1999 (12) TMI 107 - AT - Income Tax

Company car running expenses vs directors' personal use claims; disallowance under s. 37(1) rejected, perquisite route noted. (1)

Where a company incurred car expenses and the AO disallowed a portion alleging non-business use by directors, the ITAT held that a company's juristic ... Disallowance under section 37(1) - allowability of business expenses for company-owned cars - personal use as perquisite to directors - separate legal entity of the company and corporate veil - mixed user and restriction of deductions under section 38(2)Disallowance under section 37(1) - allowability of business expenses for company-owned cars - personal use as perquisite to directors - separate legal entity of the company and corporate veil - mixed user and restriction of deductions under section 38(2) - Whether the Assessing Officer was justified in disallowing car expenses on account of alleged non-business (personal) use by directors - HELD THAT: - The Tribunal held that the company and its directors are distinct legal entities and, absent any allegation of illegality or abuse of corporate form, the company's expenditure on cars used by directors cannot be treated as non-business expenditure of the company. Where company conduct permits personal use by directors, that personal benefit is at most a perquisite or extra remuneration assessable in the hands of the directors; it does not justify disallowance of the expense in the company's hands under section 37(1). The Tribunal relied on earlier authorities to the effect that part use by directors gives rise to perquisites payable to directors and does not convert the company's expenditure into non-business expenditure: ITO v. Ashoka Betelnut Co. (P.) Ltd. and Daks Copy Services (P.) Ltd. v. ITO . While section 38(2) restricts deductions where an asset is not used exclusively for business, that provision deals with items like depreciation and certain current repairs and does not extend to running expenses such as petrol; repairs (being the subject matter of the present disallowance) are distinct from running expenses, and the statutory restriction under section 38(2) does not convert ordinary running costs into non-deductible expenditure when incurred for company business. The corporate veil may be pierced only where the corporate character is used to perpetrate illegality or fraud; no such allegation exists here (Saloman v. Saloman & Co. ; Delhi Development Authority v. Skipper Construction Co. (P.) Ltd. ). Accordingly, the Assessing Officer's disallowance is not sustainable and the CIT(A)'s deletion is affirmed. The Tribunal noted that inter-High Court precedents are not binding across jurisdictions (CIT v. Thana Electricity Supply Ltd. ) but treated the relevant precedents on facts. [Paras 15, 16, 18, 19, 20]The deletion of the disallowance of car expenses is confirmed; any personal use by directors may be treated as a perquisite assessable in the hands of the directors, but no disallowance under section 37(1) is warranted in the hands of the company.Final Conclusion: Appeal dismissed on this ground; the Tribunal affirms the CIT(A)'s deletion of the disallowance of car expenses for A.Y. 1983-84, observing that personal use by directors gives rise to a perquisite in the directors' hands but does not render the company's expenditure non-business expenditure, and that section 38(2) does not convert running expenses into non-deductible items in the circumstances. Issues involved: Ground (b) of A.Y. 1983-84 challenges the deletion of addition on account of car expenses.Summary:The Appellate Tribunal considered the issue of disallowance of car expenses for non-business use of vehicles. The Assessing Officer disallowed a portion of car expenses, but the CIT(A) deleted the disallowance, stating that the perquisite value could be assessed in the hands of the directors. Referring to legal precedents, including ITO v. Ashoka Betelnut Co. (P.) Ltd. and Daks Copy Services (P.) Ltd. v. ITO, it was highlighted that expenses on cars used for personal purposes of directors could not be disallowed. The Tribunal also cited the Madras High Court's decision in CIT v. Chitram & Co. (P.) Ltd. regarding depreciation rules for assets not exclusively used for business purposes.The Tribunal emphasized the separate legal entity of a company from its directors, citing the principle from Saloman v. Saloman & Co. that the corporate veil is only pierced in cases of illegality or fraud. It was noted that unless there are mala fides, the company's legal entity remains distinct. The Tribunal concluded that the use of cars by directors should not be characterized as non-business purpose of the company, and no disallowance under section 37(1) was justified. The value of personal use of cars could be considered as extra remuneration to the directors.Additionally, the Tribunal discussed the restriction on deductions for assets not exclusively used for business purposes under section 38(2), clarifying that running expenses like petrol are not subject to restriction, but only current repairs. Ultimately, the Tribunal upheld the CIT(A)'s decision regarding the disallowance of car expenses, rejecting the Revenue's appeal.The Tribunal did not find merit in the Revenue's appeal and confirmed the CIT(A)'s decision regarding the disallowance of car expenses.