1989 PLP (Trib (PTD)

MIRZA HUHAMMAD WASIM (ACCOUNTANT MEMBER).-- These are ten appeals against the orders of the C I T (Appeals) Zone-I, Lahore, seven appeals by the assessee a private limited company engaged in the publication of an Urdu daily newspaper for the assessment years 1977-78 to 1979 80, 1982-83, 1983-84, 1985-86 and 1986-87 and three cross appeals by the Department for the assessment years 1977-78 to 1979-80. Two appeals by the assessee on the question of limitation for the assessment years 1975-76 and 1980 81 have also been heard on the same date and have been disposed of vide a separate combined order. These remaining ten appeals are disposed of through this consolidated order and findings on the various issues involved are given below. (Assessment years 1977-78 to 1979-80, 1982-83, 1983-84, 1985-86 & 1986-87). The question of admissibility of staff gratuity claimed by the assessee is common in all the years under appeal. For the assessment years 1977-78 to 1979 80 the Department is in appeal against the order of the C I T (Appeals) Zone-I, Lahore allowing the assessee's clam which in fact is the only ground in the three Departmental appeals. For the assessment years 1982-83, 1983-84, 1985-86 and 1986-87 the assessee has contested the subsequent decision of the C I T (Appeals) confirming the I.T.O.' s disallowance of the assessee's claim on account of staff gratuity.

2. The facts are that for the assessment years 1977-78, 1978-79, 1979-80, 1982-83, 1983-84, 1985-86 and 1986-87 the assessee claimed amounts of Rs.1,52,388, Rs.2,34,443, Rs.22,174,1,56,600, Rs.6,58,383, Rs.5,06,154 and Rs.15,21,912 respectively on account of staff gratuity as an expense in its Profit and Loss Accounts. In the assessment year 1977-78 the claim was disallowed by the I T O with the following brief observations: "Provision for gratuity Rs. 1,52,

388. Totally disallowed being a mere provision therefore, inadmissible." For the subsequent years under appeal also the assessee's claims were disallowed by the I.T.O. with the same or similar remarks. The assessee's appeals for the assessment years 1977-78 to 1979-80 were disposed of by the C.I.T. (A) by a consolidated order whose portion dealing with the question of gratuity reads as under: "The first common objection concerns the disallowance of the provision for gratuity made in each year. Provisions made in the years were as under:-- Assessment year 1977-78 Rs.1,52,388 -do- 1978-79 Rs.2,34,448 -do- 1979-80 Rs.O,22,174 The Income-tax Officer disallowed the above provisions as being inadmissible. It is argued on behalf of the appellant-company that the I.T.O.'s action was bad in law because gratuity was payable to the company's staff under the decision made by the Wage Board for News papers Employees. In this connection extracts from the Wage Board Award dated 6-7-1974 have been furnished. It was provided in the said Wage Board Award that gratuity was admissible @ 20 days wages for each completed year of service in the manner laid down in the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 and that gratuity payable was to be treated as wages of the employees. It is also pointed out by the authorised representative that the gratuity was not of contingent nature but was fixed under the mandatory legal provision which also provided the manner and method of its calculation and the manner of its payment. Although gratuity was payable to an employee on his resignation from service or when his serv7ces were terminated by employer for any reason other than misconduct, the appellant-company had, provided for the liability by calculating gratuity payable to each employee from year to year and crediting the same to his individual account. In this connection a Gratuity Payable Register maintained from June 1975 to June 1981 has been produced for my examination. It is observed that calculation of gratuity payable was made from year to year and hence it can be said that the same was definite and determinable. No doubt the actual payment of gratuity depended on the happening of a certain event like the resignation from service by an employee or the termination of his service but the liability was calculated in accordance with the terms of the Wage Board Award. As the accounts were maintained on mercantile basis, it is held that provision for gratuity made in each year under appeal was admissible as a deduction. The impugned disallowances are accordingly deleted." It is against the above finding of the C.I.T. (Appeals) deleting the additions that the Department has filed appeals before the Tribunal. The identical common ground of appeal for the three years is as under:

