Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 23(1)(xviii), 24(i) & 16(2)(b)‑‑‑Income Tax Rules, 1982, R.3‑‑ 'Deductions‑‑‑Assessee a non‑salaried Director of a company‑‑‑Re imbursement of medical expenses‑‑‑In profit and loss account, medical expenses ‑reimbursed to non‑salaried Director were claimed, which were disallowed under S.24(i) of the Income Tax Ordinance, 1979‑‑‑First Appellate' Authority directed that amount claimed as medical expenses was not taxable; that it did not attract the provisions of S.24(i) of the `Income Tax Ordinance, 1979 and that in fact it was covered under S.23(1)(xviii) of the Income Tax Ordinance, 1979‑‑‑Validity‑‑‑First Appellate Authority had rightly concluded that Director was not a salaried Director, therefore, S.16(2)(b) of the Income Tax Ordinance, 1979 read with S.24(1) of the Income Tax Ordinance, 1979 was not applicable and claim of medical reimbursement‑was a case of commercial expediency covered under S.23(1)(xviii)bf the Income Tax Ordinance, 1979‑‑Language of S.24(1) of the Income Tax Ordinance, 1979, provided that the key word is "Employee" and as per ‑R.3, Income Tax Rules, 1982 for a person to be termed as an "employee" he must be getting his remuneration etc. at the regular intervals and also for work full time for the Company ‑‑‑Assessee was not working for the company full time and that he was a Director in various other Companies‑‑ Assessee was also not drawing salary, this had been accepted by the Assessing Officer in his assessment order‑‑‑Order of First Appellate Authority was maintained by the Appellate Tribunal in the circumstances.

(sic) 1969 SC 335

Mirza Khan D.R. for Appellant.

Shaukat ‑Amin Shah, F.C.A. and Mehmood Mirza for Respondent.

Date of hearing: 19th August,' 2004

ORDER

MRS. ABIDA ALI (ACCOUNTANT MEMBER).‑‑‑This departmental appeal arises out of the order of teamed CIT(A), dated 4‑11‑2002 wherein assessee's appeal was accepted. The impugned order has been contested on the following ground:‑‑

"The L/CIT(A) was not justified to treat the medical expenses incurred by the Director of the assessee‑company as an admissible expense under section 23(1)(xviii) of the Income Tax Ordinance, 1979 whereas the same was taxable under section 24(i) read with section 16(2)(b) of the said Ordinance."

2. Brief facts of the case as per record are that assessee/respondent is a Public Limited Company and derives income from manufacture and l sale of sugar and spirit. In the profit and loss account, medical expenses reimbursed to Director Mr. Mir Afzal Khan, were claimed ate Rs.33,07,750, which were disallowed under section 24(i) of the Income-Tax Ordinance, 1979 (hereinafter referred to as Ordinance). On appeal this issue was not adjudicated upon and on second appeal, this Tribunal vide. I.T.As. Nos. 780, 790, 791 (departmental appeals) and I.T.As. Nos.833 to 836(PB), dated 18‑2‑2002 remanded the case to the learned CIT(A) for proper adjudication on the basis of provisions of law. The learned CIT(A) gave his finding that the amount claimed as medical expense is not taxable; that it does not attract the provision of section 24(1) and that in fact it is covered under section 23(1)(xviii) of the Ordinance.

3. Representatives of both the parties were heard. The learned D.R. submitted his arguments as per ground of appeal and defended the assessment order. On the other hand, the learned AR of assessee argued that section 16(2)(b) of the Ordinance is neither relevant nor applicable to the issue in hand because "salary" is non‑existent in terms of Explanation added to section 24(1) of the Ordinance, which defines it as "Salary" means remuneration or compensation for services rendered paid, or to be paid, at regular intervalstherefore, addition cannot be made under this section and that it is an allowable expenditure under section 23(1)(xviii) of the Ordinance. He dilated at length upon the issue and referred to the decision of Hon'ble Supreme Court of Pakistan reported as (sic)‑ 1969 SC 335. Continuing his arguments, the learned A.R. emphasized with reference to the aforementioned decision of the Hon'ble Supreme Court that the question is not whether, the expenditure are reasonable or not but whether it is incurred bona fide on the ground of commercial expediency. In this respect he stated that it was approved by the Board of Directors and that from 1982‑83 to 1985‑86, the company faced serious problems but, when the management changed and was headed by Mr. Mir Afzal Khan, the crisis of the company were over.

