JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, atthe instance of the assessee, the Tribunal has sought for our opinion on the following question :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that reimbursements of medical expenses and house rent allowance paid in cash were to be taken as part of salary for purposes of Section 40A(5)/40(c) of the Act?”
2. This reference arises out of the income-tax assessment of the assessee for the assessment year 1982-83 for which the previous year ended on September 30, 1981. The Income-tax Officer, while computing the inadmissible expenditure under Section 40A(5)/40(c) of the Income-tax Act, 1961, held that medical reimbursement and house rent allowance paid in cash would form part of salary under Section 17. Accordingly, both these payments were considered for computation of disallowance under Section 40A(5)/40(c).
3. On appeal, the Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer.
4. In further appeal by the assessee, the Tribunal, following the reasoning given by the Special Bench of the Tribunal in the case of Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom), upheld the action of the Income-tax Officer.
5. At the hearing before us, Dr. Pal, learned counsel for the assessee, relied upon a number of decisions including the decisions of the Calcutta High Court on the proposition that monetary payment to employees by way of reimbursement of medical expenses is not perquisite. He has also referred to the fact that the Central Board of Direct Taxes has consistently taken the view that such reimbursement, even though falling within the definition of perquisite, was not to be included in the total income of the assessee under the head “Salary””. He referred in particular to circular No. 33 dated August 1, 1955, which stated, inter alia, that the provision of ordinary medical facilities to the employee or his family free of charge or reimbursement of such medical expenses to the employee after they are incurred is not to be included in the total income of the employee as a part of the perquisite provided by the employer. This circular was followed by another circular referred to by learned counsel which stated that the provision of ordinary medical facilities made by an employer to his employee or his family free of charge or reimbursement of such medical expenses to the employee after they are incurred by them are not to be included in the total income of the employee provided that such amount does not in any financial year exceed one month’s salary of the employee. [See [1982] 137 ITR (St.) 3].
6. There is one more circular being No. 376 dated January 6, 1984, wherein the Central Board has taken the view that the reimbursement of medical expenses to an employee/provision of medical facilities by an employer to an employee will be taxable only in excess of Rs. 5,000 per annum. [See [1984] 146 ITR (St.) 62].
7. Eventually, on a representation being made, the Board has directed that the reimbursement of medical expenses, such as operation fees, hospitalisation charges and the cost of medicines, tests, etc., actually incurred in India by the employer on an employee, including managers or directors and their family members will not be treated as perquisite provided the expenses are incurred on medical treatment in recognised public hospitals in India. [See Circular No. 445 dated December 31, 1985, [1986] 157 ITR (St.) 49].
8. There is yet another circular issued by the Central Board being No. 481, dated February 20, 1987, which reiterates the earlier circular dated December 31, 1985 (see [1986] 157 ITR (St.) 49), that the reimbursement of medical expenses, such as, operation fees, hospitalisation charges, cost of medicines, tests, etc., which are actually incurred in India by the employee on medical treatment in a recognised public hospital will not be treated as a perquisite for the purpose of charging income-tax. The Board, in the said circular, extends the scope and ambit of “recognised public hospital” to mean, hospitals which are recognised under the CGHS and CS (MA) rules for the purpose of medical treatment/reimbursement under these rules. [See [1987] 165 ITR (St.) 225].
9. Referring to the circulars, learned counsel for the assessee urged that it has been the consistent view of the Board that reimbursement of medical expenses can be treated only as a perquisite and, on that footing, the Board has granted several concessions from time to time so as to mitigate the hardship of the employees. The circular issued on December 31, 1985 (see [1986] 157 ITR (St.) 49), as reiterated by the latest circular dated February 20, 1987 (See [1987] 165 ITR (St.) 225), accepts the position that the reimbursement of medical expenses, such as operation fees, hospitalisation charges, cost of medicines, tests, etc., actually incurred in India in a recognised public hospital will not be treated as a perquisite for the purposes of charging income-tax. Thus, the Board has never taken the view that reimbursement of medical expenses will not be treated as a perquisite but as a part of the salary. The Board treated such reimbursement as a perquisite and allowed it to be outside the net of taxation.
10. Learned counsel, however, fairly conceded that the High Courts in several cases have taken the view that reimbursement of medical expenses is not a perquisite. According to learned counsel, since the Board in the circulars treated reimbursement of medical facilities as a perquisite, it is not open to the Revenue authorities to shift their stand by reason only of the fact that several High Courts have held that such reimbursement is not a perquisite for the purpose of Section 40A(5)/40(c).
11. Learned counsel contends that the proper interpretation of Section 17 does not admit of such cash reimbursement being treated as salary proper as such reimbursement cannot come within any of the items which are included in the definition of salary in Section 17(1) of the Act.
