2023 (6) TMI 263 - AT - Income Tax

Tribunal overturns disallowance of car expenses for personal use by company directors

The Tribunal allowed the appeal, deleting the disallowance of car expenses incurred by a Private Limited company for personal use by the Directors. The ... Deductibility of expenses on company owned vehicles used by directors - disallowance of car expenses as personal or non business use - treatment of director's use of company property in light of separate legal entity doctrine - disallowance of depreciation, interest and maintenance on motor vehiclesDisallowance of car expenses as personal or non business use - deductibility of depreciation, interest and maintenance on motor vehicles - treatment of director's use of company property in light of separate legal entity doctrine - Deletion of the disallowance of car expenses made by the AO and confirmed by the CIT(A) in respect of vehicles provided to directors - HELD THAT: - The Tribunal held that where a private limited company owns vehicles and provides them to its directors-employees under the terms of their appointment, the use of such vehicles cannot be characterised as non-business or personal use of the company so as to justify disallowance of depreciation, interest and maintenance. The decision relied on earlier authorities to the effect that directors' use of company vehicles is use by employees and not a separate personal use attributable to the company: reference was made to DCIT v. Haryana Oxygen Ltd. and Sayaji Iron and Engineering Company v. CIT . Applying the separate legal entity principle, the Tribunal found no rationale for treating director employees' authorised use as a ground for disallowing expenses incurred by the company and therefore directed deletion of the disallowance made by the assessing officer. [Paras 4]Disallowance of car expenses is deleted and the appeal is allowed.Final Conclusion: The Tribunal allowed the appeal, deleting the disallowance of car expenses (depreciation, interest and maintenance) made in respect of vehicles owned by the company and provided to its directors for use, on the ground that such use cannot be treated as non business or personal use of the company. Issues:The judgment involves the confirmation of disallowance of car expenses incurred by a Private Limited company for personal use by the two Directors.Confirmation of Disallowance of Car Expenses:The appeal arose from an order passed by the CIT(A) regarding the disallowance of car expenses incurred by the assessee for personal use by the Directors. The AO had made a disallowance of Rs.1,51,350/- due to the absence of log books. The CIT(A) affirmed the disallowance, leading the assessee to approach the Tribunal. The Tribunal considered that the company provided vehicles to its employees, including the Directors, for business purposes. Citing precedents, the Tribunal held that the use of cars by directors-employees cannot be characterized as non-business use. Various judgments supported the position that expenses on vehicles used by directors/employees should not be disallowed as personal use, as the company is a separate legal entity distinct from its directors or employees. Consequently, the Tribunal ordered the deletion of the disallowance of expenses incurred on vehicles.Result:The appeal was allowed, and the disallowance of expenses incurred on vehicles was deleted. The order was pronounced in the Open Court on 16th May 2023.