"That the deletion of additions under the head `provision for gratuity' is illegal and unjustified. The learned Income Tax Appellate Tribunal has held vide his order I.TA. Nos. 609 and 610/KB of 1976-77 that provisions for gratuity are not admissible deductions." Subsequently, however, in his order relating to the assessment year 1982-83 the C.I.T. '(Appeals), after an examination of the assessee's account books came to a different conclusion and he confirmed the additions made by the I.T.O. with the following observations: "Gratuity.--The claim made at Rs.1,56,600 was disallowed by the Income tax Officer as being inadmissible. It is claimed by the learned counsel that the claim was based on ascertained liability and was admissible as a deduction. The objection raised is without any merit on examination of the account books I observed that although gratuity claimed to be payable to staff was credited to the account of each employee during the year, but in the next year that entry was reversed and again a fresh amount was credited. Although it is claimed that liability for payment of gratuity was calculated as per the Wage Board Award for Newspapers Employees it is observed from the above entries that the liability claimed was really not payable during the year and that was why the entries were reversed in the next year. The claim made was a sort of provision only, which was not admissible as a deduction. It is also to be pointed out that such claim made in the past was also disallowed. In this view of the matter the impugned addback of Rs.1,56,600 was valid and is accordingly confirmed:" For the assessment year 1983-84 also the addition made by I.T.O. was confirmed by the C.I.T. (Appeals) for the same reasons although it was admitted that a mistake had crept into the order for the assessment year 1982-83 in so far as it had been wrongly mentioned in that order that the claim had been disallowed in the past also although actually the disallowances had been deleted by the C.LT. (Appeals). For the assessment years 1985-86 and 1986-87 also the findings for the years 1982-83 and 1983-1984 were followed by the C.I.T. (Appeals) and the disallowances made by the I.T.O. were confirmed.

3. For the assessment years 1977-78 to 1979-80 it is contended on behalf of the Department that the C.I.T. (Appeals) was not justified in deleting the additions made by the I.T.O. because the I.T.O.'s action was quite valid to the light of the Income-tax Appellate Tribunal's decisions as well as the C.I.T. (Appeals)' own findings in subsequent years. On the other hand it is contended by the assessee with regard to the assessment years 1982-83, 1983-84, 1985-86 and. 1986-87 that the C.I.T. (Appeals) erred in confirming the additions made by the I.T.O. In this connection the assessee's ground of appeal for the assessment year 1983-84 is rather detailed and reads as under:- "Staff Gratuity disallowed at Rs.658,383 is contrary to the facts and circumstances of the case. The learned Commissioner of Income-tax (Appeals) has erred in disallowance being confirmed by him although it was allowed of such by him in all the preceding years except in the previous year s assessment when he wrongly fell into error to quote that such claims have been disallowed in the past and then to support such finding he even further fell into error of showing his poor accounting knowledge in the matter of recording gradual increase in the liability by means of reversing, the previous entries based on the calculations then made and providing in place thereof fresh entries based or, fresh calculations on the existing facts, which is the usual course recommended by accountancy profession to prevent against possible mistakes in calculation. The expenses in the earlier years have been allowed on the grounds that it was wages payable under the terms of employment and as awarded by the Wage Board of Newspapers Employees (Condition of Service) Act, 1973 and was calculated on facts and figures relating to each employee which were shown from year to year on the Employees Gratuity Personal Ledger and Journal for recording the calculations, and these books have been seen earlier by the same C.I.T. (Appeals) who allowed these expenses on the basis of those entries which he now applies differently, with sole object of covering his error in the preceding years appellate order" In the grounds of appeals for the assessment years 1985-86 and 1986-87 the assessee has also pointed out that while giving effect to the Tribunal's directions in I.TA. No.6330 of 1979-80 (Actually No.917 of 1978-79) dated 8-2-1986 the I.T.O. has himself allowed the assessee's claim on account of staff gratuity vide his order dated 30-6-1987 and there was therefore no reason for him to disallow the claim in the impugned assessments.

4. In the decision by this Tribunal dated 8-2-1986 in the assessee's case relating to the assessment year 1975-76 to which the assessee has referred in the grounds of appeal for the assessment years 1985-86 and 1986-87 the Division Bench had considered the I.T.O.'s view that the claim on account of gratuity was a mere provision and was, therefore, inadmissible as an expense and also the contention of the assessee, as accepted by the C.I.T. (A), that this was a statutory liability and was admissible as a deduction. In its order dated 8-2-1986 the Division Bench also considered various other decisions of the Tribunal in the matter and while remitting the case back to the Income-tax Officer wrote as follows:

"The question of allowance or otherwise of gratuity as an admissible expense has been examined by the Division Bench of the Income Tax Appellate Tribunal, Lahore at some length in another case in our order in I.T.A. No.3587 of 1979-80 (assessment year 1977-78) dated 21-5-1985 where the issue has been thrashed out. While giving the decision in this order we have kept in mind the decision of the Full Bench. of the Income Tax Appellate Tribunal in the case reported as (1982) 46 Tax 4 (Trib) decided on 18-1-1978 as well as a related decision of a Division Bench decided on 26-5-1981 and reported as (1981) 44 Tax 62 (Trib). It is considered advisable to reproduce relevant extracts from our order in I.TA. No. 3587 of 1979-80 (Assessment year 1977-78} dated 21-5-1985 referred to above: "The amount of gratuity is admissible as deduction under section 10 (2) (xvi) of the Income-tax Act, 1922, which lays down that the profits of a business will be computed after making an allowance, inter alia of any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business. While considering the claim for the deduction of the gratuity amount what is to be borne in mind is that it should not be a provision, but a liability, which has actually accrued. We may mention that while examining the question of liability on account of gratuity the Full Bench of the Income-Tax Tribunal- had earlier examined the issue in the case reported as 1982 P T D (Trib.) 10 In that case the Tribunal held that the reserve was created through provision for future contingency, and the employees had no vested rights in the amount credited to their account and the employer, not losing control over such credited amounts, could not be allowed .as admissible deduction as the liability had not accrued. Admittedly the assessee was maintaining accounts on mercantile basis and only an accrued liability would be an admissible allowance under section 10 of the Income-tax Act. The liability created was contingent but only that amount could be claimed which was payable according to the employee's 20 days wages. Later in the case reported as 1981 P T D (Trib.) 168 a Division Bench of the Income Tax Tribunal considered a similar question relating to the admissibility or otherwise of the gratuity as expenditure. In this case the assessee company had made a provision of 119.8,51,171 for Situate increasing the provision from Rs.17,68,111 standing in the balance-sheet of the preceding year to Rs.26,19,282 for the assessment year under appeal. In that case the Tribunal came to the conclusion that the provision of Rs.8,51,171 was an ascertained liability in terms of the agreement between the employer and the employees and that the liability had actually accrued. Since the company was maintaining accounts on mercantile basis, therefore, the legally and contractually accrued and ascertained liability was admissible as an expense." It was further stated m the same order as follows: "In our view the question of admissibility of the expense relating to gratuity will depend upon the facts of each case. If only a provision has been made and the amount of provision is neither paid nor it is payable in the year or if the liability has not been ascertained or accrued legally and contractually in the relevant previous year then the amount is not admissible as an expense. If, however the amount of gratuity is paid or becomes payable during the previous year i.e. if the liability accrues and a ascertained and has accrued and quantified then the amount is admissible. In other words mere ascertainment of the liability is not enough. It should have accrued legally, and contractually in the previous year relevant to the assessment year . "In the light of the above observations we would state that the facts which require to be ascertained, inter alia, are whether according to the provisions of the relevant Act and Wage Board Award the amount of Rs, 3.57,056 as gratuity has legally and contractually accrued in the parlous year relevant to the assessment year 1975-76 and was paid or had become payable in that year, or it was only an ascertained liability payable subsequent to the previous year. If it was contractually an' accrued liability and has been paid or has become payable the amount would be allowed as admissible deduction, and not otherwise. In this view of the matter we vacate the orders of the officers below and direct the I.T.O, to carry out the necessary investigation and pass a fresh order in accordance with law". The I.T.O. re-exam med the matter and came to the conclusion that the gratuity claimed by the assessee for the assessment year 1975-76 was an allowable expense. The relevant portion of the I.T.O's. order of re-as went 1987 for the assessment year 1975-76 reads as under; "The records shown by the assessee inter alia s owed the dates of appointment of the employees, the number of years of, the completed service, the number of days @ 20 days a year for which gratuity is admissible. The rate of last highest pay drawn and the amount of gratuity admissible to each such employee. Each year's new calculation replaces the previous years calculation in the individual account of each employee. However, if any employee leaves the service in between the year hrs entitlement to gratuity is calculated as on the date of his leaving the service and paid accordingly after updating his account in the Employees Gratuity Ledger. Although it is not paid every year and is paid at the time of retirement but it is determined every year. The system of accounting and calculation is meticulous. Since the gratuity record maintained by the assessee company comprehensively reflects the situation where the amount of gratuity is not merely a provision but is legally and contractually accrued in the previous year relevant to the assessment year 1975-76 and has become payable in that year and is definitely ascertainable, therefore, keeping in view the directions of the Bench of the Tribunal it is an admissible (expenditure against the income for the year under review."