12. Reliance by the Revenue on Section 17(3)(ii) of the Act is not also tenable, according to him. The said clause refers to any payment, other than any payment referred to in Clause (10), (10A), (10B), (11), (12) or (13A) of Section 10 of the Act, due to or received by an assessee from an employer or a former employer. The other terminal payments are, however, to be profits in lieu of salary such as payment received or due to be received from a provident fund or other fund not being an approved superannuation fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions. A close study of the aforesaid clauses of Section 10 would, he argued, show that the payments which are contemplated under Section 17(3)(ii) of the Act are those which are of a terminal nature paid or payable on the cessation or termination of the employment of an employee to the exception of the payments specified in the said clauses of Section 10. All the clauses of Section 10 of the Act which are referred to in Section 17(3)(ii) are also terminal payments due or payable by the employer on termination of the employment of an employee. Therefore, the reimbursement of medical allowance cannot find place in Section 17(3)(ii) of the Act. It is precisely because of the aforesaid reason that the stand of the Revenue authorities has always been that reimbursement of the medical expenses is a perquisite even though the said view has been negatived by the High Court in several decisions Learned counsel referred to a decision of the Andhra Pradesh High Court in CIT v. Warner Hindustan Ltd. . There the High Court in dismissing the application under Section 256(2) of the Act, held that the reimbursement of medical expenses and reimbursement of house rent allowance do not form part of salary for the purpose of Section 40A(5) of the Act. The Andhra Pradesh High Court, in the aforesaid judgment, referred to an earlier decision of the Bombay High Court rejecting a similar application and the rejection of special leave petition by the Supreme Court. The Supreme Court rejected the special leave petition from the said judgment and order of the High Court. [See [1990] 185 ITR (St.) 3.]
13. In a nutshell, learned counsel’s case is that the Board, having consistently treated medical reimbursement as a perquisite and the High Courts on the other hand having held such reimbursement not as a perquisite, the reimbursement cannot at all be reckoned for the purpose of disallowance under Section 40A(5)/40(c). He further buttresses his case by saying that the cash payment by way of reimbursement is not also roped in in “profits in lieu of salary”, the definition of the expression in Section 17(3) not admitting of its inclusion.
14. The Revenue, on the other hand, had supported the reasoning and conclusion of the Tribunal.
15. We have considered the rival contentions.
16. What was of primary concern to the Board was the tax relief in respect of the medical facilities provided free of cost as well as medical reimbursement provided to an employee. It is true that the Central Board of Direct Taxes in its successive circulars has shown an inclination to relieve employees of taxation in respect of provision of medical facilities including medical reimbursement. The question whether reimbursement is classifiable as a perquisite or as salary was not a question addressed by the Board as that was not directly the subject-matter before it. The Board, while exempting the value of the benefit of medical facilities from taxation, also included medical reimbursement because, inclusion of medical reimbursement was harmonious with the fundamental intent of not taxing the medical benefit whether received in specie or as cash payment as reimbursement. Therefore, we are not persuaded to read too much into the circulars of the Board for answering the question whether reimbursement as a cash allowance partakes of the character of perquisite or salary. The circulars only show a discernible leaning towards tax relief for medical benefits received by an employee irrespective of its form; thus far is quite clear.
17. It is no doubt true that there is a consensus amongst High Courts including this court that any cash allowance paid to an employee by the employer cannot be treated as perquisite for the purpose of Section 40A(5). But that alone does not advance the case of the assessee because the decisions do not say that such cash allowances are neither perquisites nor salary as is the main thrust of the argument of learned counsel for the assessee. Dr. Pal has referred to the decision of the Andhra Pradesh High Court in Warner Hindustan Ltd. , where the Andhra Pradesh High Court held that the reimbursement of medical expenses does not form part of salary. But, there is a decision of the Kerala High Court in CIT v. Toshiba Anand Lamps Ltd. , which held in the context of Section 40A(5) that the payment for expenditure incurred for gas and electricity used by the employee shall not be a perquisite but can very well be part of the salary.
18. Dr. Pal has concentrated on the exposition of the nature of Clause (3) of Section 17 defining “profits in lieu of salary”. His contention is that the expression “profits in lieu of salary” has a limited field since the clauses, in the first instance, refer to the terminal cash receipts and other cash benefits which an employee is entitled to receive from the employer on termination of service. According to him, Clause (3) of Section 17 has an exclusiveness and complete partiality with regard to the terminal benefits. The tenor of the definition precludes from its scope cash benefits other than terminal cash benefits.
