INCOME TAX QUESTIONS & ANSWERS SERIES PART -VIII
Section 17(2)(vi) of the Income Tax Act, 1961
Today we are going to consider problem based on provisions of Section 17(2)(vi) of the Income Tax Act, 1961- Whether medical expenses held by company on treatment of its Managing Director outside India will be treated as perquisite.
An amount of Rs. 12,50,000/- paid by XYZ Limited, after approval by the Board on medical surgery of its Managing Director and same was claimed as expense in the accounts of the company. The AO( Assessing Officer) during assessment proceedings ,taxed the amount paid by the company as a perquisite in the hands of its Managing Director. Critically analyze above case.
LETS CONSIDER PROVISIONS OF APPLICABLE SECTION
Perquisite' may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.
2) " perquisite" includes-
(i) the value of rent-free accommodation provided to the assessee by his employer;
(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;
(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases-
(a) by a company to an employee who is a director thereof;
(b) by a company to an employee being a person who has a substantial interest in the company;
(c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this subclause do not apply and whose income under the head" Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds twenty- four thousand rupees;
Explanation.- For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub- clause;
(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee; and
(v) any sum payable by the employer, whether directly or through a fund, other than a recognized provident fund or an approved superannuation fund or a Deposit- linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 19484 (46 of 1948 ), or, as the case may be, section 6C of the Employees' Provident Funds and Miscellaneous Provisions Act, 19525 (19 of 1952 )], to effect an assurance on the life of the assessee or to effect a contract for an annuity:
Provided that nothing in this clause shall apply to,-
(i) the value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer;
(ii) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family-
(a) in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of medical treatment of its employees;
(b) in respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner having regard to the prescribed guidelines': Provided that, in a case falling in sub- clause (b), the employee shall attach with his return of income a certificate from the hospital specifying the disease or ailment 2 for which medical treatment was required and the receipt for the amount paid to the hospital;
(iii) any portion of the premium paid by an employer in relation to an employee, to effect or to keep in force an insurance on the health of such employee under any scheme approved by the Central Government for the purposes of clause (ib) of sub- section (1) of section 36;
(iv) any sum paid by the employer in respect of any premium paid by the employee to effect or to keep in force an insurance on his health or the health of any member of his family under any scheme approved by the Central Government for the purposes of section 80D;
(v) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family[ other than the treatment referred to in clauses (i) and (ii)]; so, however, that such sum does not exceed ten thousand rupees in the previous year;
(vi) any expenditure incurred by the employer on-
(1) medical treatment of the employee, or any member of the family of such employee, outside India;
(2) travel and stay abroad of the employee or any member of the family of such employee for medical treatment;
(3) travel and stay abroad of one attendant who accompanies the patient in connection with such treatment, subject to the condition that-
(A) the expenditure on medical treatment and stay abroad shall be excluded from perquisite only to the extent permitted by the Reserve Bank of India; and
(B) the expenditure on travel shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before including therein the said expenditure, does. not exceed two lakh rupees;
(vii) any sum paid by the employer in respect of any expenditure actually incurred by the employee for any of the purposes specified in clause (vi) subject to the conditions specified in or under that clause.
Explanation.- For the purposes of clause (2),-
- "hospital" includes a dispensary or a clinic 1 or a nursing home;
- "family", in relation to an individual, shall have the same meaning as in clause (5) of section 10; and
- "gross total income" shall have the same meaning as in clause (5) of section 80B.
LET'S ANALYSE ABOVE PROVISIONS
If we go through above definition of a perquisite under provisions of section 17(2)(vi) of the Income Tax Act, 1961 ,we found that ;
- Expenses on medical treatment of the employee or any member of his family outside India will be considered as perquisite provided that such expenses will not be considered as perquisite to the extent permitted by Reserve Bank of India.
- Expenses of an attendant with the family members of an employee taking treatment abroad will be tax free to the extent it is approved by RBI.
- Travel expenses of the patient (employee or his family member) and one attendant who accompanies the patient in connection with such treatment. It shall be tax free perquisite in the case of those employees whose Gross Total Income (before including therein such travel expenditure as perquisite) does not exceed Rs. 2,00,000/-.
ANSWER TO THE QUESTION
A Managing Director generally occupies the dual capacity in the company of being a director as well as an employee. In given case let’s assume that MD is also an employee of the Company, the provisions of Section 17(2)(vi) get attracted and it provides that any expenditure incurred by an employer on treatment of his employee or any of his family members will not be taxed a perquisite to the extent allowed by the Reserve Bank of India.
The amount approved by RBI has not given in the question, let’s assume that RBI has approved;
- Rs. 12,50,000/- then there is no tax on the amount expended by employer as perquisite in the hands of MD;
- Rs. 10,00,000/- then balance amount ( Rs. 2,50,000) will be taxable as perquisite in the hands of MD.
CIT Vs. D.P. Kanodia (2008)296 ITR 616 in this case the High Court Allahabad observed that the reimbursement by the company of medical expenditure incurred outside India by the director cannot be considered as an amenity or benefit provide by the company to its director and therefore the provisions of Section 17(2)(iii)(a) would not be attracted. Therefore such reimbursement cannot be considered as perquisite under provisions of Section 17(2)(iii)(a) of the Income Tax Act, 1961.
Thus by applying above ratios the act of Assessing Officer to tax medical expenditure incurred by the XYZ Limited on its Managing director of the company as perquisite in hands of Managing Director is not correct.
The above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as a professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.
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