5. After carefully considering the Tribunal's decision dated 8-2-1986 we are, however, of the view that for the relevant assessment year 1975-76 the I.T.O. did not re-examine the matter in accordance with the directions of the Tribunal. The matter which the Tribunal had asked the I.T.O. to verify was whether the gratuity of Rs.3,57.056 claimed by the assessee had "legally and contractually accrued in the previous year relevant to the assessment year 1975-76 and was paid or became viable in that ,year or it was only an ascertained liability payable subsequent to the previous year". It was made clear in the Tribunal's order that if it was an accrued liability and had been paid or had become payable the amount would be allowed as a deduction and not otherwise. The I.T.O., however, held in his order of re-assessment that although the gratuity was not payable every year (and was, therefore, apparently not payable during the relevant income year), it was admissible as an expense because it was determined every year on the basis of a meticulous system of accountancy and was, therefore, to be considered as payable in that year. As we have noted above, however, the Tribunal had in fact held that only the liability which was paid or had become payable during the relevant income year was allowable. There is no indication in the order of re-assessment made by the I.T.O. nor in the facts narrated before us with regard to the years under appeal that the gratuity debited by the assessee to the Profit & Loss Account from year to year was actually paid during the relevant income years or had become payable during these years. Such a position could arise only if an employee of the assessee company had in fact left its employment and either the amount of the gratuity had been paid to him or the gratuity due to him had been calculated but the actual payment could for some reason not be made during the relevant income year. The crux 'of the matter as brought out in this Tribunal's order dated 8-2-1986 is that the mere ascertainment of liability is not sufficient for its being allowed as an expense but it should also become payable during the relevant income year. Obviously an employee in respect of whom the gratuity has been calculated cannot claim the payment of that gratuity unless he leaves the employment of the assessee-company. Thus, it cannot be considered as payable to him merely because the assessee had calculated the amount which would be payable to him in respect of that particular year if he left the assessee's service at some future point of time. Thus the I.T.O. does not seem to have appreciated the Tribunal's findings in the assessee's case for the assessment year 1975-76 and has allowed the gratuity as an expense for incorrect reasons. Coming back to the years for which appeals are under consideration before us now, the method and basis for computation of gratuity by the assessee has admittedly remained the same as during the income year relevant to the assessment year 1975-76 and this Tribunal's findings and our above further elaboration of the same therefore remain equally applicable for the years now under consideration, notwithstanding the fact that for the year 1975-76 the I.T.O. erroneously interpreted these findings in favour of the assessee. It may also be further added that the facts of the assessee's case are on all fours with those of the case decided by the Full Bench of this Tribunal in I.TAs. Nos.609 (KB) and 610 (KB) of 1976-77 dated 18-1-1978 reported as 1982 P T D (Trib.) 10 to which a reference was also made in the earlier mentioned I.TA. No.917 of 1978-79 (Assessment year 1975-76) in the assessee's case. The points in common between the Full Bench case and the instant case are as follows:- (a) As in the Full Bench case so also in the instant case the assessee relied on the provisions of subsection (6) of Section 12 of the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 as the basis for the calculation and claim of gratuity with the only difference that the said Ordinance was specifically made applicable m the case of the assessee's employees through the Wage Board Award of 1974. It was, however, rightly pointed out in the Full Bench decision that as far as the statutory requirements of subsection (6) of section 12 of the 1968 Ordinance went, these applied only in cases where a workman resigned from service or his services were terminated by the employer, for any reasons other than misconduct and not in other situations such as superannuation. During the hearing of the instant appeals it was not brought out on behalf of the assessee that it had any statutory obligations other than those contained in subsection (6) of section 12 of the 1968 Ordinance referred to by the Full Bench. In fact the C.I.T. (Appeals) even when deciding the matter in the assessee's favour for the years 1977-78 to 1979-80 stated in his order reproduced earlier that gratuity was payable to an employee on his resignation or the termination of his service. No mention of any other statutory obligation, e.g. in case of superannuation was made by the C.I.T. (Appeals). (b) As in the case decided by the Full Bench, in the assessee's case also the employees did not acquire a vested right in the amounts calculated as gratuity and the assessee did not lose control over the amounts. (c) The calculation of the actual amount of gratuity is not possible in the assessee's case as was the position in the case decided by the Full Bench because the calculation has to be based on the highest pay drawn in the last twelve months of service of an employee and since there is no way of knowing what that pay would be, the gratuity provisions cannot be considered as pertaining to a finally ascertained and accrued liability.

6. While referring to the aforementioned Full Bench decision, however a reference needs also be made to a subsequent Division Bench decision reported as 1981 P T D (Trib.) 168 in which the Division Bench made a distinction between the facts of the case under appeal before it and the facts of the case decided by the Full Bench. The Division Bench in deciding the case took note of the fact that in that case the provision for gratuity was strictly made in terms of the mutual agreement between the assessee company and the employees' union and therefore the observation of the Full Bench regarding lack of, statutory obligation, for instance in the case of retirement, was not applicable in the case before the Division Bench. In this connection we may again point out that in the case before us it has not been established that the assessee's obligation went beyond the requirements of the 1968 Ordinance, but even if we assume for the sake of argument that because of the terms of service of the employees gratuity was to be paid by the assessee in all cases where an employee no longer remained in its service (for whatever reason this may be) we cannot hold that merely because the assessee follows the mercantile system of accountancy it can claim any amount of gratuity as an expense which is not payable during the relevant income year. We must here distinguish between the situation where the service put in by an employee during an income year would merely enter into the computation of his gratuity when it becomes finally due to him and the situation where the gratuity has become due to him by the occurrence of any one of the events on which its payment depends but because of some time lag the amount of gratuity, though determined has not been paid during the income year. It is the amount of accrued gratuity in the latter situation which would be chargeable an expense under the mercantile system of accountancy although not under the cash system. As for the former situation we would respectfully disagree with the observation of the learned Division Bench in its order (supra) that there would be no difference between the mercantile system and the cash system of accountancy if the gratuity provision in the said first situation were not considered as a deductible expense. In fact if one acted on this principle then future payments such as commutation of pension would also become, deductible in earlier years merely because the employee's length of service in terms of those years was to be taken into account in determining the commuted amount.

