2001 (7) TMI 70 - HC - Income Tax

Allowing full car maintenance and depreciation where directors entitled to company vehicles; expenditure treated as remuneration and business expense

The HC held that disallowing 1/6th of car maintenance and depreciation was improper where directors were entitled under their service terms to use company ... Disallowance of 1/6th of total car expenses - depreciation claimed by the assessee because of the personal, use of the car entrusted to the director by him - personal use as per the terms and conditions - HELD THAT:- In our opinion, as the directors of the assessee were entitled to use the vehicles of the assessee-company for their personal use as per the terms and conditions on which they were appointed, it was not proper on the part of the Assessing Officer to disallow 1/6th of the expenditure incurred by the assessee on maintenance of its vehicles. Section 309 of the Companies Act, 1956, provides the modality for determining the remuneration payable to the directors, including any managing or full-time director. Such remuneration is payable either as stated in the articles of association of the company or in accordance with the resolution or if provided by articles, by a special resolution which might be passed by the company in the general meeting. This payment of remuneration is subject to overall limits of managerial remuneration laid down in section 198 of the Act. What is more material for the purpose of the present controversy is the Explanation to section 198 of the Companies Act which permits and provides that 'remuneration' shall include (a) any expenditure incurred in providing any rent-free accommodation, etc., (b) any expenditure incurred in providing any other benefit or amenity free of charge or at a concessional rate, (c) any expenditure which would have been incurred by the director but for such expenditure having been incurred by the com pany, (d) any expenditure incurred by the company for the purpose of any insurance on the life, etc. Therefore, it is clear that the expenditure incurred by the assessee-company on maintenance of vehicles which were available to the directors for their personal use would fall within the meaning of 'remuneration' as defined in the Explanation to section 198 of the Companies Act, and once such remuneration is fixed as provided in section 309 of the Companies Act, it is not possible to state that the assessee-company incurred an expenditure for the personal use of the directors, i.e., even if there was any personal use by the directors, the same was as per the terms and conditions of service and in so far as the assessee-company was concerned it was a business expenditure and not disallowable as such. It is pertinent to note that except for the assessment year in question, for no other assessment year the expenditure in question has been disallowed. In the circumstances, in our opinion, the Tribunal was wrong while disallowing 1/6th of the total car expenditure and depreciation claimed by the assessee on account of the personal use of the cars which we're used by the directors. We, therefore, answer the question in the negative, i.e., in favour of the assessee and against the Revenue. Issues involved:The judgment involves the disallowance of 1/6th of total car expenses and depreciation claimed by the assessee due to personal use of cars by directors.Details of the Judgment:*Issue 1: Disallowance of car expenses*The assessee, a private limited company, claimed business expenditure on vehicles used by directors for personal use. The Assessing Officer disallowed 1/6th of the expenditure, which was upheld by the Commissioner of Income-tax (Appeals) and the Tribunal. The Tribunal justified the disallowance based on personal use by directors.*Issue 2: Legal arguments*The assessee contended that directors were entitled to use company vehicles as part of their salary and perquisites, making it a business expenditure. The expenditure was allowed in previous assessment years, and the disallowance was not justified without invoking specific sections of the Income-tax Act.*Issue 3: Court's analysis*The High Court analyzed the provisions of the Companies Act, noting that remuneration to directors includes benefits like vehicle use. As a private limited company is a separate legal entity, personal use by directors does not equate to personal use by the company. The Court emphasized that the disallowance was not warranted based on the company's nature and legal framework.*Issue 4: Tribunal's decision*The Court criticized the Tribunal for upholding the disallowance, citing inconsistency with past decisions and unwarranted reasoning. Quoting a Madras High Court case, the Court emphasized the importance of institutional consistency in judicial decisions.*Conclusion:*The Court ruled in favor of the assessee, stating that the disallowance of car expenses was incorrect. The judgment highlighted the legal framework governing remuneration to directors and the distinct legal status of private limited companies. The reference was disposed of in favor of the assessee with no costs awarded.