COMMISSIONER OF INCOME TAX, BOMBAY CITY-III, BOMBAY versus BRITISH BANK OF MIDDLE EAST

Citation: [2001] SUPP. 2 S.C.R. 323 · Decided: 30-08-2001 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Appeal(s) allowed

Judgment (excerpt)

COMMISSIONER OF INCOME TAX, BOMBAY CITY-111, BOMBAY 
A 
v. 
BRITISH BANK OF MIDDLE EAST 
AUGUST 30, 2001 
[S.P. BHARUCHA, Y.K. SABHARWAL AND ASHOK BHAN, JJ.] 
B 
Income Tax Act, I96l!Income Tax Rules, I962-Section 40A(5)/Rule 
3(c)-Free cars provided by employer to employees for private use where 
actual expenditure is not ascertainable-Perquisite value-Amount of 
disa/lowance under the Section in the hands of employer-Applicability.of the C 
Rule in fixing the disal/owance-Held, Rule 3(c) is applicable to determine 
income fi"om sa/alJ' in the hands of employee-As regards the employer, 
perquisite value for disallowance should be estimated under Section 40A(5). 
In respect of respondent-assessee, for assessment years 1975-76 and D 
1976-77 Revenue estimated the value of perqu,isite of free cars provided to 
the employees at 50% of the actual expenses of running and maintenance of 
cars and disallowed the same under Section 40A(5) of the Income Tax Act, 
1961. On appeal by the assessee, CIT (Appeals) hell~ that the value of the 
perquisite should be fixed as per Rule 3(c) of the Income Tax Rules, 1962 
and the same value should be considered for the purpose of making the E 
disallowance under Section 40A(5) of the Act. On appeal by Revenue, Tribunal 
upheld the order of the CIT (Appeals) relying on the decision of the Calcutta 
High Court in the case Commissioner of Income Tax, West Bengal v. Britannia 
Industries Co. limited, [135 ITR 35 (Cal)). On reference by Revenue, the High 
Court held in favour of the Revenue relying on the decision in Geoffrey F 
Manners & Co. ltd. v. Commissioner of Income Tax, (221 ITR 695 (Born))'. 
In appeal to this Court, Revenue contended that Rule 3 of the In~ome 
Tax Rules, 1962 can be invoked only for computing the value of perquisite in 
hands of employee as income from salary; that Rule 3 is not applicable for 
determining the amount of expenditure to be disallowed to employer-assessee G 
under Section 40A(5) of the Act; and that where the actual expenditure 
incurred by an employer on providing the facility "of a car to the employee 
for private use is not ascertainable, the disallowance under section 40A(5) 
should be worked out on estimated basis. 
323 
H 
324 
SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R. 
A 
Allowing the appeal, the Court 
HELD : 1.1. Section 40A(5) of the Income Tax Act, 1961 and Rule 3 of 
the Income Tax Rules, 1962 deal with different situations and different set of 
assessees-one dealing with the employer-assessee and the other the employee-
assessee. Rule 3 deals with valuation for the purposes of computing the income 
B of the employees chargeable under the head "Salaries" whereas Section 40A(5) 
deals with computation of the income under the head "Profits and Gains of 
business or profession". The object of enacting Section 40A(5) was to 
discourage the assessees from incurring expenditure which resulted directly 
or ind!rectly in the provision of any benefit, amenity or perquisite to their 
C employees beyond a particular limit and any expenditure incurred beyond 
the prescribed limit was liable to be disallowed. The said provision constitutes 
a composite scheme and the purpose of prescribing a ceiling on expenditure 
in connection with directors and employees is to discourage the employer from 
paying excessive salaries, remuneration, perquisites etc. to its employees and 
directors, and if paid, the employer would not be able to claim the entire 
D expenditure as deduction. It will be able to claim deduction of expenditure 
upto the ceiling limit provided in the said section. This provision was enacted 
to curb extravagant expenditure. It does not contemplate deduction of notional 
value of perquisite assessed in the hands of employees. In contemplates the 
deduction of actual expenditure or on estimate basis where the details of the 
E actual expenditure are not furnished. [331-D-G] 
1.2. The employer has incurred the expenditure on the car and should 
be able to provide its figures. If he cannot, it is fair that the expenditure should 
be assessed on a realistic basis and not on the basis of Rule 3 which applies 
qua the employees, who cannot provide the figures of actual expenditure since 
F it is not he who has incurred it. [331-H; 332-AJ 
1.3. Section 40A(5) of the Act was enacted to provide for a ceiling on 
expenditure on employees. The object of Rule 3 is to give relief to the 
employees. Applying Rule 3 for the purpose of determining the dedu

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