7. Apart from the above it would not be out of place for us to examine the question of the admissibility of the provision for gratuity as a deductible revenue account expense from the angle of the treatment under the law of the amount in the hands of the employees towards whose account the provision is supposed to have been credited. This examination would be useful because an amount representing a deductible revenue expenditure of one person would normally be a taxable revenue receipt of the person to whom the payment is made and would normally be subject to tax in the year in which it is accrued or paid unless specifically exempted under a provision of law. In this connection it may be noted that section 16 of the Income-tax Ordinance 1979 deals with the charge of tax on Salary income. Subsection (2) (a) (ii) of this Section defines "salary" to include "any annuity, pension or gratuity". Section 12 of the Ordinance clarifies as to when incomes under different heads would be deemed to accrue or arise in Pakistan and its subsection (1) dealing with salaries says that salary "shall be deemed to accrue or arise in Pakistan, wherever paid, if it is earned in Pakistan ." Thus, if a provision for gratuity, like the one statedly created by the assessee is treated as a deductible revenue expense in its hands, it can also be argued that the amount of the provision should be treated as a revenue receipt and a part of the salary of the employee. This, however, is neither the practice Per the provision of the law. The' fact that gratuity is to be charged to tax in the hands of the recipient only when it is finally due to him is evident from the plain reading of subsection (1) of section 16 which reads as under:- "

16. Salary.--(1) The following incomes shall be chargeable under the head "Salary", namely: (a) any salary due to the assessee from an employer in the income year, whether paid or not; and (b) any salary (including arrears of salary) paid to the assessee in the income year by an employer: Provided that where any salary is included in the total income on the basis that it has become due to an assessee, it shall not be included again in the basis that it is paid." It is an admitted fact that the provision in question is not due to the assessee's employees who cannot lay any claim to it merely because it has been provided by the emption contemplate the payment and receipt of gratuity on a one time basis and not on a yearly accrual basis which would have been the case if the amount: of gratuity relatable to each year were considered as accrued revenue receipts it the hands of the employees. From this also it can thus be reasonably inferred that since the provisions such as those created by the assessee do not under the law represent accrued salary in the hands of the employees these should also not be considered as accrued expenses emption contemplate the payment and receipt of gratuity on a one time basis and not on a yearly accrual basis which would have been the case if the amounts of gratuity relatable to each year were considered as accrued revenue receipts in the hands of the employees. From this also it can thus be reasonably inferred that since the provisions such as those created by the assessee do not under the law represent accrued salary in the hands of the employees these should also not be considered as accrued expenses in the hands of the assessee.

