1998 (8) TMI 611 - AT - Income Tax

Summary

Issues:
1. Determination of perquisites related to the use of a company car and driver for an individual appointed as Managing Director.
2. Allowability of interest on loans taken to repay earlier loans used for advancing loans.

Analysis:

Issue 1: Determination of Perquisites:
The appeal pertains to the assessment year 1986-87, involving an individual appointed as Managing Director of a company. The individual was provided with a company car and allowed to reimburse the salary of a driver instead of providing a driver directly. The Assessing Officer treated the entire reimbursement of the driver's salary as a perquisite under section 17(2)(iv) of the Income Tax Act. However, the Tribunal disagreed, emphasizing that the employer's obligation was to provide a car with a driver to the individual. The Tribunal cited Rule 3(c)(ii) of the Income-tax Rules, which outlines the determination of the value of a motor-car provided by the employer for both office and personal purposes. The Tribunal concluded that the salary reimbursement for the driver should be bifurcated, with the portion related to office use not being added to the individual's income. The decision was supported by a Bombay High Court case, highlighting the importance of following statutorily recognized methods for assessing perquisites.

Issue 2: Allowability of Interest on Loans:
The second aspect of the dispute involved the allowability of interest on loans taken to repay earlier loans utilized for advancing loans. The Assessing Officer disallowed the interest claim, stating it could not be directly correlated to the loans from which interest was earned. However, the Tribunal referred to a Circular by the Central Board of Direct Taxes, indicating that if a second borrowing is used solely to repay the original loan, the interest on the second loan should be allowed as a deduction. Therefore, the Tribunal directed the Assessing Officer to allow the interest deduction if it was proven that the second borrowing was solely used to repay the original loans used for purchasing preference shares.

In conclusion, the Tribunal allowed the appeal for statistical purposes, ruling in favor of the individual on both issues regarding the determination of perquisites related to the company car and driver, as well as the allowability of interest on loans taken to repay earlier loans used for advancing loans.