of law shall be examined as under:

Question in the Department's reference and question No.2 in assessee's reference:

The assessee-company paid salary and provided perquisites to some employees. The Assessing Officer was of the view that-total perquisites, were in excess of the limit prescribed in subsection (5) of section 40A of the Act. The assessee had computed the value of car facility provided to two employees, which, however, was not accepted to be correct by the Assessing Officer.

The Assessing Officer looked into the actual expenditure incurred on the facility of car provided to the employees, V. K. Anand and T. S. Dhingra. Expenditure on cat provided to V.K. Anand for personal use was Rs.31, 135 and that on the car provided to T: S. Dhingra for four months (on proportionate basis) was Rs.9, 249. The Assessing Officer took into account, besides the value of car facility, the perquisites like rent-free accommodation, salaries paid to personal servants, medical expenses, club membership fee, etc., in respect of each such employee and restricted the perquisites to 1/5th of the salary in the case of each employee.

The value of the perquisites is not to exceed 1/5th of the salary paid to an employee under section 40A(5) of the Act. It was for that reason that the Assessing Officer disallowed the expenditure incurred by the assessee- company in providing facilities and perquisites to the employees in excess of 1/5^th of salary.

In appeal filed by the assessee against the disallowance, the Commissioner of Income-tax upheld the order of the Assessing Officer. In further appeal, the Tribunal took in the view that the perquisite value of the two cars provided for personal use to the directors. V. K. Anand and T. K. Dhingra should be restricted to that amount which was actually assessed in the hands of those employees. The Tribunal also held that the reimbursement of medical expenditure was not a perquisite.

Expenditure on the provision of a car to an employee is includible in the value of perquisites for the purposes of section 40A(5) of the Act. The value of all perquisites including the facility of car provided to an employee is not to exceed 1/5th of the salary paid to him as laid down in section 40A(5) of the Act. The: aggregate value of all the perquisites is liable to be disallowed to the extent it exceeded the amount equivalent to 1/5th of the salary. The amount of medical reimbursement is, however, not includible in the perquisites.

A Division Bench of this Court had an occasion to examine a question relating to the free use of car provided by the assessee-company to its employees in CIT v. Nuchem Plastics Ltd. (1989) 179 ITR 196. The question there had arisen as to whether the value of the perquisite relating to the use of car was to be calculated with reference to rule 3 of the Income-tax Rules, 1962. The Court held that there could not be two different standards for assessment in respect of the employee and employer and the value must be calculated with reference to rule 3.

The controversy in the present case actually arose from the restriction applied by the Income-tax Officer to the allow ability of deduction in respect of the value of perquisites. He allowed deduction to the extent of 1/5th of the total salary paid to the employee. In the cases of the two employees, namely, V. K. Anand and T.S. Dhingra, the Assessing Officer, after calculating the salary, computing the value of the perquisites and restricted the value of 1/5th of the salary as under:

It would, thus, appear that the Assessing Officer did not make any specific disallowance in respect of the value of perquisites relating to the personal use of the car by the employees. The disallowance was made under section 40A(5) of the Act of the value of the perquisites exceeding 1/5th of the salary. In this situation, there was no calculation of the perquisite value of the car under rule 3 of the Income-tax Rules.

Looking to the disallowance made by the Assessing Officer; the controversy projected in the questions referred for opinion does not appear to be the real controversy. It is not the application of rule 3 of the Income-tax Rules which needs to examined but it is the disallowance of the value of perquisites in excess of 1/5th of the salary.

The question which actually arises from the controversy is whether the Assessing Officer was right in- disallowing deduction of the value of perquisites in excess of 1 /5th of the salary paid to the employee. The answer to the question is in the affirmative, i.e in favour of the Revenue and against the assessee.

Question No. 1 in the assessee's reference:

The controversy projected through the question whether the Assessing Officer has to allow depreciation to an assessee without there being a claim in this behalf has been examined by a Division Bench of this Court in BECO Engineering Co. Ltd. V. CIT (1984) 148 ITR 478. In that case, the assessee had filed a revised return in which he did not claim depreciation, etc, which had been claimed in the original return. It was held that since the assessee did not claim any depreciation or extra shift allowance in the revised return, the Income-tax Officer was right in not computing and allowing depreciation and extra shift allowance. A question about depreciation was examined again by this Court in CIT v. Friends Corporation (1989) 180 ITR 334. Following the view taken in BECO Engineering Co. Ltd. v. CIT (1984) 148 ITR 478 (P &,H), it was held that the Income-tax Officer was not competent to allow depreciation suo motu against the wishes of the assessee.

Following the view taken by this Court, the question raised in the present reference is answered to the effect that in case depreciation was not sought and claimed by the assessee, the Assessing Officer was not required to allow depreciation.

Question No.3 in assessee's reference:

The assessee had incurred a loss of Rs.66, 698 due to fluctuation in the exchange rate. This loss occurred in the repayment of loan on account of change in the exchange rate. The loan was raised in foreign currency for the purchase of a machine from Germany. The Assessing Officer took the view that the loss was referable to the capital asset and was, therefore, not admissible as revenue expenditure but was in the nature of capital expenditure.

The assessee had purchased the machine outside India by securing a loan from IFCI. The loan was repayable in half yearly equal instalments in West German D.M. at the rate of 25,000 D.M. The rupee value of the repayment was debited to the machinery account in the initial year. The assessee paid two instalments of 25,000 D. M. each during the accounting year relevant to the assessment year under reference. The rupee equivalent of these instalments exceeded the amount as per the original exchange rate. The assessee had also purchased a machine on direct deferred payment basis. The rupee equivalent of the instalments paid for that machine also exceeded the original price by an amount of Rs.4, 308. The total amount of loss due to fluctuation in the exchange rate was thus Rs.66, 698.

The Tribunal upheld the view that the loss occurring due to fluctuation in the exchange rate was not revenue expenditure: The Assessing Officer was, however, directed to verify the arithmetical correctness of the amount paid by the assessee and to allow depreciation on that amount.

The Madras High Court in CIT v. South India Viscose Ltd. (1979) 120 TR 45.1, examined a question whether, the expenditure incurred on the higher payment of instalment due to change in the exchange rate was capital or business expenditure. The question was answered against the assessee with the observation that it was not allowable as business expenditure inasmuch as the payment related only to the purchase price of the machinery.

In CIT v. Elgi Rubber Products Ltd. (1996) 219 ITR 109, the Madras High Court again look the same view and held that devaluation of currency had far-reaching effect on the price of machinery etc., purchased from a foreign country. It often increased the originally agreed price. If such increase is between the dates of the agreement and the acquisition of asset, the case is covered under section 43(1) of the Act and the escalation to price would go to increase the actual cost.

The Gujarat High Court in CIT v. Rohit Mills Ltd. (1996) 219 ITR 228, has also taken the view that additional payment made in rupees on account of difference in the exchange rate becomes part of the cost of acquisition of the asset acquired by the assessee and was not a revenue expenditure.

The Karnatake High Court has also taken a similar view in CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374 and Hindustan Machine Tools Ltd. (No:3) v. CIT (1989) 175 ITR.220.

The facts in the present case before us make it clear that the assessee had to pay . an extra amount towards the cost of the machine on account of fluctuation in the exchange rate. The cost of the machine increased due to change in exchange rate only.

This view finds support from the view taken by the other High Courts as discussed above.

Question No.3 in the assessee's reference is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

M.B.A./4132/FC Order accordingly.