8. In the fight of the foregoing discussion and respectfully following the decision of the Full Bench of the Tribunal in the case reported as 1982 P.T-D. (Trib) 10 referred to earlier we hold that the provisions for gratuity made by the assessee for the years under consideration are not allowable as deduction for computing the assessee's income for tax purposes. We, however, direct the I.T.O. to allow the assessee an opportunity of showing whether any amount of gratuity was paid by the assessee to any employee during the relevant income years or whether any employee had left the assessee's service and the gratuity payable to him had been determined but had not been paid. It is only in these two situations that the amount of gratuity is allowable to the assessee as an expense and the I.T.O. will take necessary action if any specific claim in this regard is made by the assessee with regard to the years under appeal and it is found to be correct by the I.T.O. The I.T.O. has made various other profit & loss account additions namely, under the heads of entertainment, telephone, car expenses, travelling expenses and general expenses in all or some of the assessments for the years under consideration. Though the reasons for disallowances show some differences from year to year, most of the additions, in short are statedly on account of unvouched or non-business expenses. The learned counsel for the assessee has in connection with these additions raised the basic objection that in principle no disallowances on account of unvouched, unverifiable or personal expenses could be made in the case of the assessee because in its case the term "vouched" could refer only to the confirmation of an expense by the person responsible for overseeing the incurring and payment of the expense. It is contended that in the case of the assessee all expenses incurred have been duly attested and verified by the respective departmental heads before authorisation of their payment. It is further contended that in short there can be no element of personal expenditure in the case of an artificial juridical person like the assessee, which can for instance not eat or drink or incur other personal expenses. It is also stated that the definition of "person" as contained in the Income-tax Ordinance distinguishes between an individual and a body corporate and no employee can be equated with the employer when the employee is acting within the powers delegated to it and enjoying the fringe benefits allowed to it. The assessee's counsel has thus posed the following questions for adjudication by us before we consider other facts relating to the disallowances: (1) "Section 2 (32) of the Income-tax Ordinance 1979. Definition of person. 'Individual' distinct from 'limited company' and other artificial juridical person. Whether any expense of artificial juridical person could be disallowed being 'personal and non-business' (2) Business managed by staff, under a system of internal controls and checks. Whether any expense could be disallowed, being unvouched and personal and non-business when all such expense is authorised by responsible officers acting under express authority. (3) Employment of staff and fixing of their remuneration and benefitses is one of the business of the company: Whether any benefit allowed to the employees or any expense incurred on providing him any facility could be disallowed for non-business expense." It may be pointed out at the outset that in the assessee's case such disallowances had also been made in the past and had also been partly confirmed by the Tribunal. In innumerable other cases of companies also such additions are a very common feature of disallowances out of profit and loss account expenses and have been upheld by this Tribunal. However, even if we disregard assessee's own history and similar treatment in a vast number of cases of artificial juridical persons we would still hold that the disallowances of the nature made by the I.T.O. and partly confirmed by the C.I.T. (A) can be legally made in the assessee's case. To answer the assessee's questions we must first look at the provisions of law under which expenses such as telephone, entertainment, travelling and motor car maintenance etc. are allowed as deduction against business income. Obviously these are allowable under clause (xviii) of subsection (1) of section 23 of the Income-tax Ordinance which provides for the deduction of "any expenditure (not being in the nature of capital expenditure of personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession". The crucial words in the aforesaid clauses are the words "wholly and exclusively" for the purpose of such business. The upshot of the assessee's argument appears to be that if an employee incurs an expenditure, which is really his personal expenditure but the company authorises it as a business expenditure of the company there is no justification for the I.T.O. to make any disallowance out of the expenditure. We are afraid, however, that this contention is not acceptable because of the use of the words "whom and exclusively" in clause (xviii) ibid. The clause could have existed even without these words but their deliberate use clearly implies that the I.T.O. can examine whether any part of the expenditure claimed was such as was not wholly and exclusively for the business of the assessee.

9. Coming to the assessee's argument that any personal expense of an employee borne by the assessee company has to be considered as a fringe benefit enjoyed by him and allowed as an expenditure to the assessee company, we agree only to the extent that subject to the limitation contained in clause (i) of section 24, perquisites can be provided by an employer to its employees which in the hands of the latter are considered as part of salary because the word 'salary' has in section 16 (2) (a) been defined to include "any fees, commissions, allowance, perquisites or profits in lieu of, or in addition to, salary or wages". In clause (b) the said section 16 (2) "perquisites" have been defined to include: "(i) the value of rent-free accommodation; (ii) the value of any concession in the matter of rent respecting any accommodation; (iii) any sum payable by the employer, whether directly or indirectly, to effect an insurance on the life of, or to effect a contract for any annuity for the benefit of, the assessee, or his spouse or any dependent child; (iv) the value of any benefit provided free of cost or at a concessional rate; (v) any sum paid by an employer in respect of any obligation of an employee."

10. It is evident from the above definition of perquisites that these are to be allowed by an employer to the employees as a result of a conscious decision and in accordance with the terms of service of the employee mutually agreed upon. The provision of these perquisites by the employer can be considered as an expenditure wholly and exclusively incurred for business because it is for the assessee to decide as to how much of the remuneration of an employee is to be paid in cash and how much in kind, though the law has nevertheless, for the purposes of admissibility imposed a ceiling on the percentage of the perquisites in relation to the salary. The argument of the learned counsel for the assessee, however, means that even if an employee incurs any personal expense on the company's account which is not included in his terms of service it should be allowed as an expenditure in the hands of the company. To this view, however, it is not possible for us to subscribe because in such a case the expenditure would not be wholly and exclusively for the purpose of business because as we have already noted the expenditure which is wholly and necessarily required to be incurred by the company is already determined as per the terms of service which it offers to its employees. Any expenditure over and above this cannot be considered as wholly and exclusively for the purpose of business. This finding gets further support from the provisions of clause (i) of section 24 referred to above where the proportion of deductible perquisites to salary has been clearly laid down as upto 50 per cent of the salary. It is therefore not reasonable to assume that any personal expenditure incurred by an employee which is not included in his perquisites can be allowed as an expense to the assessee-company because this then would amount to an authorisation for circumventing the provision of clause (i) of section 24 of the Ordinance. Furthermore, perquisites are taxable in the hands of the employees subject to the provisions of the Income Tax rules. The said undefined perquisites referred to by the assessee's counsel can obviously not be taxed in the hands of the employees because these are not clearly known or ascertained. Again, therefore, it would not be logical to hold that while such undefined perquisites or fringe benefits cannot be taxed in the hands of the employees for practical reasons these are nevertheless allowable as an expense in the hands of the company. Coming back to the specific questions raised by the assessee's counsel we would hold with reference to the first question that it is possible for an artificial juridical person to incur personal or non-business expenses. There can be nothing unusual about this finding because an artificial juridical person can under the law also be considered as doing a variety of other things normally done by individuals including the concealment of its income for which it can be subject to punitive measures in the same way as an individual. As regards question No.2 raised by the assessee's counsel this has also been considered in the discussion above and it is held that the mere authorisation of non-business expenditure by the company cannot make it a deductible expense incurred wholly or exclusively for business. With regard to question No.3 also the question has been answered in the discussion above when it has been held that only perquisites which the company determines to be wholly and exclusively for its business and, therefore, incorporates in the terms of service of its employees can be considered as deductible expenses and not any benefit which the employee may appropriate to himself without any conscious decision in this regard by the company.

