1984 (9) TMI 145 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of motor car maintenance expenses.
2. Authorization of personal use of company cars by directors.
3. Application of section 40(c) of the Income-tax Act, 1961.

Summary:

Disallowance of Motor Car Maintenance Expenses:
The assessee, a private limited company, claimed motor car maintenance expenses of Rs. 1,70,891 for the assessment year 1979-80. The ITO disallowed the claim due to lack of detailed information required to ascertain compliance with rule 6D of the Income-tax Rules, 1962. The Commissioner (Appeals) sustained the disallowance at Rs. 14,178, reasoning that the motor car was used by the directors and the disallowance is justified if the limit prescribed u/s 40(c) of the Income-tax Act, 1961 is surpassed.

Authorization of Personal Use of Company Cars by Directors:
The departmental representative argued that expenses are disallowable unless authorized by a resolution passed in the relevant previous year. The resolution authorizing the use of motor cars by directors was passed on 29-6-1979, while the previous year ended on 31-12-1978, rendering the expenditure unauthorized. The assessee contended that the resolution's effect is retrospective, and section 40(c) applies.

Application of Section 40(c) of the Income-tax Act, 1961:
The Tribunal noted that perquisites and benefits to directors must be authorized by a service contract between the company and the employee. In this case, there was no such contract, and the expenditure for the assessment year was unauthorized as the resolution was passed after the relevant previous year. The Tribunal held that the Commissioner (Appeals) was unjustified in allowing the expenditure, setting aside his order and restoring that of the ITO.

Separate Judgment by the Accountant Member:
The Accountant Member disagreed, stating that the directors' use of cars was incidental to their employment and not merely as shareholders. He argued that the expenditure was in the interest of the business and should not be disallowed even if unauthorized under the Companies Act. The perquisite was not excessive or unreasonable and did not exceed the limits under section 40(c). The first appellate authority's decision to allow the expenditure was upheld.

Decision by the Third Member:
The Third Member concluded that the expenditure was incurred for the company's business and constituted additional remuneration to the directors. The absence of factual information to support the department's view meant the expenditure was necessary for the business. The disallowance was not justified, and the departmental appeal was dismissed.

Conclusion:
The appeal was allowed in favor of the department by the Judicial Member, but the Accountant Member and the Third Member upheld the assessee's claim, leading to the dismissal of the departmental appeal.