JUDGMENT
K.S. Paripoornan, J.
1. At the instance of the assessee to income-tax, the Income-tax Appellate Tribunal (in short, “the Tribunal”)) has referred the following question of law for the decision of this court in this batch of connected cases:
“Whether, in view of the finding of the Tribunal, the assessee had collected fair rent from their employees in respect of the buildings given for their residence, was the Tribunal right in law in holding that the entire expenditure incurred by the assessee for the maintenance of the buildings given for the residence of their employees and the depreciation thereon can be taken into account for the purpose of disallowance under Section 40(a)(v) of the Income-tax Act ?”
2. The respondent in this batch of cases is the Revenue. We are concerned with the assessment years 1970-71, 1971-72, 1976-77, 1977-78 and 1973-74.
3. We heard counsel. The short question that arises for consideration is the interpretation to be placed on Section 40(a)(v) and Section 40A(5)(b) of the Income-tax Act, 1961. Following the Revenue’s view rendered in the earlier assessments of the assessee, the Income-tax Officer applied the provisions of Section 40(a)(v)/40A(5) to the expenditure on the buildings occupied by the employees of the assessee and depreciation on the same. Reckoning the expenditure and the depreciation on the buildings occupied by the employees of the assessee, the Income-tax Officer limited the expenditure by invoking Section 40(a)(v)/40A(5) of the Act. In appeal, the Commissioner of Income-tax (Appeals), following the decision of the Tribunal for the earlier years, held that the perquisites, in so far as they pertained to maintenance expenses and depreciation on buildings, should be excluded in determining the disallowance under Section 40(a)(v)/40A(5) of the Income-tax Act. In the appeals preferred by the Revenue, the Tribunal held that the Income-tax Officer was justified in reckoning the expenditure and depreciation on the buildings occupied by the employees for the purpose of limiting the expenditure under Section 40(a)(v)/40A(5) of the Act. The orders passed by the Income-tax Officer were restored. Thereafter, at the instance of the assessee the question of law formulated hereinabove has been referred by the Tribunal for the decision of this court.
4. We heard counsel. In order to understand the scope of of the controversy in this case, it is useful to extract Section 40(a)(v) and Section 40A(5) of the Income-tax Act, 1961, (section 40(a)(v) for the assessment years 1969-70 to 1971-72 and Section 40A(5) for the assessment years from 1972-73 onwards).
“40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’, —
(a) in the case of any assessee– …
(v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of salary payable to the employee, or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year, whichever is less : . ..”
“40A(5)(a). Where the assessee –
(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or
(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an 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, subject to the provisions of Clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in Clause (c) shall not be allowed as a deduction : …”
5. The assessee pressed into service the decision of this court rendered in the assessee’s own case for the year 1974-75 and contended that the course adopted by the Income-tax Officer was clearly wrong. It was also stated before the Tribunal that it was not brought to the notice of this court on the earlier occasion that the assessee had charged rent from its employees and so the question of application of the above provisions of law does not arise. Dealing with the aforesaid plea, the Tribunal held as follows :
“Section 40(a)(v) and Sub-clause (ii) of Clause (a) of Section 40A(5) include within their purview also expenditure incurred directly or indirectly in respect of any asset of the assessee used by an employee either wholly or partly for his own purposes or benefit for being considered for the application of that provision. All that is required in respect of this part of this provision is that the assets of the assessee should have been used either wholly or partly by the employees for their own purposes or benefit. No qualification is made to the effect that the asset should have been used by the employee freely without payment of any consideration. The decision of the Kerala High Court in the assessee’s own case for the assessment year 1974-75 clearly defines the extent to which the expenditure
on such assets is to be considered for the purpose of these two provisions. In paragraph 11 where the expenses on the motor cars were under consideration, it is observed that ‘Regard being had to the object of the provision, it is evident that the control is on the amount expended on the asset which is used by the employee for his benefit to the extent he uses it for his personal purposes. Whether the employer receives any consideration from the employee for such use is not a criterion for controlling such expenditure. It is also noticed that the expenditure on an accommodation provided at fair market rent is not excluded by either the first proviso to Section 40(a)(v) or by the proviso to Section 40A(5)(b). In view of this, even if consideration is received by the assessee from its employees for the use of the assets belonging to the assessee, the expenditure incurred on such asset by the assessee should be taken into account for applying Section 40A(5). We would, therefore, hold that the Income-tax Officer was justified in taking into account the expenditure and the depreciation on these buildings for the purpose of limiting the expenditure under Section 40A(5).”
6. Counsel for the assessee stressed the fact that this court, on an earlier occasion, in disposing of I. T. R. Nos. 76 and 79 to 82 of 1978 (CIT v. Fobres, Ewart and Figgis (P.) Ltd. [1982] 138 ITR [FB]) proceeded on the basis that the assessee-company provided the buildings to its employees free of rent, that this is not factually correct and that the assessee was collecting rent from its employees at the municipal value and, therefore, the decision rendered by this court in the earlier proceeding in Forbes, Ewart and Figgis (P.) Ltd.’s case [1982] 138 ITR 1 [FB] will not apply. We will proceed on the basis, as the Tribunal has done, that the assessee was charging rent on the basis of municipal valuation. We will also proceed, as the Tribunal has done, that the municipal value would represent the fair market rent in respect of the property. Even so, a question arises, whether collection of rent for the buildings occupied by the employees of the assessee is in any way relevant to dissuade the assessing authority from reckoning the expenditure and the depreciation on the buildings for the purpose of limiting the expenditure under Section 40(a)(v)/40A(5) of the Income-tax Act. A fair reading of the statutory provisions, extracted hereinabove, will clearly show that the receipt of any rent or consideration by the employer from the employees for the use of the employer’s asset is not a criterion to hold that the reckoning of the expenditure and the depreciation on the building for the purpose of limiting the expenditure under the aforesaid statutory provisions, is not permissible. The only question is whether the assessee herein (employer) incurred any expenditure in respect of any of its assets which is used by an employee either wholly or partly for his own purposes or benefit. That it is so admits of no doubt. If that be so, the fact that the assessee-employer collected fair rent (at the rate of the municipal value) cannot be a fetter in applying the provisions of Section 40(a)(v)/40A(5) of the Income-tax Act. There is a useful discussion about the scheme of the above provisions of law in Sampath Iyengar’s Law of Income Tax, 7th Edition, Volume 2, pp. 2034 and 2035. In this view of the matter, we are of the view that the Tribunal was justified in holding that the entire expenditure incurred by the assessee for the maintenance of the building given for the residence of the employees and the depreciation thereon can be taken into account for the purpose of disallowance under Section 40(a)(v)/40A(5) of the Income-tax Act. We answer the question referred to us in the affirmative, against the assessee and in favour of the Revenue.
7. The Income-tax References are disposed of as above.
8. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal Cochin Bench.