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Issues:
1. Whether lease rent for cars taken on lease should be considered for disallowance under section 37(3A) of the Income-tax Act, 1961. 2. Whether expenditure on repairs for the leased cars is includible in the computation for disallowance under section 37(3A) of the Act. Analysis: 1. The first issue in this appeal pertains to the inclusion of lease rent for cars taken on lease by the assessee in the computation for disallowance under section 37(3A) of the Income-tax Act, 1961. The assessee had leased two cars for a period of five years and incurred a liability of Rs. 52,000 towards lease rent. The contention was whether this lease rent falls under the clauses specified in section 37(3B) of the Act. The department relied on clause (ii) of section 37(3B) and emphasized the Explanation mentioning "expenditure on hire charges for engaging cars plied for hire." However, it was observed that this clause refers to expenses incurred on hiring cars like taxis, which are solely for hire purposes. In this case, the leased cars were not meant for hire prior to the lease agreement and were not used as taxis. Therefore, the lease rent for these cars was held not includible in the disallowance under section 37(3A) of the Act. 2. The second issue concerns the inclusion of expenditure on repairs (Rs. 54,568) for the leased cars in the computation for disallowance under section 37(3A) of the Act. It was clarified that expenses on repairs are allowable as deductions under section 31 of the Act, which is not subject to section 37(3A). The judgment highlighted that expenses allowable under section 31 do not become disallowable under section 37(3A) merely because both provisions apply. Citing a decision of the Bombay High Court, it was established that expenses allowable under section 31, such as repair charges, should not be disallowed under section 37(3A). Therefore, the ITO was directed not to include the repair expenses of the leased cars in the disallowance under section 37(3A) of the Act.
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