11. In the light of the above we hold that there is no legal bar on the Income-tax Officer to examine the nature of the various expenses claimed by the assessee in order to see whether they are vouched, verifiable and wholly and exclusively for the purpose of business. As already mentioned above in the assessee's own case such disallowances made in the past have been upheld by the Tribunal also. Rejecting the assessee's preliminary objection therefore, we come to the question of reasonability of the disallowances made by the I.T.O. regarding which findings under different heads are given hereunder. Entertainment Expenses (1977-78, 1978-79, 1979-80, 1982-83, 1983-84,1985-86 & 1986-87) The assessee claimed expenses of Rs.15,444, Rs.26,675, Rs.28,081 Rs.39,745, Rs.53,761 Rs.87,666 and Rs.1,22,273 respectively for the seven years under appeal by the assessee. Out of these expenses Rs.1,500, Rs.2,500, Rs.2,500, Rs.5,500, Rs.10,000, Rs.30,000 and Rs,40,000 were disallowed for the assessment years 1977-78, 1978-79, 1979-80, 1982-83, 1983-84, 1985-86 and 1986-87 respectively by the I.T.O. on account of unverifible, non-business or personal expenses. The C.I.T. (A) allowed relief only for the years 1983-84 Rs.1985-86 and 1986-87 reducing additions to 500, 10,000 and 10,000 for the re years respectively. It is seen that for the assessment years 1975-76 and 1976-77 expenses of Rs.10,942 and Rs.13,887 respectively were claimed by the assessee out of which disallowances of Rs.1,000 and Rs.1,500 were made by the I.T.O. which remained undisturbed upto the level of the Tribunal. With this background the disallow ances for the years 1977-78, 1978-79, 1979-80 and 1982-83 appear to be in order and are confirmed. Similarly for the year 1983-84 the disallowance after relief allowed by the C.I.T. (Appeals) also appears to be reasonable and is confirmed. The disallowances for the charge years 1985-86 and 1986-87 on the other hand appear to be a little high and these are reduced to Rs.15,000 and Rs.25,000 respectively. Telephone Expenses (1977-78, 1978-79, 1979-80, 1982-83, 1983-84, 1985-86 and 1986-87). Expenses on account of telephone charges were claimed at Rs.1,21,126, Rs.1,78,495, Rs,2,72,620, Rs.5,11,326, Rs.6,45,857, Rs.5,37,162 and Rs.7,85,066 respectively for the seven years under consideration. The I.T.O. made disallowances in all the years on account of personal use of the telephone. For the assessment year 1979-80, it was further mentioned that the disallowance was on account of residential phone, while for the assessment year 1982-83 the disallowance was made on the basis of 15% of the assessee's claim as has been the practice in many other cases. The amounts of the disallowances for the seven years were Rs.8,000, Rs.12,000 Rs.15,000, Rs.75,000, Rs,96,878, Rs.80,574 and Rs.1,00,000 respectively. The learned C.I.T (Appeals) confirmed the disallowances for the years 1977-78, 1978-79, 1979-80, 1985-86 and 1986-87. The disallowances for the years 1982-83 and 1983-84 were, however, reduced to Rs.40,000 and Rs.50,000 respectively by the C.I.T. (appeals). The past history of the case is that for the assessment years 1975-76 and 1976-77 expenses under this head were claimed at Rs.40,908 and Rs.76,299 by the assessee for the two years respectively out of which the I.T.O. made disallowances of Rs. 6,135 and Rs.4,000 respectively. After decision by the Tribunal the disallowance for the year 1975-76 was reduced to Rs.2,000 while the disallowance for the year 1976-77 was deleted. It can be seen that for the assessment years 1977-78, 1978-79 and 1979-80 the percentage of the disallowance to the expenses claimed is already quite low as it ranges between over 5% to over 6% when in many other cases a disallowance upto 15% has been approved by the Tribunal. Considering, however, the fact that in the assessee's line of business, the telephone plays a very important role and a large number of calls are necessarily made for business purposes the proportion of disallowances for the assessment years 1982-83, 1983-84, 1985-86 and 1986-87 appear to be rather high and .the disallowances are, therefore, reduced to Rs.30,000, Rs.40,000, Rs.30,0(M) and Rs.50,000 for these four years respectively. For the remaining years the disallowances are confirmed. Car Expenses: (1982-83, 1983-84, 1985-86 & 1986-87) Expenses under this head were claimed at Rs.106,727, Rs.124,848, Rs.141,067 and Rs.166,089 for the assessment years 1982-83, 1983-84, 1985-86 and 1986-87 respectively. Out of these expenses the I.T.O. disallowed Rs.10,

