COMMISSIONER OF INCOME TAX Vs. SARASPUR MILLS LIMITED

JUDGEMENT

(1.) ON the application of the CIT under S. 256(1) of the IT Act, 1961, following two questions of law arising out of its order in IT Appeal No. 835 of 1982 for the asst. year 1980 81 have been referred to this Court for its opinion along with the statement of the case :

(2.) THE assessee is a company. It paid by way of cash house rent allowance to its employees during the previous year relevant to the assessment year in question, amounting to Rs. 15,337. Since extent of deduction on account of salaries being paid to its employees for the purposes of computing the profits and gains arising out of its business is inhibited by the provisions of S. 40A (5) of the Act, the ITO included this sum in determining the amount of salaries paid to its employees for the purposes of finding out the extent to which the expenditure on account of salaries are to be disallowed under the aforesaid provisions. The assessee contested the case of the AO on the ground that such cash allowances are not to be considered as 'salary', or 'perquisite', within the meaning of S. 40A(5) r/w Explanation thereto which determines the meaning of 'salary' and 'perquisite' for the purposes of the section. Sub s. (5) speaks about expenditure assessee incurs, which results directly or indirectly in the payment of any salary to an employee or a former employee, or incurs and expenditure which results directly or indirectly in the provision of any perquisite whether convertible into money or not to any employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, such expenditure beyond the limit prescribed under the sub section are not to be deducted in computing profits and gains of business of the assessee. The scheme of the Act makes it clear that such expense must either result in payment of salary or in the provisions of any perquisite whether convertible into money or not or entitlement to any allowance in respect of an asset of the assessee used by an employee for his own purpose or benefit. Therefore, unless the cash allowance paid to an employee falls in any of the categories, viz., salary, perquisite, or allowance for the use of assessee's assets for the benefit or purposes of the employee, the same cannot be considered for the purposes of determining the ceiling of expenses to be excluded from allowance. For the purposes of the said sub section, the Act itself has provided the ambit and scope of expenditure which is to be considered as salary or perquisite in Expln. 2.

(3.) AS we shall presently see, the house rent allowance paid in cash does not form part of the term 'perquisite'. However, if it is paid by the employer to employee as the terms and conditions of employment for services rendered and it is payable periodically computed in terms of time per month and is not a result of anything but arising out of relationship of employer and employee in terms of the contract, it must be considered as 'salary' itself. Even otherwise, when the inclusive definition of 'salary' includes any profits in addition to any salary or wages, any allowances or extra payments, whether for rain clothes given to its employees, lodging allowances, trade union allowances, city compensatory allowances, etc. are to be included in salary as "profits in addition to salary".