1996 (2) TMI 175 - AT - Income Tax

Summary

Issues:
1. Interpretation of section 40 of the Finance Act, 1983 regarding the taxation of specified assets of closely held companies, specifically motor cars.
2. Determination of whether motor cars owned by an assessee and used for leasing on a rental basis are liable to wealth-tax under the W.T. Act.

Analysis:
The judgment pertains to two appeals filed by an assessee-company against the consolidated order of the CIT(A)-II. The Assessing Officer had taxed the value of motor cars owned by the assessee under section 16(5) of the Wealth Tax Act, which led to the appeals before the First Appellate Authority (FAA) and subsequently before the ITAT. The FAA upheld the assessment, stating that the Wealth Tax Officer's action in taxing the motor cars was justified.

The main contention before the ITAT was the interpretation of the proviso to section 40(3) of the Finance Act, 1983, which exempts certain motor cars from wealth tax if they are used in a business of running motor cars on hire. The assessee argued that since they were engaged in leasing the motor cars on hire, the proviso should apply, thereby excluding the motor cars from wealth tax. On the other hand, the Departmental Representative (D.R.) contended that the proviso only applied to motor cars run on hire, not those used for leasing.

After considering the submissions, the ITAT analyzed the provisions of section 40 of the Finance Act, 1983. It noted that motor cars were specified assets liable to wealth tax under clause (vii) of section 40(3). However, the proviso to section 40(3) exempted motor cars used in a business of running motor cars on hire from wealth tax. The ITAT observed that the assessee's business involved leasing the motor cars on hire, which was akin to running motor cars on hire for each trip. The ITAT interpreted the legislative intent behind section 40 as targeting tax avoidance by closely-held companies and exempting assets used for business purposes.

Based on this analysis, the ITAT held that the motor cars owned by the assessee and used for leasing fell outside the purview of section 40 of the Finance Act, 1983. Consequently, the ITAT directed the Assessing Officer to exclude the value of motor cars from the computation of net wealth. As a result, the appeals filed by the assessee were allowed.

In conclusion, the judgment clarifies the application of section 40 of the Finance Act, 1983 to closely held companies and the taxation of specified assets such as motor cars. It emphasizes the legislative intent to prevent tax avoidance and provides guidance on the interpretation of provisions related to wealth tax liability for assets used in business activities.