COMMISSIONER OF INCOME TAX, BOMBAY ETC versus M/S. MAFATLAL GANGABHAI AND CO. (P) LTD. ETC.

Citation: [1996] 3 S.C.R. 227 · Decided: 12-03-1996 · Supreme Court of India · Bench: B.P. JEEVAN REDDY · Disposal: Dismissed
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Judgment (excerpt)

COMMISSIONER OF INCOME TAX, BOMBAY ETC 
A 
v. 
M/S. MAFATLAL GANGABHAI AND CO. (P) LTD. ETC. 
MARCH 12, 1996 
[B.P. JEEVAN REDDY AND M.K. MUKHERJEE, JJ.] 
B 
Income Tax Act, 1961-Sections 40(a)(V) and 40-A(S)-Amounts not 
deductible in computing the income chargeable under the head 'Profits and 
Gains of Business of Profession '-Payments made in cash by an assessee to 
its employeei~Whether fall within the mischief of Sec. 40(a)(v) and Sec. C 
40-A(S) of the Act-Held, No. 
During the accounting year relevant to the Assessment Year 1982-83, 
the assessee, a limited company made payments in cash to its employee., 
on account of house rent allowance, conveyance allowance and medical 
reimbursement and claimed deduction. The Income Tax Officer disallowed D 
these holding that the payments fall within mischief of section 40-A(S) of 
_,. · 
the Income Tax Act, 1961. On appeal, the Commissioner of Income Tax 
(Appeals) upheld the assessee's claim that cash payments cannot be 
treated as 'perquisites' ·for the purpose of and within the meaning of 
Section 40-A(S). Revenue's appeal to the Tribunal was dismissed. Applica-
E 
lions U/S 256(1) filed by the Revenue was also dismissed by the Tribunal. 
Applications under s. 256(2) were rejected by the High Courts. These 
appeals had been filed against orders of the High Courts rejecting the 
Revenue's applications U/S 256(2) of the Act. 
The assessee contended that such cash payments made was not F 
within the mischief of sub-clause (v) of Section 40(a) as what is within the 
mischief of the sub-clause is an expenditure incurred for providing benefit, 
amenity or perquisite to an employee and that a cash payment to the 
employee is not an 'expenditure' contemplated by the cash sub-clause and 
that the use of the qualifying words 'whether convertible into money or not' G 
puts the matter beyond doubt. According to the Revenue, whether the 
assessee takes a house on rent and provides it to the employee or pays a 
cash amount directly to the employee asking him to find a house on rent 
himself should make no difference. 
Dismissing the appeals, this Court 
227 
H 
A 
B 
228 
SUPREME COURT REPORTS 
[1996] 3 S.C.R. 
HELD : 1.1. The language employed in sub-clause (v) of clause (a) 
of Section 40 of the Income Tax Act, 1961, is not capable of taking within 
its ambit cash payments made to the employees by the assessee. These cash 
payments will, of course, be treated as salary paid to the employees and 
will be subject to the limits/ceiling, if any, in that behalf. But they cannot 
be brought within the purview of the words "any expenditure which results 
directly or indirectly in the provision of any benefit or amenity or per-
quisite" - more so because of the following words "whether convertible into 
money or not". [237-B-C] 
1.2. Except for certain structural changes, Section 40- A(5) (a) (ii) and 
C Section 40(a)(v) are similar in all material aspects. [237-H] 
1.3. The words "including any sum paid by the assessee in respect of 
any obligation which but for such payment would have been payable by 
such employee" in Section 40(a)(v) as well as in Section 40-A(5)(A)(ii) 
contemplate a situation where the assessee makes a payment (in cash) in 
D respect of an obligation • obligation of the employee • which would have 
been payable by the employee if it is not paid by the assessee. The payment 
' 
by the assessee contemplated by these words is not evidently a payment to 
• 
the employee but to a third party, no doubt, on account of the employee. 
Sub-clause (v) of the definition of "perquisite" in clause (b) of Explanation 
E 
(2) to sub-section (5) also refers to cash payment but that too is not to the 
employee, though undoubtedly for his benefit. Therefore cash payments by 
an assessee to his its employees do not fall within the ambit of Section 
40(a)(v) or Section 40-A(5)(a)(ii), as the case may be. [238-B-D] 
Commissioner of Income Tax v. Commonwealth Tmst Limited, (1982) 
F 
135 !TR 19 Ker (FB), overruled. 
Co1nmissioner of Income Tax, Kemataka v. Mysore Co1nn1ercial Union 
Limited, (1980) 126 l.T.R. 340; Commissioner of Income Tax v. Shriram 
Refrigeration Industries Limited, (1992) 197 l.T.R. 431 (Delhi); Commis-
sioner of Income Tax v. Kanan Devan Hills Produce Company Limited, 
G (1979) 119 I.T.R. 431 (Calcutta); Commissioner of Income Tax v. lndokem 
Private Limited, (1981) 132 I.T.R. 125 (Bombay); Commissioner of Income 
Tax v. Warner Hindustan Limited, (1984) 145 I.T.R.
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