000. Rs.15,000, Rs.40,000 and Rs.50,0(0 respectively on account of personal use of cars. The additions for the years 1935-86 and 1986-87 were subsequently reduced by the C.I.T. (A) to Rs.25,000 and Rs.30,000 respectively. The background of the case in this connection is that in earlier years also some nominal disallowances were made under this head but these were later deleted in appeals. During the hearing of appeals, however, it was admitted that while cars had been provided to the resident managers and circulation managers etc. for business use but the element of personal use could not be denied. It was also admitted in this connection that these managers did not normally maintain cars of their own. It was, however, contended that even if there was a personal use of the cars this should not justify a disallowance out of the assessee's claim because the personal use was a benefit given to its employees by the assessee company. It, however, seems obvious that the cars in question are given to the managers ostensible for business purposes and not as perquisites. We have already held in connection with the assessee's preliminary contention discussed earlier that under such circumstances the I.T.O. would be justified in making a disallowance on account of personal expenses. As regards quantum of disallowances, the disallowance for the year 1982-83 appears to be reasonable and is confirmed but the disallowances for the years 1983-84, 1985-86 and 1986-87 appear to be rather high (even after relief allowed by the C.I.T. (Appeals) in the last two years) and are reduced to Rs.13,000, Rs.15,000 and Rs.17,000 for the three years respectively. Travelling Expenses: (1983-84, 1985-86 and 1986-87) Expenses under this head were claimed at Rs.538,690 .Rs.588,317, and Rs.650,848 for the assessment years 1983-84, 1985-86 and 1986-87 respectively. The I.T.O. disallowed Rs.50,000, Rs.50,000 and Rs.60,000 respectively for the three years on account of unverifiable and personal expenses. The disallowances for the years 1985-86 and 1986-87 were subsequently reduced to Rs.40,000 and Rs.50,000 respectively by the C.I.T. (Appeals). It is contended that the expenses relate entirely to the travelling expenses of the staff who are given a daily allowances while travelling on the assessee's business. It is pointed out that for the assessment year 1975-76 a nominal disallowance was made by the I.T.O. which was subsequently deleted in appeal. It is also pointed out teat for the subsequent assessment years no disallowance was made by the I.T.O. and the disallowances in the three years under reference were therefore unjustified. The assessee's contention appears to be valid considering particularly the fact that the volume of the assessee's business had also been increasing. The additions, therefore, are uncalled for and are deleted for all the three years. General Expenses: Assessment years 1985-86 & 1986-87) The assessee claimed general expenses of Rs.2,32,744 and Rs.2,54,196 for the assessment years 1985-86 and 1986-87. Out of these expenses of Rs.50,000 and Rs.60,000 were disallowed by the I.T.O. on account of unvouched expenses. 1n appeal, the C.I.T. (Appeals) reduced the disallowances to Rs.30,000 and Rs.40,000 respectively. It is, however, rightly pointed out by the assessee that no disallowance was made under this head in the earlier years and for the years 1982-83 and 1983-84 the disallowances made by the I.T.O. were deleted by the C.I.T. (Appeals). Considering this back-ground and also the fact that the I.T.O. has not given any instance of unverifiable expenses, the additions made by him for the two years are found to be unjustified and are deleted. The I.T.O. made a disallowance of Rs.611,983 out of expenses claimed under the head salary and allowances which has been contested by the assessee m the grounds of appeal. It was, however, stated during the hearing of appeal that necessary rectification had since been made by the I.T.O. and that this ground was not pressed. This ground is therefore dismissed as infructuous.

11. As a result the Departmental appeals for the assessment years "197 1978-79 and 1979-80 succeed in the manner indicated above while the assessee's appeals for these three years stand rejected. The assessee's appeals for the assessment years 1982-83, 1983-84, 1985-86 and 1986-87, however, succeed to the extent indicated above. M.BA./623/T Order accordingly.