AMBICA MILLS LTD vs. COMMISSIONER OF INCOME TAX

ITR/277/1987HC GujaratGJHC24012009198711 March 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE KUNDAN SINGH16 pages
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What were the facts?

The assessee, Ambica Mills Ltd., claimed medical expenditure of Rs. 1,47,527/- for its Chairman and Managing Director's treatment abroad for Assessment Year (AY) 1980-81. The expenditure was approved by the General Body Meeting but Government approval was obtained later on 8.1.1981. The assessee treated it as an advance. The Income Tax Officer (ITO) held the claim premature, to be considered in the year of Government authorization. For AY 1981-82, the ITO held the reimbursed amount of Rs. 1,20,274/- as a perquisite disallowable under Section 40A(5). The CIT(Appeals) upheld the prematurity for AY 1980-81 and treated the expenses as a perquisite under Section 40A(5)(a)(ii) for AY 1981-82. The Tribunal confirmed these orders. The High Court was asked to decide on a reference.

What did the High Court hold?

The High Court held that the Tribunal was correct in holding the claim as premature for AY 1980-81. The Court further held that cash reimbursement of medical expenses to the managing director falls under Section 40(c)(i) of the Income Tax Act, 1961, and not under Section 40A(5). The reasoning was that Section 40(c)(i) covers any expenditure resulting in remuneration or benefit or amenity to a director, which includes direct cash payments. This interpretation is supported by decisions in Gujarat Steel Tubes Limited, CIT Vs. Synpol Products Pvt.Ltd., and CIT Vs. Raipur Manufacturing Co. Ltd. The Court distinguished this from the Supreme Court's decision in CIT Vs. Mafatlal Gangabhai & Co. Pvt.Ltd., which dealt with payments to employees under Section 40A(5)(a)(ii) and specifically excluded cash payments due to the absence of the phrase "whether convertible into money or not" in Section 40(c)(i). Therefore, the disallowance under Section 40A(5) was not applicable. The questions were answered in the affirmative in favour of the Revenue regarding the applicability of Section 40(c)(i) and the prematurity of the claim for AY 1980-81.

What were the issues?

1. Whether, on the facts and in the circumstances, the Tribunal was right in law in holding that cash reimbursement of medical expenses to the managing director is a perquisite and therefore, is to be considered for the purpose of disallowance under Section 40A(5) (or 40(c)) in the hands of the company, and further in holding that the claim was premature for AY 1980-81? 2. Whether, on the facts and in the circumstances, the Tribunal was right in law in holding that cash reimbursement of medical expenses to the managing director is a perquisite and therefore, is to be considered for the purpose of disallowance under Section 40A(5) (or 40(c)) in the hands of the company for AY 1981-82? Assessee's contentions: The cash reimbursement was outside the term "perquisite" and not disallowable under Section 40A(5) or 40(c). Revenue's contentions: The medical reimbursement to the managing director constituted a perquisite and was disallowable under Section 40A(5) or 40(c). The claim was premature for AY 1980-81.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 40A(5),Section 40(c),Section 17(1),Section 17(2)(iv),Section 40(a)(v),Section 40A(5)(a)(ii),Section 40(c)(i)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 277 of 1987

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge?

The order continues below.

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