Law:

Section:

Section 40A(5) of the Income-tax Act, 1961, read with Rule 3(a) of the Income-tax Rules, 1962 - Business disallowance - In case of companies - Assessment year 1972-73 - Assessee-company paid house rent for different flats provided to executives - Whether where actual rent paid by assessee-company for different flats was known and ascertained, disallowance to be made under section 40(a)(v) in case of assessee should be on basis of actual expenditure so incurred for providing accommodation to employees and not on lines of formula laid down in rule 3 - Held, yes FACTS The ITO made diverse additions as being perquisites to the employees not allowable under section 40A(5). The AAC on appeal, held that actual rent paid by the assessee-company for the different flats being known and ascertained, there was no question of restricting it to 10 per cent or 12 per cent as laid down in rule 3(a) since these percentages were laid down for purposes of valuation of rent-free residential accommodation enjoyed by the employees. In the case of the employer according to the AAC, the amount to be taken into account was the actual rent incurred. On further appeal, the Tribunal, however directed the ITO to work out the disallowances to be made under section 40(a)( v)/40A(5) for valuing the perquisites on the basis of the formula laid down in rule 3. On reference: HELD In the instant case, house rent was paid by the company for the flats provided to the executives. The actual rent paid by the company for the different flats were known and ascertained. In such a case, rule 3 could not have been applied. Further, rule 3 applies only to the computation of the value of perquisite provided to an employee for the purpose of assessing the same in his hands. This rule does not apply to the computation of the value of perquisite for making the disallowance under section 40(a )(v)/40A(5) in the assessment of the employer-company. The formula laid down in rule 3 cannot be applied for computation of the value of the perquisite provided by the employer, in this case in the form of rent-free accommodation provided to the executives. Thus, the Tribunal was not right in directing the ITO to proceed…

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