19. But, this reading of the definition of the expression “profits in lieu of salary” to us appears to be lop-sided. The reading of the said expression in an exclusive manner to mean only terminal benefits glosses over the opening words of Clause (3) of Section 17. The definition starts with the words “profits in lieu of salary includes.” This is an inclusive definition. The expression “includes” broadens the expression into a large sphere and can embrace any receipt which arises as gains or profits of employment in the shape of cash. It is a pointer to the proposition that it can include any cash receipt in the course of employment and even terminal cash receipts, unless excepted in terms. The terminal cash benefits no doubt find special reference in the said definition but this specific mention of some of the terminal cash benefits as exceptions only indicates that the Legislature has taken extra caution not to leave out from the ambit of the expression terminal benefits. We are not impressed with the argument that the cash benefits received other than terminal cash benefits cannot be brought within the description of “profits in lieu of salary”.
20. The definition of salary is also not an exhaustive one, it leaves the meaning of the word to its use in the popular sense or its dictionary meaning. But then the Legislature gives to the word an extra edge to include some of the remunerations or recompenses which an employee may receive from the employer on account of the employment. “Profits in lieu of salary” is one such addition. The Legislature thought it necessary to have an inclusive definition inasmuch as salary in its popular understanding means a periodic payment as compensation for official or professional or any skilled services. In Funk and Wagnall’s Standard Dictionary, Comprehensive International Edition, “salary” has been defined as a payment for professional, literary, executive, clerical work and is usually estimated on weekly, monthly or annual rate. Therefore, the meaning of the word “salary” in common parlance postulates periodicity of the payment at a particular rate. It was precisely for that reason that the additions as appearing in Clause (1) of Section 17 were included within the meaning of the word “salary”. Unless so defined, the cash allowance of variable and uncertain amounts received could not have been included within the definition of salary. Thus, the reimbursement of the expenditure incurred by the employee has been intended to be roped in in the definition of salary by bringing it as part of “profits in lieu of salary”. We have not been able to persuade ourselves to agree with Dr. Pal that the expression “profits in lieu of salary” should be given a restricted meaning in the manner he construes its definition in Section 17(3).
21. It has been time and again emphasised by learned counsel for the assessee that the Board has always referred to medical reimbursement as a specie of perquisite. The reason why the Board has used in the circulars the word “perquisite” to include medical reimbursement is that the concession is given in the circulars primarily to the value of the benefit received by an employee by reason of medical treatment having been provided to him or any member of his family in any hospital maintained either by the employer or by the Government or any local authority or any other hospital approved by the Government for the purpose of medical treatment of his employee and it is only in that context that the identical benefit has been extended to medical reimbursement, i.e., a case where the concession is given to the employee for the medical treatment by not directly incurring the expenditure but paying to the employee a sum equal to the expenditure incurred by the employee beforehand. Therefore, the use of the expression “perquisite” in the circulars in connection with the benefit of medical treatment including reimbursement of medical expenses does not turn the case one way or the other.
22. Reference in this connection may be made to the insertion of a proviso below Sub-clause (v) of Clause (2) of Section 17 by the Finance (No. 2) Act, 1991. One may observe that expenses incurred by the employer for the medical treatment of the employee or any member of the family of the employee have been treated as a perquisite by the Legislature. The said proviso had seven parts. In all the parts except in one, there is reference to the value of the benefit of facilities for medical treatment of the employee. With the one exception as aforesaid, all the situations involve direct spending by the employer for the treatment. Of course, the concession also includes a case where the employer, without himself incurring the expenditure, reimburses the employee who has incurred the expenditure. So, a case of reimbursement has also indirectly found a place in the word “perquisite” defined by Clause (2) of Section 17. This, instead of making any clarification, creates ambiguity.
23. The only option left for a judicial construction of the nature of reimbursement of medical expenses in this context of the new amendment could be that though reimbursement of medical expenses is not truly in the nature of perquisite yet the law has chosen to include such reimbursement in perquisite. Though, in reality, in the nature of a cash allowance, it is to artificially partake of the nature of reimbursement. The perquisite in normal circumstances as revealed from its description in Clause (2) of Section 17, before the insertion of this proviso, always referred to the value of some benefit received in specie either as service or as thing received free of cost. Before the insertion of the proviso, none of the sub-clauses of Clause (2) of Section 17 referred to any benefit by way of cash. It is either the benefit of free residential accommodation or any amenity granted or provided free of cost or at less than cost or at a rate less than cost. The residuary description of perquisite is to be found in Sub-clause (iv) of Clause (2) of Section 17 which speaks of any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee. This clearly indicates that it covers a case where the employee’s obligor is paid by the employer for the obligation received by the employee, the obligee. It also postulates that the employee, the obligee, has not paid for the obligation and the employer has paid for it. Therefore, this description does not fit in with the fact-situation where the employee pays his obligor for the obligation received from the obligor and the employer afterwards compensates the employee for such payment. Such a case is a case of pure and simple cash allowance. None of the descriptions of perquisite in Clause (2) takes in a case where the benefit paid to the employee is a monetary benefit by way of cash payment to the employee. It is exactly for this reason that High Courts have consistently taken the view that cash payment to the employees can by no means be perquisite. This has also been the view of this court in Indian Leaf Tobacco Development Co. Ltd. v. CIT [1982] 137 ITR 827, which in turn followed an earlier decision of this court in CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431.
