1986 (11) TMI 107 - AT - Income Tax

Summary

Issues:
1. Claim for depreciation on cars purchased for construction contracts in Libya.
2. Disallowance of expenses incurred in the maintenance and running of cars by the Directors.

Analysis:

Issue 1: Claim for Depreciation on Cars
The appeal involved a claim for depreciation on cars purchased by an Indian company for executing construction contracts in Libya. The company purchased cars and vans for mobilization of material and labor for the contracts. The Income Tax Officer (ITO) disallowed the depreciation claim as the cars were purchased after 1975 and were not manufactured in India. The Commissioner (A) upheld the disallowance, stating that the cars were not imported into India and were used for business outside taxable territories. The matter was then brought before the Tribunal. The Tribunal considered the distinction between motor vans and motor cars, allowing depreciation on vans based on a CBDT circular. However, the Tribunal upheld the disallowance of depreciation on cars purchased after April 1, 1975, as per the clear provision of the law, despite the hardship faced by the assessee. The Tribunal rejected the plea for allowance under section 37 and directed the ITO to allow depreciation only on motor vans.

Issue 2: Disallowance of Expenses Incurred by Directors
The second issue involved a disallowance of expenses amounting to Rs. 5,000 incurred in the maintenance and running of cars used by the Directors. The ITO disallowed a portion of the total expenditure, suspecting personal use by the Directors. The company explained that the Directors stayed alone in Libya under the contract terms and were not entitled to bring their families, eliminating the possibility of personal use of the vehicles. The Commissioner (A) reduced the disallowance to Rs. 5,000 considering the company's explanation. The Tribunal noted that the company reimbursed the Directors for the maintenance and running expenses of their personal cars. As the company reimbursed the expenditure and did not directly incur it, the Tribunal found no grounds for disallowance. The Tribunal held that the company, as a corporate entity, could not be penalized for reimbursing the Directors' expenses and deleted the disallowance.

In conclusion, the Tribunal partly allowed the appeal, directing the ITO to allow depreciation on motor vans and deleting the disallowance of expenses incurred by the Directors for maintenance and running of their personal cars.