1990 (5) TMI 65 - AT - Income Tax

Summary

Issues:
1. Evaluation of perquisite value of car for remuneration under section 40(c) of the Income-tax Act.
2. Disallowance of interest under section 40A(8) paid on Directors' current account.

Issue 1: Evaluation of Perquisite Value of Car:
The appellant, a limited company, contested the disallowance of depreciation and maintenance expenses on cars used by its Directors for personal purposes. The appellant argued that the perquisite value of the car should be limited to Rs. 5,400 per Director as per Rule 3(c)(ii) of the Income-tax Rules, 1962. The CIT(Appeals) rejected this argument and estimated 1/3rd of the expenses as related to personal use. The Appellate Tribunal analyzed section 40(c) of the Income-tax Act, emphasizing that any expenditure or allowance provided to Directors must be evaluated for reasonableness with respect to legitimate business needs. The Tribunal noted that the Calcutta High Court's decision was not applicable due to the existence of an Explanation in the statute. The Madras High Court's decision highlighted that the focus should be on unreasonable expenditure incurred by the company. The Tribunal concluded that the appellant's claim to evaluate expenses based on Rule 3(c)(ii) lacked merit as it did not align with the purpose of section 40(c).

Issue 2: Disallowance of Interest on Directors' Current Account:
The second issue pertained to interest disallowed under section 40A(8) paid on the Directors' current account. The appellant argued that a subsequent decision by the Madhya Pradesh High Court indicated that such interest should not be disallowed. The Tribunal reviewed the Special Bench decision and the Madhya Pradesh High Court's ruling. The Madhya Pradesh High Court's decision clarified that interest on current accounts would not be disallowed if the accounts did not represent deposits. The Tribunal noted that the Special Bench's view considered current accounts akin to deposit accounts if interest was paid. The Tribunal concluded that the interest paid on the account in question was in the nature of a deposit account, aligning with the Special Bench's decision. Therefore, the disallowance under section 40A(8) was upheld, dismissing the appellant's appeal.

In conclusion, the Appellate Tribunal upheld the disallowance of depreciation and maintenance expenses related to personal use of cars by Directors and confirmed the disallowance of interest on the Directors' current account. The appellant's arguments based on specific rules and previous court decisions were deemed without merit in both issues, leading to the dismissal of the appeal.