24. The assessee’s argument is two-pronged; on the one hand, it has argued that medical reimbursement is perquisite and the Central Board of Direct Taxes has consistently understood the medical reimbursement as one of the items of perquisites and described it as perquisite in the series of circulars that it had issued regulating the concession in respect of medical reimbursement for the purpose of assessment under the head “salary”. It is found from the later insertion of the proviso below Section 17(2) that the cash payment towards reimbursement of the expenses incurred by the employee has also been included in the same proviso to be a benefit at par with the other medical benefits provided for not by cash payment but by provision of actual medical relief free of cost. This no doubt creates some difficulty. That difficulty can be solved only by the presumption that the subsequent legislation has brought in a fiction by the special inclusion of a particular monetary benefit which really does not pertain to the essential nature of perquisite and that fiction brought in by the amendment takes effect only from the assessment year 1992-93 and has supplanted the state of law as prevailing prior to the assessment year 1992-93. We are here concerned with the assessment year 1982-83. Therefore, as regards the assessment year 1982-83, the decision that was taken by this High Court in the two cases as aforesaid holds the field. We do not find any reason to depart from it and we are unable to accept that cash allowance paid as reimbursement of medical expenses to the employee should be also perquisite.
25. Besides, here we are more concerned with the definitions of salary and perquisite in Explanation 2 below Section 40A(5). It is to be noticed that the word “perquisite” has been differently defined. Nor is that definition affected either by the language of the Board’s circulars or by the recent legislative amendment. Under the said definition, there is no scope to include medical reimbursement as perquisite. It can be only taken as “profits in lieu of salary”. The said Explanation 2 below Section 40A(5) is set out :
“Explanation 2.–In this sub-section,–
(a) ‘salary’ has the meaning assigned to it in Clause (1) read with clause (5) of Section 17 subject to the following modifications, namely;–
(1) in the said Clause (1), the word ‘perquisites’ occurring in Sub-clause (iv) and the whole of Sub-clause (vii) shall be omitted;
(2) in the said Clause (3), the references to ‘assessee’ shall be construed as references to ’employee or former employee’ and the references to ‘his employer or former employer’ and ‘an employer or a former employer’ shall be construed as references to ‘the assessee’;
(b) ‘perquisite’ means-
(i) rent-free accommodation provided to the employee by the assessee;
(ii) any concession in the matter Of rent respecting any accommodation provided to the employee by the assessee;
(iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee;
(iv) payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee; and
(v) payment by the assessee of any sum, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity;
(vi) the amount treated as a perquisite under Sub-clause
(vi) of Clause (2) of Section 17.”
26. The other argument of learned counsel is that the reimbursement, even if held not to be a perquisite, cannot, as a logical corollary, be taken as salary. This argument does not also appeal to us. We have already dealt earlier with the contention of Dr. Pal that, if the reimbursement is not perquisite it could not be “profits in lieu of salary”. “Profits in lieu of salary” as defined in Clause (3) of Section 17, according to him, refers to all payments that are available to the employee as terminal cash benefits and, therefore, leaves no place for medical reimbursement. The contention, though seemingly persuasive, is untenable. The logic running through the argument snaps because it overlooks the fact that the terminal benefits which are referred to in the definition appear in that clause only as special inclusions combined with certain exclusions. The expression “profits in lieu of salary” as such is not defined. It is left to the common understanding of the expression. But the Legislature takes additional pains to see that the terminal benefits are also included in the meaning of the expression “profits in lieu of salary”. Any receipt of cash can constitute salary being profits in lieu of salary provided the payment is by the employer to the employee arising strictly from the jural relation of employer and employee. This is also very clear from the provisions of Section 10(14) of the Act which excluded from taxation any special allowance but not being perquisite, granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit to the extent to which such expenses had been actually incurred for that purpose.
27. At any rate, any monetary payment coming within the ambit of profit in lieu of salary is salary. If the medical reimbursement is held to be a cash benefit, it answers the description of salary within its meaning under Explanation 2 below Section 40A(5) for the purposes of Section 40A(5)/40(c) of the Act.
28. As regards house rent allowance, the principle cannot be otherwise. As a matter of fact, Section 10(13A) is a fitting answer to the nature of house rent allowance. That provision grants exemption to any special allowance specifically granted to an employee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee to certain prescribed limits. Therefore, house rent allowance would certainly be included in computation of salary for the purpose of Section 40A(5)/40(c) of the Act. The decision of the Kerala High Court in Toshiba Anand Lamps Ltd. supports this view.
29. For the reasons aforesaid, the question is answered in the affirmative and against the assessee.
30. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
31. I agree.