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TMI Blog1998 (4) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... 5) and section 40(c)(i) of the Income-tax Act, 1961 ?" The question is an involved question and the facts are not so complicated. The assessee is a public limited company. The assessee is carrying on business in spinning and weaving. The assessee for the assessment year 1976-77 returned an income from the business of Rs. 22,24,043. The assessee while computing the income under the head "Business" has not taken into account a sum of Rs. 1,26,413 with reference to section 40A(5)(a)(ii) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), and a sum of Rs. 3,55,988 with reference to section 40(c)(i) of the Act. The disallowance made by the assessee relates to the expenditure incurred by the assessee on the cars maintained for the use of employees and its directors. The Income-tax Officer, while completing the assessment, found that there should be a further disallowance of Rs. 2,72,333 with reference to the employees, and a sum of Rs. 93,084 with reference to directors with the result the total disallowance would be Rs. 3,98,746 with reference to section 40A(5)(a)(ii) of the Act and a sum of Rs. 4,49,072 with reference to section 40(c)(i) of the Act, and determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company's business as well as for the personal purpose of the directors, an estimated value of perquisite would represent the expenditure incurred by the company which would be disallowable under that section. The Tribunal, in this view of the matter, upheld the order of the Commissioner (Appeals) and dismissed the appeal preferred by the Revenue. On an application filed by the Revenue, the Tribunal has referred the question of law set out earlier. Learned counsel for the Revenue submitted that under section 40(c)(ii) of the Act, any expenditure or allowance in respect of any asset of the company used for the own purpose or benefit of the director, either wholly or partly, would be subject to the ceiling under that section. He submitted that the same analogy should be employed to section 40A(5)(ii) of the Act as well and the emphasis given in both the sections is "any expenditure or allowance in respect of the assets used by the director or employee either fully or partly and for considering the ceiling limit", it is only the actual expenditure that has to be taken into account and not the total expenditure prescribed under rule 3 of the Income-tax Rules. Learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees has to be taken into consideration for the purpose of disallowance in the hands of the employer. This court expressly dissented from the decision of the Calcutta High Court in the case of CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35, and the decision of the Punjab and Haryana High Court in CIT v. Nuchem Plastics Ltd. [1989] 179 ITR 196. Learned counsel for the assessee, on the other hand, submitted that the decision of this court in Wheels India Ltd.'s case [1996] 218 ITR 293, is concerned with the expenditure by way of house rent and it has no application for the valuation of perquisite on the car provided by the employer to the director. We are unable to accept the contention of learned counsel for the assessee. There is no material difference between the use of a car and the use of a house, and in the light of the ambit of sections 40(c) and 40A(5) of the Act, the principle laid down by this court that only the actual expenditure has to be taken will apply in the case of use of the car also. As a matter of fact, in CIT v. P. R. Ramakrishnan [1980] 124 ITR 545, this court was considering the use of the car and telephone of the company by the director for his p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent, it may even be conceivable that a director may be assessed on a larger figure than what has been disallowed in the hands of the company as the officer assessing the company may have been more liberal in applying section 40(c) to the company, or he may not have disallowed at all anything under section 40(c)." The above decision makes it clear that if a company claims certain expenditure for the assets used by the director either partly or wholly for his personal use, it claims the same as its business expenditure to be deducted in the computation of its income. The Income-tax Officer has to find out what would have been the expenditure incurred for the company's purpose and if it exceeds the ceiling limit, that amount would be disallowed. Therefore, the question of applicability of rule 3 does not arise in determining the ceiling under sections 40(c) and 40A(5) of the Act. The same view has taken by the Kerala High Court in the case of CIT v. Malayalam Plantations (India) Ltd. [1990] 186 ITR 322, wherein the Kerala High Court held that the objects of section 40A(5) of the Act and rule 3(c) of the rules are distinct and different and section 40A(5) was intended to effecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1989] 179 ITR 196. Learned author Sampath Iyengar in Law of Income-tax (volume 2, 9th edition), at pages 2761 and 2762 observed as under : "The section further enacts that, in respect of any asset of the company used by such persons as aforesaid, not only expenditure thereon, but also any allowances in respect thereto can be disallowed..... In order to render an allowance disallowable under this clause it is important that a personal benefit must have been derived by the director or the person having a substantial interest in the company, that is the company did not, and the director or other person alone did, use that particular asset. It is only in respect of such cases that the allowance is sought to be curtailed by sub-clause (ii) of clause (c)." Now, it is necessary to consider the other arguments of Mr. Janarthana Raja, learned counsel for the assessee, that though rule 3 may not be strictly applicable for the purpose of determining the expenditure to be disallowed under section 40(c) or 40A(5), the amount determined under rule 3 can be relied upon for the purpose of such disallowance. He strongly placed reliance on a decision of the Bombay High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rquisites in respect of the use of the car owned and maintained by the employer for the employee.... The method of valuation of perquisite in respect of motor car set out in the first part of sub-clause (ii) of clause (c) of rule 3 of the Income-tax Rules would be applicable in all cases where it is possible to do so. It is only in cases where determination of the value in the manner laid down in the first part of clause (c)(ii) is found to be difficult that the valuation should be made on the basis set out in the second part thereof and the table appended thereto." We respectfully dissent from the judgment of the Bombay High Court. We have already noticed the decision of this court in the case of CIT v. P.R. Ramakrishnan [1980] 124 ITR 545 and the decision of this court in Wheels India Ltd. v. CIT [1996] 218 ITR 293. In both the cases, this court has taken a view that the valuation of perquisite under rule 3 has no relevance in determining the ceiling under section 40(c) or 40A(5) of the Act. Section 40(c) of the Act deals with any expenditure or allowance in respect of any asset of the company used by the director or any person referred to in section 40(c) either wholly or part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , provided the conditions stipulated therein are satisfied. We are in respectful agreement with the decision of the Gujarat High Court in CIT v. Rajesh Textile Mills Ltd. [1988] 173 ITR 179, wherein S. B. Majmudar J., as his Lordship then was, speaking for the Bench, observed that the expenditure incurred by the employer-assessee for providing perquisites to the employee cannot be a mirror image of the evaluation of such perquisite in the hands of the employee. The Gujarat High Court in the said decision observed as under : "In that view of the matter, it is not possible to agree with the submission of Mr. Shah, for the assessee, that when assets of the employer are partly used by the employee for his own purpose and partly used for the business purpose of the employer, the break-up figures of actual expenditure incurred by the employer on the one hand and the expenses incurred for maintaining that part of the asset which is used for business purposes on the other, would not be available and, therefore, the rule of thumb laid down by rule 3 of the Income-tax Rules can be projected and can be pressed into service for the purpose of computing expenditure in such cases even in cases ..... X X X X Extracts X X X X X X X X Extracts X X X X
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