4. We are convinced by the arguments of the learned AR and are of the view that the learned CIT(A) has rightly concluded that Mir Afzal; .Khan was not a salaried Director, therefore, section 16(2)(b) read with section 24(1) is not applicable and that the‑ claim of Rs.33.0" 750 as medical reimbursement is a case of commercial expediency covered under section.23(1)(xviii) of the Ordinance. For the sake of reference, relevant portion of the case‑law cited by the learned AR of assessee on the issue of commercial expediency reported as (sic) 1969 SC 335 and observations of the learned CIT(A) are reproduced below:‑‑

" ....it will thus, be seen that the most important factor in determining whether an expenditure by way of payment of remuneration to the Managing Director is "wholly and exclusively for the purpose of the business of the company, is whether the expenditure is voluntary and is incurred on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business". The question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency. It is not for the income tax department to say that the expenditure is not reasonable"

Observation of the learned CIT(A)‑

The applicability of section 24(1) is enforced when the following pre‑conditions are available:‑‑

(a) The word used in this section is "EMPLOYEE".

(b) He must be getting salary, which is defined as remuneration of compensation received at "regular intervals".

(c) The "EMPLOYEE" must have "perquisites, allowances for ;other benefits". Thus if there is no remuneration of compensation at regular intervals, no perquisites etc. will be included under the head salary (ref. Section 16(2) of the Ordinance).

(d) The expenditure or perquisites and other allowances and benefits, when exceeding 50% of the salary are to be taxed under section 24(1).

After going through the spirit and language of the section, it becomes clear that the key word is "Employee" and as per the Income Tax Rules, for a person to be termed as an "employee" he must be getting his remuneration etc. at the regular intervals and also for work full time for the Company. Ref. Definition of salary‑Rule 3(2) and the issue of the valuation of perquisites is a consequences, these rules are laid out in Rule 3 of the Income Tax Rules.

The appellant, in this case was not working for the company full time and that he was a Director in various other companies also. The appellant was also not drawing salary, this has been accepted so by the Assessing Officer .in his assessment order. By looking at the explanation to section 24(1) where, salary is defined, it is quite clear that the appellant was not getting remuneration at regular intervals"

6. In view of the foregoing discussion, we have no hesitation in maintaining the order of learned CIT(A).

7. At the time of hearing of appeal on the issue of addition under section 24(1) of the Ordinance, the learned DR stated that even otherwise the claim is inadmissible under section. 25(c) of the Ordinance. Assessment order was examined and it was observed that Assessing officer had made this observation on page‑4 of his order but while computing the income for the year he has mentioned on page 5 that, "add inadmissible amount under section 24(1) as discussed above Rs.33,07,750. At this point, attention of the DR was drawn to the fact that this issue has never been contested earlier at the first stages of appeal, neither at the time of original appeal before this forum nor at present. To this he stated that legal issue can be taken at any stage and that the ground of appeal is being prepared. This submission was made by the learned DR at the time of hearing on 5‑8‑2004. On this date, the learned AR of assessee wanted time and hearing of appeal was adjourned to 19‑8‑2004, but, additional grounds on the issue of addition under section 24(c) were not submitted till rising of the Court nor till the time of writing the judgment. As such, it is not admitted for hearing.

As a result, the departmental appeal fails and is hereby rejected.

C.M.A./358/Tax (Trib.) Appeal rejected.