1997 (11) TMI 30 - HC - Income Tax

Business Expenditure, Depreciation Allowance, Capital Or Revenue Expenditure, Capital Expenditure

Summary

Issues Involved:
1. Disallowance of motor car maintenance expenses for personal use of directors.
2. Disallowance of medical expenses reimbursed to a director as perquisites.
3. Deduction claim for payment to ICICI due to foreign exchange fluctuation.
4. Inclusion of depreciation allowance on cars used by directors for personal purposes in disallowance computation.

Detailed Analysis:

Issue 1: Disallowance of Motor Car Maintenance Expenses
The first question pertains to whether the expenses incurred on maintaining motor cars used partly for personal purposes of directors can be disallowed under section 40(c) of the Income-tax Act, 1961. The Income-tax Officer disallowed a portion of the expenditure as perquisites and benefits allowed to the directors. The Commissioner of Income-tax (Appeals) and the Appellate Tribunal upheld this disallowance, noting that the assessee failed to prove that the cars were used solely for business purposes. The Tribunal's finding that the cars were used partly for personal purposes is based on factual appreciation, and the assessee did not provide contrary evidence. Consequently, the Tribunal's decision to disallow the maintenance expenses under section 40(c) was upheld.

Issue 2: Disallowance of Medical Expenses as Perquisites
The second question addresses whether the reimbursement of medical expenses to a director constitutes a perquisite under section 40(c) of the Act. The assessee argued that cash payments should not be considered perquisites, citing Supreme Court decisions under section 40A(5). However, the court distinguished the language and ambit of sections 40(c) and 40A(5), noting that section 40(c) includes any remuneration or benefit without the qualifying words "whether convertible into money or not." The court referred to previous judgments, including Rane (Madras) Ltd. v. CIT and Alembic Glass Industries Ltd. v. CIT, which support the inclusion of medical reimbursements as perquisites. Thus, the Tribunal's decision to treat medical reimbursements as perquisites under section 40(c) was upheld.

Issue 3: Deduction Claim for Payment to ICICI Due to Foreign Exchange Fluctuation
The third question concerns the assessee's claim for deduction of a payment made to ICICI due to foreign exchange fluctuation. The court referred to its decision in CIT v. Elgi Rubber Products Ltd., which held that such payments constitute capital expenditure and cannot be allowed as revenue expenditure. Consequently, the Tribunal's decision to disallow the deduction was upheld.

Issue 4: Inclusion of Depreciation Allowance in Disallowance Computation
The question raised by the Revenue pertains to whether depreciation on cars used partly for personal purposes of directors should be included in the disallowance computation under section 40(c). The Appellate Tribunal had excluded depreciation, considering it a statutory allowance. However, the court held that the term "allowance" in section 40(c) includes statutory allowances like depreciation. The court emphasized that the purpose of section 40(c) is to curb excessive remuneration, including statutory allowances, if they exceed the prescribed limit. The court cited CIT v. Kisenchand Chellaram (India) P. Ltd. and C. W. S. (India) Ltd. v. CIT, which support the inclusion of depreciation in disallowance computations. Therefore, the Tribunal's exclusion of depreciation was incorrect, and the court ruled in favor of the Revenue.

Conclusion:
- First Question (Assessee): Affirmative, against the assessee.
- Second Question (Assessee): Affirmative, against the assessee.
- Third Question (Assessee): Affirmative, against the assessee.
- Question (Revenue): Negative, in favor of the Revenue.

Each party is entitled to costs of the reference, with specified amounts for the respective cases.