Limit on allowance in respect of benefit, amenity or perquisite under clause (c)(iii)/clause (a)(v) - Reimbursement of certain expenses/pay-ments whether form part of perquisite to be restricted to one-fifth of salary
Circular No. 80 was issued by the Central Board of Direct Taxes on 4 March 1972. Its subject is Limit on allowance in respect of benefit, amenity or perquisite under clause (c)(iii)/clause (a)(v) - Reimbursement of certain expenses/pay-ments whether form part of perquisite to be restricted to one-fifth of salary.
Draws the line between salary and perquisite for the ceiling in section 40(c)(iii), and in section 40(a)(v) which replaced it from assessment year 1969-70 and applied to all employers and not merely companies. Expenditure giving an employee a benefit, amenity or perquisite, including a sum paid to meet an obligation that would otherwise have been the employee's, is deductible only up to one-fifth of the salary payable to him. Salary for this purpose takes the meaning in rule 2(h) of Part A of the Fourth Schedule, which includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites. So reimbursement of medical expenses, electricity, water and gas at the employee's residence, club bills, domestic servants and gardeners are perquisites and go into the one-fifth pot, the list being illustrative. Bonus is salary where it is paid under a service agreement, under the Payment of Bonus Act, 1965, under a binding decision of a trade association, or under a binding award of a Labour Tribunal; bonus paid gratuitously with no legal or contractual obligation is a perquisite. Commission depends on the facts: where the terms of service make it part and parcel of the remuneration for services it is salary, and where the employer is under no obligation or it is purely at his discretion it is a benefit added to salary.
The question was which of these payments form part of salary and which fall into the category of perquisite, amenity or benefit for the purposes of the one-fifth ceiling.
Limit on allowance in respect of benefit, amenity or perquisite under clause (c)(iii)/clause (a)(v) - Reimbursement of certain expenses/pay-ments whether form part of perquisite to be restricted to one-fifth of salary
1. Under section 40(c )(iii), any expenditure incurred by a company after February 29, 1964, which results directly 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 company in respect of any obligation which but for such payment would have been payable by such employee) would be admissible as a deduction in computing the company’s income, only to the extent of one-fifth of the amount of salary payable to the employee. Section 40(c)(iii) was replaced by section 40(a)( v) with effect from assessment year 1969-70 and was applicable to all assessee-employers, not restricted to companies only.
2. The question for consideration is whether the benefits given to the employees in the form of provision of medical facilities or reimbursement of medical expenses, electricity, gas, gardener, rent-free accommodation, motorcar and bonus or commission should form part of the "salary" or whether they fall in the category of "perquisite, amenity or benefit". For the purpose of section 40(c)(iii)/ 40(a)(v), the term "salary" has to be taken as per the definition given in rule 2(h) of Part A of the Fourth Schedule. According to the definition, the term "salary" includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites.
3. All payments in the form of benefits or amenities such as reimbursement of medical expenses, provision of electricity, water, gas at the residence of employees, payment of club bills of employees, provision of domestic servants, gardeners, etc., would be part of "perquisite" which would be restricted to one-fifth in the assessment of the employer. The list of perquisites given above is only illustrative and by no means exhaustive.
4. As regards the payment of bonus, the Board are advised that the payment of bonus will be treated as salary in the following types of cases :
a. payment of bonus made under a service agreement between the employer and the employee ;
b. bonus paid pursuant to requirement of the Payment of Bonus Act, 1965; in such a case the service agreement may be treated to have been modified to that extent;
c. where the bonus is paid in accordance with the decision of a trade association which is binding on its members; and
d. bonus paid under an award by a Labour Tribunal where the award is binding on the employer and the employees.
If the bonus is paid gratuitously without there being any legal or contractual obligation, the payment is in the nature of a perquisite and has, among other perquisites, to be linked to one-fifth of the salary for allowance under section 40(c)(iii )/40(a)( v).
As regards payment of commission to the employees the question whether it form part of "salary" or "perquisite" has to be decided on the facts of each case. If the terms and conditions of service are such that commission is paid not as a bounty or benefit but is paid as part and parcel of the remuneration for services rendered by the employee, such payment may partake of the nature of salary rather than as a benefit or perquisite. If, however, on the terms and conditions of service either there is no obligation for the employer to pay the commission or it is a matter purely in the discretion of the employer, such payment should be treated as a benefit by way of addition to salary rather than in lieu of salary.
[These instructions are issued in supersession of the Board’s Circular No. 62 [F. No. 13A/ 103/69-IT (A-II)], dated 29-6-1971 [Annex I] and in modification of the Board’s Circular No. 32 [F. No. 10/93/68-IT (A-II)], dated 29-10-1969 [Annex II] and may please be brought to the notice of all the Income-tax Officers working in your charge.]
Circular : No. 80 [F. No. 13A/103/69-IT(A-II)], dated 4-3-1972.
A disallowance in a company's assessment restricting perquisite expenditure to one-fifth of an employee's salary, typically over medical reimbursement, servants or a gratuitous bonus.
An employee draws a salary of Rs. 30,000, including dearness allowance under the terms of employment. The employer spends Rs. 9,000 on his electricity, gas and gardener and pays him a gratuitous bonus of Rs. 3,000. All Rs. 12,000 is perquisite, so only one-fifth of Rs. 30,000, that is Rs. 6,000, is deductible and Rs. 6,000 is disallowed. Had the bonus been paid under the Payment of Bonus Act, 1965 it would have been salary, raising the base and taking Rs. 3,000 out of the capped pot.
Rules it names. Rule 2 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.