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TMI Blog1984 (9) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... re, should be made. In appeal, the Commissioner (Appeals) sustained it at Rs. 14,178 on the ground that the disallowance was not unjustified as the motor car had been used by the directors of the company and, therefore, the disallowance is to be made if the limit prescribed under section 40(c) of the Income-tax Act, 1961 ('the Act'), is surpassed. The revenue being aggrieved has preferred this appeal. 3. Shri S.L. Narasimhan, the learned departmental representative, contends that in the case of a company, flat rate is applicable and, therefore, the expenses, if at all on any item of expenditure, are to be incurred and expended by the company, if so authorised by passing a resolution as required under the Companies Act, 1956. Furthermore, section 40(c) can be applied if there is a resolution of the company to authorise the use of motor cars by the directors as perquisite in the previous year relevant for the assessment year under consideration. In the case of the assessee, the resolution is passed on 29-6-1979 while the previous year ended on 31-12-1978 and, therefore, the claim is not authorised, hence, disallowable. Reliance is placed on the decisions in CIT v. C. Kulandaivelu K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner (Appeals) is not justified in sustaining the disallowance on the application of section 40(c), which plea is not relevant or justified. Hence, we reject it. The reason is that authorisation is to be there as required by the aforesaid decisions of the Hon'ble Madras High Court in A.R. Adaikappa Chettiar's case and C. Kulandaivelu Konar's case, which say that benefit or perquisite in the case of managing director, director and employee of the company is there if it is as per conditions of service contract. Further, in the case of the assessee, the expenditure in the assessment year under consideration is unauthorised as it was authorised by the resolution on 29-6-1979 which date falls outside the previous year relevant for the assessment year under consideration. The decisions of the Madras High Court are binding on the Benches of the Tribunal at Madras situated within its jurisdiction and, therefore, following it with respect, we hold that the Commissioner (Appeals) is unjustified in making the allowance for maintenance of cars expenditure. Apart from it, there are no details regarding this expenditure. The expenditure can be allowed if the expenditure is verifiable and is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such use. It was, however, claimed that such expenditure relating to the directors was nothing more than provision of perquisites for them and that there could be no such disallowance unless the payment exceeded the limit under section 40(c), the first appellate authority found that the ITO has not shown that the benefit was excessive or unreasonable or that it is beyond the limit laid down by section 40(c). It is under these circumstances, he deleted the addition. In the departmental appeal, it is claimed that the specific resolution authorising such personal use by the directors was passed at the general meeting only on 29-6-1979 which is beyond the assessee's accounting year which ends on 31-12-1978. It was, therefore, presumed that the benefit was unauthorised during the year and that it is hit by the decision of the Calcutta High Court in the case of M.M. Mehta and the Madras High Court in C. Kulandaivelu Konar's case. The learned departmental representative repeated the stand. The learned counsel for the assessee, however, claimed that it will be wrong to say that the perquisites were unauthorised. The directors were whole-time employees attending to the family business c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial remuneration under the Companies Act provide that car can be provided to the directors for official and private purposes, but the value thereof has to be ascertained on the basis of rule 3 of the Rules for the purposes of the ceiling of one-third of the salary or Rs. 30,000, whichever is less. It was only in 1979 the guidelines were modified limiting the use of the car for such private purposes to one car subject again to the revised limits with which we are not concerned for this year--See Managerial Remuneration by Dr. Vinod K. Singhania [1983] 15 Taxman 46 (Sec. IV). Hence, the departmental inference that this perquisite was unauthorised under the Companies Act, is incorrect. Even the argument of the learned counsel that the fact that the accounts were approved by the general body and that a special resolution was recorded in the subsequent year authorising the allowance also confirm the assessee's claim that it was not unauthorised. Again, even if the allowance was unauthorised, but all the same if it is in the interest of the business, this cannot be disallowed. The Madras High Court in the case of CIT v. Sree Rajendra Mills Ltd. [1974] 93 ITR 122 held that even a payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that whether the benefit is authorised or even if unauthorised, it would still be a perquisite since it is a benefit or advantage in the hands of the company. The High Court in the decision relied on by the revenue in C. Kulandaivelu Konar's case observed as under : ". . . It is by reason of the fact of his being an employee deriving such a benefit, that provision directs it to be included in the salary income of such an employee. Normally, a company is not expected to allow its funds to be utilised by its employee for his personal benefit. In cases where the company permits an employee to utilise its funds for his own benefit, it shall be deemed to have given a personal benefit to such employee. The relationship of employer and employee, in such circumstances, is the primary reason for grant of such benefit to the employee. We have, therefore, no doubt that the benefit was not derived by the employee de hors his status as an employee." The purport of this decision is that an amenity or benefit granted to an employee would amount to a perquisite of an employee as it arises in his capacity as an employee, though he may be a director as well. It was for this reason that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deduction. In the assessee's case, it is, however, not unauthorised. Again, the entire ground in the appeal is on the basis of the decisions in the case of employees. The position regarding the company is that the perquisite allowed to an employee would be deductible unless it is hit by section 40(c) or section 40A(5), as the case may be. In the case of CIT v. P.R. Ramakrishnan [1980] 124 ITR 545 (Mad.), where a similar car perquisite was involved and it was considered as a perquisite by the High Court, the High Court had occasion to consider the assessment of the company as regards such benefit in the following words : "From a reading of clause (c) of section 40, it would be clear that it applies only to a case where the person concerned is either a director or has substantial interest in the company or his relative. In the present case, we are concerned with sub-clause (ii) of section 40(c) because the motor cars and telephones are found to be the assets of the company. The expenditure has been incurred by the company on the motor cars as well as the telephones. In such a case, the ITO must apply his mind to find out whether the expenditure is excessive or unreasonable having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the addition, since section 40(c) was not applied to the case. It is, thus, that the matter came up to the Tribunal on a departmental appeal. 2. The members who heard the matter having differed, reference is made to me as the Third Member. The Judicial Member has posed the following question : "Whether, on the facts and in the circumstances of the case, an amount of Rs. 14,178 expended on personal use of company's cars by its directors without any contract between the company and directors for the use of the company's cars by them is to be disallowed being unauthorised expenditure ?" Whereas the Accountant Member has referred the following question : "Whether, on the facts and in the circumstances of the case, an amount of Rs. 14,178 being the estimated value of personal use of company's cars for personal purposes of the directors could be disallowed ?" 3. The learned counsel for the department has pointed out that the assessee is a private limited company. It is thus under the complete control of the directors. Substantial amounts are spent on maintenance of cars. The directors have no cars of their own. The car expenses incurred by the company to some extent went to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or even a director, it is absolutely necessary to pass a resolution of the board nor even where the provisions of the Companies Act require the passing of such a resolution ; if it could be shown that as a matter of fact, there was an agreement to make a particular payment to an employee or director, the fact of the payment could be ignored or its legality challenged. Any contravention of the Companies Act made, have to be dealt not under the 1961 Act especially in a tax matter in an altogether different context. In my opinion, therefore, to say that the user of the car is unauthorised, would neither be correct nor proper. The directors knew that they were using the cars. The company knew that the directors were using the cars. Admittedly, this was going on from day-to-day. Certainly if there was any irregularity, prejudice to the company, etc., somebody would have stopped the use of the cars. The facts, therefore, would indicate that there was complete ad idem with regard to the user of the cars on the part of the directors as well as the company. 6. There is no factual information with the department to show that the expenditure to the extent disallowed on the maintenance of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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